OCTOBER 2015 Kenya Toward a National Crop and Livestock Insurance Program SUMMARY OF POLICY SUGGESTIONS Kenya Toward a National Crop and Livestock Insurance Program SUMMARY OF POLICY SUGGESTIONS © 2015 International Bank for Reconstruction and Development / International Development Association or /// The World Bank /// 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 03 Table of Contents 04 Acknowledgments 05 Executive Summary 05 The Problem 05 The Solution 06 The Proposal 06 Costs and Benefits 07 The Way Forward 09 Introduction 10 The Problem: The Agricultural Sector’s Vulnerability to Natural Disasters 11 Public-Private Agricultural Insurance as Part of the Solution 14 The Proposal and its Benefits 14 A Public-Private Agricultural Insurance Program for Kenya 14 Crop Insurance 16 Livestock Insurance 17 Role of Government in the Proposed Public-Private Partnership 22 Cost 23 Moving Forward 25 Annex 1: Summary of Next Steps for the Government of Kenya 27 Endnotes 04 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S Acknowledgments The summary note on policy suggestions was led and Solutions Appraisal (2015), and “Kenya: Agricultural prepared by Daniel Clarke (Disaster Risk Financing Sector Risk Assessment Risk Prioritization” (2015), and Insurance Program, Finance and Markets Global a report by the World Bank Agricultural Risk Practice, World Bank Group) in collaboration with Management Team. the Ministry of Agriculture, Livestock and Fisheries, The note benefited greatly from the data Kenya, and with contributions from the following: and information provided by the Ministry of Barry Maher (Disaster Risk Financing and Insurance Agriculture, Livestock and Fisheries, Kenya. Special Program, Finance and Markets Global Practice, World acknowledgments are extended to Kenneth Ayuko Bank Group); Felix Lung (Disaster Risk Financing (Director, State Department of Agriculture, Ministry and Insurance Program, Finance and Markets of Agriculture, Livestock and Fisheries) and Vincent Global Practice, World Bank Group); Sarah Coll- Ngari (Deputy Director, State Department of Black (Labor and Social Protection Global Practice, Livestock, Ministry of Agriculture, Livestock and World Bank Group); Shadreck Mapfumo (Finance Fisheries). We also gratefully acknowledge the and Markets Global Practice, World Bank Group); support, inputs, and feedback from Kenya’s National Chloe Dugger (Finance and Markets Global Practice, Treasury, the National Drought Management World Bank Group); Richard Carpenter, Sommarat Authority, Kimetrica, the UK Department for Chantarat, James Sinah, Andrea Stoppa, and Charles International Development, and the Tegemeo Stutley (Consultants, World Bank Group); Andrew Institute of Agricultural Policy and Development. Mude (International Livestock Research Institute); and Michael Mbaka (Financial Sector Deepening We gratefully acknowledge funding support from Kenya). Overall guidance was provided by Olivier the Ministry of Foreign Affairs of the Netherlands Mahul (Program Manager, Disaster Risk Financing and the U.S. Agency for International Development and Insurance Program, Finance and Markets Global (USAID) through the World Bank’s Agricultural Practice, World Bank Group) and Smita Wagh Insurance Development Program. The Agricultural (Finance and Markets Global Practice, World Bank Insurance Development Program is part of the Group). Megan Cossey provided support in editing World Bank–Global Facility for Disaster Reduction the report. This nonlending technical assistance and Recovery (GFDRR) Disaster Risk Financing (NLTA) note has been prepared as part of an NLTA to and Insurance Program. Contributions of the the Ministry of Agriculture, Livestock and Fisheries International Livestock Research Institute (ILRI) are to support the ministry in deciding whether to supported by the UK Department for International Development, Australian AID, and the European establish a large-scale public-private partnership in Union, which fund ILRI’s Index Based Livestock agricultural insurance in Kenya. This note can be Insurance Agenda. read in conjunction with the accompanying World Bank technical report, Kenya: Agricultural Insurance K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 05 Executive Summary : The Problem Agricultural insurance can provide much- /// needed protection to keep farmers out of /// The large majority of farmers in Kenya extreme poverty, and enable them to invest remain vulnerable to natural disasters, a fact in their future; Kenya’s current agricultural that poses a significant social and economic insurance market, however, is suffering problem. Sixty-one percent of the Kenyan /// from a clear market failure. In Kenya, as in /// population is dependent on agriculture, livestock, much of Sub-Saharan Africa, the development of a fisheries, and related production for their livelihoods. successful large-scale agricultural insurance market is constrained by several factors: Over 75 percent of Kenyan farmers are smallholder subsistence farmers who are highly vulnerable to the • A lack of timely, audited data, which are needed economic effects of natural disasters like drought and to accurately estimate premiums and payouts flooding. • Poor understanding of and limited trust in insurance by agricultural producers Severe drought, in particular, strikes northern Kenya approximately every three to five years, and the • The inability of local and national insurers to losses are significant. For example, during the very adequately access the international reinsurance severe droughts between 2008 and 2011, the Kenyan markets that allow them to off-load some risk economy lost an estimated K Sh 968.6 billion. The from their balance sheets—leaving them exposed livestock sector alone incurred 72 percent of that to catastrophic risk and much higher premiums. loss, or K Sh 699.3 billion; 9 percent of all Kenyan livestock died as a result of these droughts. Losses The Solution in the agriculture sector were 12.5 percent, or K Sh Large-scale agricultural insurance, if 121.1 billion, corresponding to a loss of 23 percent /// implemented as a public-private partnership of crops.1 Such devastating disasters push better-off (PPP), can smooth agricultural income during farmers and pastoralists into poverty and push the shocks and thereby provide protection already poor into destitution. They can take years to for vulnerable populations. International /// recover from. They can also make it more costly or experience shows that sustainable, scaled-up simply impossible for farmers to take out loans, thus agricultural insurance programs need to be part of limiting opportunities for agricultural producers to a broader agriculture risk management framework invest in better tools and technologies to increase for vulnerable farmers and herders, and require productivity. engagement, innovation, and action from both the public and the private sector. 