Insurance is a huge market within the fintech ecosystem. It’s growing at a rapid pace. Despite going through so much in the last 2 years due to the COVID-19 pandemic, a very large set of populations around the world undermine the value of insurance services. The value of insurance can be understood not only by availing of its benefits but also by also understanding the various ways insurance companies work all around the year.
Africa Risk Capacity Limited (ARC) recently paid out US$$350,000 to farmers in a corner of Madagascar after a drought, proving the value of insurance in building resilience. David Maslo, head of business development at ARC Ltd, explained “The value of insurance comes from a claim. At that point, the insured discovers the true value of insurance and the cost of the premium melts in terms of significance.”
Madagascar is a country that faces many perils. Since 2018, ARC has supported the government in developing and implementing a comprehensive disaster risk management framework to better plan, prepare and respond to these natural disasters.
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As part of this initiative, for the past two years the Madagascar government has taken out a policy against drought, and last year subscribed to a policy against tropical cyclones. In 2020, following a significant drought in the south, the country as a whole received a claim pay-out of $2.13m.
Although this has a significant impact at the country level, it is not necessarily sufficient to manage the extent of risk in Madagascar, particularly for those suffering smaller losses – but which have a big impact on them.
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As Maslo said “We were concerned for those impacted by a catastrophe, but the overall claim cost would fall into the retention layer below the excess of the parametric insurance product. In addition, while macro products are well suited to coordinating and financing national-scale response operations, they could have limitations in addressing the special local needs of communities.
“This is particularly true when they may be located in unique and uncorrelated areas or exist within a microclimate. In these parts, the needs of the communities can be addressed with tailor-made micro and meso insurance products. Although less cost-efficient at the macro level (due to higher costs and time lags), such products can provide a more relevant response,” he added.
In consideration of both these elements, ARC decided to support a microinsurance initiative in Madagascar launched by its longstanding partner, the World Food Programme (WFP). This initiative, called R4, was known as Aron’ny Fambolena Voatse, which translates as agricultural protection, and is an area-yield index insurance program for farmers in nine pilot localities.
The Village Saving and Loans Association ‘Mandresy’ network contracted the insurance on behalf of all its members participating in the program in the localities of Sampona, Ifotaka, Behara, Berano, Tanandava, Maroalomainty, Maroalopoty, Ambovombe and Amboasary, an area known for its droughts and severely affected by climate change.
The WFP purchased insurance for some 3,500 households in the area from local insurer ARO, with ARC reinsuring the program and carrying 95% of the risk.
The insurance aims to protect farmers’ income against a number of risks that might impact their harvest, including flood, drought, sandstorm and pest infestation. It is innovative because it ensures the value of inputs purchased and invested, against a low return.
To capture the particularities of the southeast region of Madagascar, WFP and its local partners opted for an Area Yield product designed and delivered by Kenya-based company, Pula Advisors.
In the first planting season after November 2020, the region suffered extreme drought, followed by sandstorms and pest infestation, which triggered the insurance program and ultimately resulted in a pay-out for the incurred losses.
This was not a generalized event across the whole southern part of the country, which is insured by the government, but a collection of severe localized drought pockets in the southeast corner of the island.
One of these pockets of drought-affected the southeast region was covered by the Aron’ny Fambolena Voatse program. In fact, crop-cutting experiments and assessments from the ground show a complete failure of sowing in these regions.
As a result, ARO Assurance and its reinsurer ARC Ltd paid out $350,000 for the planned response operations. The payment was made within weeks of the end of the season and benefitted 3,500 farmers and their households.
“This experience,” said Mr Maslo, “highlights the complementary nature of macro and micro-insurance products in supporting governments to better manage and respond to natural disasters and alleviate their financial burden. Indeed, while the sovereign policy did not trigger a pay-out, the microinsurance program paid out a significant amount and indirectly supported the government in responding to its share of risk retained.”
“Without the Aron’ny Fambolena Voatse program, those 3,500 farmers would have been facing increasing debt and greater poverty. There would have been a likelihood that more of them would have left the region to look for a living in the towns and cities.”
Mathieu Dubreuil, senior program adviser for climate risk insurance at the World Food Programme, explains, that was far from the end of it.
“This is not just payment without explanation. We do not want to be paying premiums on behalf of the farmers forever. We want them to understand the value of insurance, save enough money to pay the premiums and benefit should there be claims in the future.”
Mr Maslo stressed the need not just to make a single pay-out but also to encourage developmental goals and to build the capacity of local insurance providers.
“This project can be seen as a success on all three levels. Not only have we protected vulnerable farmers, but we have delivered a successful program using a local insurer, ARO Assurance, and opened up the conversation around the value of insurance. Going forward, we look to the day when these farmers will be financially independent, able to fund their own insurance program, and become resilient to future threats from climate change,” he concluded.
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