Can Rural Insurance programmes be implemented successfully in Ethiopia? Current scenario and future perspectives

Paper submitted for the fifth international conference on the Ethiopian Economy, June 2007

By

Rojers P. Joseph,

Lecturer in Business management,

Faculty of Business and Economics,

Jimma University, PO Box 378

Jimma, Ethiopia

Email: ropjo@yahoo.co.in

ropjo@rediffmail.com

Phone: 0471-119464 (R)

0917-804350 (Mobile)

Abstract:

Rural insurance programs are designed to cover various risks that affect the rural population. Agricultural/crop insurance is a rural insurance program that is gaining importance all over the world. It is a risk management tool that farmers can use in today’s agricultural world. Despite all the efforts of the current and past governments and the availability of abundant resources, Ethiopia’s agricultural production and productivity, is absolutely inadequate to meet the food, feed and industrial needs of the country. One of the major reasons cited for lower agricultural output and the resulting food insecurity is the natural calamities which hit the country frequently. In this context this paper tries to analyze the role of rural insurance as a mechanism to transfer the losses of poor rural farmers in Ethiopia that result from natural calamities. It focuses on the types of agricultural insurance programs, challenges faced by rural insurers, lessons learned from the implementation of such programs in selected countries and the role of government and private firms in their administration using an analysis of data collected from various secondary sources of information.

Introduction

“We should be managing risks instead of managing crises”

- Dr. Aberra Deressa, Minister for Agriculture and Rural Development of Ethiopia.

Insurance is a mechanism by which losses resulting from pure risks are transferred to insurers, who agree to indemnify the insureds for such losses as and when they occur. Many different types of insurance programs are in existence for centuries but less attention has been given to risks affecting the rural population.

Risks faced by Rural Population

The risks faced by rural households are broadly classified as risks related to life and risk related to livelihoods. Of these, the first category of risks doesn’t come under the purview of this paper. The major risks related to livelihood of rural households are:

1) Risks to agricultural activity

2) Risks to agri-allied activities like risk to livestock

3) Risks to assets used in non farm activities

4) Health risks

Among the risks associated with livelihood of rural population, the focus of this paper is on the risks associated with agriculture and allied activities in general and rural Ethiopian population in particular, especially in the light of recent developments in the country.

Farmers face floods, drought, pests, disease, and a plethora of other natural disasters. The weather is their greatest adversary, something that can never be controlled by man. Yet, farming has been in existence since the caveman turned his spear in for a hoe. Farming has come a long way since then; nevertheless; farmers are still at the mercy of the heavens. Crop insurance is a risk management tool that farmers can use in today's agricultural world. For a premium, farmers can pass their weather-related risk onto a third party.

Insurance programs designed for agricultural and allied activities

The various schemes under rural insurance could be classified as follows:

1. Crop insurance: These programs are used to cover crop losses resulting from natural calamities like drought, flood, fire etc by transferring such losses to the insurer. Crop insurance schemes constitute the majority of agricultural insurance programs in terms of premiums collected and claims paid. These programs, as implemented in various countries, commonly cover most of the food crops and oilseeds and a few annual commercial and horticultural crops like cotton and sugarcane.

2. Livestock insurance: This policy covers milk cows, bullocks and calves/ heifers. It provides risk cover of death due to accident including natural calamities, strikes, riots and acts of terror. Maximum sum assured can not be in excess of the market value of the cattle concerned.

3. Sheep and goat insurance: The coverage under this policy is similar to cattle insurance and the maximum sum assured is limited to the market value.

4. Camel/Horse/Mule/Pony/Donkey insurance: Here also the risk covered and the sum assured are similar to that of cattle insurance.

5. Plantation/Horticulture insurance: This policy can be issued to cover grape, citrus, pomegranate, banana, eucalyptus, tea, apple, coffee, oil palm, floriculture, etc. The policy shall cover and indemnify the insured to the extent of loss or damage to the insured trees/fruits due to any one or more of these: fire, lightning, storm, hailstorm, cyclone, tempest, tornado, floods, riots and acts of terrorism.

6. Sericulture (silkworm) insurance: Sericulture insurance is applicable to univoltine/bivoltine/multivoltine/pure or hybrid races of mulberry silkworm crops reared by the sericulturalists as declared by the farmer/department/agency.