06 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S The Proposal Costs and Benefits With the goal of protecting farmers and /// Implementing a PPP in agricultural /// pastoralists, the government of Kenya may insurance could be a way for Kenya to consider joining with counties and the private achieve two goals simultaneously: address sector to implement an agricultural insurance the agricultural sector’s vulnerability, and PPP. More specifically: /// enable farmers to double crop yields in some regions. The government is considering • For crop insurance, the government of Kenya /// encouraging agricultural lenders—including national intends to initially consider an “area yield index and local banks and credit unions—to bundle credit insurance” approach covering maize and wheat. provision to farmers with agricultural insurance. Under such an approach, insured farmers would Such an approach would not only reach a great receive a claim payment if the area average yield, number of potential policyholders; by making as measured through a series of crop cuts, was it possible for farmers to invest more money in critically low. improving their farms, (by buying better seeds, • As pastoralists can be difficult to reach and levels fertilizer, etc.), it could also boost agricultural of vulnerability in the arid and semi-arid lands productivity. For pastoralists, livestock insurance (ASALs) are high, for livestock insurance, the would help keep livestock, particularly breeding livestock, alive, and would thus support efforts to government of Kenya is considering purchasing build large, resilient herds. index insurance on behalf of vulnerable pastoralists. This insurance would rely on free Providing financial support to agriculture /// international satellite data that tracks the amount insurance could be an effective way for of green forage on the ground. When data indicate the government of Kenya to restructure there is not enough forage to keep animals alive, disaster relief efforts, making them more herders receive a payout. Such an initiative would affordable, faster, and more effective. Indeed, /// be complemented by a market for two additional the government of Kenya recognizes that it—along livestock insurance products, a “top-up” product with donors—is already financially protecting rural providing cover over and above that purchased livelihoods during times of disaster. Over the last by the government, and a product for interested 10 years, annual post-disaster relief has on average pastoralists not considered vulnerable enough cost the government K Sh 4.2 billion and donors K to be not covered by the government scheme. Sh 8.1 billion. Most of that support was spent on For this initiative, the government can build on humanitarian food assistance, but the financing the substantial experience of the International of this cost is typically sought after a drought or Livestock Research Institute (ILRI) in the ASALs. flood has already been declared. A market-mediated approach to agricultural insurance and scalable These products should be refined with input from social protection—one using insurance markets the private sector, and going forward insurers should and the broader financial system—could reduce the continue to develop insurance products for these uncertainty and increase the speed of humanitarian and other agricultural commodities. These products response expenditure (leading to potential welfare can also be considered by government for inclusion gains), while at the same time crowding in private within the PPP over time. insurance and reinsurance markets in Kenya. K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 07 The government is considering taking on a /// This report considers the costs and benefits /// number of functions to support the creation of a program under which the government of a sustainable agricultural insurance covers 50 percent of the cost of crop market. Creating this market would require both a /// insurance for wheat and maize farmers and financial investment and a range of support measures up to 100 percent of the cost of livestock to correct market failures: insurance premiums for pastoralists, depending on beneficiary income levels. • The government is looking into treating reliable, /// Government would cover premium payments at audited data for agricultural insurance, such as rates ranging from 100 percent to none at all. crop-cutting data, weather data, and remote- sensing data, as a public good, and seeking to Over the first five years of such a program’s /// ensure that these data are accessible to insurers in operation, the annual average fiscal cost a timely fashion. The government is considering to national and county governments is its own role and that of the private sector in estimated to be K Sh 619 million, making collecting, auditing, financing, and managing a agricultural insurance affordable for central repository for such data through relevant approximately 160,000 agricultural government agencies, such as the Ministry of producers by 2019 (table 1). The fiscal cost to /// Agriculture, Livestock and Fisheries and the the government would slowly rise as more producers Meteorological Department. It may be necessary purchased insurance every year. Part of the fiscal to invest in additional data, such as additional cost of agricultural insurance may be seen as upfront crop cuts, to enable more localized—and thus financing for the government’s existing contingent accurate—claim payments to farmers. liability in respect of ad hoc financial protection to • The government could also support commercial farmers and pastoralists against droughts and floods. insurers in reaching out to potential policyholders in a number of ways: • Providing financial support to help reduce the The Way Forward cost of premium payments; The government has key policy decisions to /// • Enabling distribution of agricultural insurance make, including whether to move forward through publicly supported distribution with program design and implementation, channels, such as publicly supported which agricultural commodities and farmers agricultural credit or cash transfer programs to prioritize, and how national and county like the Hunger Safety Net Program; governments would share costs with farmers. The next steps that could be undertaken /// • Leveraging its infrastructure of extension are listed in annex 1. agents for awareness creation and insurance education; • Providing a platform to enable integration of complementary services that would increase the value of insurance provision; and • Carrying out public information marketing campaigns. 08 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S Table 1—  Illustrative Fiscal Costing for Agricultural Insurance Programs by 2019 Estimated number Program Annual fiscal cost Average cost per producer of producers Description (2019) (K Shs millions) per year (K Shs) covered Maize: area yield 345 70,000 5,000 index insurance Wheat: area yield 49 5,000 9,200 index insurance Pastoralists: satellite-based livestock protection 300 71,000 4,200 insurance (fully subsidized) Pastoralists: satellite-based livestock protection 31 15,000 2,100 insurance (partially subsidized) TOTAL 725 161,000 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 09 Introduction At the request of the government of Kenya /// for International Cooperation (GIZ) through its and under its guidance, a team of national Adaption to Climate Change and Insurance Project, and international experts conducted an and has included analysis of potential structures, the appraisal of different agricultural insurance fiscal cost to government and the economic impact options for Kenya. This appraisal, as set out in /// on farmers, thus providing a suite of evidence that this document and the accompanying technical may be useful for Government