The protection gap in the agricultural sector in Africa has given rise to a new, innovative solution -- parametric insurance, says Mr JP Fabri, an economist and co-founder of the Malta-based advisory firm Seed Consultancy and MyUbuntu.
In an opinion piece published in The New Times, Mr Fabri points out that as Africa faces the brunt of climate change, the continent's agricultural sector, which employs over 60% of its population and contributes approximately 23% to its gross domestic product (GDP), is increasingly vulnerable to unpredictable weather patterns.
Africa's agricultural sector is predominantly rain-fed, making it highly susceptible to climate-related risks such as droughts, floods, and unpredictable rainfall patterns. These events not only threaten food security but also undermine the livelihoods of millions of smallholder farmers who lack the financial resources to recover from such losses.
Traditional insurance models are often unsuitable in these contexts due to their high costs, complexity, and the logistical challenges of assessing damages in remote areas, Mr Fabri says.
In recent years, several African countries have adopted parametric insurance models with promising results. For instance, in Kenya, the Kenya Livestock Insurance Programme (KLIP) uses satellite data to monitor vegetation conditions. When these conditions fall below a certain threshold, indicating drought, payments are automatically triggered to the insured pastoralists. In Zimbabwe, MyUbuntuInsurance is piloting parametric insurance for smallholder farmers, covering risks such as drought and excessive rainfall.
Data
The effectiveness of parametric insurance is heavily dependent on the availability and accuracy of data, says Mr Fabri. Advances in technology, particularly in satellite imagery, remote sensing, and data analytics, have significantly improved the precision and reliability of parametric insurance triggers. These technologies enable insurers to monitor weather patterns and environmental conditions in real time, ensuring that payouts are made promptly and accurately.
Moreover, mobile technology has made it easier for farmers in remote areas to access insurance products and receive payouts. For example, in many African countries, farmers can now purchase parametric insurance policies and receive payouts directly through their mobile phones, making the process more accessible and efficient.
While parametric insurance offers significant advantages, it is not without its challenges. One of the primary concerns is basis risk, which occurs when the payout does not fully match the actual loss incurred by the policyholder. For example, a farmer might experience crop damage due to localised flooding, but if the rainfall trigger is not met, no payout would be made. Managing basis risk requires careful design of insurance products and the use of high-resolution data to set accurate triggers.
Another challenge is the low level of insurance literacy among many African farmers, which can hinder the adoption of parametric insurance. Educating farmers about how parametric insurance works and its benefits is essential for building trust and encouraging uptake.
Despite these challenges, the potential for growth in the parametric insurance market in Africa is enormous. With the right investments in data infrastructure, technology, and education, parametric insurance can play a crucial role in building resilience against climate change and ensuring the sustainability of Africa's agricultural sector.
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