Posted on May, 23, 2024 at 09:21 am
Agricultural value chains are multi-faceted industries encompassing farmers, agro-processors, and traders. The resilience of each impacts the entire system. However, the vulnerability of these facets to various risks threatens the stability and sustainability of the whole value chain.
Agriculture remains vital in feeding nations and maintaining economic stability in the ever-changing global economies. Despite its immense contribution, it faces a series of challenges. From unpredictable weather patterns to market fluctuations, posing a risk to livelihoods, food security, and economic stability.
Moreover, post-harvest losses further aggravate the challenges faced, leading to significant economic losses. For example, according to the Fresh Produce group of Kenya, nearly 40 per cent of the food produced in the country’s horticultural value chain is lost through poor post-harvest handling, knowledge gaps on best practices, and improperly structured markets.
In the face of such uncertainty, building resilience within the agricultural value chain is not just a necessity but a strategic imperative.
Insurance emerges as a beacon of hope in mitigating risks and managing resilience across the agricultural value chains. To cover climate-related risks affecting this sector, agriculture insurance provides farmers with financial protection against adverse weather conditions. By compensating for crop losses, this type of insurance helps farmers recover from setbacks and maintain their livelihood, thereby ensuring food security and stability in rural communities.
Furthermore, insurance solutions tailored to other players in the agriculture value chain, such as farm input suppliers, transporters, and Agro-processors, play a vital role in safeguarding against operational risks. For instance, business interruption insurance can help Agro-processors mitigate losses from supply chain disruptions or equipment breakdown, enabling them to recover swiftly and resume operations.
Beyond risk mitigation, insurance also facilitates access to credit for agricultural stakeholders. Creditors are more inclined to extend loans to farmers and agribusinesses equipped with insurance coverage, as it reduces the lender’s risk exposure.
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Although agricultural value chain resilience is a vital wheel to food security and sustainable food systems in Africa, insurance penetration within Africa’s agricultural value chain remains relatively low. Several barriers, including low awareness, affordability concerns, and inadequate infrastructure, impede insurance uptake among small-scale farmers and other stakeholders.
The low demand for insurance in the agricultural value chain, limited availability and accessibility of quality data, and the need for greater clarity from insurance supervisors on how index-based products will be dealt with are major challenges. Additionally, there are commonalities in the critical success factors for scaling up agricultural insurance, such as the need to design products that correspond to customers’ actual needs, effective coordination between different stakeholders, and enabling technological innovations that make processes more efficient.
Moreover, availability and access to accurate and quality agricultural data is a challenge in designing an index-based product. Index-based insurance relies on historical data (meteorological data, yield statistics, satellite data) and current yield data to create a benchmark for assessing the level of compensation when losses occur. In many cases, to improve the quality and availability of data, investment is required to enable improvements such as the renovation of automated weather stations and the development and implementation of more modern data collection and storage technologies.
Index-based insurance is a promising tool to enhance farmers’ resilience and protect their production risks. 96 per cent of the products available in the agricultural insurance market are indemnity-based. Indemnity-based agricultural insurance provides valuable support in many countries. However, they are susceptible to adverse selection, moral hazard, and high costs of loss assessment, linked to farm visits needed to determine the cover limits and assess the loss when a claim has been made.
Agricultural value chains are facing a paradigm shift, from competency-driven industrial agriculture to resilience-focused eco-friendly agriculture. The nature of the criteria shift is similar to the transformation taking place in many other industries, its impact on the environment is, however, far-reaching.
Partnerships between the government and private entities are needed to devise, develop, and establish efficient and sustainable solutions to risks in the agricultural value chain. Regional workshops aimed at creating awareness and capacity-building support through sharing knowledge and fostering innovative solutions should be regular.
To cope with the additional pressure of climate change on socioeconomic development and food security, Africa has adopted a policy framework that concedes and puts emphasis on the importance of strengthening climate and disaster resilience and adapting insurance in the agricultural value chain.
Bundling several services with index-based insurance is considered part of a broader value proposition for farmers. To generate sales of agricultural insurance products, insurance is linked to credit from microfinance institutions (MFIs), input companies, off-takers, farmer associations, mobile companies, and climate information services.
Furthermore, Bundling agricultural index-based insurance with other insurance products and providing value-added services like weather information services or access to training on new farming methods may be attractive to customers and improve the product value proposition. One example of bundling products would be medical insurance combined with seed insurance or life insurance combined with dairy insurance.
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In conclusion, Insurance is a linchpin in building resilience within Africa’s agricultural value chain. By providing financial protection, enhancing access to farmers, agribusiness, and other stakeholders to withstand shocks and seize opportunities for growth.
Addressing barriers requires concerted effort from policymakers, insurers, and other stakeholders to promote financial literacy, develop innovative insurance products, and enhance the accessibility of insurance services.
For instance, in 2020, we saw the Kenyan government partner with six local underwriters, including CIC Group, in the Crop Insurance Program (CIP), with international backing from Swiss Reinsurance Company, to release US$1.08 million in compensation to 25,000 smallholder farmers in 27 counties for climate-related crop losses. Strengthening such partnerships is essential for scaling up insurance solutions tailored to the needs of Kenya’s agriculture value chain.
Furthermore, government support in the form of subsidies, incentives, and regulatory frameworks can incentivise insurers to expand their offerings and reach underserved segments of the agricultural sector.
Collaborations between insurers, agribusinesses, and farmer organisations can also facilitate the co-creation of insurance products that help solve the specific needs and issues faced by different actors within the value chain.
Source: The Exchange