HomeOpinionThe potential of insurance in agric

The potential of insurance in agric

By Tafara Mtutu

THE last 50 years have raised the eyebrows of climate experts given the rising number of natural disasters reported globally.

Data from the World Meteorological Organisation’s latest Atlas of Mortality and Economic Losses from Weather, Climate and Water Extremes shows that natural disasters in Asia, which numbered 3  454, accounted for the most deaths (975 622) and economic losses of US$2 trillion  compared to other regions between 1970 and 2019.

The North America, Central America and the Caribbean regions  collectively recorded 74 389 deaths and suffered economic losses of US$1,7 trillion in the same period, while Europe lost 159  438 lives and incurred economic losses of US$476,5 billion.

The African continent has not been spared from natural disasters. According to the United Nations, 1 695 natural disasters were recorded in Africa between 1970 and 2019, and the occurrences caused 731 747 deaths and US$5 billion in economic losses.

The year 2021 has also perpetuated the trend as news of cyclones, hurricanes; earthquakes, wildfires, and volcanic activity continue to make global headlines alongside Covid-19.

In addition, a study by the United Nations paints a dim picture of the various scenarios that are expected to play out because of global warming. For example, an increase in the global temperature by 1,5 degrees Celsius is likely to result in drought spells that will last for two months on average,and up to 10 months for a 3 degrees Celsius increase. In the last few years, Zimbabwe has had its fair share of natural disasters. The country experienced consecutive drought seasons between 2018 and 2020, a cyclone in 2019, and a locust outbreak in 2020. These occurrences severely impacted the agrarian economy, which contracted by -8,1% in 2019 alone due to poor harvests. These losses underpin the increasing importance of insurance and the need to mitigate losses from natural disasters in Zimbabwe.

Zimbabwe’s insurance industry is grouped between life and non-life insurance. Non-life encompasses short-term insurance businesses, while the term “life insurance” is often used interchangeably with long-term insurance. Motor insurance, which accounts for more than 40% of non-life insurance gross premiums written in Zimbabwe, is the largest class of business in the subsector, followed by fire insurance which makes up roughly 20% of total short-term insurance gross premiums written.

Insurance aimed at mitigating the losses incurred at the hands of natural disasters has largely contributed less than 30% of all short-term gross premiums written in Zimbabwe since 2019 despite the increasing necessity to cover against such losses.

Reasons cited by farmers, who are most affected by natural disasters, include affordability and dishonest insurers who have swindled farmers in the past. Farmers in the country have beencomplaining about the challenging environment that they operate in, which is marked bya predominantly USD-denominated cost-base against ZW$ proceeds from their sales.

This has been a source of value loss for farmers, and the depreciation of the local currency on the parallel market only worsens the situation.

As a result, farmers often resolve to spend their constrained income on critical expenses, such as inputs and implements that ensure the viability of their trade.  Grudge purchases such as insurance are often the least of the farmer’s worries and hardly receive any consideration. In addition, there have been documented cases of farmers that suffered at the hands of dishonest insurers, and this has also marred the insurance business’ penetration into one of the largest untapped subsectors into the country.

However, both insurers and farmers stand to gain by venturing into insurance products that limit agriculture-related losses. Over the last five years, global economic losses incurred because of natural disasters have ranged between US$160 billion and US$350 billion, yet insured losses have only ranged between US$50 billion and US$140 billion. In Zimbabwe, losses incurred by farmers in Zimbabwe in the drought-stricken 2019/20 agriculture season were in excess of US$260,6 million and this makes the case for insurance products that address the needs of smallholder farmers, who are the majority in Zimbabwe’s agriculture sector.  One such product is an agriculture insurance pool, such as one in Ghana. An insurance pool is a gathering of insurance companies to cover against a specified risk that is often too high for a single insurer to take on and can only be addressed through shared resources.

Ghana, a country that employs 65% of its labour force in the agriculture sector, set up the Ghana Agriculture Insurance Pool (GAIP) in 2011 to cover its five million farmers from natural disasters. However, since inception, GAIP has insured only 29 000 farmers because of affordability issues and a poor appreciation of the benefits of insurance by smallholder farmers.We opine that agriculture insurance pools, though off to a shaky start in Africa, remain a viable and untapped product with a win-win outcome for insurers and smallholder farmers. After all, this product has been a success in Peruand Turkey, albeit with the help of government subsidies.

There remains scope for short-term insurance players to share resources and underwrite an agriculture insurance pool product in Zimbabwe, especially with the help of the government.

Currently, support for smallholder farmers is limited and mostly channelled through government programmes like the Smart Agriculture programme, Pfumvudza, and the Presidential Input programme.

In addition, a few financial services houses, such as ZSE-listed CBZ Holdings and Finsec-listed Old Mutual Zimbabwe Limited, are at the forefront of these efforts through agro-focused insurance products and loans.

Mtutu is a research analyst at Morgan & Co Research. — tafara@morganzim.com or +263 774 795 854.

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