deliberations. analysis, lays out the costs and benefits of developing large-scale agricultural insurance that The analysis considers potential structures /// involves both the public and private spheres. The for large-scale agricultural insurance in appraisal team includes representatives from the Kenya, the fiscal cost to the government World Bank’s Agricultural Insurance Development of Kenya, and the economic benefits for Program, housed within the Disaster Risk farmers and pastoralists. It is intended to /// Financing and Insurance Program, as well as the provide the government with important information International Livestock Research Institute (ILRI) for future deliberations on this issue. This work and Kenya’s Financial Sector Deepening (FSD). on agricultural insurance is also being supported The analysis builds on the 2013 situational analysis by a broader agricultural risk assessment analysis jointly conducted by the Ministry of Agriculture, being conducted in parallel by the World Bank’s Livestock and Fisheries and the German Agency Agricultural Risk Management Team. 10 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S The Problem: The Agricultural Sector’s Vulnerability to Natural Disasters Agriculture is the mainstay of Kenya’s /// Disaster-related expenses are often /// economy. The agricultural sector accounts for 61 /// unpredictable and can be of significant size, percent of employment and 30 percent of GDP. Over and post-disaster relief is often inefficient. /// three-quarters of Kenya’s population live in rural For example: 5 areas. In Kenya’s arid and semi-arid lands (ASALs), • Over the past 12 years, the government of Kenya pastoralism accounts for approximately 90 percent of has spent on average K Sh 4.2 billion per year on employment and 95 percent of family incomes. disaster relief funding. During the catastrophic Most crop and livestock production in Kenya /// drought years from 2008 to 2011, this unbudgeted is rain fed, and as such is highly exposed to funding requirement rose to K Sh 9.3 billion the weather-related perils of drought and per year. flooding, as well as to pests and disease. /// • Post-disaster funding is often prone to lengthy According to international scientific consensus, delays (in some cases 12 months or more). weather-related natural hazards will become even • Post-disaster relief can be poorly targeted, so that more unpredictable and greater in scale in the farmers most in need of financial assistance do coming years. not receive the funds. • Since 1970, Kenya has experienced a total of 41 Employing agricultural insurance as a financing flood events, which affected 6.9 million people, instrument—and thereby planning for disaster and 12 drought events, which affected 47 million before it strikes—can help overcome these problems. people. 2 • Drought in particular is the most significant cause Against this background, the government /// of losses to crop and livestock production in of Kenya has identified the agricultural Kenya, accounting for K Sh 699 billion in livestock sector as an important area of focus losses and K Sh 121 billion in crop losses between under its Kenya Vision 2030, which aims 2008 and 2011 alone. 3 to transform Kenya into a middle-income country. Agricultural insurance is a stated priority • Government statistics show the loss of nearly /// of government, as reflected in the Second Medium 1 million head of cattle, or 5 percent of the Term Plan. country’s national herd, between 2008 and 2009. 4 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 11 Public-Private Agricultural Insurance as Part of the Solution Agriculture insurance can help to soften /// However, the agricultural insurance market /// the economic blow of natural disasters. /// in Kenya is still very small, and those who Agricultural insurance programs that are carefully would benefit most—subsistence and small designed and implemented can increase farmers’ commercial farmers and pastoralists—are access to credit, improve agricultural productivity, largely excluded from it. Despite the products reduce the economy’s vulnerability to the effects of /// already on offer, less than 1 percent of Kenyan natural disasters, and provide much-needed social farmers have some form of crop or livestock protection to the poor. insurance cover. This is largely because most of the Some agricultural insurance products are /// currently offered agricultural insurance products in already being offered in Kenya by commercial Kenya do not cater to the needs of the smallholder insurers. Largely in the absence of government /// and mainly subsistence-based crop and livestock support so far, eight local insurers currently producers who make up more than 75 percent of the underwrite two kinds of agricultural insurance agricultural population. These producers are mainly programs in Kenya: located in the ASALs of Kenya and are particularly 1. Traditional indemnity-based crop and livestock vulnerable to losing their livelihoods during the insurance products, under which insurance severe droughts that affect Kenya every three to companies reimburse policyholders for their five years. Instead of safeguarding themselves with losses, up to the limiting amount of the policy. insurance products, they depend on support from These are marketed to medium-size and large the government and donor partners through disaster commercial cereal producers and commercial dairy farmers. relief assistance. Without scale, very few insurance companies in Kenya are covering the administrative 2. Pilot programs for index insurance, which and operating costs for their agricultural insurance depend on an index, such as rainfall, to determine business lines, let alone generating profits on a payouts. These are being developed with donor assistance and are specifically tailored sustained basis. Going forward, these companies for small and semicommercial crop producers face major challenges in how to reach more potential and pastoralists who have the potential to go policyholders, make a profit, and achieve long-term fully commercial. sustainability. 12 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S A strong partnership between the public /// Agricultural insurance suffers from market /// sector and the private sector could inefficiencies that government involvement provide the foundation for a scaled-up and could help overcome. Some typical market /// sustainable agricultural insurance program inefficiencies in Kenya that could be addressed in Kenya. Time and again, the experience of /// through government intervention include the other developing countries has demonstrated the following: importance of involving both government and the 1. Reliable data required for agricultural insurance, private sector in agricultural insurance initiatives. including weather data, yield data, remote-sensing When only private sector insurance companies data, and livestock ownership and mortality data, are provide agricultural insurance without government currently not collected, audited, and made available support, the necessary insurance data are often to insurance companies in a systematic manner. unavailable. Crop yield data, for example, can be expensive and technically difficult for the private 2. Commercial insurers are often unable to sector to gather without support from government. reinsure their agricultural insurance portfolio on international