Agricultural Insurance Experience in Ghana …...Agricultural Insurance Experience in Ghana Subject...
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Agricultural Insurance Experience in Ghana Subject The impact of climate change on farming has contributed to the evolution of many agricultural insurance initiatives. In 2009, – on behalf of the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB) – the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), together with the National Insurance Commission (NIC), launched the Innovative Insurance Products for the Adaptation to Climate Change (IIPACC) project in Ghana. The IIPACC aimed to capacitate the insurance sector to develop innovative, demand-oriented and economically sustainable insurance products against the financial risks of extreme weather events. This set the basis for the first Ghana Agricultural Insurance Pool (GAIP). Currently, GAIP has three products in the market: 1. A drought Weather Index Insurance (WII) product for smallholder farmers. 2. Multi-Peril Insurance for Poultry (MPIP) for commercial farmers 3. Multi-Peril Crop Insurance (MPCI) for commercial farmers. Challenges in Ghana There are two major challenges with respect to agricultural insurance in Ghana: 1. Enrollment: Scaling performance of the agricultural insurance market remains low (very few products). The growth rate of the sector is very slow (36% from 2011-2016). Very poor performances in 2012 and 2013 when overall enrolment dropped by 84% and 86% respectively. These challenges are attributable to the complexity of insurance products, financial illiteracy and aversion towards new risk management approaches. 2. Claims: The only prominent claim pay-outs were in 2015 where 1,701 farmers received a payment equivalent to a claim ratio of only 29%. Solution Innovation in products portfolio and market development 1. It is important to diversify the products portfolio by focusing on products that specifically target small-scale farmer groups and commercial farmers. The commercial market has the potential to generate 80% of revenues, which will enable the development of a self-sustaining, client-oriented and viable market. 2. Leverage aggregators are needed to minimize cost and increase scale. 3. Establishing independent regional offices increases premium costs. Therefore, it is important to make use of the existing aggregators, such as input suppliers, cooperatives, microfinance companies and rural as well as community banks across Ghana.
Transcript of Agricultural Insurance Experience in Ghana …...Agricultural Insurance Experience in Ghana Subject...
Agricultural Insurance Experience in GhanaSubjectThe impact of climate change on farming has contributed to the evolution of many agricultural insurance initiatives.
In 2009, – on behalf of the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB) – the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), together with the National Insurance Commission (NIC), launched the Innovative Insurance Products for the Adaptation to Climate Change (IIPACC) project in Ghana.
The IIPACC aimed to capacitate the insurance sector to develop innovative, demand-oriented and economically sustainable insurance products against the financial risks of extreme weather events. This set the basis for the first Ghana Agricultural Insurance Pool (GAIP).
Currently, GAIP has three products in the market:
1. A drought Weather Index Insurance (WII) product for smallholder farmers.
2. Multi-Peril Insurance for Poultry (MPIP) for commercial farmers
3. Multi-Peril Crop Insurance (MPCI) for commercial farmers.
Challenges in GhanaThere are two major challenges with respect to agricultural insurance in Ghana:
1. Enrollment: Scaling performance of the agricultural insurance market remains low (very few products). The growth rate of the sector is very slow (36% from 2011-2016). Very poor performances in 2012 and 2013 when overall enrolment dropped by 84% and 86% respectively. These challenges are attributable to the complexity of insurance products, financial illiteracy and aversion towards new risk management approaches.
2. Claims: The only prominent claim pay-outs were in 2015 where 1,701 farmers received a payment equivalent to a claim ratio of only 29%.
SolutionInnovation in products portfolio and market development
1. It is important to diversify the products portfolio by focusing on products that specifically target small-scale farmer groups
and commercial farmers. The commercial market has the potential to generate 80% of revenues, which will enable the development of a self-sustaining, client-oriented and viable market.
2. Leverage aggregators are needed to minimize cost and increase scale.
3. Establishing independent regional offices increases premium costs. Therefore, it is important to make use of the existing aggregators, such as input suppliers, cooperatives, microfinance companies and rural as well as community banks across Ghana.
Objective
On behalf of the German Ministry for Environment, Nature Conservation and Nuclear Safety, and Building (BMUB) Integrated Climate Risk Management (ICRM) concepts are being developed in selected country contexts to insure vulnerable population groups, private businesses and governments against financial risks from extreme weather events. The resulting lessons learnt are being made available for the international debate on climate risk management for replication and scaling-up purposes.
