I had an opportunity to visit Zambia sometime in December 2016 and witnessed the devastation caused by the crippling drought which spread across the southern African countries. I recently made a second visit and noticed the change made by the rainy season which has changed the whole landscape to beautiful green stretching to the horizon. Flying across Tanzania into Zambia revealed the beauty of the land from the snow caped Kilimanjaro to the extensive grassland. As we approached the Zambian border, the beautiful landscape got destructed by patches of bare land on the fertile agricultural field a result of catastrophic army worm infestation. In a short time frame a region had gone through drought and now pest infestation.
Malawi has reported loss of about 2,000 hectares of crop to the army worm infestation. The pest infestation has also been reported in Zambia and Zimbabwe. As per Information from the United Nations World food program, about 6.5-million Malawians and 4.5 million Zimbabweans will depend on food aid until this year’s harvest in March. The infestation will result in a shortfall in annual crop harvest in the region threatening food security.
How can the insurance industry support efforts towards food security? The insurance industry plays major roles as risk carriers, risk managers and economic investors. Agriculture insurance has emerged as a risk transfer mechanisms that involve purchase of insurance cover to cushion farmers against the adverse impacts of insurable risks. The risk is transferred from the farmer to the insurance industry in exchange for a consideration (premium). There are mainly two types of crop insurance available in the sub-Saharan market which are weather index and named perils covers. The uptake of agriculture insurance in the continent has been very low.
The benefit of agriculture insurance is that it protects the farmers earning. While this is of great importance, the greater intend of commercialized farming is missed it. In Insurance, one of the key principle is insurable interest. For one to have Insurable interest, there must be a financial loss when a claim occurs. The farmers intend is to secure their income which forms the basis for their insurable interest. The consumer who depend on the harvest for their consumption is therefore left out when there is crop failure yet the consequence will result in financial loss in terms of increase food prices.How has the consumers insurable interest been secured? The principles of risk management establish four ways of handling risk: Accept risk, avoid risk, mitigate and transfer. The government hold the insurable interest on behalf of the public (consumer).
For most government, like the proverbial ostrich they have opted to hide their heads in the sand and assume this risk does not affect them. As much as there has been efforts by various government to push for insurance uptake in the agriculture sector, emphasis has mainly been to secure the farmers interest. On occurrence of catastrophic event like the army worm outbreak in southern Africa, the government have had to put in finances and human labor to mitigate the https://www.bloomberg.com/news/articles/2017-01-03/zambia-battles-ravaging-armyworms-that-threaten-food-security. Access to post-disaster financial relief, aid often comes too late and covers too little. The government’s efforts have therefore been reactive rather than proactive.
As the government holds insurable interest, it is the duty of industrial stakeholders to liaise with the government to protect this insurable interest. Several global reinsurance companies including Swiss Re, Allianz, Barclays, and Deutsche Bank have made public commitments to expand their holdings of climate risk insurance which has offered insurance capacity. It requires innovation in product development to capture this market and ensure sustainable food production as insurance capacity exists.
A good example: The insurance industry has offered crop insurance protection. This covers shortfall in production due to either changes in weather pattern (index based insurance) or occurrence of perils (named perils cover). The yield per hectare has been well established with statistical support. In addition to the covers taken by farmers, the government can take up insurance cover for the same shortfall. This cover will give additional funds to the government which can be used to import foods to cover the shortfall. In addition to this, the regional government can also form conglomerate which will substitute each other’s shortfall with over production. If there is a shortfall in one country and over production in another, the country with shortfall can import products from the overproduction company.
The insurance industry role as risk managers would greatly assist in preventing and or reducing losses. If the governments of the southern African countries had taken insurance to protect agriculture production against catastrophic pest outbreak, the insurance industry could have stepped in to offer proactive assistance by setting up systems to monitor and control the peril. This would reduce the financial burden from the government.
Category: Food security: Farming