Insurers in Ethiopia recently launched crop insurance policies for smallholder farmers. Crop insurance is an umbrella term used to refer to a series of policies designed to help farmers avoid or recover from risks associated with farming. In a country like Ethiopia, where smallholder farmers are especially susceptible to shocks like drought and cyclical poverty, many say that these insurance policies are a welcomed change. Still, others argue that there is more work to be done to improve the lives of smallholder farmers beyond offering crop insurance services. EBR’s Ashenafi Endale met with key stakeholders to learn more about the details of the policies that many hope will bolster the lives of small-scale farmers.
For years, critics have complained that the Ethiopian government has remained passive in addressing the climatic risks that negatively affect the agriculture sector, which is almost entirely dependent on rain and highly prone to droughts. This severely affects agriculture, keeping farming at a subsistence level, with meagre use of improved technology, low productivity and high risk.
However, things are likely to get worse with the onset of the current drought, which is killing livestock, damaging crops and has left roughly twenty million people in need of emergency aid (10.2 million in need of humanitarian food aid, 7.9 million people in need of food aid under the Productive Safety Net Programme and 1.7 million children, pregnant and lactating women in need of specialised nutritional support). By some international aid agencies’ estimates, the number of people affected by the drought is expected to increase – and will likely keep putting people at risk for more than a year.
This reality has dire economic consequences. Within roughly the last decade, the country has lost more than ETB2.5 billion due to disasters suffered by the agricultural sector, according to data from the Agricultural Transformation Agency (ATA). The worst losses occurred when farmers took actions to cope with the disasters – selling their assets and migrating to urban centres.
In order to protect against such losses and help mitigate the risks facing smallholder farmers, the state-owned Ethiopian Insurance Corporation (EIC) launched a group of policies on March 1, 2016. The programme is known as Normalised Difference Vegetation Index-based crop insurance (NDVI) and was announced at the UN Economic Commission for Africa. For a country of agriculture and more than 80Pct of its people are dependent on the sector, it is worrisome that uncertainties with regard to climate change are growing. This is why the news of EIC’s policies was well received.
In the presence of officials from the Public Financial Enterprises Supervisory Agency (PFESA); ATA, National Meteorology Agency (NMA); the University of Twente, in the Netherlands; the Development Bank of Ethiopia (DBE); Kifiya Financial Technologies (KFT); insurance companies and various other stakeholders, the EIC launched the package, which it has been developing for the last three years.
According to the United Nations Food and Agriculture Organisation (FAO), crop insurance policies are especially important for economies in transition. This is because such programmes often align farmers with the “increasing commercialisation of agriculture, international trade, and foreign direct investment.”
The FAO study also notes that insurance policies not only help mitigate risks and protect farmers, they also confer business decision-making capabilities that are crucial to increasing productivity. According to the report, “Risk management is of crucial importance in the investment and financing decisions of farmers in developing countries,” because they can help with important business decisions, including “choice of plant varieties and animal breeds, crop and animal husbandry practices, [and] diversification of farm enterprises.”
Industry insiders echo the sentiments relayed in the FAO report, believing these policies will increase farmer productivity. “This will help the farmer to…invest more, get in touch with technologies, produce more and become the base of the industry,” said Sintayehu Woldemichael (PhD), Director General of the PFESA.
Others add that the programme will also help solve structural problems plaguing farmers. “Ethiopia’s economy has been on the back of smallholder farmers. However, whatever effort and struggle they put in, there are always big challenges, like drought, which are out of their control. This technology targeted to solve those challenges out of their control. And just like this, cooperation across all institutions is needed to address big problems in the country,” said Khalid Bomba, CEO of the ATA.
According to the forecasts, based on satellite information from the NMA, Kifya provides a network called the Cloud Based Insurance Platform – the place through which insurance companies sell policies, assess damages, as well as estimate and pay compensation to farmers. The platform works wherever there is an Internet connection. When there is no network, it stores and sends data after the connection is restored.
Using cross-checked data from the newly rented satellites of the European Organisation for Meteorological Satellites (EUMETSAT) and the existing technologies of the United States and China, the NMA plans to provide images that show a one square kilometre resolution of farmland, known as pixel, to KFT, which is far better than the previous satellite images received, which were limited to 10 square kilometres. The platform has divided Ethiopia into 60 agricultural sections and over 800,000 pixels. Based on 16 years of historical data, the damage extent for each pixel is analysed.
