Agricultural insurance: How does it work?

Agriculture is an entire process. At which stage do you offer insurance?
Our insurance policies for agriculture cover both production- and revenue-related risks. Production risks include all the risks on the farm. This could be poor weather during germination or breakdown of farming equipment.
Revenue related risks include the poor infrastructure. A damaged road or bridge can cause a farmer to lose revenue because of delayed transportation. Also covered are processing risks. In general, agricultural insurance covers the whole value chain.

Is increase in agricultural funding, which is needed to improve productivity?
From our analysis, 80 per cent of Ugandans are employed in the agricultural sector and yet only 10 per cent of bank lending is geared towards agribusiness. That alone tells you there is a gap that needs to be fixed.
If what the reports say, that we need to improve agricultural production by 100 percent to feed the population by 2050, then we are lagging behind. The funding that goes to farming by the government and private sector is not sustainable. By the private sector I mean banks and insurance companies.
We carried out a survey and discovered smallholder farmers [operate] on an average of 4.5 hectares. Our focus, as a country, should not be on expanding farmland but on intensifying the productivity of these farmers.

How do we intensify productivity?
First of all, to have a productive farming community, we need the farmers to buy genuine seeds and farming equipment. For example, when germination fails, it is not easy to tell whether it is due to the fake seeds on the market or because of weather vagaries.
If these uninsured risks are not addressed, they lock the rural population in the vicious cycle of poverty they are already entangled in.

How are you filling the gap between the banks and the farmers?
There is a tendency to think that insurance only benefits large commercial farmers. While we also offer them services, we should understand that it is not the commercial farmers who are feeding the population. The small-scale farmers supply most of the food on the market.

If a farmer borrows Shs500,000 from a bank and there happens to be a drought, which causes the farmer to lose an entire crop. What will happen to the farmer, his or her family, and the bank?
This is where insurance comes in. There are basic risks that the farmer is not in control of. We have products that buffer the farmer from these risks. Our products also enable the bank to re-lend more money to this farmer because the insurance company will pay off what the farmer owes the banks.
This is how the link between agricultural insurance and financing works. It is strengthening because we have to improve our farming.

There are misconceptions about compensation. How would you reassure them?
It is true that the population has a misunderstanding about benefits of risk management that insurance brings to the table. Insurance protects one’s existing assets.
When you put a seed into the ground, it becomes your asset. You have invested money in buying the seeds and in clearing the land. If you lose that, you must get back what you invested.
The insurance sector is now regulated by the Insurance Regulatory Authority, which functions just like Bank of Uganda in the banking sector. So, there is no way a farmer can buy insurance and not get compensated for what they deserve, in the event of a disaster.

Are farmers in the rural areas aware of your products? There is a perception that insurance is only for the rich.
We have realised that most farmers do not access the media where most of our information is. So, we mobilise them through their own groups instead of creating a new platform they may not be able to join. We use mobile platforms, SACCOs, and village associations.
Since the farmers also listen to their group leaders, we sensitise the leadership to understand the product we have offer. We help them realise that farming is a business investment. That investment should be backed up with the right input, technology, and management. They need insurance to back up this investment.

A product, like Kungula, is simple to understand, relevant and affordable. This product provides both crop and livestock security.
Quite a number of policies have been written for individual farmers. On the other hand, a number of partners like The World Bank, IFDC, and UNDP are financing premiums for farmers who cannot afford to apply for insurance individually.

Given that the agricultural sector is fraught with many risks, how does your presence assure the banks that they will get their loans back?
When banks price the money they are lending to the farmer, they are looking at the risks that come with lending to smallholders. As insurance companies, we make sure that the base risk in lending the farmers is reduced significantly to about 80 per cent of the risk.
Banks can reduce the cost of lending by the amount of risk that has been taken away by the insurance company. So, basically, we come in to help farmers to access money at affordable rates.
In Kungula, we are coming up with a proposal to show how the government and private sector can partner with us in agricultural insurance.

What insurance policies do you offer farmers?
We have the Weather Indexed Insurance that covers crops and pasture losses due to drought and excessive rainfall. The crops covered under this policy usually fetch a good price on the market like maize, beans and coffee. Because matooke is a staple food, the market value is low. So, it is not included in the policy.
We also insure sorghum; we are in discussions with farmers in Kapchorwa District, and a local bank, to encourage them to buy insurance.

We also have the Livestock (ARM) Insurance that covers livestock production losses. An animal is insured within a specified geographic area from death by fire, lightening, floods, windstorm, drought, earthquake, diseases, and surgical operations within the insured period. However, we do not insure theft of animals.
The policy covers cattle, chicken and pigs but it does not cover fish farming as yet.
The policies also cover balances with the bank, in case of disasters. We will pay the debt to the bank so that the farmer can be able to start again. As a quality control measure, the insurer and the bank insist on who should supply the seeds to the farmer.

What are your premium rates?
The minimum premium rate for the Kungula product is 2.5 per cent of the sum insured. The rates are not universal for the whole of Uganda. They are determined by the weather patterns in the particular districts. The premium rate for the central region will not be the same as that of the northern region, for instance.

As an industry, what challenges do you face?
The introduction of Value Addition Tax on the buyers of every insurance policy has been reflected on the farmer. Ironically, it is the farmer we are trying to protect by coming up with various affordable and simple products.

We are also challenged by the low level of understanding of insurance in the population. The poor need more insurance than the rich because they can hardly afford to replace their assets once lost; which means they need to protect what they have. The rich, on the other hand, can buy more assets. So, this misconception that insurance is for the rich is unfortunate.

Which other insurance providers provide the Kungula product?
APA Insurance, National Insurance Corporation, UAP Insurance, FICO and NIKO Insurance Uganda.

Farmer’s experience
Sarah Nalugya
Kiboga Farmers Initiative Sacco

As a Sacco, we sensitise diary farmers in Kiboga district to become members and save their earnings with us. Once a farmer saves with us, they are eligible to buy shares in the SACCO.
In this way, they can apply for loans, including school fees loans, agricultural loans and business loans.
In October 2014, we partnered with UAP so they normally come to the district to sensitise people about insuring their assets, including the dairy cows.
Last year, we gave out farming implements and cows to farmers and insured them at five per cent equivalent to the amount of the asset the farmer was taking.

One of the members received a dairy cow, worth Shs1.8m, which was pregnant. Unfortunately, before it gave birth it was bitten by a snake, and died.
When I contacted UAP, they took me through the procedure for compensation.
Our veterinary doctor had to write a report on the cause of death, I also wrote a report, and UAP officials came and inspected the farm as well.
They then wired Shs 1.62m to the SACCO account. It was less because according to the UAP policy, they compensate 90 percent of the amount, and the farmer pays the remaining 10 percent.

Christine Kanyesige
Kiruhura Epicenter Sacco Ltd

In our Sacco, if someone wants to have a dairy cow, we do not give them the money to buy the cow. Instead we send them to a dairy farmer so that they can make their choice among the cows on the farm.
So when in November 2014 one of our members picked the cow of his choice, worth Shs 1.5m, we sent a veterinary doctor to check the health of the cow. It was healthy.
The cow was insured with UAP for 8.5 percent of its price. 7.5 percent for the animal and 1.5 percent for the farmer.
Unfortunately, once on our member’s farm, the cow developed East Coast fever and died. The veterinary doctor inspected the cow and made a report, which I forwarded to the insurance company.
The farmer has been compensated with another cow.