Livestock Insurance failure to take off

In developing countries like Ethiopia, where the majority of the population is small scale farmers and pastoralists, livestock and crop insurances play a vital role in minimizing the risk of climate shock and drought. However, livestock and crop insurance remains a luxury in Ethiopia. Even though livestock and crop insurance policies were introduced in Ethiopia 20 years ago by the state owned Ethiopian Insurance Corporation, the number of beneficiaries is insignificant. Currently, there are only three insurance companies that provide livestock and crop insurance in the country. The situation is getting worse when it comes to micro insurance since it still remains in pilot testing stage dependent on aid from foreign NGOs. EBR’s Kiya Ali spoke with various stakeholders to shed light on the reasons behind.

46 years old Ereda Dobi, a father of nine, lives in Hamer woreda located in the South Western part of Ethiopia. The area is inhabited by pastoralists and agro-pastoralists that depend predominantly on livestock for their livelihood. The health of his cattle is one thing that consistently ticks Ereda’s mind. However, things suddenly changed three years ago as he lost 120 of his cattle to climate shock.

“The incident has turned my life upside down. It has left me dependent on aid from a position of managing a household with 11 members,” Ereda told EBR in frustration. Ereda is only one of numerous Ethiopians affected by climate change and drought. Climate shock that leads to drought is the most pervasive hazard encountered by many households in Ethiopia. Especially pastoralists like Ereda that live in different corners of the country are the most vulnerable for climate change.

Megerssa Miressa, director of Micro Insurance at Kifiya Financial Technology, pointed out that the damage of climate shock is not limited to individual farmers and pastoralists. “Its spillover effect will result in a big loss for the country because the majority of income and export earnings come from the agricultural sector,” remarked Megerssa.

The agricultural sector is the foundation of the economic and social life of Ethiopians. It plays a significant role in the country’s economy by constituting 33.3Pct of the country’s gross domestic product (GDP) and generating employment opportunity for 80Pct of the population. Therefore, it is considered as a major priority area of the government for reducing poverty and achieving food security. Livestock is an integral part of the agricultural sector and Ethiopia has the largest livestock population in Africa with more than 100 million cattle, sheep and goat. Nevertheless, the contribution of the livestock sector for the economy remains low as it makes up only 19Pct of the country’s GDP.

Despite its low contribution to GDP, rural inhabitants still continue to accumulate wealth in the form of livestock such as cattle. Since the livestock are not insured against disasters like climate change, drought or epidemics, however, farmers and pastoralists like Ereda are likely to lose everything they have. Death of livestock signifies a threat to the livelihood of pastoralists in lowland areas where there is limited access to finance to recover from the disaster.

To combat this problem, the Ethiopian Insurance Corporation (EIC) started providing livestock insurance 20 years ago. Currently, it has only 25 registered commercial farmers for livestock insurance.

In broader terms, agricultural insurance in Ethiopia is classified as crop and livestock insurance. Under crop insurance, there are three types of insurance schemes: multi period, index based and crop yield insurance. On the other hand, livestock insurance is categorized as traditional or common and shelf insurance. The beneficiaries of shelf insurance are mainly commercial farmers and those farmers with a minimum of 20 cattle in the case of EIC and 10 cattle in the case of Nyala insurance. Yet, the number of clients is very small.

Teshome Deboch, senior agricultural surveyor at EIC, believes that people don’t consider insurance as a risk management mechanism because they lack awareness. “Majority of the Ethiopians don’t even have life insurance, let alone buying insurance for their cattle,” he argues. “Even the insured dairy farmers have done so involuntarily. They buy insurance to fulfill the bank’s prerequisite for loans and not with the understanding that it is a risk management mechanism.”

Teshome believes that the lifestyle of the society and financial constraints lead people to consider insurance as a luxury rather than a risk minimization technique.

However, the reasons for low insurance subscription by large scale livestock owners are far from lack of awareness and financial constraints. “The price is affordable and we know the benefits of livestock insurance,” says Tefera Hailu (PhD), general manager of Tefera Hailu Livestock and Meat Exporter. “Business slow down is the major factor that holds us back from buying livestock insurance.”

Tefera stated that contraband accounts for 90Pct of the livestock export from Ethiopia. “This has greatly affected our business and decreased our income. Few years back, export earnings from livestock were more than ETB300 million. Currently, it is below ETB40 million. Thus, contraband is more risky for our business than other types of shock,” Tefera explained.

The fact that livestock are not taken as collateral for loan is an additional factor that suppresses the interest of investors to buy livestock insurance. They prefer to shift the expenses for insurance to other efficiency and productivity related issues.

Solomon Zegeye, micro insurance business division manager at Nyala Insurance, believes lack of interest from insurance companies to invest more and expand livestock insurance is a major factor for the underdevelopment of the sector. “Insurance companies give priority for lucrative businesses and livestock insurance is not one of them. It requires dedication and effort to mobilize critical mass and the benefit will be seen after a long period of time,” Solomon states.

