Policy against disasters
Insurance companies could provide protection during droughts in Africa. How exactly this could be done is what the industry is currently trying to figure out. First experiences are available. An interview with the Managing Director of the Munich Re Foundation, Thomas Loster
Mr Loster, how can insurance companies help a farmer in Africa adapt to climate change?
Loster: Insurance companies certainly cannot eliminate the problems, but they can provide some relief. In some cases, they have already done that. But in many places we are just at the beginning of this development and cannot expect miracles. Insurance packages in Africa need to be structured quite differently than in Europe or the US. We in the foundation are also contact persons in this process.
In rural Africa a representative in a suit cannot simply walk across the fields and sell insurance
What concrete experiences are there so far?
An interesting example is the Rural Resilience Initiative R4 in East Africa. Oxfam trained 200 farmers in Ethiopia in 2009. The focus was on cultivation methods that should help them adapt to extreme weather conditions which are occurring more frequently. Part of the project included insurance against the effects of extreme drought. Meanwhile, the United Nations World Food Programme (WFP) has joined the project and is working with 57,000 farmers in five countries. $125,000 in insurance amounts have already been paid. The insurance often runs through farmers' associations, which often count hundreds or even thousands of farmers as members. It helps the association and those affected, of course, if someone shows up with a $20,000 check after a drought and says, ‘Well, distribute it among those who were hit the hardest.’ The money paid out helps people overcome the crisis more easily. Farmers then do not have to sell their tools, cattle or other productive goods to feed their families.
The payout is not determined based on individual damage?
No, that would be far too costly with the small insurance amounts. It is a so-called index insurance. It goes into effect when, for example, a certain temperature or drought level in a region is exceeded. A simplified criterion would be: 'If it's over thirty degrees Celsius for a whole month, it'll payout'. This is an elegant and simultaneously uncomplicated method. There is just one problem: A farmer may experience losses, although the temperature in the region remained just below the defined value. It is then very important to explain this well to him. The people in poor countries so far mostly only know how to hedge themselves with savings, where something continuously comes back. With insurance, on the other hand, there is only money in hardship. That's new to them.
Can the data for index insurance be determined accurately enough?
Of course, data collection is a problem in many poor countries, where metering stations may be hundreds of miles away and the values in between must be extrapolated. The individual farmer may have the feeling that it was terribly hot and he is now entitled to a payout, even if this value cannot be objectively proven. The criterion must be as simple and understandable as possible, and many mistakes have already been made in that sense.
We are in a learning process where all sides need to get to know each other better: Governments, aid organisations, insurance companies and people living at risk
Please give us an example.
The WFP has teamed up with the African Union to create a major insurance package called African Risk Capacity (ARC), which operates at national levels. It is up to the individual governments to develop a precautionary strategy for extreme droughts and famine. The ARC then develops a suitable insurance offer. When the problems arise, payments are made from the ARC programme. However, Malawi, for example, has recently defined a complicated ‘moisture index’ that uses several values to determine how much water the plants need to absorb. This indicator was not easy to understand by a simple person and it caused great dispute whether payments should be made or not.
Insurance companies can only afford farmers who have at least minimal income. However, the poorest are often most affected by climate change.
In some cases, these can be integrated through work performance. The already described R4 initiative in East Africa also offers poor helpers insurance coverage, for example, if they help prevent erosion of the soil. In that case they are not required to pay any premiums and are still covered because their work is valued.
Oxford economist Stefan Dercon says: ‘Our disaster relief is medieval’. It usually arrives too late, because aid organisations must first collect funds through campaigns before the victims can receive help. Insurance companies were able to help more quickly. However, based on the volume of current offers it looks like we are still very far from such a form of provision in Africa.
I have had several discussions with Stefan Dercon. I think we need both: Reconstruction aid and protection against heavy blows. Such approaches have only been implemented for a little over five years and have maturities of up to ten years and more. So, miracles should not be expected yet. We are in a learning process where all sides need to get to know each other better: Governments, aid organisations, insurance companies and people living at risk.
Do aid organisations support insurance companies in mitigating climate risks?
Cooperation between the private and public sectors is a prerequisite for the success of cooperative development, generally referred to as Public Private Partnerships (PPP). Insurances have gained quite a new status through the discussion in recent years.
Does your sponsor, Munich Re, see any chance of profitability from agricultural insurance in Africa?
Yes. Munich Re is already active in some of the more developed insurance markets in Africa, for example in South Africa and Zambia. And it has been acting as a reinsurer, for example for ARC. However, the transaction volume is still insufficient in many African countries, and often the right products have not yet been developed. For the time being, we at the Munich Re Foundation are available as contact persons.