By: Bob Baulch and Berber Kramer
In fulfilling its electoral pledge to introduce the Affordable Inputs Programme (AIP), the Tonse Alliance government has set in motion the most radical reform of agricultural subsidies in Malawi since the introduction of the Farm Input Subsidy Program (FISP) in 2005/06. Many observers, while welcoming the much-needed reform of the FISP, have commented on the AIP’s cost ─ which has almost doubled the Malawi’s agriculture sector budget ─ and the risk of wasting this MWK 160 billion (about US$215 million) if the rains fail. The National Association of Smallholder Farmers (NASFAM) has therefore proposed that the Ministry insures the cost of the AIP against drought and other production risks such as Fall Army Worm or locusts.
This proposal has much to recommend it. Research in various countries has shown that insurance not only improves farmers’ ability to recover from crop losses, but also encourages them to invest more in their farms even before a payout is made. It is nonetheless important to recognize that agricultural insurance comes in many forms, each with its pros and cons, and any insurance policy needs to be carefully designed, monitored and evaluated.
Ideally, one would offer indemnity insurance to farmers, which pays out when an agent visits the field and certifies that something beyond the farmer’s control damaged their crops. In Malawi, a market for such insurance is, however, unlikely to work, because it is too expensive for insurance companies to verify whether farmers submitting insurance claims have really suffered losses, and whether these were indeed beyond their control.[1] Instead, the AIP could consider taking out rainfall index insurance, which triggers payouts when rainfall (measured by meteorological stations or through satellite imagery) is so extreme that it could result in crop damage; or area-yield index insurance, which triggers payouts when average yields in a given area (often measured through crop cutting) fall below a pre-agreed threshold.
For a nationwide program such as the AIP in a country with high rainfall variability, rainfall index insurance has many advantages. Such insurance can be relatively cheap, and claims are easy and quick to verify, so that insurance payouts instead of alternative sources of financing can be used to re-invest in agricultural inputs.[2] But, as the name implies, it only covers rainfall, not the risk of harvest failure due to other production risks, such as crop pests or disease. Also, a natural choice for the AIP would be to insure the cost of fertilizers and seeds, which would be cheaper than insuring the overall costs associated with crop losses; however, when there is widespread crop failure, the economic damage would be more than what input insurance policies would pay out, putting the burden on farmers to cope with the additional losses.
Malawi has not always had positive experiences with index insurance. In 2016/17, Malawi took out a policy from Africa Risk Capacity to cover humanitarian response costs in case the rains failed. Despite a disastrous maize harvest that year, the insurance payout was only slightly more than the insurance premium. This happened because the model underlying the index insurance policy was based on a different maize variety than what farmers had planted that year, so the impact of the drought was different than what was predicted by the model. So, despite good intentions of all stakeholders, payouts were delayed and low because of what could be seen as a calibration issue. This shows how important it is to get the details right.
Failure of rainfall index insurance to adequately track actual crop losses, also known as ‘basis risk', is all too common, and leaves investments in the AIP exposed to drought and other production risks. How to reduce such basis risk? An area-yield index insurance policy provides more comprehensive coverage, as it covers against yield losses from multiple sources. However, it can miss damage to individual farms stemming from localized flooding, pests or diseases. Moreover, such insurance programs require yield measurement at a large enough scale to provide an adequate indication of average village-level yields. India’s area-yield index insurance scheme faces the daunting task of going to every village at the end of every season to take crop samples from different plots to measure yields; a complicated logistical operation that comes with its own costs, risks of cheating, and delays in claims settlement.
An alternative would be a hybrid solution, with rainfall index insurance as the main instrument for settling claims, but with an option for farmers to request an ‘audit’ through crop cuts which activates their area-yield index-based coverage if they suffer damage but the rainfall insurance does not pay out. Such ‘gap’ or ‘fail-safe index insurance’ has been successfully piloted in Ethiopia, Mozambique, and Tanzania, with some pilots discouraging farmers requesting audits unnecessarily by asking them to pay a small fee if their crops turn out to be healthy after the audit. One could also use technology to monitor crop conditions, for instance satellite imagery or pictures of farmers’ fields, taken with cell phones, to verify that crop losses have occurred.
Bundling agricultural inputs offers a good starting point to insure farmers. The cost of insurance can for instance be reduced when farmers buy stress-tolerant seed varieties, as insurance would only need to cover the more severe conditions under which these varieties fail. Other successful crop insurance programs in eastern and southern Africa have also bundled insurance with─in some cases─climate smart inputs.
Zambia has combined its Farm Input Subsidy Program with a farm input insurance scheme since 2018/19, to protect farmers’ inputs against losses due to drought or excessive rainfall. In the 2019/20 season, around 874,000 Zambian farmers benefiting from the FISP were insured. Due to poor rains during the first month of the season, about a quarter of farmers received payouts, allowing them to purchase new quick maturing seeds and fertilizer, replant, and avoid missing out on the entire season. Bundling the Zambian FISP with input insurance may, however, have prevented the poorest farmers from full use of improved seeds or applying fertilizer at optimal rates, as they may not have been able to afford the mandatory insurance premium.
In Kenya, the seed sector has been an important distribution channel for insurance, through so-called replanting guarantees. Farmers received insurance alongside the purchase of certain brands of seeds. Scratch cards packed inside seed bags allow farmers to activate their insurance cover using regular mobile phones when planting their crops. A nice side-effect was that these scratch cards acted as a form of e-verification for the seeds. If a farmer purchased a bag of seeds that had a scratch card inside, this farmer could be assured that the seed was authentic. This system could increase accountability of seed traders to provide legitimate seeds, and it would reduce farmers’ concerns about being sold fake seeds or adulterated products, which regrettably, are all too common in Malawi.
In conclusion, despite the common-sense appeal of insuring the AIP through insurance, we should recognize that ‘the devil is in the details’ when it comes to designing, implementing and monitoring such insurance products. There are promising opportunities to boost and protect farmers’ investments in agriculture, but the pros and cons of different farm insurance products must be carefully balanced to ensure that premiums are well spent, and shield the Government’s MWK 160 billion investment in the AIP from a myriad of risks.
[1] Since insurance companies need agents to assess losses—and ascertain whether these were avoidable—when farmers submit claims, this can quickly become unsustainable, particularly when the client base is comprised of small, remote farmers.
[2] This holds applies to both insurance payouts arriving quickly enough for farmers to replant in the event of an early crop failure, and to farmers avoiding costlier sources of financing the subsequent season.
About the authors
Bob Baulch is a Senior Research Fellow in the Development Strategy and Governance Division (DSGD) of IFPRI and Country Program Leader of the Malawi Strategy Support Program
Berber Kramer is a Research Fellow in the Markets, Trade and Institutions Division (MTID) of IFPRI based in Kenya
Note: a slightly modified version of this extended blog was published as a feature article in the Malawi Nation on Saturday 10 October 2020.
Further reading
Kramer B, J. Hellin, J. Hansen, A. Rose, and M. Braun. 2019. Building Resilience through Climate Risk Insurance: Insights from Agricultural Research for Development. CCAFS Working Paper No. 287. Wageningen, the Netherlands: CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS). https://cgspace.cgiar.org/handle/10568/106171
Boucher, S., M. Carter, T. Lybbert, J. Malacarne, P. Marenya, and L. Paul. 2019. Innovations for Drought Resilience Two Ways in Mozambique and Tanzania. MRR Innovation Lab Evidence Insight 2019-02.
