Building a Stronger Foundation for Climate Resilience

Nete Chimwaza, a Malawian farmer whose house and fields were destroyed earlier this year by Cyclone Freddy, received an insurance payout after the storm. (Photo by Claire McGuinness | One Acre Fund)

When it comes to adapting to climate change, there are no silver bullets for smallholder farmers. Building their long-term resilience, and thereby the resilience of the communities they feed, requires an array of tools and approaches. Methods like agroforestry, soil remediation, and crop diversification all have a role to play, and are relatively established practices among climate-focused organizations working with smallholders in sub-Saharan Africa. But another important tool remains underutilized despite its potential: insurance.

Smallholder farmers number 50 million strong in Africa alone. They contribute 80 percent of the food on the table on the continent and account for 52 percent of the employment in rural Africa. They also rely on rainfed agriculture to make ends meet. And as a group, they have no buffer to absorb losses caused by climate shocks like the devastating cyclone in Malawi earlier this year. The typical smallholder farmer in Africa meets the standard for extreme poverty and already has to endure a season of meal skipping when their annual food stores run out. When shocks hit, they have almost no safety nets to fall back on. Many are forced to pull their children from schools they can no longer pay for, take out high-interest loans, sell assets, and endure protracted hunger. These effects can reverberate for years, as farmers lack the resources to invest in planting their next season’s crops—a vicious cycle that can negatively impact a whole region’s food security.

At One Acre Fund, a nonprofit that supports the prosperity of farmers in Africa, we like to talk about ways farmers can construct a “resilience shield” for themselves through climate-smart farming practices. Right now, the parameters of a new paradigm-shifting Loss and Damage Fund, which will help poorer nations adapt to the consequences of climate change, are being debated at the COP28 global conference on climate. As those conversations proceed, it is vital to bear in mind that insurance policies are an indispensable part of this shield. While it is by no means the only safety net the fund should support, insurance is one of the most effective food security tools available. It gives farmers the confidence they need to fully invest in their fields at the planting stage in spite of climate risks and offers protection if shocks destroy that investment. It is also most impactful when it is part of a comprehensive agricultural support program. For example, depending on the time of year and whether seeds are still available locally, an insurance payout in the form of re-delivered seeds that farmers can replant after the crops they initially sowed are destroyed can be much more valuable than cash.

Unfortunately, agricultural insurance doesn’t look the same in Africa as it does in the Global North. In the United States, for example, the Farm Bill subsidizes most of the cost of agricultural insurance. This public participation in the market is widely accepted in recognition of the social and security imperatives to maintain a reliable domestic food supply, especially given commodities markets’ tendency to boom and bust. By contrast, these subsidies are largely non-existent in Africa, where just 1 percent of farmers have insurance coverage. African smallholders—who are almost entirely dependent on precipitation for their water needs, and on the whole lack access to irrigation systems, drought-resistant seeds, and other resilience-strengthening tools common in the Global North—must make do with much less protection than their counterparts. In fact, the general narrative in the philanthropic sector is that African smallholder farmers must be able to graduate out of support within five years or so, a standard that completely ignores the fact that farmers in rich economies have not been able to do the same after decades of support by their governments.

Three Market Failures

In addition to the subsidization gap, three main market failures keep this valuable resilience tool out of the hands of smallholders:

First, limited data on risk factors and farm-level outcomes, such as detailed historical rainfall records to feed into climate models that could inform regional crop yield predictions, makes the African insurance sector costly and prone to delays. Private insurance companies do not have the risk data they need to offer affordable premiums, and instead hedge against the unknown by building in large buffers. In addition, on-the-ground data collection on crop yields, flooding, and other payout triggers can be time-consuming in remote rural areas. This means that often payouts are not disbursed until long after farmers have resorted to costly coping mechanisms. These local data collection challenges also mean that payout decisions are typically made at the regional level, rather than the policyholder level, so a smallholder might lose their entire farm to local flooding but not receive compensation because their wider area was not affected.

The second failure is also data-related: The entire sector is operating in the dark when it comes to farmers’ resilience thresholds. Currently, there is little data on what minimum income level allows smallholders to avoid coping mechanisms after shocks. Without that information, no one can design data-backed policies to reliably keep farmers above that red line or understand what subsidy levels are even needed to provide farmers with adequate support.

