Pioneering micro-insurance efforts in East Africa focus on preventing catastrophic losses as climate impacts worsen
DURBAN, South Africa (AlertNet) – Equipping illiterate migratory herders with drought insurance in one of the driest regions of drought-prone East Africa might seem a big task, particularly in a region where claims adjustors, cell phone coverage and cash to pay for policies are nearly as rare as rain itself.
But a range of such pioneering insurance efforts – considered one of the few ways to help East Africa’s herders weather worsening droughts – are taking hold in Kenya and Ethiopia, and are now being replicated as far away as Peru and Guatemala.
“(Herders) are fantastic risk managers. All they lack is the tools to do it even better,” said Richard Choularton, a senior policy officer focusing on climate change and disaster risk reduction for the World Food Programme (WFP).
Equipping them with insurance “keeps households above the poverty line so they don’t enter this downward spiral” when bad times hit – a key way of helping them adapt to climate change, he said during an explanation of insurance programmes at the United Nations’ climate talks in Durban, South Africa.
In Kenya’s northern Marsabit district, near the border with Somalia and Ethiopia, the landscape is so dry that herding animals – camels and goats in the parched north, cattle in the slightly lusher south – is the only option for most people to make a living.
Long accustomed to dealing with drought, herders have traditional ways of coping, including moving animals to distant pastures, selling some for cash to reduce herds and build reserves when drought strikes, loaning animals to those who have lost their herds and, in some cases, raiding neighbours’ herds to restock.
But worsening droughts – believed to be linked to climate change – mean many of those traditional mechanisms are no longer effective, and growing numbers of families are slipping into hunger and worsening poverty.
Insurance – or more specifically index-based micro-insurance – offers a way to help prevent that, its backers say.
Under most programmes, pastoralists are offered a chance to insure a portion or all of their animals against losses to drought. The average annual cost of a policy in Marsabit district is about $5 to $8, according to Brenda Wandera, who works on livestock-based index insurance programmes there for the International Livestock Research Institute (ILRI).
If a drought strikes, payouts are determined by a pre-set index – in the Marsabit case, a comparison of satellite data of grazing land during the drought compared to a normal year. If conditions are bad enough, animals are presumed to have died and their owners compensated, whether or not the animals are actually dead.
Other index-based insurance programmes base payouts on different “triggers” – perhaps a certain number of days without rain, days of intense heat or wind speeds, in the case of hurricane risk insurance.
Because claims adjustors don’t need to visit each insured person, payouts can be made quickly, often through established mobile phone-based banking systems or other governmental social payment systems.
That is key because it allows a “faster response than conventional humanitarian relief,” Wandera said.
There are also some side benefits. Simply having insurance also gives pastoralists the ability to use their now-protected herds as a form of collateral that is acceptable to banks and can allow them to get loans, for instance. And because insurance policies are provided by commercial insurance companies, the programmes are helping build an industry and culture of insurance in new areas.
Insurance “allows a much more predictable mechanism for households to plan and manage their risk,” said Choularton of WFP.
That’s not to say there aren’t plenty of difficulties in putting insurance programmes in place in such remote, difficult areas, and for people who are often illiterate and have little or no experience with insurance.
In the first two years that ILRI sold insurance policies to herders in Marsabit, there were no payouts because there was no drought. With no proof the insurance worked, the number of policies sold plunged from 1,979 in January 2010 to 516 in August 2011.
“People bought without much knowledge, thought it was savings, thought the policy was paid for life,” Wanders said. “Some people were not very happy.”
But drought this year produced the first payouts in October 2011, she said, and “that has improved trust in the product.”
ILRI’s programme also has tried to deal with the trust problem by having village chiefs chose a reliable community member to be trained as an insurance representative and salesperson.
Another problem facing emerging micro-insurance programmes is that often the most vulnerable families cannot afford to pay for insurance. To deal with that, Oxfam's HARITA programme (Horn of Africa Risk Transfer for Adaptation) in Tigray, Ethiopia, is allowing families to provide labour on drought risk reduction projects in exchange for insurance.
In Ethiopia, 8 million poor farmers are already allowed to work a set number of days in exchange for government payments. To pay for insurance they add a few days of work, with donor governments or others backing the insurance programmes.
As families become more financially stable and better able to withstand climate shocks, WFP - which is working to scale up the Oxfam effort - hopes they will eventually be able to pick up the bill for insurance themselves, Choularton said.
The HARITA insurance programme has now attracted 13,000 policy holders in 43 villages, up from 200 policy holders in one village in 2009, Choularton said, with about 20 to 30 percent of the farmers in each village taking part.
With support from the U.S. Agency for International Development, WFP now aims to expand the HARITA programme to three more countries, with the aim of covering 72,000 households by 2016, he said.
Whether indexed micro-insurance turns out to be a sustainable way to combat losses associated with worsening extreme weather – which could eventually drive up policy costs as droughts come more often – remains to be seen.
But Choularton says he is reasonably confident.
“Is it a sustainable solution? I think so,” he said. But it must be combined with other efforts to reduce risk, through climate adaptation and other policies, he said.
“Reducing risk has to be the starting point, not just transferring risk,” he said.
(Editing by Rebekah Curtis)
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