The Kenyan tea industry is an excellent reminder that insurance does not just follow growth in Africa – it is fundamental to it. Insurers have an excellent understanding of the risks facing producers, and also the tools to keep the industry economically viable.
The Kenyan insurance market is an exciting one for insurers. Swiss Re's sigma research shows a non-life 9.3% premium growth for 2012, far ahead of the 4.3% GDP growth rate for the country. Optimism and expertise has been flowing into Sub-Saharan African markets for some time, increasing business and investment confidence.
Growth is good. But it is also good every now and then to take a step back and remind ourselves that there is also an existing established insurance market in the region which is vibrant and profitable. The Kenyan agricultural insurance market, and the tea industry in particular, provides a great example of how insurance partners can apply their expertise to cover the very specific risks of a crop, and build long term relationships at the local level.
Trust begins with knowing your market…
Kenya is easily the world's largest tea exporter and the third largest tea producer after India and China. Over the 50 years since its beginnings tea production has increased 20-fold. In 2013, tea overtook tourism as the largest single generator of foreign currency, with market earnings reaching USD 1.2 billion.
In order to run a sustainable business and deliver a useful product to tea farmers, re/insurers have to be experts in all these risks and know the market participants. In Kenya that understanding begins at the Kenyan Tea Board, which provides the regulatory supervision and a competitive market place dominated by three large major producers. Over 500,000 growers in the country contribute to supplying over a hundred tea factories. The vast majority of this production flows into the world's largest and most important tea market – the Mombasa Tea market, which serves as the benchmark for tea prices globally.
…and knowing your risks
Like other agricultural producers, tea farmers are at the mercy of the elements and suffer losses due perils of drought, hail, frost and excessive rainfall. We can add to this the more common natural perils such as fire, flood, uncontrollable pests and diseases. We have seen some large losses in the Kenyan market in recent years that highlight the value of having financial protection in place. In January 2012, over 20 million kg of tea were lost due to frost. However even "small" hail storms or water shortages can cause a significant impact on earnings.
Beyond the field, tea producers rely on an extensive value chain, involving seed and fertilizer suppliers, local and international transport companies, processing companies, and retailers. These stakeholders are also exposed to a large group of risks: production failure; operational risks and labour shortages; market fluctuations; unavailability of credit; risks that technological advantages make current systems uncompetitive; risks that governments put up or knock down international export barriers .… the list is seemingly endless and the risks are interrelated.
Then there are the tea plants themselves which have certain properties that make them different from other crops. For example, tea is a perennial crop, which means it grows the whole year – so the types of seasonal insurance cover we see in other agricultural products may not be relevant. A tea estate spreading over thousands of hectares will have plants ranging from newly sown to 85-years old in the same estate. If a localized hail storm hits the estate, it might destroy different aged plants. Unlike other crops, tea can suffer from localised drought. This is because the soil catena over such estates will not be consistent – which means that those plants growing in deeper soil may not be as affected by drought as those in shallower soils which may whither.
Local knowledge is essential
It is one thing to understand the risks that tea farmers face – but it is another to put together a solid policy to cover them. A large multi-national company may decide to take a broad policy at the group level - however, there is a significant trend to localised coverage as well – and this means insurers have to get to know the people with whom they share their risks.
A visit to a client estate is the best tool which the insurer has to fully assess the risk profile of an estate. One very valuable lesson I have learned in my travels throughout Kenya is the value of being on-site with the partner you are writing the cover for. On the one hand, it allows us to collect and analyse the data we need to put together the right risk rates for that estate. On the other, there is great value in understanding the individuals charged with managing the risks at these locations – it is very difficult to write this type of risk from an office in Zurich or London.
In the end, agricultural insurance is not that much different from other types of insurance. You need to understand the specific risks and apply expertise to the client's specific situation. In that way insurance becomes a foundation component of that growth – both by allowing risk taking and by ensuring the established business is sustainable. And that is something we do want to do not just for all the tea in Kenya.
This article was originally published in the August edition of Africa Insurance Review.
( www.africainsurancereview.com) Republished with permission.
Category: Food security: Farming, Food industry