Managing Agricultural Risk in Northeast Nigeria: Lessons from Piloting Agri-Insurance
This blog is jointly authored by Dongnaan Swomen, Intervention Lead, Agri Insurance of the Rural Resilience Activity, Mark Akpan, Senior Advisor, Financial Services of the Rural Resilience Activity, and John Rachkara, Deputy Chief of Party, Rural Resilience Activity.
Crop farming is a risky livelihood option, especially when it's rainfed agriculture. For smallholder farmers, productivity, income, and well-being are defined by this risk. Farmers in Nigeria have to contend with several risks: climate change, a high prevalence of pests and diseases, and other man-made threats, such as insecurity, herder encroachment, and market-related risks that impact farmers and their livelihoods and the economy. Smallholders in Northeast Nigeria are particularly vulnerable to the effects of climate change. They frequently have to contend with drought, floods, and other extreme weather events, which cause crop failure, loss of livestock, and property damage. They also face market-related risks, such as a lack of access to markets, information, and finance, making it difficult for farmers to sell their products at competitive prices. Farmers in the region are often vulnerable to theft and other security threats, resulting in the loss of crops, livestock, and property. More recently, farmers witnessed high input costs. High input costs can reduce profitability and limit further investment in their farms. These challenges also trigger conflicts, amplify insecurity, and further promulgate backsliding into chronic poverty.
Addressing these risks requires a combination of policies and interventions at the national, sub-national, and local levels. These may include investments in infrastructure, increased access to markets and finance, improved access to inputs, and better weather forecasting and early warning systems. Moreover, most smallholders need access to essential risk management tools such as agricultural insurance. Insurance can mitigate risk for smallholder farmers, helping them prepare for their next harvest and withstand the risks, shocks, and stressors. But agri-insurance as a risk management tool is alien, new, and challenging to access for small-scale farmers. Insurance providers have not yet penetrated rural areas.
To solve this challenge, The Feed the Future Nigeria Rural Resilience Activity (RRA) collaborated with several insurance companies and service providers to introduce agricultural insurance to farmers in the Northeast as a mechanism for risk management. RRA works to protect the livelihoods and well-being of the population in Northeast Nigeria by deploying the market systems development (MSD) approach. MSD aims to help create sustainable economic growth, increase incomes, and reduce poverty over the long term. MSD is a path to economic development focusing on improving markets, so they work better for poor and marginalized communities. It recognizes that markets are complex and dynamic and that making them work better requires working with the private sector and tailoring interventions to the specific context. This can involve improving the skills and knowledge of market actors, building better connections between different parts of the market, and encouraging businesses to adopt practices that benefit smallholder farmers and other vulnerable groups.
Agricultural insurance is a critical tool to help farmers to manage risk and protect their livelihoods. However, making agricultural insurance work in new markets can be challenging. In our case, we knew several private and public agri-insurance companies in the country. We also know that the uptake of policies was uniformly low across all states but much less in risk-prone areas such as the Northeast. It is justifiable to intervene, but how we intervene needs to be revised. First, we should have asked why the uptake could have been higher among farmers. Secondly, considering their traditional and religious belief systems, we should have interrogated the existing business models and whether they were appropriate for the Northeast. Thirdly, we concluded that the current products were suitable but were costly for farmers, and there was a need to subsidize them. After all, several pieces of evidence show that agri-insurance subsidies work.
Reasons behind subsidies – market failures and externalities that constrain the development of privately provided and unsubsidized insurance, and social objectives such as helping specific segments of poorer farmers to access insurance, reducing the need for disaster assistance payments, or finding quick wins for acceptable means of supporting farm incomes – reinforced our subsidy position. We decided, but with very little information about the effectiveness of subsidies in achieving their intended purposes or whether the impacts they generate justify their costs. Generally, data that could have provided us evidence from evaluations and impact assessments of subsidized agri-insurance programs in similar contexts were missing, too. We were happy to try out a subsidy for 10,000 farmers. Whether this number makes a robust commercial case for the private sector to invest was also not interrogated. We encountered product availability challenges; farmers were more interested in products that addressed herder encroachment on farmlands. However, no insurance provider was willing to roll it out as it was too expensive. Other challenges include product-market fit, affordability, socio-cultural behavior, and weak government regulatory framework. In addition, some of the products on the shelf were generic; they could not fit well with the end users' contextual, socio-economic, and cultural dynamics.
Looking back, our intervention had challenges with the design and implementation. This impacted what and how we framed our offer with the private sector partners. Our subsidies were improperly done and couldn’t align well with partner priorities. If subsidies are not designed appropriately, it creates disincentive problems, leading to high costs and inefficiencies. We witnessed this firsthand as implementing our subsidy model took much work. Agri-insurance subsidy needs to be carefully designed to be “smart” to make it cost-effective in achieving its underlying purpose and to minimize disincentive problems. Our support may have been misaligned, but the intervention reached more than 5.5 million farmers with information on agri-insurance and insurance-facing extension messages. Agri-insurance companies have expanded their footprint in Northeast Nigeria in the last 18 months—more agribusiness firms are demanding tailor-made insurance products. There is an increasing exchange of information between the various market actors on agricultural insurance. As a project, we now know much more about the challenges that can all too easily undermine the benefits of agricultural insurance subsidies.
Looking forward, what can we do differently? First, development interventions could invest in building trust between farmers and insurance providers. Building trust with farmers by providing transparent and reliable insurance products is essential in new markets. This can be achieved by working closely with local stakeholders and engaging with farmers to understand their needs and concerns. Secondly, there might be a need to develop tailored products. Agri-insurance products must be tailored to meet the specific needs of farmers. This may include developing insurance products that cover particular risks, such as drought or crop damage, and offering flexible payment options that fit the cash flow of smallholders. We know that time and resource constraints may limit product development, but stakeholders could take existing products as minimum viable products to gather the information that could trigger product improvements. Marketing insurance as a stand-alone product could be challenging. Identifying the right incentives to spur Financial Service Providers (FSPs), Insuretech companies, and Fintechs to develop a product blend with derived demand (a product mix of credit, insurance, and technology) to secure smallholders' business investments and livelihoods against risks is another way forward.
Development interventions, agri-insurance companies, and service providers should invest in market research, product development, and bridging the information gap. Access to the right information is critical to the success of agricultural insurance. We think stakeholders should treat agri-insurance products as new products in new markets. Although agri-insurance has been around for some time, farmers need to understand the benefits of insurance, how it works, and how to access it; investing in awareness campaigns can help overcome barriers to adoption and increase the uptake of agricultural insurance products. Stakeholders also need to blend products with solutions and leverage technology. Technology can be a game-changer in agricultural insurance. Mobile phones and digital tools can deliver insurance products, provide weather and market information, and facilitate claims processing. By leveraging technology, agricultural insurance can be made more accessible and affordable to farmers in new markets.
Lastly, we contend that engaging with government regulatory stakeholders with the right data on insurance uptake, emerging trends, innovations, and challenges is necessary. In Nigeria, as a regulator, the National Insurance Commission (NAICOM) could use its convening power to deepen insurance penetration by encouraging industry players to evolve new insurance products and policies. We engaged little with this important stakeholder. Engaging with regulators can help create an enabling environment for agricultural insurance in new markets. Governments can provide policy support, help establish regulatory frameworks, and provide subsidies or other incentives to make insurance more affordable and accessible to farmers. Engaging NAICOM appropriately might have given us the critical mass of insurance companies and service providers to drive information flow to farmers. Development projects could make agricultural insurance work in new markets required by intervening appropriately. More work is needed to drive information for behavior change if agri-insurance uptake is scaled.