Background
In 2013, there were 330 destructive natural disasters worldwide, which claimed human lives, caused severe destruction and significant economic loss. The share of damage caused by extreme weather events related to climate change has significantly increased over the past few decades. A single natural catastrophe can have enormous financial impacts for people and governments. For example, the 2007 floods in the UK caused damage worth USD3.2–4.8 billion. Another example is Peru – its economy is particularly vulnerable to El Niño. The 1997/1998 event caused deadly flooding and mudslides in the country, and the damage to infrastructure amounted to about USD 3.5 billion, which was about 4.5% of Peru’s GDP that year.
The topic of climate (disaster) risk management has gained prominence in the Framework Convention on Climate Change (UNFCCC). The Sendai Framework for Disaster Risk Reduction 2015-2030 and the Paris
Promoting Integrated Climate Risk Management and Transfer (ICRM)
Project name Promoting Integrated Climate Risk Management and Transfer (ICRM)
Commissioningparty
German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB) through its International Climate Initiative (IKI)
Duration 11/2015-10/2018
Project region Bilateral (Ghana)Global (selected countries)
Local partner Ghana: Ministry of Finance (MoF)
Implementing Partner
Global: Munich Climate Insurance Initiative (MCII)Ghana: National Disaster Management Organisation (NADMO), Ghana Agricultural Insurance Pool (GAIP)
Target group Vulnerable population groups, small-holder farmers, SMEs such as commercial agricultural business, International Organizations (IOs), delegates participating in climate negotiations, non-governmental organizations (NGOs), (re)insurer, local governments, city councils, civil society
Climate Agreement explicitly refer to it. The importance of suitable and sustainable access to direct or indirect insurance coverage against the impacts of climate change is also reflected in the G7 Initiative on Climate Risk Insurance adopted at the G7 Summit in Germany. Since 2009, climate risk management and risk transfer have been a key component in the success of implementing various disaster risk management initiatives by GIZ GmbH and the Munich Climate Insurance Initiative (MCII).
Published by Deutsche Gesellschaft fürInternationale Zusammenarbeit (GIZ) GmbHRegistered offices Bonn and Eschborn, Germany
Promoting Integrated Climate Risk Management and Transfer (ICRM)7 Volta StreetP.O. Box KIA 9698T +233 (0) 302 760448F +233 (0) 302 [email protected]
Authors Branko Wehnert
Contact [email protected]
As at August 2016
GIZ is responsible for the content of this publication
On behalf of Federal Ministry for Environment, Natural Resources,Building and Nuclear Safety (BMUB)
Division Referat KI II
Adresses of the BMUB Offices
BMUB Berlin BMUB Bonn Stresemannstraße 128-130 Robert- Schuman-Platz 31017 Berlin, Germany 53175 Bonn, GermanyT +49(0)3018305-0 T +49(0)22899305-0F +49(0)3018305-2044 F +49(0)22899305-3225
Adopting an Integrated Disaster Risk Management Approach
1. The government should hedge the high impact but low frequency risks to sovereign pools, such as the African Risk Capacity.
2. The private sector should be able to provide insurance coverage for the medium-to-low impact agricultural risks.
3. Government subsidies negotiations, which are based on practical evidence focusing on how subsidies could increase production of high-value crops, should be intensified.
Lessons Learned1. Key challenges are: Over-optimistic demand assumptions
for agriculture insurance, misunderstanding of insurance products as well as farmers choosing alternative coping measures for managing lighter weather risks.
2. Complexity of index products and financial illiteracy impede insurance uptake. Particularly, the WII structure and the various levels of triggers as well as pay-outs were perceived as complex by well-educated farmers.
3. Limits to the insurability of drought is determined by technical issues, such as the elaboration of an operational drought definition and the minimization of basis risk.
4. A majority of farmers are averse to new risk management approaches towards naturally induced disasters.
5. The agricultural sector faces several risks and focusing solely on insurable risks hinders the adoption of a value chain approach that is sustainable. Client-oriented products are essential to building confidence and trust which favors insurance uptake.
6. Subsidies may be required up-to a certain point as especially drought WII is very expensive for small-scale farmers.
Published by: Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Registered offices Bonn and Eschborn, Germany
Promoting Integrated Climate Risk Management and Transfer (ICRM) 7 Volta Street P.O. Box KIA 9698 T +233 (0) 302 760448 F +233 (0) 302 773106 [email protected]
Authors Branko Wehnert
Contact [email protected]
As at January 2018
GIZ is responsible for the content of this publication
On behalf of Federal Ministry for Environment, Natural Resources, Building and Nuclear Safety (BMUB)
Division Referat KI II
Adresses of BMUB Berlin Stresemannstraße 128-130 1017 Berlin, Germany T +49(0)3018305-0 F +49(0)3018305-2044
[email protected] www.bmub.bund.de
the BMUB OfficesBMUB Bonn Robert- Schuman-Platz 3 53175 Bonn, German T +49(0)22899305-0 F +49(0)22899305-3225
Industry Performance Enrolment With all the initiatives so far, the scaling performance of the agricultural insurance market is not as expected. There are very few products. The growth rate of the sectors has been very slow. Comparing 2011 against 2016, enrolment has increased by only 36%. This encompasses also very poor performances in 2012 and 2013 when overall enrolment dropped by 84% and 86% respectively.
