Draining the pool: Climate change tests agriculture insurance models

Tawanda Musarurwa

CLIMATE change is testing the limits of the insurance industry worldwide.

With rising temperatures and unpredictable weather patterns, insurers are grappling with unprecedented risks.

In 2023 alone, the Swiss Re Institute reported 142 natural catastrophes globally, resulting in insured losses of US$108 billion – the fourth consecutive year this figure exceeded US$100 billion.

In Zimbabwe, the effects of climate change are palpable.

The 2023/2024 agricultural season was marked by an El Niño-induced drought, while forecasts predict above-normal rainfall due to the La Niña phenomenon for the current season.

Both scenarios pose significant threats to agricultural output, particularly for a country heavily reliant on rain-fed farming.

The increase in frequency of adverse weather patterns is particularly concerning, given that the uptake of agriculture insurance in the country – especially among smallholder farmers – is low.

The pressing question is whether Zimbabwe’s short-term insurers possess the financial capacity to provide comprehensive drought coverage for all smallholder farmers.

An agricultural insurance market assessment carried out by the International Finance Corporation (IFC) showed that Zimbabwe’s total agriculture market premium for 2022 stood at US$26,5 million, which accounted for 8,99 percent of the insurance industry premium of US$295,4 million.

A further breakdown of the numbers showed that tobacco hail insurance accounted for 61,6 percent of total agricultural insurance premium, while “other” agriculture insurance lines (non-tobacco crop, livestock, farm infrastructure/equipment, etcetera) accounted for the balance.

The same study also highlighted that the country’s insurance supply side was not set up for inclusive agriculture insurance coverage.

For instance, it was noted that in 2022, 13 out of 18 brokers, 13 out of 17 insurers and all the eight reinsurers were active in agriculture (indemnity agriculture insurance).

On the other hand, no brokers, two out of 13 insurers and one out of eight reinsurers were active in index insurance.

According to the Food and Agriculture Organisation (FAO), there are approximately 1,5 million smallholder farmers (mostly subsistence) in the country, with many relying heavily on rain-fed agriculture for their livelihood.

Unfortunately, many of these farmers are unaware of the benefits of insurance or find it too expensive.

But in recent years, Zimbabwe has taken steps to extend the scope and coverage of agriculture insurance.

Earlier this year, ‘Farmer’s Basket’ – a multi-stakeholder parametric insurance initiative was effectively trialled and launched.

The Farmer’s Basket is a hybrid weather index and area yield index insurance.

Said IPEC public relations manager Mr Lloyd Gumbo:

“We combined both the area yield and the weather index models, to see what works better for Zimbabwe.”

With regard to the hybrid index insurance product, the weather insurance index is based on daily satellite data, while the area yield index insurance is based on crop cutting experiments.

The successful pilot of the agricultural index insurance project – a collaborative initiative between the Insurance and Pensions Commissions, the Insurance Council of Zimbabwe, Access to Insurance Initiative, IFC, various Government Ministries, Insurance Brokers Association of Zimbabwe, Zimbabwe Farmers’ Union, Women Farmers’ Land and Agricultural Trust, and World Food Programme – saw 1 800 smallholder farmers receive payouts of US$65 each, after having paid a once-off premium of US$15.

Plans are underway to extend the scope of the Farmer’s Basket initiative to more smallholder farmers across the country.

Government has indicated plans to link the Farmer’s Basket initiative to its flagship climate-proofing inputs scheme, the Pfumvudza/Intwasa, which supports over 1,6 million households.

In a scenario where the Farmer’s Basket project is successfully extended to all smallholder farmers across the country, actuarial experts say careful actuarial modelling is required to effectively determine the reserve pot size.

“Under the new IFRS17 there is a whole lot of considerations that need to be taken into account before one can shout out a figure,” said actuary Mr Gandy Gandidzanwa.

But, with adverse weather becoming more frequent ostensibly as a result of climate change, do local insurers have the capacity to provide coverage to this wider market?

The historical data paints a stark picture.

Zimbabwe is drought-prone.

Zimbabwe is one of the African countries that is most prone to drought. Source: Centre for Research on the Epidemiology of Disasters

Since independence in 1980, the country has experienced 13 major droughts, with frequency increasing since 2000.

“The following recorded drought seasons were associated with declines in crop production: 1982/1983, 1986/1987, 1992/1993, 1995/1996, 2002/2003, 2004/2005, 2007/2008, 2011/2012, 2012/2013, 2015/2016, 2019/2020, 2021/2022 and 2023/2024,” highlighted IFC agriculture value chain specialist Master Mushonga earlier in April, while presenting during an Index Insurance Project Results Dissemination Workshop.

To estimate the probability of droughts occurring between 2025 and 2030, one can analyse and infer from the historical data.