7. Cultivation of Beehives insurance: Honey is a key agricultural product in Ethiopia with its vast forests and grass lands and therefore has large potential to emerge as a major agricultural activity with honey being used as a key ingredient in lots of medicinal and natural preparations. Ethiopia has huge potential for exporting honey if it can organize the sector by supporting the farmers adequately.

Challenges faced by insurance providers in rural areas

1) Awareness and Education:

One of the major challenges for insurance companies and policy makers is to increase the awareness levels among rural population, so that they may view insurance policies as a risk management tool. For the question “why did households not buy?” crop insurance policies in a survey conducted in India in 2004 among 1052 rural households, 24.9% of the responses were that the farmers did not understand the product. Traditionally rural households have addressed their risk protection in various forms in Ethiopia: social ties, iqub, idir etc. Most of the financial assistances that rural population are familiar with have been sponsored or subsidized by the government. The legacy of this past is that rural people do not fully see insurance as a risk sharing mechanism through contributions in premium. There is need for sufficient investment by both private and public institutions to bring about a change in the perception of insurance as a risk management tool and enhance the awareness levels on various insurance products and how they work in principle.

2) Documents for Certification:

For effecting and servicing various insurance contracts a variety of documents are expected to be provided by the customer to the insurance company. On account of their low awareness levels and also lack of documentation systems in public institutions for issuing various documents, rural people face a peculiar disadvantage of not possessing even some very basic documents required for taking insurance policies.

3) Product Customization:

There is always a need to differentiate between urban insurance and rural insurance, as the requirements of rural customers can be very different from that of the urban customer. More often than not insurance companies are not concerned about such differences. The product needs specific design in terms of pricing, premium payment options and simplicity in product features and process requirements.

4) High cost of distribution and servicing:

It is well known that cost of delivering micro-finance services is very high. This is a result of the combination of small and multiple transactions, with the customers scattered over a wider geography. The same is the case of rural insurance programs.

5) Premium routing:

Customers in rural areas do not have direct access to insurance companies and also the banking infrastructure in rural areas is grossly inadequate. Therefore there is a need for the regulator and the insurance companies to work on a process which allows rural farmers to remit premium to insurance companies in a convenient and cost effective manner. An alternative would be to route the premium through distribution channels like micro financing institutions or micro insurance companies established for this purpose.

6) Lack of regulations for rural insurance

Today most of the regulatory activity is directed in general at the whole market which is dominated by the urban and commercial insurance business. Some of these regulatory directions while addressing the regulatory requirements of the larger market may sometimes actually work to the disadvantage of developing the rural market. Therefore it is essential for the regulator to come out with separate regulations, which would propel the development of insurance services for the rural sector.

An overview of the Ethiopian Agricultural Sector

A brief review of the Ethiopian agricultural sector is essential before we discuss on the utility of agricultural and allied insurance programs for Ethiopian farmers.

The agrarian nature of the Ethiopian Economy

Ethiopia is endowed with abundant natural resources that have huge potential for agricultural development. These resources include land, water, favorable agro-ecological conditions and huge reserve of biodiversity which remain greatly untapped. It is estimated that at least 60% of the total area (estimated at about 1.12 million square kilometers) is suitable for some form of agricultural activities which means that about 65 million hectares of land can be used for cultivation. It is also estimated that some 30 million hectares of land is potentially cultivable, although no more than 10 to 12 million hectares is used for crop production in any single year. It is also important to mention that Ethiopia’s cattle population is the largest in Africa which stands at a whopping 75 million making it about one cattle per capita. The presence of large number of lakes and rivers in the country provides ample opportunities for the development of various agricultural activities such as irrigation and fisheries.

Given the above facts and figures, it is not surprising that about 84% of Ethiopian population, estimated at 73.044 million in 2005, is rural and agricultural. The government is also pursuing a strategy based on this natural endowment which is known as Agricultural development led industrialization (ADLI).

It is seen that over the years the largest contributor to GDP is the agricultural sector with nearly half of the share (Refer to table 1). More significantly the sector accounts for 60% of exports, and 80% of total employment. The industry contribution to the GDP remains around 12-13% which is the lowest of all the sectors. These figures emphasize the role of agricultural sector in economic development especially as the government is pursuing the policy of ADLI

Table 1

Sector- wise contribution to GDP^* of Ethiopia (in percentage share)