Claims Claims payment has not also been very encouraging during the period. Even with the highest reported enrolments in 2016, no paid claims were recorded. The only notable claims pay-outs were in 2015 when 1,701 farmers received payment for their losses amounting to a claim ratio of only 29%.
Key Lessons Learnt Over-optimistic demand assumption Demand for agriculture insurance was over-estimated whiles the realities on the ground proved otherwise. An income assessment conducted by the GIZ IIPACC team showed that given the prevailing rates, insurance premiums will consume a significant proportions of farmers income – the equivalence of 62% of their total cash expenditure on production. Other factors that affected demand included misunderstanding of the insurance products as well as farmers preferring their alternative coping mechanisms for managing lighter weather risks.
Complexity of index products. Low financial literacy has been a major impediment to uptake. The products, especially the weather index insurance, were too complicated to be fully understood by small-holder farmers. Even for well-educated farmers it was still a very tasking challenge to explain the various levels of triggers and pay-out structure.
Limits to insurability of drought. Overcoming the inherent technical issues associated with drought index insurance – including the elaboration of an operational definition of drought (x sequential days with rainfall below y mm), as well as minimizing the product specific basis risk were a major challenge. Consequently, very few pay-outs we made prior to June 2014 when the IIPACC project ended.
Static Agriculture. While some farmers in Ghana have learnt to cope with various risks through diversification of their income sources, their limited safety nets do not immune them from the impact of unexpected financial losses resulting from natural disasters. Most
farmers are therefore averse to new approaches to risk management. This was a major challenge especially when the general reputation of insurance is low and premiums perceived to be expensive.
Adopting a Value Chain Approach. The agricultural sector is confronted with various risk. Only focusing on the insurable risks misses the opportunity to be client-oriented and ultimately building confidence and trust which will translate into high uptake. Fortunately, the GIZ-ICRM project provides the platform to develop multifaceted approaches to agricultural risk management
Subsidy is necessary up-to a certain point. Globally, the experience shows that some agricultural insurance products require subsidies to be sustainable. This was iterated by the GAIP General Manager, Alhaji Ali Katu, who opined that drought index insurance is particularly expensive for the small-scale farmers and could do better with poverty-sensitive government subsides.
Propose Ways Forward Diversify products portfolio. This should include products specifically targeting small-scale farmer groups and commercial farmers. It is argued that the commercial market could potentially generate 80% of revenues. This will help to develop a market that is self-sustaining both in terms of being client-oriented and commercially viable.
Leverage aggregators to minimize cost and increase scale. Establishing independent regional offices adds to the cost of premiums. However, the availability of aggregators such as input suppliers, cooperatives, microfinance companies, and rural and community banks across the country, provide an opportunity for feasible distribution partnerships.
Intensify government subsidies negotiation. Although negotiations for premium subsidies started since GAIP’s inception, the argument has not been sufficiently made on why government should prioritize insurance over the other agricultural inputs it already provides to farmers. There is a need to support the argument with practical evidence including how subsidy could increase production of high-value crops. Turkey has been successful with this and provides useful lessons.
Adopt an integrated approach to Disaster Risk Management (DRM). This should include government hedging the high impact but low frequency risks to sovereign pools such as the Africa Risk Capacity (ARC) as well as enabling private sector to provide insurance cover for the medium-to-low impact agricultural risks.
Published by Deutsche Gesellschaft fürInternationale Zusammenarbeit (GIZ) GmbH, Registered of ces Bonn and Eschborn, Germany Promoting Integrated Climate Risk Management and Transfer (ICRM) 7 Volta Street, P.O. Box KIA 9698 T +233 (0) 302 760448 F +233 (0) 302 773106 GIZ is responsible for the content of this publication
Author ICRM and Mark Achaw
Contact [email protected]
As at November 2017
3,073
490 436
2,117
3,261
4,785
0 87 129 25
1,701
00
1,000
2,000
3,000
4,000
5,000
6,000
2011 2012 2013 2014 2015 2016
Number Insured Farmers No. of Claim Beneficiaries
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
2011 2012 2013 2014 2015 2016
Total Gross Premium (GHS) Total Claims Paid (GHS)
Figure 2. The Integrated Disaster Risk Management Cycle
Industry Performance Enrolment With all the initiatives so far, the scaling performance of the agricultural insurance market is not as expected. There are very few products. The growth rate of the sectors has been very slow. Comparing 2011 against 2016, enrolment has increased by only 36%. This encompasses also very poor performances in 2012 and 2013 when overall enrolment dropped by 84% and 86% respectively.
