The promise of insurance in planting for food and jobs

In June, 2018, the media space in Ghana was awash with news that one Kwame Kitiwa, 28, had been found hanging in his room in Kwaekesemu in the Tain District of the Brong Ahafo Region in what was reported to be a suicide committed to escape the burden of debt arising out of plunging profits from his farm produce.

Kwame Kitiwa thus becomes the latest statistics in a string of farmers who have been driven to suicide due to apparent frustrations with crop losses, supply glut and alleged debt burden.

Other reports claimed personal reasons drove him to suicide but the death in a farming community that lies just about 61 kilometers from Tuobodum- a farming community in the Brong-Ahafo region- where scores of tomato cultivators in May 2018 threatened the Ghana government with mass suicide if nothing was done to stem the flood of tomatoes from neighbouring Burkina Faso- which to the farmers has aggravated the supply glut of tomatoes on the market- has raised concerns about how agrarian distress is driving many farmers to the brink of death.

Suicides by farmers are not new in Ghana but according to the Ghana Agricultural Workers Union (GAWU), the numbers have risen sharply in recent years and have become what the Union says is an ‘annual ritual’ because of drought, crop losses and loan burden, which limits farmers’ ability to pay back debt secured from banks, self-help groups and private money lenders.

The high loan delinquency and credit default rate among farmers has pushed banks and other financial institutions in Ghana to cut back financial support to the agricultural sector.

In 1990, lending to the agricultural sector stood at 16% of total bank lending, as per figures from the Bank of Ghana- the financial services regulator. However, as at the end of 2017, bank lending to the sector now stands at about four (4) percent. This is in spite of the fact that the agricultural sector accounts for about 22 percent of Ghana’s Gross Domestic Product (GDP) and employs more than half of Ghana’s estimated 28 million population.

The decline in agricultural loans have largely been attributed by industry players to the perception of high lending risk associated with agriculture.

Presently, many of the smallholder farmers in Ghana rely on rain-fed crop production for their livelihood, which makes them sensitive and vulnerable to extreme weather conditions associated with climate change such as drought and flooding. Additionally, they have to contend with the incidence of pests and diseases. These factors present substantial threat to farming and the income of the rural poor and it could get worse.

Research has shown that by 2100, the mean daily temperatures in Ghana are expected to increase by between 2.5 and 3 degrees Celsius while rainfall will also decline between nine (9) percent and 27 percent.  These changes in the weather pattern make investment in farming more expensive, risky and less profitable.

It is on the back of these challenges that the Government of Ghana with the support of the country’s development partners have sort to modernize agriculture production, which per reports of the Africa Development Bank, is critical for poverty reduction and sustainable socio-economic growth.

However, modernization of the agricultural sector requires innovative ways of dealing with agricultural risk exposure, which drive many smallholder farmers to operate at sub-optimal level as a way to reduce their exposure to risk.

In view of this, the government of Ghana believes agriculture insurance offers the best bet to reduce the risk exposure of farmers and incentivize financial institutions to loosen their purse string on agric-financing.

As such the government, through the Bank of Ghana, has unveiled what it calls ‘Agri-business insurance facility’ whereby appropriate insurance products for agriculture and agribusiness will be developed and deployed as a means of lowering the risks faced by smallholder farmers and agriculture entrepreneurs.

Indeed, this facility is part of a grand scheme called “Ghana Incentive-Based Risk-Sharing System for Agricultural Lending” (GIRSAL) designed by the Alliance for Green Revolution in Africa (AGRA) to help governments across the continent to reduce both the potential and real risks associated with lending to agriculture and agribusiness.

It is expected that the facility will among others help to boost food security, increase the income of farmers and reduce poverty.

However, ensuring the successful roll-out of the Agri-business insurance facility and uptake of insurance among farmers present a significant challenge to policymakers and insurers on how to make it work.

After all, this is not the first time that attempts have been made to use insurance as the solution to the agricultural risk problems that farmers face and also to draw investments into the agricultural sector.