markets because of poor-quality or When the government alone offers agricultural untested data collection systems. International insurance, its lack of infrastructure and expertise reinsurance is critical to ensure that large-scale makes distributing policies, delivering payouts, and agricultural insurance initiatives are financially paying claims difficult. Experience from agriculture sustainable; without it companies may face massive insurance schemes developed across the world (for losses. example in India, Mongolia, and Morocco) shows that public-private partnerships (PPPs) can overcome 3. Products are typically complex, making it difficult these challenges by building on the comparative for potential policyholders to differentiate between advantages of the respective sectors. good and bad products, and in turn weakening incentives for insurers to invest in better products. Box 1—  How Government Supports Livestock Insurance in Mongolia Since 2005, the World Bank has supported the Government of Mongolia in setting up a public-private partnership with domestic insurance companies to offer affordable and cost-effective insurance coverage to herders. Today, 16 percent of the approximately 1 million herders in the country are insured under the Index-Based Livestock Insurance Program (IBLIP). While the Government of Mongolia significantly subsidizes the national program, the subsidization does not take the form of direct premium subsidies. Instead: 1. The Government pays for the collection of all data used in the livestock insurance scheme, and provides audited data to accredited insurance companies in a timely manner. 2. The Government also provides a “social layer” of reinsurance to all farmers at no additional cost. While farmers purchase insurance priced commercially against relatively frequent shocks, the social layer protects against infrequent catastrophic losses when the insurance is exhausted. In other words, the Government guarantees payouts in extreme natural disaster situations, allowing insurance companies to offer affordable premiums to policyholders. Additionally, thanks to this publically funded extra layer of insurance, policyholders possess additional coverage beyond that of the insurance they purchase. 3. Finally, government extension workers provide education to herders about livestock insurance and its potential use as part of a holistic approach to herd risk management. K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 13 Government contributions through a PPP /// Meanwhile, private sector insurers provide /// in agricultural insurance could solve market the necessary expertise to implement large- inefficiencies. (See box 1 on Mongolia.) For /// scale agricultural insurance successfully, example, government could consider supporting since providing insurance is, of course, their core business. International experience shows • Collection and management of reliable /// that agricultural insurance is most effective when agricultural insurance data, such as yield data, private insurers contribute to certain tasks, including weather data, remote-sensing data, and livestock ownership and mortality data • Collecting, auditing, and managing data • Outreach to potential policyholders through • Marketing and distributing insurance products financial literacy campaigns or bundling of • Underwriting the risk agricultural insurance with existing distribution channels, such as publicly supported • Managing claims and handling loss adjustment agricultural loans • Making decisions concerning risk retention and • Partial public reinsurance for private insurers reinsurance strategies • Promotion of a coinsurance pool through which private sector insurers could collaborate where it is economically efficient for them to do so • Provision of technical expertise in insurance product design and development • Establishment and implementation of an enabling legal and regulatory environment, for example by ensuring that consumers are protected against potential abuse by insurers 14 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S The Proposal and its Benefits A Public-Private Agricultural Crop Insurance Insurance Program A program based on an area-average /// approach would be most appropriate for for Kenya small commercial crop producers in Kenya. /// The government of Kenya is considering /// Specifically, a large-scale “area yield index insurance” establishing a PPP covering both crop and program is proposed. In such a program the livestock insurance. The accompanying technical /// actual average yield of the insured crop across the report (Kenya: Agricultural Insurance Solutions predefined geographical area is measured through Appraisal) analyzes an agricultural insurance PPP for audited crop cuts, and is compared to a pre-agreed maize, wheat, and pastoralist livestock—including threshold yield. If the measured average yield for an area is lower than the threshold yield, all insured cattle, goats, sheep, and camels—to show the concrete farmers within that area are eligible for the same rate potential costs and benefits if Kenya were to adopt a of claim payment. Individual crop insurance would large-scale agricultural insurance program aimed at be prohibitively expensive, or even impossible on these target segments of the agricultural community. technical and administrative grounds, for small-scale The PPP could be extended to other agricultural semicommercial farms in a country such as Kenya. commodities, such as coffee or horticulture, if crop insurance solutions were found to be feasible for them. The government of Kenya is considering /// initially piloting the agricultural insurance The potential beneficiaries of the large- PPP for wheat and maize farmers in selected /// scale public-private agricultural insurance counties. The accompanying background report /// program include both the very large numbers explicitly investigates insurance for maize and wheat of subsistence crop and livestock producers and finds that area yield indexes would provide the located in the low-rainfall ASAL regions most appropriate basis for a product. It might also of Kenya and Kenya’s emerging class of be possible to add a weather trigger to this product smallholder commercial crop producers. This /// to provide early protection in the event of failed latter group in particular is extremely important for sowing. Analysis of product design has not yet been the production of food and cash crops, and its success conducted for other crops. These products should be is crucial to achieving Kenya’s Vision 2030. Because refined with input from the private sector, and going they lack money and access to credit, however, these forward insurers should lead continued insurance farmers mostly use outdated and low-quality seed product development for these and other agricultural and fertilizer technology. A package of insurance and commodities, to be considered by government for inputs on credit could help to remedy this problem. inclusion within the PPP over time. K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 15 Crop insurance will be most effective if linked /// credit for maize farmers could bring about to production loans that farmers take out to significant productivity gains, up to double in /// invest in their crop yield. Bundling agricultural /// medium- and high-potential maize areas of Kenya, insurance with production loans results in four key and almost double in wheat areas. Such an increase benefits: would strengthen Kenya’s food security and could 1. It can help the insurance program to /// potentially lead to reductions in the probability achieve scale quickly. Many large-scale /// of farmers falling into poverty—specifically, the agricultural insurance programs in low- and probability could be reduced by 78 percent, 39 middle-income countries (for example, China percent, and 29 percent, respectively, for farmers in and India) have achieved scale—meaning at least the high- and medium-maize zones and in the wheat a fifth of farmers are protected—in part because region. banks or government have bundled insurance with agricultural credit on a compulsory basis. 