World Bank backs index insurance scheme to assist Kenyan farmers

Farmers in Kenya are set to benefit from the launch of a new innovative, index insurance scheme which utilises advanced technology and satellite data to assist agricultural workers in the face of flooding and drought conditions.

Collaboration between public and private sector entities, with the assistance of the World Bank has resulted in the launch of an important Government-backed insurance scheme in Kenya, the Kenya National Agricultural Insurance Program and Kenya Livestock Insurance Program (KLIP), helping to protect the livelihoods of some of the region’s poorest against the negative impacts of natural disasters and severe weather.

“This partnership between government and the private sector for the benefit of vulnerable farmers builds on international good practice and is innovative,” said Olivier Mahul, Program Manager of the Disaster Risk Financing and Insurance Program at the World Bank.

One aspect of the new scheme will focus on livestock insurance, while another will be dedicated on protecting maize and wheat production, explains the World Bank, noting that the programme has been designed and built on experiences of comparable programmes in Mexico, India, and China.

Interestingly, both programmes utilises advanced technology to establish an index that will be used to determine when a policy is triggered, essentially using satellite data to assess the impact adverse weather events have had on livestock and crop conditions.

Mahul expands on this point, “The program introduces a state-of-the-art method of collecting crop yield data, using statistical sampling methods, GPS-tracking devices, and mobile phones. This offers the promise of greater accuracy and transparency.”

“This program could pave the way for other large scale agricultural insurance programs in Africa,” said Mahul.

Beyond Africa, should the initiative be successful in assisting governments and farmers cope with the financial burden of losing agricultural revenue owing to catastrophe events, it’s possible the scheme could be replicated and launched in other countries and regions that are susceptible to natural disaster events and have a strong reliance on the agricultural sector.

At scale programs like this could also require reinsurance protection, which given the parametric nature of the underlying insurance may result in opportunities for insurance-linked securities (ILS) players as well as traditional reinsurance firms.

Drought and flooding events can be extremely detrimental to food production and cattle in numerous regions across the globe, places that often have little or no insurance penetration but regularly feel the force of adverse weather events.

The innovative use of satellites, mobile phones, and other advanced technology underlines the potential for this type of scheme to be replicated and put to good use in other emerging, underserved and underinsured regions.

“The large majority of the poor in Kenya are farmers, so this program has the potential to have a significant impact on Kenya’s economic development. This program aims at improving farmers’ financial resilience to these shocks and will enable them to adopt improved production processes to help break the poverty cycle of low investment and low returns,” explained Diarietou Gaye, the World Bank’s Country Director for Kenya.

KLIP will obtain data from satellites to estimate the availability of pasture on the ground and will trigger a payout to participating farmers when pasture availability falls below a predetermined threshold.

It’s a smart and innovative approach, as while the two schemes don’t payout based on the actual flood or drought event, the data received from satellites, GPS and so on, takes into account the weather event and determines if a payout will be triggered from the resulting impact on pasture, crop production, and so on.

The World Bank cites that the KLIP initiative was first introduced in October of last year for 5,000 farmers throughout Turkana and Wajir, with plans to significantly broaden its reach by 2017.

During the six-year period of 2005 to 2011, the Kenya Government estimates that it spent more than $69 million a year on disaster relief. Schemes such as KLIP will alleviate some of the financial burden the government is faced with after a catastrophe strikes, meaning greater economic and financial stability post-event, and also faster recovery.

The work of the World Bank in initiatives such as this demonstrates how index insurance technology and structures can be utilised to provide insurance to the very poorest, while as they grow over time creating parameterised pools of risk which can provide opportunity to reinsurance and ILS capital.

These initiatives demonstrate the future of insurance for weather and certain catastrophe risks, in regions where indemnity coverage remains impossible. They may also demonstrate that their efficiency suggests that the coverage should always remain index or parametric based, while technology provides the trigger data.