Sector	Year
	1999-00	2000-01	2001-02	2002-03	2003-04
Agriculture Crop Livestock and hunting Forestry Fishing	48.2 30.6 12.0 5.5 0.04	49.8 32.9 11.6 5.3 0.04	48.8 31.7 11.6 5.4 0.04	44.8 27.5 11.4 5.8 0.05	47.4 31.1 10.9 5.4 0.04
Industry	12.2	11.9	12.6	13.8	13.2
Services	39.5	38.4	38.6	41.5	39.5
Total	100.0	100.0	100.0	100.0	100.0

^*At constant factor cost of 1980-81

Source: CSA, Ethiopia-Report on National accounts, 2005

Given the primary focus of the economy on agriculture and the diversity of crops and products, large-scale agro-processing offers numerous opportunities. Ethiopia's cash crop production has enormous potential for growth, especially in coffee, tea, sugar, spices, and tobacco. Cotton is well integrated in the economy with a large number of textile and garment factories relying on domestic production. Ethiopia already produces beeswax, oilseeds, fruits and vegetables for exports but there is plenty of room for growth. Another promising area is floriculture. With the increased growth of agricultural sector there is an increased scope for supporting and allied industries such as food processing, manufacturing of farm-equipment, fertilizers and other agro-chemicals. The cascading effect of all these activities is expected to result in faster development of the sector in particular and the economy in general.

The Current Agricultural Scenario of Ethiopia

Ethiopia’s agricultural production and productivity, although showing a slight improvement in recent years is absolutely inadequate to meet the food, feed and industrial needs of the country. There are so serious problems associated with chronic food insecurity that millions of people need food assistance and thousands die of starvation.

One of the major reasons cited for lower agricultural output and the resulting food insecurity is the vagaries of nature in the form of drought, floods and other natural calamities which hit the country without giving any respite for the farming community. Such disasters prevent the community from engaging in large scale agricultural activities and in most cases the farmers find themselves content with subsistence farming to meet their immediate requirements. The financial and socio-psychological impact of crop-losses due to natural calamites prevents the farmers from taking further risks of engaging themselves in large-scale farming.

Aid from external agencies usually comes after the catastrophe has taken its toll fully. For example, the World Food Program (WFP) now must rely entirely on voluntary contributions to finance its humanitarian programs. The current process waits until there is a disaster and a request from the affected government, then WFP launches an appeal. While they wait for contributions to come in, hungry families eat their seed stock, eat or sell their animals, and are driven deeper into chronic poverty resulting from this asset depletion and loss of livelihoods.

Table 2

Distribution of total number of holders, total crop area and crop area per holder by size of holding, Main season 2004-05 Ethiopia

No. of holders and area	Size of holding (Hectares)
	0.00-0.10	0.10-0.50	0.51-1.00	1.01-2.00	2.01-5.00	5.01-10.00	10.01+	Total
Number of holders Cumulative percent of holders Total crop area (hectare) Cumulative percent of total crop area Average crop area per holder (hectare)	750,938 6.62 23,679 0.22 0.05	2,791,556 31.25 683,346 6.49 0.30	2,778,223 55.76 1,708,627 22.19 0.74	3,010,777 82.32 3,588,243 55.14 1.43	1,836,183 98.52 4,158,135 93.33 2.86	156,308 100.00 650,841 100.00 6.39	11,966 100.00 75,083 100.00 13.11	11,335,945 100.00 10,887,953 100.00 1.20

Source: CSA, Ethiopia-Report on Agriculture, 2005

Table 2 shows that the great majority (about 83%) of holders of agricultural land in the country holds crop area of size 2 hectares or less which probably can be categorized as small and marginal. It is also to be noted that the average size of holdings is 1.20 hectares for all holders. These figures throw light on the fact that most of the farmers are small and marginal for whom natural calamities and resulting crop losses can be catastrophic. Such risks can put huge financial burden on them, throw them out of their livelihoods from which a recovery can be near impossible. It is also important here to note that such farm holdings may be scattered over a large geographical area so that covering the risk of such farmers can pose serious problems for insurers.

Table 3

Estimates and percentages of total crop area by crop type, size of holding and irrigated area as of 2004-05

Type of crop and area	Area (Hectares)	Percent
Temporary crop Permanent crop Total crop area Irrigated area	10,150,937 737,017 10,887,953 121,493	93.23 6.77 100.00 1.12

Source: CSA, Ethiopia-Report on Agriculture, 2005

As can be learned from table 3 temporary crops constitute about 93% of the total crop area which will be more susceptible to climatic changes, low amount of rains and other such events which are more frequent and which may not pose an immediate threat to permanent crops. Of the total area under cultivation almost 99% is rain-fed. All these necessitate better risk management tools to be in place to protect the poor rural farmers especially during periods of adverse rainfall.