Lack of availability of various packages is another factor raised by exporters and dairy farm owners for not buying insurance for their cattle. “Although livestock insurance has been in place for the last 20 years, the product is not still comprehensive. The situation is getting worse when it comes to micro insurance. It has been in pilot testing stage, sponsored by foreign NGOs, for the past 20 years,” Fikru Tsegaye, Marketing and Strategic Team Leader of Ethiopian Re, stated.

In general, the Ethiopian insurance penetration rate is very low and its contribution to GDP is below one percent. According to Fikiru, the penetration rate of Ethiopian insurance companies as a whole (as an industry) is 0.43Pct. This is way below the world average of 8Pct.

Megerssa pointed out that the insurance sector is facing a number of challenges. “These include less/no customer centric product development skills, absence of linkage between micro insurance products and microfinance products beyond credit life insurance, capacity to pay of low-income people and absence of a distinct government body to oversight the sector.”

However, the reason for the stagnation in index based insurance is different from the causes of poor performance of other types of livestock insurance. Index based livestock insurance requires the application of satellite to collect climate information and it is intended to protect pastoralists in remote areas. The satellites then assess the state of the grazing conditions in a certain region by measuring the color of the ground. Green indicates wet lands and is a sign of good condition while yellow is very dry and signals risk. If the data collected passes a certain threshold, the pastoralists would automatically receive a lump sum payment that would allow them provide feed, water, medicine and other essentials for their livestock. Such resilience mechanism has worked for different African countries. The Kenya Livestock Insurance Program (KLIP) is a case in point. KLIP was initially implemented in two areas of Kenya: at Wajir and Turkana. It quickly became successful. The scheme started as a pilot project in 2015 but now it has been scaled up across the whole country, benefiting many pastoralists. Furthermore, the scheme shifted from being fully donor dependent to be funded by the Kenyan government.

However, in the case of Ethiopia, livestock insurance in general and index based insurance in particular have failed to meet their intended objectives. Index based insurance has been in pilot stage for more than 10 years. “NGOs are making duplicative effort and it is performed in fragmented form,” Solomon assessed.

“Lack of precise forecasts and information delivery instruments is the major factor that makes index based insurance difficult,” explains Asefa Hailu, a climatologist and chief of party at Building Resilience and Adaptation to Climate and Disaster (BRACED), a program funded by the Department for International Development (DFID).

BRACED project was terminated last year after running for five years. While it was on operation, the project was implemented by Farm Africa and Mercy Corps and they were able to register 20,000 pastoralists and farmers in the state of Somali and 4,000 in the state of Afar under the subsidized livestock insurance program. The project provided ETB682, 661 for 1,250 pastoralists from six woredas in Afar following the drought that occurred in the area. Yet, after the termination of the project, no one was in place to take over the project and sustain it.

Similarly, Index Based Livestock Insurance has played a significant role particularly in Borena Zone of the state of Oromia where Oromia Insurance Company and International Livestock Research Institute (ILRI) launched the product since 2012. However, it is still donor dependent. Hence, Solomon concluded, lack of proper exit strategy by donors and absence of government involvement are additional reasons for the poor performance of index based insurance. “Moreover, absence of infrastructure, deficiency of smart subsidy approach, lack of proper market and distribution channels, poor saving habits of rural farmers, intensive farming approach and absence of medical history of livestock have forced the scheme to languish in pilot stage for years,” noted Robel Engida (MD), veterinary service coordinator at Hamer Woreda livestock and fishery resource office.

Health situation of livestock, types of feed and tag are among the major prerequisites requested by insurance companies to sell premium for livestock insurance. Compared to index based insurance scheme, which is suitable for small holder farmers, insurance for large scale farm is suitable and more convenient for insurance companies. Insurance companies are, however, having a hard time scaling up their accessibility for large scale farms rendering commercializing index based insurance even more unrealistic.

Among the type of insurance products incorporated in agricultural insurance, livestock insurance is the smallest amount and its contribution is below one percent,” Solomon confirms.

“Covering millions of pastoralists needs strong and long term collaboration between government, donor agencies and the private sector. Effective and efficient use of technology for awareness creation, underwrite, claim process and payouts need to be in place. It is also important to introduce livestock market structure so that the market system may subsidize premium payments and these needs blessings by the government body,” Megerssa suggested.

Stakeholders suggest effectively utilizing the opportunities presented by Micro Finance Institutions (MFIs) and cooperatives (direct potential customers for micro insurance products) to boost livestock insurance. Beyond these opportunities, Megerssa explained, further development of the industry will rely on establishment of new structure in the government body (apex body of Micro insurance). Solomon seconded Megerssa’s claim by stating: “government intervention and the establishment of a separate regulatory body independent from the National Bank of Ethiopia is needed to improve insurance accessibility.”

Due to low levels of liquidity in remote areas of the country where pastoralists live, pastoralists must often consider selling an animal in order to pay for the premium. As a result, industry insiders stress it is important to use smart subsidy approach. “Given the long-term nature of the required micro insurance infrastructure, it is critical to initiate the necessary processes as soon as possible,” Megerssa concludes.EBR

9th Year • Apr.16 – May.15 2020 • No. 85