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African droughts: Could insurance schemes help out?

Aid groups are appealing for proactive action, as Horn of Africa drought persists. Could insurance schemes for poor farmers and drought-prone nations provide the answer?

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On a grander scale, the African Risk Capacity project, run by the United Nations' World Food Programme and the African Union, plans to provide payouts triggered by weather forecasts to drought-threatened participating governments. The project is a "central pillar of Africa's climate change adaptation strategy," AU Commission Chairperson Jean Ping says. The hope is that eight nations will have signed up to sharing risk and buying coverage together by 2013.

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"Pooling risk across the continent could save countries up to 50 percent in the cost of emergency contingency funds, while decreasing reliance on external aid," ARC managing director Richard Wilcox says. The initial capital base of $300 million will come from donors and AU member states, with "premiums paid annually commensurate with the risk profile of the country," according to ARC's adviser on governmental affairs, Fatima Kassam. The cash paid to governments will not necessarily go to farmers, but could be used to "lock in futures contracts on grain markets or to scale up safety-net programs," she explains.  If a 13-member-state pool had been operational, after the drought was identified in November 2010, Kenya would have received a total of $100 million from two installments in February and July for a cost of $4 million to $6 million.

Most participating farmers in Tigray receive policies from Africa Insurance, which is run by managing director Kiros Jiranie from the capital, Addis Ababa. He says that rural Ethiopian farmers have "understood very well" the benefits of insurance. While the company's involvement is partly philanthropic, "the board believes in the future potential of the business," he says. "It's a strategic involvement."

Goodwill – or at least the politically powerful perception of goodwill – is also a factor in attracting funds for the ARC venture. "Gulf states are looking at contributing to the pool." Ms. Kassam explains. "The solidarity argument is real. A lot of countries want to contribute."

The plan with the ARC is for it to be sustained by members' premiums – the AU states' and donors' contributions were a one-time arrangement. With the Ethiopian project, commercial viability will come with expansion outside Tigray, allowing insurers to spread risk across a nation with several climatic zones, Kiros believes.

"They will pay out for Somali region but they will make a profit from other regions," he says, referring to the semi-desert of Ethiopia's eastern region, most of whose 3.7 million, primarily livestock-herding inhabitants are badly affected by the rain failures.

Even if support is needed to make it work both for subsistence farmers and for-profit insurance companies, it would still be worthwhile, says Nebil Kellow, founder of the financial advisory firm First Consult.

"Clearly riskier customers pay a higher insurance premium. But what would be more costly overall? Subsidizing insurance to make it affordable to farmers in the Somali Region or mobilizing emergency relief to those farmers after a drought has occurred?" he says. "Developing insurance markets to manage farmer’s risks strikes me as a more sustainable solution that would limit the burden of funding emergency aid." 

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