Fighting climate change impacts with agriculture insurance cover

Malawi: Malawi’s economy is heavily dependent on climate-sensitive agriculture and is highly vulnerable to droughts and floods. The country loses 1.7% of GDP every year to extreme weather events such as drought, writes Raphael Mweninguwe.

In response to these challenges imposed by climate change the Government of Malawi in partnership with the World Bank and other development partners, initiated a weather index insurance (WII) scheme as a pilot project in 2005—the first of its kind in Southern Africa. The project was seen as a breakthrough in mitigating the impacts of climate change to millions of smallholder farmers in the country.

According to the World Bank the pilot project had three objectives which are to help farmers manage weather (drought) risk, facilitate farmers’ access to agricultural credit by reducing the risk of smallholder loan default and allow banks to expand their lending portfolio to the agriculture sector without increasing default risk.

The World Bank observed that prior to 2005, only 50,000 of the millions of smallholder farming households in the country were able to secure credit from formal financial institutions.

The Bank notes that one of the reason why there were not many farmers accessing the loans to insure their crops was the unwillingness of financial lending institutions because “of the risk that the smallholder farmers would not pay back their loans if there were a drought.”

Failure by smallholder farmers to repay the loans, is cited as an example of the factors that later on contributed to the project failure to register full success.

But in 2015 a similar programme was initiated by government and implemented by multi-stakeholder partnerships under the coordination of the World Food Programme (WFP).

From this programme, in 2020-2021 growing season about 65,000 farming households received cash payouts from an agricultural insurance programme of the United Nations agency, WFP. Government said this was the largest crop index insurance payouts ever on the African continent, amounting to US$2.4 million.

Former Minister of Agriculture, Lobin Lowe, said millions of farmers in Malawi are affected by climate change which causes drought, floods and an increase in the number of pests and diseases arguing that farmers need to be covered by insurance.

National Smallholder Farmers Association of Malawi (Nasfam) announced in 2018 that it was insuring 50,000 farmers against severe weather events such as drought. The project, according to Nasfam, had the potential of building the resilience of smallholder farmers by providing a pay-out during droughts and floods.

Nasfam’s Business Development Manager, James Nangoma, said in an email questionnaire response that insurance policies are good for the farmers because they provide relief during the time of drought.

“These insurance policies that are there to cover for crops are essential with the issue of climate change, though most farmers do not show interest to insure their crops,” says Nangoma.

Nasfam is no longer supporting farmers with crop insurance but the organization said it supports farmers with insurance to cover for their family during death.

“When farmers have an insurance policy, in times of death, it helps them because they do not have to sell their produce at a cheaper price to cover for funeral expenses,” said Nangoma.

International Food Policy Research Institute (IFPRI), Senior Research Fellow, Joachime De Weerdt said insurance policies are good for the farmers. He however said the only problem is that in Africa it is not a facility that is fully utilized to benefit farmers in times of severe weather conditions.

“There is certainly a lot of untapped potential here, both for the farmers and for the insurance industry. Globally the agricultural insurance industry is worth around US$30 billion, but the African market accounts for only 1% of this, while agriculture is central to the livelihoods of most rural Africans,” he said.

Impacts of climate change on insurance companies

Many insurance companies in Africa have been impacted by climate change and this is causing a great risk on the growth of the companies. Insurance companies are aware of the risks they take when insuring smallholder farmers and with climate change hitting both sides-companies and farmers-the risks are even greater for their survival.

A survey conducted by pan-African reinsurer, Continental Reinsurance, last year on Chief Executive Officers (CEOs) in Africa identified several challenges that are a risk to insurance companies’ growth in Africa and these include changing climate, the war in Ukraine, food security and energy cost increases.

According to the survey 90% of the 70 CEOs warned that their perception of these risks has increased in the past 12 months – compared to 63% who believe opportunities are growing.

About 13% of the CEO surveyed said climate change risk is a growing threat and “warned that businesses must adapt their business models to manage changing weather patterns, whether this is increased drought, cyclones or floods.”

Climate change, not only affects the agriculture sector but also the insurance companies that offer premiums to farmers to mitigate them against climate change impacts.

Malawi is one of the poorest countries in the world and the World Bank estimates that 50.7% of the population of 19.1 million people live in poverty, and nearly three-quarters live on less than $1.90 per day.

Poverty is pushing people deep into poverty and the World Bank pointed out in its report that agriculture is the only sector that can pull people off the jaws of poverty. But with the sector facing severe weather conditions, some experts believe that weather index-insurances could be the way to go.

With the insurance companies themselves facing a risk from climate change, there is need to find a solution to fix the climate change jig puzzle.

Sustainability of crops insurance for smallholder farmers

Climate change is posing a threat to insurance companies and is also a threat to the survival of smallholder farmers not only in Malawi but Africa as a whole. As a country largely dependent on rain-fed agriculture, Malawi’s economy is struggling.

Currently government an estimated 3 million people are facing starving. Their crops failed due to floods and droughts. Insuring their crops would have given them a relief but majority of farmers are not interested and others do not know what crop insurances are.

“Providing insurance to farmers is not really sustainable,” argued De Weerdt.

He said crop insurances are part of the mix, “but they are no silver bullets.”

“Malawi has a large number of smallholder farmers, many of whom farm such small plots that there is little hope for them to turn these into profit-making businesses,” said De Weerdt , adding, “A first order priority is to move from subsistence farming to commercial farming. For those who farm as a business, taking out insurance will be part of a number of smart business decisions. Smallholder subsistence farming, even with crop insurance, is unlikely to guarantee food security.”

He believes that the way to is to invest in irrigation and in soil health, as well as using stress resistant crop varieties to deal with climate change impacts.

“I should also point out, though, that severe weather is not the only risk that farmers face. There are also risks related to diseases, pests and strong fluctuations in the price of agricultural produce,” said De Weerdt.

Nangoma said farmers are not interested in insurance just like banks are not interested in helping famers for fear of losing their money due to non-repayment.

“Farmers have difficulties to understand how insurance policies work, hence more awareness campaigns are needed from the insurance companies,” said Nangoma.

Other factors that make weather index-insurance difficult to sustain include lack of collateral security by smallholder farmers, high default risk, high transaction costs, and low insurance literacy.

Crop insurances are struggling to be sustained but they could offer relief to many farmers in Malawi. The solution, however, is with the insurance companies themselves to ensure that farmers understand what kind of products they have on the market.