Adoption of index-based insurance and how it supports farmers in Kenya

Executive Summary

Index insurance, when combined with other risk management instruments like agricultural management and extension services, can help developing countries like Kenya overcome the shortcomings of traditional climate change mitigation techniques. Policymakers are increasingly endorsing this approach. 
The adoption of index-based insurance in Kenya, its benefits and drawbacks, and the many kinds of index-based insurance will all be covered in this report.

Introduction and Background

Index insurance is a novel type of insurance that distributes rewards according to a preset index for investments and assets, mostly working capital, that are lost as a result of natural disasters and weather-related occurrences. 

Index-based policies connect risk-associated variables like rainfall levels to insurance products, with compensation determined by index volatility and payouts begin when the index falls below or rises above thresholds. The index's data comes from dependable, outside sources such as satellites, weather stations and official government documents. In the areas of agriculture, cattle and natural disasters, this method works very well for risk management.

The research's goal is to help smallholder farmers; it is a promising financial instrument because it makes claims settlement processes quicker and more unbiased.

Data and Analysis

Adoption of index-based insurance in Kenya:

1) Kilimo Salama , a Kenyan weather index insurance policy, offers farmers timely compensation for drought and excessive rainfall, particularly beneficial for maize and staple crop farmers.

2) Index-Based Livestock Insurance (IBLI) in northern Kenya uses pasture availability index to protect pastoralists from drought-related livestock losses, sold through local banks and Marsabit insurance providers.

3) The Kenya Crop Insurance Programme (KCIP ), which targets maize and wheat crops, offers smallholder farmers area yield index insurance to make up for low yields brought on by unfavorable weather conditions.

4) In order to reduce the risks associated with rainfall unpredictability and improve their output and climate change management, Kenyan coffee producers turned to weather index insurance.

Note: The Kenyan government's  National-Agricultural-Insurance-Policy-2024. aims to enhance agricultural insurance, providing farmers with a viable option to mitigate risks and secure their livelihoods.

How Index-based insurance supports farmers & also the insurers:

• Lower Administrative Costs: By doing away with the requirement for individual loss assessments, insurers can drastically cut their administrative expenses.
• Quicker Claims Processing: Because payouts are based on objective facts, they may be processed effectively and swiftly.
• Openness and impartiality: lessen disagreements and boost confidence between farmers and insurance companies.
• Better Access: Smallholder farmers who would not be eligible for standard insurance may find it easier to obtain.

The disadvantages of Index-based insurance:

– Basis Risk: There's a chance that the selected index doesn't accurately reflect the losses that individual farmers have actually suffered.

– Data Limitations: In certain areas, it may be difficult to collect data in a timely and reliable manner.

– Limited Coverage: Some possible losses, like those brought on by illnesses or pests, might not be sufficiently covered.

– Challenges in Product Design: It is crucial to carefully examine local factors, farmer needs, and accessible data when designing effective IBI products.

Key Findings

Different kinds of index-based or parametric insurance :

a) If the average yield is below the insured yield, area-yield index insurance determines indemnity based on the insured yield, usually between 50% and 90% of the local normal.

b) Crop weather index-based insurance provides indemnity when the actual index value surpasses a predetermined threshold. It does this by multiplying the agreed-upon sum per unit by the realized unit value, which accounts for compensation against a variety of weather aberrations, including drought, flooding, and severe winds.

c) Satellite index-based insurance uses satellite imagery time series to create crop protection data. International Research Institute (IRI) and NASA have been collaborating on projects impacting thousands of farmers in Africa.

Recommendations

+ Innovation & Technology: Better index calibration and monitoring will be possible with the use of drones, artificial intelligence and satellite imagery.

+ Collaborations between the public and commercial sectors will contribute to reduced costs and improved accessibility.

+ Outreach and Education: Efforts to use education and training to increase awareness and encourage adoption.

+ Create sound and well-organized finance plans that will assist disadvantaged groups in paying for premiums by utilizing donor funds and subsidies.

References

scaling up agricultural index insurance in Africa building disaster resilience of smallholder farmer

Index insurance forum

Preferences for index-based pasture insurance: a choice experiment in Limpopo Province, South Africa

Index-Based Insurance: Types, Benefits, And Solutions

Index-based agricultural insurance products: challenges, opportunities and prospects for uptake in sub-Sahara Africa