Protecting Livestock and Livelihoods from Climate Change
Sarfraz Shah is Project Manager of Micro & Agriculture Insurance at APA Insurance Limited, where he works on development and distribution of micro and agriculture insurance products through conventional and other alternative channels. He has 16 years of experience in insurance distribution in India and Kenya. Previously, he worked with IFFCO TOKOI General Insurance Company in India for 13 Years. He is a Fellow in Insurance from Insurance Institute of India and a Fellow of ILO’s Impact Insurance Facility Geneva. He has an MBA from the National Institute of Management India and a Bachelor’s degree in Commerce from the University of Delhi.
FinDev: Congratulations on winning the 2019 European Microfinance Award. This year’s theme was “Strengthening Resilience to Climate Change.” Can you tell us how climate change is affecting your clients in Kenya?
Sarfraz: Agriculture in Kenya is highly dependent on rains, but climate change is affecting rain cycles, and droughts are now occurring more frequently. About 75 percent of Kenyan farmers are smallholder subsistence farmers who are highly vulnerable to the economic effects of the natural disasters brought about by climate change. Droughts in particular have been devastating, pushing farmers who are better off into poverty and the already poor into destitution. Pastoralists risk losing their livestock when forage availability is reduced due to drought, and farmers risk losing their crops. As a result, most small-scale farmers and pastoralists remain trapped in a cycle of poverty, and youth are leaving rural areas to seek opportunities in the cities.
FinDev: How does APA Insurance Ltd help your clients to deal with climate change and strengthen their resilience to it?
Sarfraz: APA has responded to the growing climate risks for our clients through two major insurance initiatives: Index Based Livestock Insurance (IBLI) and Area Yield Index Insurance (AYII).
IBLI was launched in 2015, in partnership with the Government of Kenya Livestock Department, to insure pastoralists against forage deterioration that can lead to drought and livestock deaths. Livestock is the primary asset and income source in northern Kenya. Our project baseline survey showed that sales of livestock and livestock products constitute 40 percent of household income.
Between 2015 and 2017 APA insured over 37,000 pastoralists and paid out approximately $6 million in claims under this program. These payouts helped pastoralists to buy forage to keep the livestock alive or transport them to better grazing places during the drought situation, and also to buy new livestock immediately after the drought, so they could continue their livelihood.
Our other climate-related insurance product is the Area Yield Index Insurance (AYII) program, in partnership with the Government of Kenya’s State Department of Agriculture, World Food Program, One Acre Fund, Kenya Seeds Corporation, Equity Bank and Acre Africa. This product aims to mitigate the risks faced by the farming community by paying out claims to farmers when the average yield in their area falls below a set level, regardless of the actual yield on each client’s farm.
AYII is the most extensive agriculture insurance, protecting farmers against damage to growing crops due to excessive rainfall, flood, frost, hail damage, excessive heat wave, windstorm, uncontrollable pest and diseases, and drought.
Between 2016 and 2018, APA insured over 545,000 farmers under this scheme and paid claims amounting to almost $1 million. These payouts provide financial support to farmers in the event of losses arising from major agricultural shocks, minimizing or eliminating the need for emergency assistance provided by the government during periods of agricultural disasters.
FinDev: What kind of data do you need to gather for this type of insurance? Where do you get the data from?
Sarfraz: For the livestock insurance product, we use satellite data - Normalized Difference Vegetation Index (NDVI) – to document forage availability when evaluating claims. Satellites take photos of the forage conditions on the ground every ten days to rate the severity of the drought and determine whether payouts are needed.
For the Area Yield Index Insurance, we generally need the historical yield data for each crop we insure in a particular unit area of insurance (UAI). The Government of Kenya provides us with this data, which is used as a basis for pricing, and we also work with other partners who collect the data from the field to build up our own database for future pricing.
FinDev: How hard has it been to sell index insurance? Has uptake been a challenge, and if so, how did you overcome it?
Sarfraz: Selling this kind of insurance is difficult, as it can be hard for smallholder farmers to understand and trust. In fact, trust is the biggest barrier for these products. However, the distribution approach can make a big difference. Partnerships have helped us to reach more farmers, as has embedding insurance with existing products or services. Once farmers see these products coming from an existing relationship and when they see that claims are indeed paid out, they appreciate these solutions.
FinDev: What about the business model? How do you ensure profitability? If you have to give a pay-out to all your farmer clients because of a condition which affects all of them, how do you remain sustainable?
Sarfraz: APA has strong reinsurance support from various reinsurance organizations to run these programs. Both initiatives are also partly subsidized by the Government of Kenya which makes them affordable for farmers and pastoralists. However, as client enrollment increases, we are sure that in the future, subsidies will no longer be necessary.
As more and more farmers and pastoralists buy these products, we will get better data quality and be able to achieve scale and bring down the costs. Both products have had a great response from clients so far, especially when both products have been paying decent claims. Of the two products, IBLI has experienced more losses, and we have been in discussion with stakeholders to seek ways to make it more sustainable through other support structures along the livestock value chain.
FinDev: What do you plan to do with the prize money?
Sarfraz: Part of the prize money will be used to build sand dams in the communities where we work, to support their climate change resilience. These dams are constructed across river beds using locally available materials to create a reservoir which provides water for communities living in arid and semi-arid lands in Kenya. We will use the rest of the prize money to educate and raise awareness of climate change resilience insurance solutions.
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