INDEX-BASED AGRICULTURAL INSURANCE PROGRAMME (IBAI)
A Discussion Paper
Barineka Thompson, FCA, CAMS
1. An ongoing efforts by the present administration to diversify the Nigerian economy and create opportunities to promote Agric. business and employment in the last few years.
2. The role NAICOM has played in the last couple of months in promoting access to Agric Finance and assurance of compensation on basis that are different from the conventional insurances to formers;
3. A strategic initiative in Insurance penetration & contribution to the development of Agric
4. IBAI is a programme in support of the policy of government.
5. Agricultural insurance was introduced in Nigeria in 1987 through the creation of the Nigerian Agricultural Insurance Scheme (NAIS).
6. NAIC was dissolved and replaced in 1993 by the NAIC.
7. Currently, NAIC writes a portfolio of crop, forestry, livestock, poultry and aquaculture insurance and also non-life commercial insurance lines.
8. NAIC receives government support –
i. The initial capitalization of the company; and
ii. 50% premium subsidies on most classes of agricultural crops, livestock, poultry and aquaculture insurance.
9. The NAIC scheme is closely linked to public sector credit provision – farmers accessing crop or livestock loans from national banks have to purchase compulsory agricultural insurance cover to protect the loans.
B. INDEX BASED AGRICULTURAL INSURANCE (IBAI)
1. Traditionally, when risks or a loss event such as a major drought, epidemics or other hazards affects a large population all at the same time or small rural farmers, and often in difficult circumstances, even over a relatively small area or region, assessing the losses of each individual insured party that is affected is not feasible.
2. Traditionally, The insurer will not have the resources to assess each claim individually in a short period even in the best conditions.
3. IBAI is a relatively new financial instrument for transferring agriculture risks from individuals or groups of farmers to (international) risk carriers (Insurers).
4. In an Index-Based System, when a claim is triggered for a specific area, all insured units (farmers) within a given geographical area and having similar characteristics, are compensated at the same payout rate, usually a percentage of the sum insured, on events specifically covered by the policy (usually those for which the proxy(ies) meet the specified triggers).
5. IBAI is relatively new but innovative.
6. Pays out benefits on the basis of a predetermined index (e.g. rainfall level, crop yield) for loss of assets and investments, primarily working capital, resulting from weather and catastrophic events, without requiring the traditional insurance services.
7. The purpose is to compensate farmers in the event of a loss resulting from shared risks (rather than individual risk) associated with weather fluctuations, disease outbreaks or poor yield.
IMPORTANCE OF IBAI
1. Innovative & Spur Rural Financial Markets
Financial institutions in Nigeria will be more willing to provide credit to rural and smallholder farmer’s households that have index based agricultural insurance policy because these households will be able to utilize insurance pay-out at the event of loss to repay their loans. Weather insurance products could also be used by the financial institutions themselves to protect their portfolios against excessive loss due to defaults associated with extreme weather events.
2. Supports Economic Development
Natural disasters can depress economic output, damage infrastructure, and increase fiscal demands on government and donor organizations. Using weather insurance to manage the risk of catastrophic weather events will stimulate economic development by improving stability and opportunities for growth in the agricultural and financial sectors. IBAI can have immediate impact on reducing vulnerability to weather risk by:
• Protecting rural livelihoods, thereby reducing poverty;
• Protecting the productive capacity of rural enterprises and farm households;
• Protecting financial institutions against Index Based Agric-related loan defaults;
• Financing disaster relief and encouraging structured social safety net policies; and
• Expanding rural finance through improved access and better terms of credit for farm households and agricultural enterprises.
Traditional Indemnity Insurance Vs. Index-Based Agricultural Insurance
The table below will provide an insight to the major difference between Index Based Agricultural Insurance and Traditional Indemnity Insurance in Nigeria:
TRADITIONAL INDEMNITY INSURANCE
INDEX BASED AGRICULTURAL INSURANCE
No trust on the part of the insurer and insureds. The parameters are difficult to understand by all stakeholders.