2. It can increase rural lending and thus /// Figure 1 —  Pure Premium Rates at agricultural productivity. As figure 1 shows, /// 80 Percent Coverage Level of Maize the production risk faced by crop producers in Crop in Kenya Kenya, as measured by the fair cost of insuring the risk (the “pure premium rate”), varies significantly from division to division. Without a way to put a price on this risk and manage it, banks typically restrict their lending to farmers, a practice referred to as “risk rationing.” Agricultural insurance can both put a price on risk and allow banks to transfer the risk off of their balance sheets, enabling greater lending to support investments in better seeds, better fertilizers, and new technologies. 3. It protects farmers. Agricultural insurance /// /// can protect farm income and revenue in times of severe crop losses and ensure that farmers are able to repay their loans, thereby remaining creditworthy. 4. It improves the solvency position of rural /// Source: Authors banks. Agricultural insurance reduces the /// vulnerability to natural disasters of both farmers and the banks that lend to them, protecting them against agricultural shocks. The accompanying background report /// estimates that an area yield index insurance program linked to seasonal production 16 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S products for program recipients who may need Livestock Insurance additional coverage. These additional policies, which The government is considering initially /// would cover the slightly less vulnerable, would be purchasing an index insurance cover against partially subsidized by the government. drought on behalf of selected vulnerable pastoralists in the two Hunger Safety Net To be cost-effective, the government- /// Program (HSNP) counties Turkana and Wajir. /// subsidized livestock macro coverage would Building on the existing experience of the ILRI, the need to be integrated into the framework government would purchase, on behalf of selected of existing social protection and insurance vulnerable pastoralists, an insurance product that programs. In the HSNP counties, two other /// issued payouts based on a forage availability index. relevant programs are already being operated—the This approach would offer a 100 percent subsidy for HSNP cash transfer program for the 100,000 poorest a predetermined level of coverage and be designed households, and the ILRI livestock index insurance to protect rapidly deteriorating livestock assets. Though the insurance coverage is purchased by the program that has covered over 4,000 pastoralists government—and is known as “macro coverage”— since its inception in 2010. To avoid overlap between the insurance companies would pay claims directly to the three programs, the State Department of the final beneficiaries in case of a drought, allowing Livestock would utilize the NDMA’s classification of pastoralists to keep their livestock, particularly households according to wealth status, and provide their breeding stock, alive. The government could livestock insurance to the people immediately above use the existing census conducted by the National the HSNP’s target beneficiaries. Private insurers Drought Management Authority (NDMA) for the could then offer coverage (partially subsidized HSNP—which currently provides cash transfers to or otherwise) to those not targeted in the free the 100,000 poorest households across four counties government program, and provide top-up contracts (Mandera, Marsabit, Turkana, and Wajir)—to assist to any targeted households that demanded additional in the identification and verification of beneficiaries. In addition, the government could use the HSNP coverage. This layering approach is illustrated in payment system as a way to distribute the payouts. table 2. The figures used are indicative and subject to This could be complementary to the use of mobile change as the insurance program is concretized. payment options. Thus existing HSNP infrastructure Beyond these two pilot counties, the would be used to facilitate identification and /// registration of beneficiaries as well as distribution of government of Kenya is considering rolling the financial protection. out livestock insurance to all ASAL counties going forward. The government recognizes /// The government is also considering that the pastoralist population affected by severe /// supporting the development of a voluntary drought stretches far beyond the pilot counties, but livestock insurance market beyond fully given the availability of payment infrastructure and subsidized coverage for the very poor. The /// government would foster this market by making relevant data, has chosen to focus initially on two sure that insurance providers underwriting pilot counties. The diagnostic analysis conducted for the government’s macro coverage also develop this policy note and the accompanying background infrastructure to allow for voluntary purchases of report focuses on the four HSNP counties for livestock insurance contracts, as well as top-up illustrative purposes. K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 17 Table 2—  Proposed Livestock Safety Net and Insurance Program for Kenya’s Four Hunger Safety Net Program Counties: (Mandera, Marsabit, Turkana, and Wajir) Number of pastoralists Government’s Cost per Form of financial expected to be covered contribution to Income level of beneficiary for protection across four counties cost of premium beneficiarya government against disasters over next five years (of or welfare (K Shs/year) 470,000 total) payments (%) Unsubsidized Middle-income 0 0 n.a livestock insurance (US$1/day or more)1 Partially subsidized Low-income (below 15,000 (by 2019) 50, 25b 2,100 livestock insurance US$1/day)1 Ultra poor (below Macro-level national rural 71,000 100b 4,200 insurance program poverty line of US$0.5/day) 1 Hardcore poor Hunger Safety Net (below national Program scalable 100,000 100c 21,000 food poverty line of cash transfers US$0.3/day) Note: n.a. = not applicable. a. Classification based on distribution livestock holding size for Marsabit County, which may not be similar in other HSNP counties. b. Contribution is from State Department of Livestock, based on annual assumed budget of K Sh 300 million per year. c. Contribution is from National Drought Management Authority. The accompanying background document /// Role of Government in estimates that a large-scale program that insures pastoralists against drought and the Proposed Public- includes different levels of government subsidies for premiums—to complement Private Partnership existing social protection to the poorest— Figure 2 shows the roles and responsibilities /// would both significantly reduce the risk that that the government of Kenya is considering the poorest households would be forced into taking on to promote the development of destitution during catastrophic droughts and sustainable agricultural insurance markets. allow vulnerable households to grow their /// viable herd. Under the program, the probability /// With regard to data, the government is /// that vulnerable households would suffer irreversible considering increasing the number of crop losses of viable herd and be trapped in long-term cuts for insurance purposes. Crop cuts are /// poverty is reduced 80 percent. These impacts would sample assessments of crop yields conducted in greatly reduce food insecurity and chronic poverty in selected locations. They provide the data baseline the region. that enables insurers to offer area yield insurance. 