Claims Claims payment has not also been very encouraging during the period. Even with the highest reported enrolments in 2016, no paid claims were recorded. The only notable claims pay-outs were in 2015 when 1,701 farmers received payment for their losses amounting to a claim ratio of only 29%.
Key Lessons Learnt Over-optimistic demand assumption Demand for agriculture insurance was over-estimated whiles the realities on the ground proved otherwise. An income assessment conducted by the GIZ IIPACC team showed that given the prevailing rates, insurance premiums will consume a significant proportions of farmers income – the equivalence of 62% of their total cash expenditure on production. Other factors that affected demand included misunderstanding of the insurance products as well as farmers preferring their alternative coping mechanisms for managing lighter weather risks.
Complexity of index products. Low financial literacy has been a major impediment to uptake. The products, especially the weather index insurance, were too complicated to be fully understood by small-holder farmers. Even for well-educated farmers it was still a very tasking challenge to explain the various levels of triggers and pay-out structure.
Limits to insurability of drought. Overcoming the inherent technical issues associated with drought index insurance – including the elaboration of an operational definition of drought (x sequential days with rainfall below y mm), as well as minimizing the product specific basis risk were a major challenge. Consequently, very few pay-outs we made prior to June 2014 when the IIPACC project ended.
Static Agriculture. While some farmers in Ghana have learnt to cope with various risks through diversification of their income sources, their limited safety nets do not immune them from the impact of unexpected financial losses resulting from natural disasters. Most
farmers are therefore averse to new approaches to risk management. This was a major challenge especially when the general reputation of insurance is low and premiums perceived to be expensive.
Adopting a Value Chain Approach. The agricultural sector is confronted with various risk. Only focusing on the insurable risks misses the opportunity to be client-oriented and ultimately building confidence and trust which will translate into high uptake. Fortunately, the GIZ-ICRM project provides the platform to develop multifaceted approaches to agricultural risk management
Subsidy is necessary up-to a certain point. Globally, the experience shows that some agricultural insurance products require subsidies to be sustainable. This was iterated by the GAIP General Manager, Alhaji Ali Katu, who opined that drought index insurance is particularly expensive for the small-scale farmers and could do better with poverty-sensitive government subsides.
Propose Ways Forward Diversify products portfolio. This should include products specifically targeting small-scale farmer groups and commercial farmers. It is argued that the commercial market could potentially generate 80% of revenues. This will help to develop a market that is self-sustaining both in terms of being client-oriented and commercially viable.
Leverage aggregators to minimize cost and increase scale. Establishing independent regional offices adds to the cost of premiums. However, the availability of aggregators such as input suppliers, cooperatives, microfinance companies, and rural and community banks across the country, provide an opportunity for feasible distribution partnerships.
Intensify government subsidies negotiation. Although negotiations for premium subsidies started since GAIP’s inception, the argument has not been sufficiently made on why government should prioritize insurance over the other agricultural inputs it already provides to farmers. There is a need to support the argument with practical evidence including how subsidy could increase production of high-value crops. Turkey has been successful with this and provides useful lessons.
Adopt an integrated approach to Disaster Risk Management (DRM). This should include government hedging the high impact but low frequency risks to sovereign pools such as the Africa Risk Capacity (ARC) as well as enabling private sector to provide insurance cover for the medium-to-low impact agricultural risks.
Published by Deutsche Gesellschaft fürInternationale Zusammenarbeit (GIZ) GmbH, Registered of ces Bonn and Eschborn, Germany Promoting Integrated Climate Risk Management and Transfer (ICRM) 7 Volta Street, P.O. Box KIA 9698 T +233 (0) 302 760448 F +233 (0) 302 773106 GIZ is responsible for the content of this publication
Author ICRM and Mark Achaw
Contact [email protected]
As at November 2017
3,073
490 436
2,117
3,261
4,785
0 87 129 25
1,701
00
1,000
2,000
3,000
4,000
5,000
6,000
2011 2012 2013 2014 2015 2016
Number Insured Farmers No. of Claim Beneficiaries
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
2011 2012 2013 2014 2015 2016
Total Gross Premium (GHS) Total Claims Paid (GHS)
Figure 2. The Integrated Disaster Risk Management Cycle
