Braving an uncertain world with agricultural insurance

Around the world, a billion people live in fragile contexts. Many more are vulnerable to risks such as disease, conflict and changing weather patterns. Small-scale farmers, especially in low- and middle-income countries, often lack the tools to rebuild their lives and livelihoods when these shocks occur.

Insurance is central to building resilience in an uncertain and rapidly changing world. But how does it work in agriculture?

Farming can be a risky business. A drought or a rainstorm at the wrong time of year, insect infestations, changes in consumer demand, or even global events that affect the price of essential inputs like fuel and fertilizer can determine a farm's fate.

Yet many small-scale farmers in low- and middle-income countries have little margin for error. One bad harvest can deal a severe blow to their finances, which could take years to recover from. Many are forced to sell off essential assets such as land or farm equipment to cope, making it harder to rebuild their businesses. They may see no choice but to take their children out of school, compromise on their family’s nutrition or abandon farming to find work in cities or other countries.

Taking out insurance for agricultural products can allow small-scale farmers to mitigate such risks. If a disaster happens, they can rely on insurance pay-outs to help them recover without having to sell off essential assets.

Take James and Onesta, a married couple in Zambia who painstakingly built their cattle herd from two to 15 animals. When drought devastated their fields, they could no longer grow animal fodder. Then the COVID-19 pandemic put the cost of purchased feed out of reach.

But they had participated in a livestock insurance scheme provided by E-SLIP, which received US$22.96 million on highly concessional terms from IFAD, along with co-financing from the OPEC Fund for International Development and the Government of Zambia. As a result, the couple had funds to buy feed even when prices soared.

Agricultural insurance can break the vicious cycle of shock, debt and poverty that often holds rural dwellers back. It supports agricultural productivity, strengthens food security, transfers otherwise unmanageable risks away from rural producers and stabilizes rural economies.

Insurance seems like a no-brainer. Yet for small-scale farmers in low- and middle-income countries, obtaining it isn’t always straightforward.

Many small-scale farmers simply aren’t aware of insurance options and their benefits. It’s often unclear to them how crop insurance works, especially in places where formal banking services are not widely used. Insurance may be expensive relative to their incomes, difficult to register for and claim, and require added costs such as transportation to a nearby town to speak to an agent. Finally, the insurance available may not be suitable for their needs.

Meanwhile, insurance companies also face difficulty reaching rural clients, especially in remote areas. Designing crop insurance services is expensive, adding to high operational costs, while low premiums and high distribution costs may limit profitability. It can be difficult to provide insurance products that work for clients and providers without government support.

But as IFAD has found in its cooperation with governments, private sector partners and rural people, none of these are insurmountable barriers.

IFAD’s INSURED programme, funded by Sida with US$6 million in an initial phase from 2018 to 2023, works with governments and other partners to develop and roll out agricultural and climate risk insurance suited to small-scale rural producers. By integrating insurance into IFAD-supported projects in 13 countries, the initiative combines insurance with other financial and non-financial products, from mobile banking to weather forecasting services.

During the first phase of INSURED, about 630,000 rural people were covered by crop insurance through a series of pilot schemes in Guatemala, Kenya, Uganda and Zambia. For 73,000 households, insurance made all the difference: when disaster struck, they were able to receive pay-outs collectively worth about US$3 million, providing them a safety net to get through difficult times.

In Kenya, IFAD partnered with the national government and the European Union to co-finance the KCEP-CRAL project, providing US$71.78 million on highly concessional terms. Collaborating with KCEP-CRAL, INSURED supported local insurance providers to pilot area yield index insurance, in which farmers pay a premium and receive a pay-out if harvests fall below a certain level in their agro-ecological zone. Farmers were also offered e-vouchers through KCEP-CRAL, which they could use to buy subsidized agricultural inputs, services and technologies to increase their production and reduce crop losses.

For farmers like Fatuma, an insurance pay-out cushioned the shock of the 2020–2023 drought in the Horn of Africa. When the insurance technology company Pula Advisors facilitated pay-outs to 400 of the 11,500 Kenyan farmers who received compensation in a 2022 ceremony, Fatuma said she was relieved. “I’m so glad I will be compensated,” she said.

After the success of insurance pilots, IFAD is now developing integrated, sustainable solutions embedded in broader rural development strategies. The next phase of INSURED will involve working with governments to create risk mitigation approaches that meet rural needs by bundling insurance with advisory services and climate-smart agricultural services.

IFAD envisions a world where all farmers have access to agricultural insurance – where insurance is embedded into systems, policies and financing frameworks, taking its rightful place at the heart of rural resilience.