Insured loans help small farmers reduce hunger, climate risks


The world\’s half-billion poor farmers, already struggling to get by, are facing growing pressure from droughts, flooding and other climate change impacts just as global demand for food is rising.

How can the pressures on them be eased? Entrepreneur Steve Coffey thinks he has the answer: farm loans, backed by insurance.

Small farmers typically lack money to buy good-quality seed, fertiliser and other things they need to boost crop production, he said, trapping them in a cycle of low subsistence production. Even that is increasingly threatened as extreme weather hits more often.

Loans could help solve the problem. But banks see small farmers as too big a risk, particularly in an era of more frequent crop failures, and farmers themselves may be hesitant to fall into debt if they lose a crop.

That\’s where insurance comes in, says Coffey, vice president of MicroEnsure, a pioneering insurance company focused on small-scale policies for the poor. With an initial $24 million in backing from the Bill and Melinda Gates Foundation, it has set an ambitious aim: to lift 500 million small farmers out of poverty in a decade, even in the face of worsening climate impacts.

By pairing farm credit with insurance, which repays a farmer\’s debt if crops fail, \”you unlock the potential of these farmers\”, said the UK-based businessman. In a world where 80 percent of the poor rely on agriculture in one way or another, \”if you can fix this, that\’s all you need to do\” to solve a range of poverty-related problems.

Insurance is increasingly seen as a cost-effective way to reduce the impacts of climate change on the world\’s most vulnerable. In the Caribbean, a pioneering multi-country insurance scheme has already provided $33 million in payouts to nations hit by worsening hurricanes and other disasters. In eastern and southern Africa, micro-insurance pilot programmes are helping farmers and herders survive droughts.

Insurance \”is not a one-size-fits-all panacea to the entire development question\”, warned Haresh Bhojwani, a development specialist with Columbia University\’s International Research Institute for Climate and Society. But if it is integrated with other efforts to reduce poverty and improve resilience to climate pressures, it can be an effective tool, he said.

Incomes treble

In drought-hit northern Tanzania, insurance-backed farm loans of about $1,000 per year have helped farmers who once produced five bags of maize per acre boost their harvests to 28 bags in good years, said Coffey, who put together a programme in the region with aid agency World Vision. Even after repaying the loans, interest and the cost of the insurance, farmers are seeing their income per acre more than triple, he said.

That extra money gives people resources to expand and diversify their farming, put children in school and provide a savings cushion for bad years – all ways of improving resilience to climate threats, Coffey said.

While poor harvests are expected to come more often as droughts, floods and storms worsen around the world, insured farmers still come out ahead, he said, and the risk to insurance companies can be dealt with by grouping clients together in larger pools.

Even in a worst-case scenario of drought every three years, farmers are still better off using insured loans than not, said Coffey, whose company has run an expanding range of credit and insurance programmes for tens of thousands of farmers in countries including Malawi, Rwanda, Tanzania, the Philippines and India since 2005.

Bringing insured farm credit to 500 million farmers worldwide has its challenges, he admits, not least finding the massive $500 billion in bank credit needed to make it work.

But with loans being offered at commercial rates of interest – except in cases where aid agencies offer subsidised insurance and loans – banks should be interested in entering what could be a huge new market, Coffey said.

Other challenges involve finding ways to adequately explain sometimes complicated loan and credit programmes to farmers who may be uneducated or unfamiliar with insurance, and managing their expectations about payouts, particularly when bad weather damages crops but not enough to justify a settlement.

Index insurance

Under so-called \”index\” insurance, farmers are entitled to an insurance payment when a pre-agreed trigger or group of triggers are passed – typically a number of days without rain, a certain wind speed or flooding that hits a set high-water mark.

Setting up graduated triggers – to provide smaller levels of payouts for smaller losses – may be one way of managing farmers\’ expectations, said Thomas Loster, chairman of the Munich Re Foundation, which focuses on managing risks associated with climate change and other problems.

Because index insurance depends on accurate and highly local weather readings, many new weather stations will be needed to expand the use of insurance-backed loans. Weather stations typically cover about a 25-kilometre radius, Coffey said, and can cost a hefty $5,000-$10,000 to install.

Another problem is that, in some areas, insurance may prove only a temporary solution as policies become too expensive in places where crop failure becomes too frequent, Bhojwani warned.

But so far his institute, working on micro-insurance pilot programmes in Ethiopia with Oxfam and insurance provider Swiss Re, has found the new offerings effective and popular among the poor.

\”Can insurance products be developed that can handle the uncertainty of climate change? So far, yes, in Ethiopia,\” he said.

Innovative adapation

Coffey and others hope some of the costs associated with micro-insurance – including initial subsidies for particularly vulnerable farmers to improve uptake – could eventually be paid out of international climate adaptation funds.

Some pioneering efforts are already producing unexpected payoffs. Farmers in India\’s Maharastra state, after seeing their incomes rise, have used some of their profits to buy health micro-insurance, further protecting their families against unexpected shocks, Coffey said.

Similarly, farmers in Kenya have approached Coffey\’s company about providing political risk insurance to cover damage to their property from rioting and other political unrest.

\”The poor are very innovative,\” he said. \”They come to us and say, \’Have you thought about this?\’.\”

If insurance-backed loan programmes are successfully scaled up, boosts in agricultural production around the developing world could help ease expected food shortages as the world\’s population soars toward 9 billion by 2050 and appetites grow in fast-developing nations like China, Coffey said.

Loster believes micro-insurance will soon be a widely adopted form of climate adaptation in some of the poorest parts of the world.

\”I think this will be normal,\” he said. \”Africa and some other places have no other solutions.\”