Steps taken by the government to promote the growth of agricultural sector

The current government of Ethiopia has embarked on a policy for economic development based on promoting the growth of agricultural sector (ADLI). It may be pertinent here to have an overview of some of the steps taken by the government to support it.

Government expenditure on agriculture

The data given in table 4 show the trends in government expenditure on agricultural and natural resources in relation to total expenditure for a period of six years from 1998/99 to 2003/04. It can be noted that there is a continuous growth in government expenditure on agricultural and natural resources even when there was significant reduction in total expenditure for certain years. It is to be noted that there was no reduction in outlay of funds for agriculture even when there was a steep increase in expenditure on national defense due to war with its neighbor. This shows the government’s commitment towards the policy of ADLI. As regards the government policy on subsidies, there was complete withdrawal of subsidies from the year 2001/02 (1994 EC) which points towards the fact that the government is giving greater emphasis on developing agricultural infrastructure and other facilities which may prove beneficial in the long run rather than providing subsidies.

Reorganization of farmers’ cooperatives in Ethiopia

The agricultural cooperative societies Proclamation No. 85/98 and Proclamation No. 147/98 ushered in the present phase of cooperative development by providing necessary ambience for the rejuvenation of the cooperative movement. In 1996, the government recognizing the need for a strong cooperative sector in a free market economy established a cooperative desk under the Office of the Prime Minister together with Cooperative Bureaus at regional levels. In 2002, the cooperative desk was strengthened and transformed into a Federal Cooperative Commission headed by a Commissioner of Cooperatives. In January 2004, under Proclamation No. 380/2004, the Cooperative Commission was transferred to the newly restructured Ministry of Agriculture and Rural Development.

Table 4

Trends in Government expenditure on Agricultural and natural resources in relation to Total Recurrent Expenditure and provision of subsidies

Type of Expenditure	Year
	1998/99 (1991 EC)	1999/00 (1992 EC)	2000/01 (1993 EC)	2001/02 (1994 EC)	2002/03 (1995 EC)	2003/04 (1996 EC)
Agriculture and natural resources	520.4	542.8	633.8	675.0	730.0	870.0
Annual Growth (%)		4.3	16.8	6.5	8.2	19.2
Total recurrent expenditure	17097.3	20167.9	17137.6	10551.0	13527.2	11961.0
Annual growth (%)		18.0	−15.0	−12.9	28.2	−11.6
Subsidies	3368.6	2684.1	2671.6	0.0	0.0	0.0

(All amounts in million birr)

Source: CSA, Ethiopia-Reports on Public finance, 2005

The cooperative movement as a vehicle for rural development

The cooperative movement in Ethiopia has been identified as a suitable vehicle for mobilization of human, capital and financial resources for rural development. Cooperatives have pooled resources to put up processing facilities for their produce such as coffee and milk, which would not have been feasible for an individual small holder producer. Such members have also been able to jointly own transport facilities to move their produce from farms to market places. It is this economies of scale that make the cooperative movement the backbone of small holders’ agricultural development in Ethiopia.

Primary farmer's co-operative Societies:

• Provide agricultural inputs to their members.

• Provide financial credit service to their members.

• Provide different industrial products to their members.

• Help marketing agricultural products of their members at better price

They can also help in disseminating information among members regarding improved farming techniques, provision of agricultural loans, management of risks related to agricultural activities and so on.

Initiatives by World Food Program (WFP) and National Bank of Ethiopia (NBE)

In this context, it is to be noted that the United Nations food agency (WFP) recently announced that it had signed the world's first-ever insurance cover for humanitarian emergencies in Ethiopia in the event of extreme drought during the 2006 agricultural season. The contract had been awarded to AXA RE, reinsurer of the global insurance firm AXA Group to provide "$7 million in contingency funding in a pilot scheme to provide coverage in the case of an extreme drought during Ethiopia's 2006 agricultural season". The insurance policy is based on rainfall data gathered from 26 weather stations across the nation and payment will be made when the data indicates that rainfall between March and October 2006 is below historic averages. According to the firm’s chief, this is the first time that an insurance cover transferring risk to financial players is used for protecting people against the consequences of extreme drought.

It is also pertinent here to mention that the National Bank of Ethiopia (NBE) has currently embarked on a study to launch agricultural insurance scheme, aimed at encouraging private investors who are involved in mechanized farms to engage in the agricultural sector, insuring them from the losses they may incur.