18 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S Crop cuts are currently conducted by ward officers Kenya’s national and county governments /// in Kenya. Going forward, these may complemented may consider becoming involved in efforts to by publicly supported data collection by private reach out to potential policyholders. Currently/// sector stakeholders. less than 1 percent of Kenyan agricultural producers are insured against the impact of natural disasters, In order for crop-cut results to better represent mostly through small, fragmented donor-supported actual yields, however, the government is considering pilots. The analysis in the accompanying background expanding beyond the current number of crop cuts report, however, shows that by year 7 of operation and enabling more localized yield estimation, as of the crop insurance program about 135,000 maize this would make it possible to offer farmers more and wheat growers, or about 20 percent of emerging accurately priced and designed insurance products. small-scale crop producers, could be covered by insurance. Achieving such large-scale coverage is If the increased workload is too much for ward fundamental to the sustainability of agricultural officers, the government is considering outsourcing insurance programs, because it makes it possible some crop cuts to private companies (as has been to spread costs of provision among numerous done in India, for example), with ward officers policyholders. providing oversight. • Building on the existing social protection In addition, the government is considering /// infrastructure, particularly for the livestock working with local insurers to establish an insurance program audit process for yield data that is acceptable • Encouraging credit institutions to make to international reinsurers. Currently, the /// insurance compulsory for farmers who take collection of agricultural production data is out agricultural credit from agricultural banks coordinated by government agencies, and work is (specifically for the crop insurance program) underway to further enhance the data collection • Providing financial support to reduce system. To be useful for insurance purposes, however, farmer premiums the data will need to be subject to a strict audit • Promoting effective linkages with mechanism acceptable to international reinsurers. complementary public services in target areas It is possible, for example, to share crop-cutting • Launching public awareness campaigns through data with insurers on the day of the cutting via extension services cell phone, enabling real-time data auditing and therefore lower insurance premiums. This method has been successfully piloted in India (see box 2). In addition, insurers and government can spot- check data, and freely available satellite data can be used as an additional check. Without such an audit mechanism, companies will not have affordable access to international reinsurance markets and will be unable to off-load some of the risk from their balance sheets—meaning that they will be unable to offer affordable insurance. K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 19 Figure 2 —  Potential Roles the Government of Kenya Considers in Supporting Agricultural Insurance Development in Kenya Data Outreach Risk Financing Collect Link to social safety nets Public Sector Audit Link to Credit Reinsurance Manage Premium Subsidies Promote Coinsurance Pool Finance Awareness Building Financial Support Support Product Enabling Environment Design & Development Product Development & Institutional Framework Pricing (Short Run) Legal Framework Technical Support for Consumer Protection Insurers (Long Run) Box 2—  Improving the Quality of Yield Data in India For the past eight years, the Government of India has been working on improving its agricultural insurance programs, which cover approximately 34 million farming households with the support of technical assistance from the World Bank. The National Agricultural Insurance Scheme suffered from a number of problems, including a lack of consistency in the way crop cuts were conducted and recorded, a scarcity of trained personnel, and insufficient monitoring of crop cuts. As a result, the Scheme suffered from significant delays in paying claims to farmers, and did not always pay claims when farmers had been severely affected. To address these challenges, the Agricultural Insurance Company of India joined forces with the World Bank to establish a pilot program where crop cuts were video recorded with GPS-tagged footage using mobile phones. The data, along with the yield estimates, was then provided to insurance companies by text message at the time of the crop cuttings to allow real-time monitoring. This innovative use of technology greatly improves the quality of data collected and thus the trust of insurers and reinsurers and ultimately lowers the insurance and reinsurance premium. It is also an example of how the speed and auditing of data can be significantly improved through using developments in technology. 20 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S Box 3—  Setting Up A Coinsurance Pool in Turkey Prior to 2006 only 0.5 percent of farmland in Turkey was insured. A number of private insurance companies provided limited crop and greenhouse insurance, while livestock insurance was as-yet poorly developed. At the time, the Government did not support agricultural insurance, but rather provided limited ad hoc post-disaster relief to crop and livestock producers after catastrophic losses. In 2006, the Government of Turkey established the Tarsim Agricultural Insurance Pool. Established by law, it comprises 16 private commercial companies, each with a 6.25 percent share in the company. Tarsim underwrites crop and livestock risk on the behalf of coinsurers. The Government subsidizes half of most premium payments. No other companies are allowed to offer agricultural insurance. With Tarsim operational, the number of policy sales has increased from 218,938 to 744,093 (an increase of 240 percent) and premium income for participating companies has increased from TL 47 million to TL 273 million (USD 23 million to USD 131 million, a 482 percent increase). Turkey has grown to be the third largest agricultural insurance market in Europe by premium volume. The advantages of Tarsim include: • Cost savings, since administrative and operating costs of all insurers are shared through the pool; • Better reinsurance rates, as the pool can buy