It is transparent and parameters are easy to understand by all stakeholders.
Expensive loss adjustment, high moral hazard & pay-out may take some time due to disagreement among stakeholders.
Cheap loss adjustment, no moral hazards & fast pay-out.
Insured is meant to officially notify the insurer of a loss. Insurer will instigate, and process. This process may take a very long time.
Pays out when the specified parameters triggers. (Insured need not notify the insurer), most times subject matter of insurance is yet to suffer damage.
Pays claims with bureaucracy.
Pays claims promptly without bureaucracy.
Low risk management mechanisms and no professional advisory services.
Adequate risk management mechanisms and professional advisory services.
Covers the farmers alone.
Covers smallholders’ farmers and every players in the value chain.
Gives no confidence and guarantee to the institutional lenders to agribusiness value chains.
Give confidence and guarantee to the institutional lenders to agribusiness value chains.
✓ low uptake
✓ high anti-selection
✓ Moral hazard
✓ high administrative costs; and
✓ the programs have been exposed to systemic losses in severe drought or flood years
✓ Moral hazard and anti-selection are minimized.
✓ Low administering costs
Does indemnify crop yield losses at individual or farm level only
Does indemnify crop yield losses at group or area fields.
Payments to growers are in accordance with the happening of the indicated insured peril in a defined farm.
Payments to growers are according to yield loss or shortfall against an average set parameters (the index) in a defined geographical area (e.g. LGA)
Offers high premium costs to growers.
Offers low premium costs to growers
THE JOURNEY SO-FAR
i. Collaboration with NIRSAL
➢ In February 2017, the MD/CEO of Nigeria Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL) made a presentation to the NIA at its annual retreat in Lagos.
➢ On June 7, 2017 the CFI and management received a delegation of the MD/CEO and management team of NIRSAL.
➢ The NIRSAL sought for the collaboration of NAICOM in delivering its mandate under the Insurance Facility pillar and utilizing the Anchor Borrowers’ Programme of the CBN.
➢ NIRSAL is a public-private sector initiative that has the objective to transform the country’s agricultural sector through enabling the flow of affordable financing to all players along entire agricultural value chains.
➢ NIRSAL is looking to expand insurance products for agricultural lending from the current coverage of 0.5 million to 3.8 million agricultural primary producers.
➢ The insurance facility Pillar is designed to expand insurance products for agricultural lending to agricultural primary producers and help reduce credit risks and increase lending across the entire value chain.
➢ An In-house/Joint Technical (Committee) Team of NAICOM/NIRSAL was constituted to take further actions towards seamless deployment of Area Yield Index Insurance being facilitated by NIRSAL for its grain finance/other projects that kicked off in June 2017 (wet season).
➢ A technical adviser has been working with both NIRSAL and the Consortium of insurance companies to grant Group Yield Crop Insurance cover under the Scheme.
➢ The collaboration has so far been very successful in Maize, Rice, Sorghum.
➢ Product approval has been granted to 5 companies participating in the Pilot Scheme
➢ The Pilot Areas and Crops for the Pilot Scheme.
a. Pilot Area (States)
Ten States were selected for the pilot scheme:
ii. Capacity Building (Regulators & Operators)
Training assistance for capacity building in risk modelling was sought by the CFI from the World Bank Group (WBG) under the Global Index Insurance Facility GIIF. A training programme has been approved by WBG to be hosted by the IFC Nigeria office in collaboration with Africa Re and the Commission; scheduled to hold on 5th – 9th February, 2018 in Abuja. The training programme is free of course/training fee and all non-life, takaful and reinsurance companies in Nigeria has been invited to participate and take advantage of the programme to build their internal technical capacity.
The 2017 planting (wet) season has gone with five insurance companies participating in the consortium mainly under the NIRSAL facility, we anticipate that more companies will join in the 2018 planting season as a result of greater awareness and the upcoming capacity building programme.