In Africa, agricultural insurance often falls on stony ground

JACKSON LEWANGU looks up at the clouds scudding above the dry plains of northern Kenya. And, somewhere higher still, a satellite looks down on him. Since 2012 Mr Lewangu, who keeps goats and cattle, has bought insurance designed by the International Livestock Research Institute, based in Nairobi. The satellite monitors vegetation; when it is unusually scarce, he gets a payout. He can then buy food for his animals or pay a rancher for access to grazing land, without which his cows would die.

Insurance could bring peace of mind to Africa’s pastoralists. It could also help the continent’s crop farmers, whose fields are almost entirely rain-fed. But Mr Lewangu’s neighbours are unconvinced. The satellite gives false information, says one woman; there is no payout in good years, complains another. Such scepticism is typical. Although schemes have proliferated in the past decade, almost all are subsidised by governments or foreign donors. Insurers and farmers are “not speaking the same language”, says Rahab Kariuki of ACRE Africa, a Kenyan firm that works with both.

Lack of demand has muted the hype around index insurance, an innovative way to cover smallholders. Data on rainfall or sample yields are crunched; a payout is triggered when an index falls below a threshold. That is cheaper than assessing farmers’ losses, or checking if nomads’ cows have died. And since farmers cannot control the rain, there is less “moral hazard”: changes in their behaviour cannot make a payout more likely.

But the models make assumptions, for example about when farmers plant or how rainfall affects yields. And no model can capture all risks. Buyers may lose their crops and still get nothing, ending up worse off than if they had been uninsured. Such flaws may be sufficiently serious to mean that the most risk-averse farmers will buy less insurance, argues a 2016 paper by Daniel Clarke, then of the World Bank. Demand is lower from pastoralists in Kenya whose losses have been underestimated by the index in the past.

Insurance is an unfamiliar concept in rural Africa. It is also an unsettling one, asking buyers to pay in advance for a return they hope not to need. That is a problem where trust is low, fraud common and the law remote. Another barrier to take-up is that premiums are typically paid before planting, when farmers are poorest. One trial offered insurance to sugar-cane growers in Kenya. Only 5% signed up when they had to pay the premium upfront. More than 70% did when payment was deducted from their sales at harvest, even though they had to sign up at planting time, before knowing whether they would need it.

Some firms are finding clients. Pula, a startup, bundles insurance with other products. In Zambia and Malawi it is in partnership with Bayer, which sells seed. Farmers register by phone, using a unique number attached to each bag of seed; some 130,000 are expected to do so this season. For now Bayer absorbs the cost. But trials by Pula in Nigeria, this time with fertiliser, suggest that farmers will pay more for insured bags. The extra cost seems small to those already forking out for inputs, says Thomas Njeru, one of Pula’s founders.

Meanwhile governments and donors must decide when to subsidise, and how much. Some insurance is so badly designed that it is less useful than cash, says Michael Carter of the University of California, Davis. Well-designed insurance prods farmers to invest more in seed and fertiliser, because they are less worried about being wiped out by drought. Mr Carter and his colleagues are designing a certification system to sort the wheat from the chaff.

Good experiences may ultimately sway farmers. Women near Kitui in eastern Kenya used to survive droughts by walking 5km to the river with a donkey, bringing back water to sell at 1 shilling ($ 0.01) a litre. In the past two years they have received payouts from an insurance scheme run by the World Food Programme, Pula and the government. This too is subsidised. But when asked if they would pay the full premium, almost all say yes.

This article appeared in the Finance and economics section of the print edition under the headline “Paying for rain”