coverage for a more diversified portfolio than if each insurer tried to do it individually; • The ability to maintain underwriting and data quality standards; • Easier coordination of government support. Through other, more technical types of /// The government is considering establishing /// assistance, the government of Kenya is a Program Steering Committee with considering further promotion of agricultural representation from both the government insurance. The highly specialized and technical /// and the private sector to examine options nature of insurance solutions requires a great deal for an institutional framework. Among other /// of technically sound support, both in the form of things, the Program Steering Committee should capacity within commercial insurance companies consider both international experience and the local and in the form of a supportive regulatory and context in determining the appropriate functions legal environment. The government of Kenya could of the public and private sectors, and should make provide such support in these ways: recommendations for the development of an institutional framework to accommodate them. • Offering technical expertise to insurers, For the latter, as recommended by the Ministry such as how to design products and apply of Agriculture, Livestock and Fisheries report, actuarial pricing the Program Steering Committee could consider • Supporting coordinated investments in other whether a separate entity should be established to types of data, such as weather and remote-sensing coordinate public policy and provide support to the data, which may be useful for the design and individual private sector companies that sign up for implementation of improved insurance products the PPP. • Enacting legislation that enables the Insurance Regulatory Authority to establish and implement an appropriate regulatory framework K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 21 The Program Steering Committee may advise /// given to structuring the pool with a lead insurer. whether the government of Kenya should Coinsurance would enable the pooling of risk, which promote the establishment of a coinsurance could ultimately result in making policies more pool by interested insurers, which would affordable for farmers. Box 3 gives an example of enable the pooling of risk. Given the high costs /// such a coinsurance pool in Turkey. of designing and distributing agricultural insurance to small farmers, some form of cooperation between insurers is desirable; cooperation creates economies of scale and thereby cost savings for insurers. The Program Steering Committee may therefore consider recommending that the government of Kenya establish an agricultural coinsurance pool by interested insurers. Special consideration may be Photo Credit: Neil Palmer (CIAT) 22 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S Cost Any agricultural insurance program aiming /// Calculations suggest that the government /// to operate at a large scale will entail a could facilitate insurance coverage for substantial fiscal cost to the government. /// 75,000 crop producers and 86,000 pastoralists by 2019 for a total fiscal cost of The fiscal implications of a large-scale K Sh 725 million per year (see table 1). These /// insurance program depend on who the /// calculations take into account the cost of risk and beneficiaries are, how much they contribute the charges required to cover data, reinsurance fees, to the cost of financial protection, and the administration cost, tax, profits, and any other cost ratio of cost sharing between national and of doing business. Given the challenges linked to county governments. Everyone needs financial maintaining the long-term financial stability of the /// protection against disasters, but the government insurance scheme, the government will also consider may assume a greater or lesser share of the costs depending on the commodity or geographical area. devising a long-term financing strategy before First, the size of fiscal implications depends on how undertaking such large premium subsidies. many policyholders will be eligible for insurance coverage. Second, the size of public subsidies determines the size of fiscal implications. Third, public cost could be shared between central and county governments. For example, counties could be offered the choice to opt in or out of any national agricultural insurance program, with those that opted in participating in cost sharing with national government and farmers. The government already offers some financial /// protection to farmers and pastoralists through drought- and flood-response mechanisms, and part of the fiscal cost of agricultural insurance may be seen as upfront financing for this existing contingent liability. /// Traditionally, government and donors have financed disaster responses ad hoc after a disaster has struck. Under an insurance solution, government and donors could shift the financing to ex-ante expenditure over a longer time period through premium payments and/ or subsidies. In this way, funds would be more readily available in the case of disaster. K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 23 Moving Forward In order for it to partner with the private /// The government of Kenya may develop a /// sector to prepare and implement a large- road map for establishing the institutions scale agricultural insurance program, the required for large-scale agricultural insurance government should consider taking the programs, with the goal of covering at least following next steps. /// a fifth of Kenya’s agricultural producers. In /// The government of Kenya may build on the /// order to offer livestock insurance by October 2015, recommendations by the Program Steering interim responsibilities for relevant tasks would be Committee to take the lead in formulating a assigned within the government until an institutional national policy on agriculture insurance, in solution is established. cooperation with county administrations and As next steps for establishing livestock private insurance companies. The policy would /// /// insurance, the government of Kenya may address the objectives for agricultural insurance, including social objectives, the functions and decide how to integrate the proposed roles of each party to the PPP, and the institutions insurance product with other existing most suitable for delivering those functions. Once protection mechanisms. The government intends /// finalized, the policy would provide the blueprint to finalize the design of the envisaged insurance for the institutional and legal framework for coverage and make a number of implementation agricultural insurance. decisions, including 24 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S • Determining the amount of financial distribution channels, such as production credit. support available Thus the government could enter consultations with commercial agricultural banks with the aim of • Deciding on who the beneficiaries will be and establishing an agricultural insurance partnership. defining the registration process (the required Equally, government could promote the timely decisions are described in full in annex 1) availability of reliable crop-cutting data to insurers, • Defining how to fit the proposed policy into the for example through same-day text messages. existing framework to ensure complementarities