An overview of Crop Insurance programs in selected countries

In this backdrop it is deemed pertinent to study the experience of selected countries in implementing agricultural insurance programs to safeguard poor rural farmers.

Crop insurance programs in India

Indian agriculture not only feeds a population of over 1.1 billion but also provides livelihood to nearly two-thirds of them. So agriculture in India is not merely an occupation, but a way of life for the population. Nearly three-fourth of the population still lives in the rural areas of the country. They follow varied agricultural practices with the average small farm holding size of about 1.5 hectares. More significantly 65% of the cropped area is rain-fed with predominantly sustenance agriculture. Many parts of the country are prone to onslaught of frequent natural calamities like flood, drought etc.

Evolution of crop insurance programs in India

Crop insurance program in India was introduced in the year 1972 targeting farmers cultivating H-4 cotton in the state of Gujarat. It was initially offered by Life Insurance Corporation (LIC) of India and the responsibility was transferred to General Insurance Company (GIC) in the year 1973 after nationalization of general insurance business. This scheme was based on “individual approach” and later expanded to include more crops and covered farmers under more states and continued till the year 1978. It covered only 3110 farmers for a premium of INR 454,000 against claims of INR 3.79 millions.

1) Pilot Crop Insurance Scheme (PCIS)

In 1979 a Pilot Crop Insurance Scheme (PCIS) was introduced on the basis of a report on the feasibility of introducing a crop insurance program in the country. The scheme was based on “Homogenous Area approach” and covered cereals, millets, oilseeds, cotton, potato and grams. It was confined to borrowing farmers on a voluntary basis with the maximum sum insured equal to 100% of the loan advanced which was later increased to 150%. The scheme offered 50% subsidy in premium payable by small/marginal farmers which was equally shared by state and federal governments. PCIS-1979 was implemented in 13 states till 1984-85 and covered 627,000 farmers for premium of INR19.70 millions against claims of INR 15.71 millions.

2) Comprehensive crop insurance scheme (CCIS)

A major step towards the implementation of crop insurance programs in India was the introduction of Comprehensive Crop Insurance Scheme (CCIS) in 1985 at the national level. The CCIS was implemented for 15 years, from 1985 to 1999. It was also based on the “Homogenous Area” approach and covered food crops and oilseeds. The highlight of the program was that it offered protection for borrowing farmers on a compulsory basis. Initially the sum insured was 150% of the loan amount which was later reduced to 100% with a cap of INR 10,000. Premium rates varied between 1-2% and small/marginal farmers got a premium subsidy of 50%. Claims and premiums where shared by federal government and states in 2:1 ratio. It was implemented in 15 states and 2 union territories and covered 76.28 million farmers for premium of INR 4.04 billions against claims of INR 23.20 billions. This scheme was replaced in 1999 by a new and the so called improved scheme namely the National Agricultural insurance scheme (NAIS)

3) National Agricultural insurance scheme (NAIS)

NAIS was launched on June 23, 1999 and is administered by the Ministry of Agriculture. It was initially implemented by the General Insurance Corporation (GIC), but later the responsibility for implementing the scheme was transferred to Agricultural Insurance Company (AIC) of India which was established solely for this purpose. It covers almost all food crops, oilseeds and commercial and horticultural crops. The major perils covered under the scheme include natural fire and lightning, storm, hailstorm, cyclone, typhoon, tempest, hurricane, tornado, flood, inundation and landslide, drought, dry spells, pests/diseases etc.

The broad features of the scheme are as under:

• It provides yield guarantee based on the “area approach”
• It covers around 55 crops as of 2004-05 including food crops and oilseeds (Group I) and annual commercial/horticultural crops (Group II).
• It is available to all states and union territories and covers all farmers- borrowing on compulsory basis and non borrowing on voluntary basis.
• Premiums vary between 1.5% and 3.5% for Group I crops and actuarial rates are applicable for Group II with a premium subsidy of 50% available for small/marginal farmers which is to be phased out gradually.
• The sum insured was equal to the amount of crop loan advanced. However the farmer has the option to insure an amount equivalent to 100% of the average yield for Group I crops and 150% for Group II crops on payment of premium at actuarial rates.

NAIS offers coverage for most number of farmers when compared with similar schemes worldwide. Since its inception in 1999, it has offered coverage to 75.08 million farmers till 2005 with the total sum insured till the year 2005 equals INR 706.91 billion.