Information from EUMETSAT enters the Agency’s server every 10 minutes. The KFT platform processes the data into tangible production expectations based on the greenness of the farmland and decides the amount of compensation to be paid in the case of drought-related losses. It then calculates whether the farmers have to be compensated fully, half or any percentage of their investment, based on the severity of the damage, which will be announced by the NMA.
This type of Internet- and information-based system has worked well in other countries. According to a World Bank study, a similar programme operating in India, the country with the most insured farmers, yielded fruitful results. “Insurers received transparent, reliable and timely crop data, reducing the possibility of data manipulation, and allowing for lower insurance premiums,” according to the report. In addition to this, the study demonstrates that accessible, reliable data and timely payments also engendered trust towards public insurers, resulting in an “increase of the public insurer’s weather-based crop insurance portfolio to almost 1 million farmers and a total annual premium volume in excess of USD50 million.”
The EIC hopes for similar popularity – with plans to sell the product to up to 300,000 farmers this fiscal year and one million within three years. The Corporation, along with private insurance companies that are expected to join platform, plans to cover all smallholder farmers in the country, nearly 15 million people, by the end of the second phase of Growth and Transformation Plan (GTP II) period in 2019/20.
Since the voucher system, which helps farmers access goods such as fertiliser, improved seeds and labour-saving tools on credit basis through microfinance institutions, started as a pilot project in the Amhara Region in 2014, 82 rural districts have been covered by the scheme, amounting to 1.9 million farmers as of June 2015.
Key stakeholders say that the best interests of farmers are at the centre of issuing these policies. “It is not about competition now; it is all about serving the nation and curbing damages for farmers, so I expect all insurance companies will join us in providing the service,” says Wondwesen Sintayehu, CEO of EIC. The Corporation also bought a guarantee for the new package from SwissRe, he adds.
The premium rate is 15Pct of the cost of input the farmer used during a specific harvesting season. “Some regions have already agreed to subsidies part or a total of the premium,” says Fikru Tsegaye, Director of Marketing and Strategic Management at the EIC. According to data obtained from the ATA, a smallholder farmer spends ETB2,500 to ETB3,000, on average, to purchase various agricultural inputs in a given harvesting season.
The platform, which was developed by KFT, can accommodate up to 10 insurance companies. The Company worked with the University of Twente to come up with the algorithm that turns satellite imagery into production loss, according to Munir Duri, CEO of KFT. The satellite image shows the greenness of the vegetation and the amount of the chlorophyll in the plant, which is decided by rain, weather, wind and humidity. Two experts from the ATA have also taken trainings at the University to familiarise themselves with the process.
“The platform is scalable and for the future, we will start insuring the exact amount of the production loss, because the platform can calculate yield. We will also start providing livestock and life insurance policies soon,” said Wondwesen, who added that the technology is also helpful to improve financial inclusion.
Nyala, Oromia and Africa insurance companies have already entered an agreement to use the technology with the new consortium, in addition to the EIC, according to Megersa Meressa, Director of Micro Insurance at Kifya. This arrangement of working in consortium reduces administrative costs by half, making the service more affordable, he said.
In the past, weather index-based crop insurance policies were provided by some private insurance companies and also by donors through pilot projects. However, “they could not last because of their high premiums, which is caused by the high administrative cost in the delivery channel,” says Megersa.
Wondwesen, head of the EIC, says that the new platform provides efficiency, which is important when dealing with far-flung farmers. “Now we do not have to go to rural areas to sell policies or check damage physically. We do everything from our headquarters in Addis,” he says.
Upon the launch of the product, farmers can buy the policy along with the agricultural inputs they purchase, whether it is on credit or with their money, from microfinance institutions (MFIs), cooperatives and unions. After taking the loan from the institutions through the input voucher system, farmers then take inputs from cooperatives, at which point the KFT takes the serial number on the voucher and enters it into the platform. Personnel at the agent offices (MFIs, cooperatives and unions) also take biometrics of the farmer, like fingerprints, and send it to the platform.
The KFT and the agents get commission from the number of policies sold while the EIC profits if there are no disasters. “We are not thinking about profit for now. Maybe in the future,” says Wondwesen.
Still, some are sceptical that the policies are a comprehensive solution to the multi-faceted problems plaguing smallholder farmers. “This is a risky mitigation strategy. It is simply adding the new insurance package on the input voucher system, which is already set before,” says Atomsa Besha, Microfinance Officer at the ATA, who is also the coordinator of the new insurance package.