with other mechanisms, given the other insurance Annex 1 contains a summary of the actions /// and social safety net instruments in place in the and the time frame for the preparation and HSNP counties implementation of the proposed large-scale PPP for livestock and crop insurance that • Identifying the appropriate insurance companies the government of Kenya will consider and to underwrite the risk and the optimal way to decide upon. /// structure their contribution • Determining the share of responsibilities and roles of the national and county governments in selected program counties As next steps for crop insurance, the /// government of Kenya may seek consultations with agricultural banks and work with private sector insurers to develop a data audit system acceptable to international reinsurers. Reaching scale for crop insurance will /// depend on how well it is integrated into existing K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 25 Annex 1 Summary of Next Steps for the Government of Kenya Type of actions Short term actions Medium term actions Institutional National policy Program Steering Committee to coordinate Implement the national policy on design on agriculture development of national policy on agricultural agricultural insurance. insurance insurance, which will define functions of government, counties, and the private sector. Government Allocate responsibilities between government of MALF agricultural insurance Program institutions Kenya and private sector to enable cover inception Steering Committee to evaluate of livestock insurance by October 2015. proposed institutional options and adopt one for sustainable operation of agricultural insurance in Kenya. Risk financing Coinsurance pool Facilitate negotiations with private sector insurance Develop road map to pilot coinsurance and reinsurance companies on initial method pool; refine and potentially of developing a livestock coinsurance pool in institutionalize. Kenya. Investigate possibility of coinsurance pool acceptable to all relevant insurers. Enabling Monitoring and Define appropriate M&E framework and M&E data Implement M&E framework. environment evaluation (M&E) collection mechanisms. Consumer The Insurance Regulatory Authority should Address any potential shortcomings, protection advise on the state of consumer protection under e.g. through appropriate regulation. envisaged insurance program. Livestock Fiscal support Determine the amount of available resources to insurance provide financial support to the livestock insurance program. Consult with county governments to agree on Institutionalize agreed cost-sharing optimal cost-sharing contributions across national formula. and county governments. Support product Carry out analysis and design of features of macro- Further test and refine macro-level design and level asset protection product. asset protection product. development Integration with Coordinate with NDMA to define coordination Ensure complementarity of various HSNP between insurance and social safety net mechanisms. mechanisms in HSNP counties with relevant government of Kenya agencies. Product design Design timing and amount of potential claim payments. Liaise between MALF, NDMA, and county Institutionalize partnership. governments to secure access to HSNP database and optimally leverage HSNP infrastructure in support of livestock insurance. 26 K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S Type of actions Short term actions Medium term actions Outreach Define collaboration with service providers (risk . carriers, distributors, etc.). Design and implement registration process Institutionalize process. Consult with county governments to define Institutionalize role of national and their role in outreach process and how national county governments in outreach. government can support. Liaise with county governments on the role Define roles between of government of of extension workers in consumer awareness Kenya and private sector in awareness campaigns creation. Crop Insurance Fiscal support Determine the amount of available resources Develop strategy to provide support to provide financial support to crop insurance to crop insurance, including level of program, including premiums subsidies. premium subsidies by target segment of market, risk-financing strategy, data investments, and financial education/ consumer awareness. Data Select size and shape of insurance units, number of Implement expanded yield data crop cuts per insurance unit, and resourcing. collection methodology. Data Define changes in agricultural data collection and Implement changes in data collection auditing to align with requisite reinsurance quality and auditing. (and speed), including liaising with private sector to determine private sector role. Eligibility Decide on crop types and locations to pilot Launch pilot crop insurance program in government crop insurance program in Kenya target locations. (maize/wheat, subsistence farmers/commercial crop producers, districts/divisions). Outreach Link to credit: Liaise with banks, rural lending Implement credit linkage approach. institutions, and microfinance institutions to establish partnership for crop insurance linkage to agricultural credit. Link to credit: Liaise with government of Kenya Distribute agricultural insurance lending institutions to the rural sector on linkage of through a range of publicly and agriculture insurance to credit. privately managed distribution channels. Liaise with county governments to understand county government role in crop insurance outreach, in addition to counties to pilot in first year of operation. Risk financing Develop strategy for public sector support Establish and capitalize public sector to financing of crop insurance risk, including risk financing fund. providing reinsurance, supporting development of coinsurance pool, and establishing a risk financing fund. Support product design and development Carry out analysis and design of features of area yield index insurance solution. K E N YA : S U M M A RY O F P O L I CY S U G G E S T I O N S 27 Endnotes 1 Statistics are from Government of Kenya 2012, Kenya Post Disaster Needs Assessment, Drought 2008–2011 (Nairobi: Government of Kenya). 2 Data from the Centre for Research on the Epide- miology of Disasters’s (CRED) Emergency Events Database (EM-DAT). http://www.emdat.be/ 3 GoK (Government of Kenya). 2012. Kenya Post Disaster Needs Assessment, Drought 2008 – 2011. Nairobi: Government of Kenya. 4 Ibid. 5 Ibid. 6 For a detailed review of these programs see, Finan- cial Sector Deepening, Review of FSD’s Index-based Weather Insurance initiatives (Nairobi: FSD, 2013). 7 Data are from FAOSTAT (Food and Agriculture Or- ganization of the United Nations Statistics Division), 2014. http:// http://faostat.fao.org/. Exceptions include the ILRI livestock predicted mortality index insur- ance program, which is targeted at resource-poor pastoralists located in northern Kenya, and the UAP-Syngenta Weather Index Insurance program, which is targeted at small-scale commercial crop producers in higher-rainfall regions of southwestern and southern Kenya. 8 See Government of Kenya, Kenya: Situation Analysis for a National Agricultural Insurance Policy (NAIP) (Nairobi: Government of Kenya, Ministry of Agricul- ture, Livestock and Fisheries, 2014). The World Bank /// /// 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org