Finally, these markets are simply underdeveloped in Africa; there are not enough players. In a mature market, a single insurance policy is the end result of a long chain of risk-sharing partnerships, from local brokers to local insurers to (sometimes several) re-insurers. This keeps competition healthy and ensures that neither individual players nor the market as a whole are exposed to dangerous levels of risk. In Africa, local underwriters are functionally just playing a box-checking role for companies that need to work with local partners to assure regulatory compliance; these local underwriters are not actually designing the policies. This is partly due to historical underinvestment, which has left these local players without the capacity to know their customers, design fit-for-purpose insurance products, and service the needs of the African farmer. It’s also due to the perverse incentives created by this market structure. As things stand now, local actors can earn a profit while not having to develop their own products or participate in any significant risk sharing. Therefore, there is no strong motive for them to push for a change in the current state of affairs.

In essence, most of the local insurance market in Africa has had to abandon the fundamental function of underwriters to a small group of “super brokers” who operate at each and every stage of the value chain. This allows those players to command unfairly high premium prices, including high commissions and fees, while keeping data and learnings from past programs fenced into their own protocols.

Changing the Smallholder Insurance Market

Addressing these challenges requires that philanthropies, investors, climate change groups, and agricultural organizations get four things right. First, insurance products need to cost less and cover more. Bringing expenses down through more efficient data collection—for example, by using technologies like remote sensing that collect data from a distance via tools like satellites and drones—is one way to achieve this. Subsidization is also important. In the Global North, this is usually provided by governments. But here, absorbing risk while testing and scaling new solutions sounds like a classic job for philanthropy, and in the long term, a function that local governments may take on.

One Acre Fund is announcing a first-of-its-kind reinsurance fund, One Acre Fund Re, created in partnership with the International Finance Corporation (IFC), the US Development Finance Corporation (DFC), and African Risk Capacity, to make progress against this goal. This new fund will be able to offer farmers lower premiums and strengthened coverage, because we do not need to earn the same margin as private players and because we can leverage our historical harvest yield data to right-size our risk hedging. It will also allow us to flexibly design products and direct payouts in a way that will more effectively respond to farmers’ shock experiences. The process will be “open source” so that others, particularly local insurers, can use the product development and pricing methodology, and, as we’re planning to funnel insurance profits back to smallholders, subsidies will always end up in the pockets of farmers rather than private companies’ bank accounts. Over time, we would like to open this fund to others who serve smallholder farmers so that it has sector-wide value. We also hope to see other microfinance institutions undertake similar projects, and to learn from different types of “insurance affordability solutions” that groups like Turaco and Risk Shield are implementing.

Second, we need to understand what income levels households really need to achieve resilience. One Acre Fund is currently partnering with IFC and the Microinsurance Center at Milliman on a three-year study that will provide the agricultural insurance sector with solid data on the income Malawian farmers need to get through the year without taking drastic measures—and thus, the amount of subsidization it will take to get them there. However, household income needs in Malawi will be different from those in countries like Nigeria, Ethiopia, and Zambia. Others need to undertake studies in different regions so that we can begin to assemble a full picture of what resilience looks like on the continent.

Third, the African agricultural insurance sector needs to address payment delays. This is another great use case for tools like remote sensing, which can offer more granular, field-specific pictures of farm-level outcomes and take months off the payout timeline. Leading agricultural research centers CGIAR and IFPRI have also been doing some innovative work here recently, testing different tech-enabled data collection approaches that add real efficiency to the process, such as self-reported mobile phone pictures of farmers’ crops, rather than in-field visits by insurance agents.

Finally, we need to find a way to pull in new private sector players on the supply side by easing access to the farmers on the demand side. Right now, it is too expensive for companies to send their agents to these remote areas to sell insurance door-to-door. Instead, they should begin partnering with co-ops, seed suppliers, and other farmer-facing organizations that have already done the work of pulling farmers together into groups. This will bring down acquisition costs, and allow smallholder insurance to make economic sense to both local and international risk-carrying markets.

Drought in Malawi smallholder farmer John Handson’s area resulted in the loss of the crop he planted in 2022. As part of his insurance package, One Acre Fund re-delivered seeds, which he planted in time to salvage the season and avoid catastrophic harvest losses. (Photo by Hailey Tucker | One Acre Fund).

With COP 28 upon us, the time for action is now. We need governments, philanthropists, farmer-facing nonprofits, remote sensing experts, private insurers, and climate advocates to work together now to bring down costs and boost coverage; test and launch new remote sensing technologies; fund and conduct vital data collection on farmer resilience thresholds; articulate the value proposition of this market to private players; and invest in consortium building to build local players’ technical capacity. Boosting the resilience of farmers dependent on rainfed agriculture—who are among the least responsible for and the most vulnerable to climate change—is right in line with the global climate justice agenda.

Read more stories by Claire McGuinness, Matthew Forti, Hassan Bashir & Johannes Borchert.