Vision
We envision resilient, diversified and inclusive smallholder farmers, pastoralists, agro-pastoralists and associated cooperatives and groups’ economies, where the communities pursue sustainable and environmentally-friendly livelihoods.
Mission
Our mission is to transform the economies and food systems of smallholder farmers, pastoralists, agro-pastoralists and associated cooperatives and groups by making them more inclusive, productive, resilient and sustainable through providing a platform for cooperation, sharing knowledge and exchanging experience in manner that adds value to existing initiatives.
Background
For decades, the financing of disasters in developing countries has relied on a reactive approach, consisting of the diversion of funds from domestic budgets and extensive financing from international donors. Such “ex post” funding approaches are found to be inefficient, ineffective, and often poorly targeted. The increase in hazard exposure and vulnerability point to a continuing trend of increasing losses due to natural disasters. Costs from these disasters disproportionately fall on poor and vulnerable populations. Consequently, national and regional stakeholders have made considerable efforts to find and promote innovative solutions to reduce disaster risk and build resilience.
There is a growing body of evidence showing that investments in risk transfer mechanisms have enhanced access to fast and cost-effective liquidity for disaster-affected people, especially poor and vulnerable populations. Therefore, mechanisms that promote risk transfer – shifting the responsibility or burden for disaster loss to another party through legislation, contract, insurance or other means – as a means of better managing disaster risk can close this gap and help build resilience among nations and their populations.
However, insurance markets in the majority of developing countries are undeveloped, and coverage for natural disasters is extremely limited. The demand for risk transfer instruments in developing countries is often constrained by market gaps, lack of regulatory frameworks, inadequate data on disaster risk, a lack of a culture of risk financing, and the reluctance of large reinsurance market players to invest in the development of small risk markets.
Commonly, there are two ways of transferring risk: insurance policy, which facilitates shifting financial risks to the insurance company; and indemnification clause in contracts, through which the parties involved in the contract commit to compensating each other for any harm, liability, or loss arising out of the contract. This report focuses on the insurance type of risk transfer.
Insurance Services
Insurance is a contract, represented by a policy, in which a policyholder receives financial protection or reimbursement against losses from an insurance company, which pools clients’ risks to make payments more affordable for the insured. There are many types of insurance policies, and virtually any individual or business can find an insurance company willing to insure them – for a price.
The conventional insurance products, covering natural hazards, are written on what is often termed an “indemnity” basis, where the policy holder insures a defined property, economic activity or other entity, such as a building or a business, against specific hazards such as earthquake, wind or flood. In the event of the insured item being lost or damaged as a result of a covered hazard, the policy holder is compensated for their financial loss. Risk assessment for natural hazards like drought and floods, however, is more complex and difficult, due to challenges in assessing both the hazard as well as the vulnerability of insured items to a specific hazard. Furthermore, natural hazards tend to impact large areas, thus affecting large portions of the population or risk pool at the same time. This can challenge the resources of a local insurance provider who may only do business in the affected areas.
It is, however, important to highlight that, due to its high transaction costs and the scale of information demand, conventional insurance is not a suitable solution for improving the welfare of low-income pastoralists living in IGAD -ASALs. Innovative insurance schemes are therefore, required to address the specific challenges faced by the low-income communities, who are increasingly becoming vulnerable to the natural and human-induced shocks. One of such innovative risk transfer approaches is micro-insurance, which aims at providing affordable insurance for low-income households, who are vulnerable to numerous risks including sickness, loss of crops and livestock and catastrophic climate events, among others.
Micro-Insurance
Microinsurance is a type of insurance designed to make essential insurance products more affordable, through breaking down conventional insurance in its traditional form, into something much smaller. Microinsurance, in essence, operates the same as conventional insurance except that it is targeted at low-income households, who cannot afford traditional insurance approaches. The most significant difference between conventional insurance and microinsurance is the size of the premium and the insured amount.
Micro-insurance can therefore be seen from two complementary perspectives;
- A way of extending social protection to excluded populations and
- A new market for the insurance industry
Although the introduction of index insurance increased access to formal insurance products for smallholders in many low-income countries, take-up rates remain low. This reflects challenges associated with the basis risk, liquidity constraints, and low trust in insurance providers. In response, nearly all agricultural insurance projects are heavily subsidized.
The micro-insurance-based risk transfer approaches undertaken in the IGAD can be divided broadly into two types – crop insurance and livestock insurance. However, the schemes can also be divided, based on the insurance product design employed, as vegetation-based, weather-based and area-yield-based types. Ethiopia, Kenya, Somalia, Sudan and Uganda are implementing different schemes of index-based micro-insurance services. To assess the performance of such interventions, IGAD has, through IFRAH, commissioned an assessment mission and visited three of these five countries – Ethiopia, Kenya and Somalia.