EIB and WFP launch parametric insurance scheme to protect Ethiopian smallholder farmers

The European Investment Bank (EIB), through its development arm EIB Global, is issuing a grant of up to €4 million to the United Nations World Food Programme (WFP), which will be used to support the development and rollout of parametric insurance products to protect smallholder farmers in Ethiopia.

According to the announcement, roughly 210,000 smallholder farmers are expected to be covered by adapted microinsurance products against crop and livestock losses linked to adverse weather conditions or natural disasters.

WFP will use its extensive expertise in rural finance and climate-resilience programming in Ethiopia to develop and pilot this index-based microinsurance (parametric) scheme in partnership with a number of private insurance companies.

The products will reportedly be rolled out to selected rural finance institutions under the Rural Financial Intermediation Programme (RUFIP III) in Ethiopia, through technical assistance, capacity building and awareness raising.

In addition, WFP will initially administer the Premium Guarantee Fund before transferring its management to the Development Bank of Ethiopia, in order to help support the scheme’s long-term sustainability. The Premium Guarantee Fund will help address borrowers’ liquidity constraints, whilst also serving as a guaranteed mechanism for financial institutions that contract insurance on behalf of final beneficiaries in the event of premium payment defaults.

The EIB explained that the initiative is designed to de-risk the agricultural portfolios of rural finance institutions under (RUFIP III) and help final beneficiaries accessing RUFIP III financing manage climate-related shocks.

The grant will support capacity building for the Development Bank of Ethiopia, rural finance institutions and smallholder farmers, as well as the establishment of a Premium Guarantee Fund to pre-finance insurance premiums.

As well as this, the grant aligns with development finance priorities by fostering stable incomes and sustainable growth for smallholder farmers amid climate change.

It also aids micro, small, and medium-sized enterprises by offering access to microinsurance, to help de-risk economic activity.

Importantly, this also marks the first climate-risk insurance project to be backed by the European Investment Bank.

EIB also confirmed that the grant will complement the organisation’s Global’s €110 million credit line for the third phase of the Rural Financial Intermediation Programme (RUFIP III) in Ethiopia.

The credit line is channeled through the Development Bank of Ethiopia and on-lent to eligible rural finance institutions. The grant is financed under the African, Caribbean and Pacific (ACP) Trust Fund’s Member States Compartment.

EIB Vice President Gelsomina Vigliotti, commented: “Climate change remains one of the greatest risks to agricultural livelihoods in Ethiopia. Through this partnership with the World Food Programme, EIB Global is helping rural finance institutions and smallholder farmers better manage climate shocks, protect incomes and improve access to finance.

“By combining insurance, credit and capacity building, this initiative will strengthen resilience, support food security and create more sustainable economic opportunities for rural communities.”

WFP Representative and Country Director in Ethiopia, Zlatan Milišić, added: “For millions of smallholder farmers in Ethiopia, climate shocks can quickly wipe out harvests, incomes and hard-earned progress, eroding gains that vulnerable communities have worked hard to achieve.

“Access to finance is essential for increasing agricultural productivity, but climate risks often discourage both farmers and lenders from making productive investments. This partnership with EIB Global brings together climate risk insurance, rural finance and capacity strengthening to help farmers invest with greater confidence, protect their livelihoods when shocks occur and recover more quickly. It is an important step toward building more inclusive and climate-resilient financial systems in Ethiopia.”

Recall that, the United Nations World Food Programme (WFP) has been utilising parametric insurance arrangements for approaching two decades. Our first coverage of a WFP arrangement was a weather-index insurance research initiative back in 2008.

Over the year’s the WFP has entered into weather-index insurance arrangements, typically in partnership with aid organisations and charities, while also offering parametric risk transfer protection to countries for humanitarian disasters, and becoming the beneficiary of a parametric drought reinsurance arrangement.

As we reported in April this year, the World Food Programme (WFP) is progressing a plan under its Innovation Accelerator, to become the first to sponsor food security catastrophe bonds to increase its financing capabilites.