Index based crop insurance in West Africa : p rinciples, existing projects and prospects

1. 3rd West and Central Africa Agricultural Science Weekand 10th General Assembly of CORAF/WECARDNdjamena, Chad, 14th – 18 th May 2012 Index based crop insurance in West Africa : principles, existing projects and prospects L’Assurance agricole indicielle en Afrique de l’Ouest: principes, premières réalisations et perspectives Bertrand MULLER1, Moussa SALL4, Antoine LEBLOIS5, Alpha BALDE2, Moustapha FALL3, Patrice KOUAKOU3 et François AFFHOLDER1 1 2 3 4 5

2. Introduction : constraints/risks limit productions • Crop productions are limited by constraints and risks • Many constraints(problems) and risks can be controlled or prevented: good practices, inputs, organization … • But residual risks: rainfall variability(droughts) massive locusts and birds attacks extremes temperatures, winds, floodings • And those risks are generally extremely covariant : affect numerous people at the same time Quelea Quelea

3. Introduction : constraints/risks limit productions • Soudanian (600-1200mm) and Sahelian (200-500mm) areas: very important rainfall spatio-temporal variability • Spatially, inter-annual and intra (seasonal) annual • Very variable (uncertain) start, dry-spells/droughts • Sharp decrease in 1970 -> 1990 : 1st sign of CChange • Increasing since 15 years …

4. Introduction : constraints/risks limit productions • Risks and economic conditions affect productivity • WA farmers are used to climate variability and CChange: aim at securing medium/low yields and don’t want to loose investments in bad years : “risk aversion” (pertinent) • Risk aversion reinforcedby economic conditions : low prices, markets, organizations “value chains”, etc.. => extensive systems : low productivities => food dependency (some exceptions : irrigated rice ..) • But African population will increase by 2,5 – 3 • And Asian production seems to not increase more … • Agricultural productivities must increase to feed Africa • Under climate change with probably more climate variability

5. Introduction : constraints/risks limit productions • Agricultural (crops, animals) insurances appear as a possible tools to cope with residual risksby paying indemnities in case of low productions (losses) • May secure part of farmers incomes • May secure credit programs : more sustainable • Mays allow access to credit for much more farmers • May generate credit rate decrease • May contribute to a virtuous circle conducing to more investments (inputs, works) and productivity increase • Also considered as an adaptation tool to CC and CV • Interest of backers : many money is coming • Very ”fashion” theme for many stakeholders … and a new market for (re-)insurers • Just starting in West Africa but 10 years in Asia, S.Am., E.Af.

6. Insurance and index based insurance principles • Insurance is a service: • the insurer pays compensations in case of bad production / losses due to one(some) problem(s) (residual ones) • the insured farmer must pay an annual premium • nobody know when compensations (payouts) will come .. • Premium prices depend on: • compensations/payouts : statistical average (on time and space) • service management costs : same for credit and all services but insurance specificity is losses evaluation • commercial margin : same for credit and all services • re-insurance costs : to allow the insurer to be able to compensate simultaneously numerous customers if necessary … that is often the case in agriculture since risks are extremely covariant

7. Insurance and index based insurance principles • Damages/losses evaluation is difficult/costly, particularly in South Countries where fields are small, disseminated, heterogeneous, etc.. risk of conflicts and “moral hazard” • Index based insurances (since early 2000s) • No direct damages/losses evaluation (at fields) • Damages/losses indirectly assessed through the value of an index (indicator) related to some measurements • For instance measures of temperature in one reference site => reduced cost • Allow to insure several farmers of an area at the same time, and/or to have group contract => reduced cost • Additional ways to decrease costs • Management linked with credit • Mobile phones technologies (sms) for contracts and payments

8. Insurance and index based insurance principles • Calibrated to protect investments and then credit systems: not for production/profit losses: would be too costly considering markets and risks frequencies (1 year out of 5-10) • “Real insurance” (private sector) is a priori reserved to “intensive (using inputs) and market linked productions” because farmers (or other stakeholder) have to pay premium • Cotton, peanut, maize, rice, vegetables … • But could be partially subsided by Governments/Backers -> PPP • Index system can be used also for “social protection system” • Aggregated (average) yields index : “all-risks insurance” • Specific index allow to link losses to only one specific risk (whatever the other problems) • Climate index : on temperature, rainfall measurements • Satellite data index : NDVI, biomass, ET%... • Water level index for floodings

9. Insurance and index based insurance principles • Main problem: “basic risk” i.e. risk that index values and thus payouts aren’t correctly linked to damages • Depend on kind and quality of index • On spatial variability of reference observed factor .. • On variability of other conditions: soils, sowing dates, varieties • Development of insurance requires efforts (time, money) to explain and convince farmers and others stakeholders: • difficult to install “confidence” (trust) since there is no “insurance culture” and because of “commercial” aspects … • Also some initial investments in technologies : secured raingauges, satellite data, yields controls …

10. Insurance based on aggregated yields • Payouts depend on average yield compared to a reference yield level that is a fraction of the mean inter-annual yield • Requires a very good and confident “yields measurements system” : cotton, sugarcane, vegetable • Quite expensive • Difficult now with national statistics : spatial cover and “quality” .. • Better if also some control of practices at farmers fields • Problem if bad yields due to human factor such as bad fertilizer for instance … or decrease in tendency

