NAIROBI, Kenya, Aug 1 – The College of Insurance has launched an Index Based Weather Risk Management Program targeted at improving the risk management capabilities of insurance company professionals and stakeholders within the agricultural supply chain.
The program in partnership with the World Bank will be offered in eight modules, and is funded by the European Union.
Speaking during the program launch, College of Insurance CEO Ben Kajwang said unlike conventional agricultural insurance that has higher administrative costs and is more technically complex, weather index insurance provides a new way to tackle the risks associated with rain fed agriculture as it relies on weather observations and not loss assessments.
“Conventional agricultural insurance is difficult to deliver in small holder economies as it involves costly individual loss assessments and is prone to moral hazard and adverse selection. Weather Index Insurance uses weather observations as proxies for losses in production or quality,” he said.
Mr Kajwang also added that the program comes at a critical time with the country currently in the throes of a biting drought and will be instrumental in cushioning farmers against crop losses when adverse weather conditions occur in the future.
Weather Index Insurance is linked to an index such as rainfall, temperature, humidity, or crop yields rather than actual loss. This approach solves the problems that limit the application of traditional crop insurance in rural parts of the country.
Also speaking during the launch, Insurance Regulatory Authority CEO Sammy Makove said opening up the agricultural market to weather index insurance gives the insurance industry an opportunity to tap into a diverse line of business.
“It can help tap into a new client base in rural areas and enhance insurance penetration. It will also assist in generating new product opportunities through micro-insurance at the rural level. This will also enable lending to agriculture, by commercial lending institutions,” he said.
However, Mr Makove said, despite the promising prospects index based weather insurance offers, it is still a relatively new concept to local underwriters and insurance regulators, presenting other challenges.
“A number of issues will be important for noting. Technical feasibility for the product will be driven by the type of the crop as well as the type of periods insured. Data availability and considerations such as meteorological perimeters are important in establishing a quantifiable relationship between weather risk and loss,” he said.
He added that the roles of various insurance players would have to be clearly defined due to the number of individuals involved in the supply chain of insurance services.
“Index insurance differs from indemnity insurance in that claims are paid based on weather measurements not by measuring actual loss in the field. Therefore care needs to be taken to insure that sufficient correlation between weather events and losses is attained,” said Mr Makove.
Insurance groups that have already began pilot testing index based weather insurance locally include; CIC Insurance Group, APA Insurance and UAP Insurance Company.