In 2011, the Ministry of Food and Agriculture collaborated with insurance practitioners to roll out the Ghana Agriculture Insurance Programme (GAIP) to tackle potential risks farmers face. About 19 insurance companies have since been pooled together to form the Ghana Agriculture Insurance Pool under GAIP and is credited with developing Ghana’s first agricultural insurance.

Through GAIP, some agri-businesses have received financial compensation for loses made in their farms. In the 2016/17 farming seasons, fall army worm infestations/outbreak became the biggest threat to the growth and livelihood of many farmers in Ghana. Though many farmers lost their crops to the pests, a few agribusinesses that insured their farms through GAIP got reprieved with compensations totaling almost GHC3 million.

Nonetheless, uptake of insurance through GAIP has not reached the volume and value expected when GAIP was conceptualised. For many insurers, agriculture insurance is not growing at a rate that is attractive to insurance companies.

This has largely been pinned down to a gap in dissemination and awareness creation on crop insurance. In addition, many people do not trust a lot of insurance companies and that mistrust arises from bad experiences with insurance and those bad experiences come from complex and bad insurance products. The cold fact is that, the experience part of insurance for many people in Ghana has not been interesting and that has dampened confidence in insurance products. So if the new agro-insurance facility is to work, the industry needs to and consistently clean up its image and pay claims when they arise.

More so, just as farmers, insurers that venture into agricultural insurance are equally exposed to the vagaries of the weather and other catastrophic events that could plunge them into bankruptcy. Besides, most of the insured in the agric sector are better informed of their risks than the insurer. Add that to the fact that moral hazards, which causes the insured to undertake riskier practices on buying the insurance, will also set in and cause the indemnities paid by the insurer to rise beyond expectation. And these could lead most insurers to bankruptcy and to avoid getting into insolvency, the insurance firms look away from the agriculture sector.

Those insistent on doing business in agriculture therefore turn to reinsurance firms to cushion them against the systemic risks that they face. However, due to other factors such as government’s regulatory environment, reinsurance becomes too costly and difficult to obtain. And when the insurers successfully obtain one, they pass on the cost of the reinsurance to the insured. As a result, many subsistence farmers see crop insurance as too expensive and this has reduced the demand for insurance.

Again, to ensure farmers taking agric insurance paid the right premiums, insurers often rely on information and profiling of farms so they can tailor the contract terms and premiums to the risks of the policyholder. However, in Ghana, many smallholder farmers do not keep agriculture production and loss data, and this makes it difficult for insurers to adequately assess the farms and raise the right premiums.

To navigate around this challenge, which is often associated with conventional agricultural insurance, where the policy covers provable farm level crop or livestock production losses from one or more named perils, insurers have turned to index insurance- which in spite of its own inherent flaws of being a limited insurance with a lot of basis risk (failure to cover all losses that may be incurred by the insured)-  is proving to be the game changer in selling agricultural insurance in a country where insurance penetration is under two percent.

The uniqueness of index insurance is that, instead of paying out indemnities for actual loss, insurers link the policy to an index, such as rainfall, temperature, humidity or crop yields which are all objectively observable and measurable. The good thing is that the selected index cannot be influenced by the insured, which limits moral hazard concerns. This makes index insurance financially viable for the insurer and less expensive to buy by the farmer.

In fact, index insurance is the most popular and efficient agricultural crop insurance that has worked in many countries. And since Ghana is not the first country to embark on agricultural insurance policies, the country must learn from other countries that have gained substantial experience in undertaking agricultural insurance policies to scale it up and transform farming.

It is in that vein that the Ghana government could learn from its Kenya counterpart for instance on how to assist farmers to purchase agricultural insurance through the provision of premium subsidies. This will ensure that insurance becomes a lot cheaper for small-holder farmers to buy.

And it is when agricultural insurance works and farmers could afford it that they will stop praying for the rain in times of drought. That will also give incentive to financial institutions to expand credit facilities to the historically marginalized agriculture community. More importantly, it could stop farmers from turning to suicide when they are faced with the adverse consequences of crop failure and supply glut.