He says the new insurance scheme will encourage farmers to increase their productivity, income and assets. “[However], if it is not supported by the right agronomic practices, just introducing the insurance scheme does not ensure greater productivity.”
Indeed, although much has been done to improve the lives of smallholder farmers, stakeholders stress that there is still more work to be done. This includes establishing a National Cooperatives Bank in order to beef up MFI’s lending capacity so that they disburse enough loans to farmers to buy agricultural inputs and the insurance policies.
Recently, executives of MFIs complained that they are facing capital shortages to meet the loan demands of farmers during a meeting they held with the Governor of the National Bank of Ethiopia (NBE) at the end of 2015.
However, Mewardi Abdulrahman, Micro and Small Enterprise Development Unit Officer at the Association of Ethiopian Micro Finance Institutions (AEMFI), disagrees with this rationale. “The five biggest MFIs are even stronger than most private banks in the country,” she explains.
Data demonstrates that MFIs have increased their lending over the past decade. As of September 30, 2015, the 32 MFIs in the country, which are members of the AEMFI, disbursed a total of ETB19.3 billion in loans since 2000, a figure that was ETB15.7 billion in 2014 and ETB609 million in 2004, according to data obtained from the AEMFI. The number of active borrowers has also reached 3.6 million as of September 2015, while the average loan per borrower stood at ETB5,362 in 2015, up from ETB978 in 2004.
Of the total ETB49 billion in loans disbursed by MFIs so far, 57Pct went towards the purchase of agriculture inputs, 9.4Pct for trade and 7.5Pct for the manufacturing sector, while the remaining were disbursed to the construction and service sectors as well as personal consumption.
Experts, however, have their own perspective. “Although they usually insure the credit they give to their clients, most MFIs do not provide crop insurance because of their limited capacity to assess risks,” argues Tekie Alemu (PhD), Associate Professor of Economics at Addis Ababa University, who has conducted extensive research on MFIs.
Government officials say the problem of limited capacity among MFIs will be resolved soon. The National Cooperatives Bank will be established during the second phase of the Growth and Transformation Plan period, according to Usman Surur, Director General of the Federal Cooperatives Agency.
Although some have been testing weather index-based crop insurance since 2006, Atomsa argues most of them stop in the middle because the programmes were donor-driven with short-term duration. The number of total clients under those pilot projects is roughly 20,000 so far. Yet, for a country with more than 15 million farmers, the progress made thus far is decimal. Some of those projects have also used geological and satellite data through public-private partnerships. Nevertheless, relevant bodies like the NMA were not involved in any of the projects.
In tandem with the activities undertaken by the EIC, private insurance companies, which already sell crop insurance, are also taking action. However, they say there are still problems that should receive government attention.
Backed by 34 cooperative unions and 1.6 million farmers as shareholders, the Oromia Insurance Company was established in January 2009 as the first company to sell crop insurance policies. It started with a weather index crop insurance policy before expanding to other forms: multi-peril crop and livestock insurance, as well as credit life shield and property insurance.
Because of the current drought, Daniel Negassa, head of the Micro Insurance Department at the Company, says that almost all of the clients that purchased crop and livestock policies are making claims for compensation. In October 2015 alone, the company paid close to ETB1 million to farmers in drought-prone areas.
Drawing from his experience, Daniel says that the challenge is not only limited to the lack of technological platforms, but also lack of awareness, supportive policies and incentives from the NBE. “So far, there is no directive that can allow us to use insurance agents to sell our crop insurance policies, so we had to use cooperatives to sell policies,” he argues.
He continues: “The administrative costs spent to collect the ETB1 premium [is sometimes around] ETB5 to ETB6,” he says. “Government has to incentivise private insurance companies that support the disadvantaged part the society through different schema.”
Tekie also points to another hindrance. “Although farmers are good in taking credits, they lack the awareness about buying insurance packages,” he argues. “Government must give attention to that.”
Daniel hopes that the emergence of companies like M-Birr, Hello Cash and Kifya will open a new era for MFIs to reach a wider area – and, by extension, make insurance more accessible. “We are planning to cover as much area as possible using innovative interactions,” he said. “Although the return will not be realised in the near future, using technology will have a positive and long-term impact.” EBR
4th Year • March 16 2016 – April 15 2016 • No. 37