Introduce compulsory insurance for strategic crops

By TINASHE KADUWO

INVESTMENT without insurance is an added risk factor. The government over the years has been pouring significant funds in the agricultural sector without considering insurance. 

Agriculture is a critical sector in the Zimbabwean economy, but it has not sufficiently supported the required economic growth and poverty reduction. Given the under-performance of the agricultural sector, Zimbabwe is among countries with the lowest scores on agricultural transformation in Africa and is one of four Sadc states that are not on track in implementing the seven commitments of the African Union (AU)’s June 2014 Malabo Declaration.

The country scored 3.3 out of 10 when the 3.94 benchmark was set as the minimum score for a country to be on track to achieving the Malabo targets by 2025. The Malabo commitments were translated into seven thematic areas of performance such as enhancing investment finance in agriculture; ending hunger in Africa by 2025; halving poverty by 2025 and upholding the Comprehensive Africa Agricultural Development Programme (CAADP).

Enhancing investment finance in agriculture is one of the thematic areas of performance Zimbabwe failed. The country scored zero on enhancing access to finance when 3.33 is the benchmark. The poor uptake of agricultural insurance was cited as a major contributor.

Indeed, the sector’s consumption of insurance services is very minimal, contributing 1.45% to the gross written premium in 2020, which is an increase of 370% in real growth compared to 2019. However, 290% of the growth is attributed to hail insurance for the tobacco crop on the back of the contract system used in financing. Generally, main consumers of agricultural insurance are commercial and contract farmers.

Agricultural insurance can provide value to low-income farmers through protecting farmers when shocks occur and encouraging greater investment.

However, lack of insurance products that address the needs of smallholder and subsistence farmers, who are the majority in Zimbabwe following the land redistribution exercise, general mistrust in insurance services, and reliance on traditional self-insurance in risk and loss management are the major factors limiting the growth of the product.

Furthermore, the government remains the single largest financier of the sector, availing inputs and other key requirements for the sector. However, almost all of the programmes do not have an insurance package. 

We must remember that agriculture is characterised by biological idiosyncracies or, more precisely, high production risks, which make it, from the aspect of insurance, a more complex and demanding industry than many others. The importance of agricultural insurance lies in the fact that it provides economic protection to insureds – farmers – from harmful effects and disturbances that arise from occurrences of insured events, that is, from occurrences of covered risks. 

Agricultural insurance in general, and crop insurance in particular, exists in many countries as an institutional response to current risks characteristic of agricultural production. Crop production insurance is one of the riskiest insurance protections, which means the economic protection in the market is available just for a limited number of risks.

Weather is the main factor of uncertainty in agricultural production and, in times of global climate change, the management of this risk is necessary so as to compensate to some extent the consequences of the elements. 

The objective need for insurance in Zimbabwe is very pronounced since both crop and livestock production are exposed to numerous risks which have a growing tendency, especially in the context of climate emergencies.

However, the subjective need for agricultural insurance in domestic conditions is insufficiently developed due to low ability to pay, that is, due to economic under-development of farmers, as well as due to low awareness of the importance of insurance. The under-development of agricultural insurance at microlevel deserves serious attention.

To rapidly develop agricultural insurance in Zimbabwe, there is a need to make it compulsory rather than voluntary as has been the case. Japan, for example, makes it compulsory for wheat, barley and rice farmers to have insurance. Zambia included insurance to its Farmer Input Subsidy Programme.

Zimbabwe has been promoting grain production through programmes such as Command Agriculture (which started as a special maize production programme), the Presidential Input Support Scheme and Pfumvudza, among others.

The government should therefore make it compulsory for all grain producers to have insurance and for beneficiaries of these programmes to have insurance.

The compulsory insurance should be on all special crops (maize, wheat and soyabeans) and cover farmers (commercial, dryland smallholder farmers) being financed by the government, banks, micro-finance institutions and non-governmental organisations. 

A closer analysis of countries that have  a higher agricultural insurance penetration rate shows that these nations enacted an agricultural insurance law that governs agricultural insurance.

Unlike Zimbabwe which classifies agricultural insurance under non-life insurance, these countries recognise agricultural insurance as a special type of insurance.

As such, the government through the Insurance and Pensions Commission (Ipec) should broaden the classification of insurance to include agricultural insurance as a standalone type of insurance.

The introduction of partly compulsory agricultural insurance is necessary. To achieve this, the insurance line needs to be legally defined as partly compulsory.

The suggested model of partly compulsory agricultural insurance should be based on public-private partnership, and its implementation would not just enable the development of agricultural insurance, but would provide for the funds necessary for current and investment financing of this significant economic activity. 

As with the Command Agriculture model, whereby the government developed a product and invited stakeholders to support the product, the government should come up with an insurance product and invite stakeholders to participate.

For instance, the government in partnership with insurance  companies may come up with a Special Agriculture Insurance Programme (SAIP)and invite all stakeholders in the agriculture value chain (seed producers, fertiliser producers, pesticide manufacturers) to participate. 

Partly compulsory agricultural insurance would therefore imply compulsory agricultural insurance for all farmers who are beneficiaries of some type of government funds, against the most common risks in a particular area. Thus, according to the suggested model, agricultural insurance should be compulsory for: 

(a) beneficiaries of agricultural development incentives paid out from the national, regional or local government budget; 
(b) users of loans with interest rates subsidised by the government; 
(c) users of loans granted by the state financial institutions and placed with low (subsidised) interest; 
(d) leaseholders of state agricultural land. 

Partly compulsory agricultural insurance would relate to the insurance against the most common risks in particular areas. For that purpose, an agricultural risk map should be drawn up for Zimbabwe, where areas would be categorised according to the probability of risk occurrence, i.e. according to risk zoning.

This would enable determination of risk coefficients as well as compulsory agricultural insurance for risks that are most common in particular areas. This can be done by Ipec. 

In line with the suggested model, increased revenue of insurance companies should be used for financing the agricultural sector. For instance, insurance companies would have to invest 20% of the collected agricultural premiums into agriculture, without increasing the price of agricultural insurance.

The earmarked funds would be most rationally used in this respect if the specialised state financial institution, Agribank, plays its specialised role of agricultural financing. 

Agribank, for instance, would therefore primarily invest these funds in preventive economic protection of farmers, such as the construction of irrigation systems to mitigate drought. Loans would be granted only to subjects who fall within the system of compulsory agricultural insurance, under the most favourable conditions in the banking market. 

Given the seasonality of farmers’ incomes, for compulsory agricultural insurance to be successful, only 25% of the premium would be paid when signing an insurance contract and the remaining amount would be effected after the harvest.

In this way, the seasonal character of agricultural production would be followed and current solvency of farmers would not be jeopardised in the months when they have most investments. That would result in less resistance by farmers towards this new law. For this purpose, insurance companies would have to change insurance conditions since under the current conditions a fully paid insurance premium is a condition for the payment of indemnity in case of an occurrence.

It is clear that the prospects of successful agricultural insurance development will require a more active role by the government. The government role could also be reflected in the introduction of partly compulsory agricultural insurance, as well as in providing funds from the budget for higher insurance premium subsidies.

At the same time, insurance companies should have a key role in the domestic market of agricultural insurance by developing both offer and demand, as well as in informing and educating farmers on the importance of the economic protection of their production.

The suggested model of partly compulsory agricultural insurance would not only enable the development of agricultural insurance, but would also ensure funds necessary for current and future investment financing of the agricultural sector.

*About the writer: Kaduwo is a researcher and economist: Contact [email protected] or call 0773376128