From the given data, it can be observed that the frequency of droughts increased in the new millennium.

Droughts occurred in nine out of 22 years (from the 2002/2003 farming season to the 2023/2024 farming season).

The average interval between droughts is approximately 2,44 years.

Using this information, one can estimate the probability of droughts occurring between 2025 and 2030.

Assuming a uniform distribution of droughts, one can calculate the probability as follows: number of years between 2025 and 2030 is six years.

So, to calculate the expected number of droughts in six years, we divide six by 2,44, which is approximately equal to 2,46.

And since it is impossible to have a fraction of a drought, one can round down to two expected droughts between 2025 and 2030.

According to these basic calculations, the probability of at least one drought occurring between 2025 and 2030 is approximately equal to 83 percent.

But, this is a simplified analysis and does not take into account other factors that might influence drought occurrence, such as climate change, frequency of El Niño and La Niña events or other environmental factors.

While Zimbabwe has medium-to-long-term plans to extend the Farmer’s Basket model to more smallholder farmers, the increasing frequency and severity of droughts due to climate change may also elevate the risk profile for insurers.

This heightened risk may deter insurers from offering comprehensive coverage or result in higher premiums that are unaffordable for small-scale farmers; the latter has already been a problem for of the old indemnity insurance type for many smallholder farmers.

Enter reinsurance

Mr Cuthbert Masukume, managing director of AFC Insurance, is optimistic.

He highlights the role of reinsurance in managing claims, explaining that most agriculture insurance in Zimbabwe is backed by both local and international reinsurers.

“Reinsurance companies provide additional capacity to insurers. We also insure with reinsurance companies and that, to an extent, reduces the net effect on insurance companies because when we pay these claims we also recover from these reinsurance structures,” he told a journalists’ mentorship programme recently.

“Currently, most agriculture insurance is heavily covered, not only with Zimbabwean reinsurance companies, but it also goes to international reinsurance companies.”

Added Mr Masukume:

“Insurance companies do not only write agriculture insurance, they write quite a lot of other classes of insurance, for example, fire and property, so there is that cross-subsidisation that actually happens.

“The losses from agriculture then get diluted by the profits from the other classes.

“The net impact on our portfolio is manageable, so we are keen to take on more agriculture insurance, albeit the impacts of climate change.”

Anticipating the unpredictable

While Government and partner support in programmes like the Farmer’s Basket are commendable, some observers believe that funds and efforts are better channelled towards risk reduction strategies such as supporting environmental, social and governance (ESG) initiatives.

Through investing in climate-smart agriculture, for example, local insurers can boost Zimbabwe’s climate finance flows into the sector, which is still below requirements.

According to the IFC, as of 2021/2022 total climate finance flows into Zimbabwe was around US$489 million, and of that total only US$45 million (or 9 percent) was channelled to agriculture projects.

This is against estimated annual climate finance of around US$108 million required to meet the country’s agriculture sector mitigation goals.

In a 2023 paper titled “Enhancing the Insurance Sector’s Contribution to Climate Adaptation”, the Organisation for Economic Co-operation and Development (OECD) said risk reduction can be a better strategy for insurers dealing with climate change issues because it addresses the root causes of risk.

“Government support for risk reduction is likely a more cost-effective approach to managing the financial impacts of climate risks than providing compensation for damages and losses after an event or even supporting the availability of insurance coverage for climate risks through catastrophe risk insurance programmes, as investments in risk reduction provide a permanent reduction in losses – not just a mechanism for absorbing losses after a single event (which may reoccur),” said the OECD.

Regardless of which strategy insurers focus on, the stakes are high.

Agriculture accounts for 60 percent of Zimbabwe’s workforce and around 17 percent of its gross domestic product (GDP).

A failure to insure smallholder farmers adequately could have cascading effects on food security and economic stability.

There is a correlation between Zimbabwe’s agricultural GDP and overall GDP growth. Source: World Bank

For instance, according to the country’s Second Round of Crops, Livestock and Fisheries Assessment and the Rapid Village-based Food Assessment – both carried out this April – 7,7 million Zimbabweans (approximately 51 percent of the population) required food assistance between May 2024 and March 2025 because of the El Nino-induced drought.

Dissection of these numbers also point to the vulnerability of people living in rural communities, with 6 million (or 78 percent) of the 7,7 million Zimbabweans in need of food assistance based in the rural areas.

The significant disruption of millions of people’s livelihoods has impacts that ripple across multiple levels of the economy, from individual farmers to national food security and macroeconomic stability.

Expanding initiatives like the Farmer’s Basket and improving awareness of index-based insurance are critical steps.

However, success will require collaboration among insurers, reinsurers, policymakers and farmers.

Climate change may be draining the insurance pool, but innovative solutions from the industry can ensure Zimbabwe’s agricultural sector remains resilient.