11. Rainfall index based insurance • Based on rainfalls = “drought insurance” : most frequent • Many kinds of rainfall index: • Simple : total rainfall amounts but don’t perform well • Most complex : simulated yield (or stress index) by crop model • Intermediate (IRI, World Bank) and most used since it is quite good and easy to explain to farmers and insurers : composite index based on rainfall amounts on different phases of crop cycles • Whatever the index : its parameters must be precisely defined based on agro-climato-economical analysis • Attention to pure statistical index as “payout if observed value reach percentile x%” : not recommended • payouts not calibrated according to crop status • induces differences in protection level between areas

12. Rainfall index based insurance • Composite index: • Simulation of a “virtual crop cycle” that starts within a recommended sowing period according to a reference rainfall value (20 mm) • Fixed cycle and fixed phases (2 to 4) considered for insurance • “Trigger/Strike” and “Exit” reference rainfalls values for each phase to pilot payouts according to rainfalls during the phases

13. Rainfall index based insurance • Several parameters in the contract • Main problems : potential “basic risks” due to • Rainfall spatial variability • No good time synchronization between contract functioning and farmers crops

14. How to improve “rainfall” index based insurance • Favorable environment promoting homogeneity and adequate practices limiting insured risks (sowing date, variety) and other problems (diseases, etc..) • Index are calibrated and perform well for “good practices” • Losses due to other factors are not considered • Mathematical solutions to partially limit basic risks: • Use of majored dekadal (10 days) rainfall amounts • Index related to several raingauges

15. How to improve “rainfall” index based insurance • Most recommended : use of geospacialized data from satellites : pixelised rainfalls or relative evapotranspirations ET% (or mix), controlled/calibrated using some ground observations • But researches are required to assess accuracy of those methods and of their pertinence for crop insurance • Agrhymet - EARS project • IFAD/WFP/AFD project • Will be required also for extension/upscaling • Already on-going pilot projects in Mali, Burkina and Benin by PlaNet Guarantee and EARS, using 3km x 3km Meteosat info EARS figure

16. How to improve “rainfall” index based insurance • Other points to consider to improve insurance systems in the future • “Personalized” contract considering sowing date (within sowing window): info transmitted by mobile phones • “Sophisticated index”: simulated yield (or ET%) by crop model : more accurate and will allow to consider also over-rained period and/or integer other factors (Temp) • Because farmers who invest need precision / quality : in focus groups and meetings they ask very pertinent questions about index functioning • And since technologies allow (will allow) to do it

17. Index based insurances experiences in West Africa • Up to now only in Burkina Faso and Mali : on cotton and maize, less than 1000 farmers in 2011 ; PlaNet Guarantee / GIIF / EARS • 20.000 farmers expected in 2012 … • Pilots will be implemented in 2012 in Senegal on maize and peanut : PG/GIIF+WorldBank+Cirad : 1000 farmers (??) • Pilots will be implemented in 2012 in Bénin on maize ; PG/GIIF • Different studies : Ghana (GTZ), Bénin (WB), Cameroun, BOAD

18. What we can learn from experiences • USA : fully subsided (EU : prices are subsided ..) • India : different programs sustained by Government which subsides premium : more than 20 million farmers • Positive for credit and allow government to help small farmers • Malawi, other projects: strong investments • GRET (2011) : “insurance programs could be economically profitable but require at the beginning many investments from Governments or Backers” • feasibility studies (experts) • equipments/technologies • explanation/information, capacity building … • Subsides generally required for small farmers

19. What we can learn from experiences • When there is no subside (Mali, BF) : strategies consist in proposing very cheap products to launch insurance culture : but they poorly protect farmers … is that pertinent? • Subsides may also contribute to create equity between areas • Senegal : subsides higher for Northern region in order to have same premium and protection everywhere • Better to consider insurance in agricultural policy • Basic risk is a problem • IFAD/WFP (2010) : “The future largely depends on how the industry will be able to expand the technology frontier” (satellite and communications technologies)

20. Conclusions • Insurance could contribute to enhance productivity by securing credit (at least) • Index based insurances are quite cheap and thus allow providing insurance to much more farmers • Major technical issues to be addressed to reduce basis risk and improve quality of insurance products : satellite and mobile phone technologies and crop models also • Satellite technology also necessary for extension • Insurance development requires expensive investments at the beginning, including eventual premium subsides • Subsides/other mechanisms are also required for equity • Insurance must be considered in agricultural policy • Government must also regulate the sector (legal issues)

21. Recommendations • Let be optimistic : crop markets and agricultural policies in Africa will allow insurance development .. • Researchers must work on technical issues and also on economical and policy ones • what are the adequate Private-Public-Partnership ? • how to integer agricultural insurances and index based insurances in global food security management system?? • Researchers and development stakeholders must participate to insurance projects / feasibility studies • to technically help them • to ensure transparency, equity and balance between development and commercial issues • to capitalize experiences in order to advise Governments

22. Thankyouverymuch Bertrand Muller bertrand.muller@cirad.fr With Moussa SALL (ISRA-BAME), Antoine LEBLOIS (CNRS-CIRED), Alpha BALDE (AfricaRice), Moustapha FALL (ISRA-CERAAS), Patrice KOUAKOU (ISRA-CERAAS) et François AFFHOLDER (CIRAD) « l’assurance agricole est un sujet trop sérieux pour être confiée aux seuls assureurs, ré-assureurs et acteurs du crédit et de la micro-finance »