The Kenyan government is proposing new rules aimed at shielding farmers from the mounting risks of climate change by requiring insurers to pay out claims on weather-related policies within 10 days.
Kenya’s Business Daily reported (paywall) that the draft regulation will govern the setting of premiums and settlement of claims under index-based insurance, otherwise known as parametric insurance, which pays out based on a predetermined variable such as rainfall rather than an individual claim assessment.
The report said that the proposed framework would require insurers offering index insurance to design fair, transparent and scientifically sound products and settle claims within 10 days.
Weather index insurance was developed in the early 2000s to help small-scale farmers by simplifying the process of verifying claims.
It has been gaining popularity given the increase in floods and droughts due to climate change and has been implemented successfully in markets such as India, Latin America and the Caribbean, Business Daily said.
Berber Kramer, senior research fellow at the International Food Policy Research Institute, welcomed the proposal.
“Delays in insurance payouts have been a real concern for farmers, eroding trust, and sometimes even leading them to not renew their insurance policies,” she said, adding that if farmers receive compensation quickly, they can re-invest, sometimes even in the same season.
Even in the developed world, major economies risk becoming uninsurable due to worsening natural disasters triggered by climate change and the loss of natural habits, according to environmental group WWF.
Agriculture is the backbone of the economy in most African countries, but farmers struggle to secure funding due to the high risks posed by unpredictable weather, market fluctuations and limited financial protections, according to insurers African Risk Capacity Limited.
Kenya, where agriculture accounts for more than a quarter of economic output, has seen an increase in droughts and floods due to climate change.
Fewer than 1% of farmers in Kenya have insurance coverage, limiting access to credit and discouraging investment in better seeds, equipment and technology, the Kenyan Wall Street reported.
The African Reinsurance Corporation and the International Finance Corporation, are working together to accelerate the adoption of affordable agricultural and climate insurance in Kenya to protect smallholder farmers from extreme weather and other risks.
“Constituencies that are underinsured are poorer consumers and markets. This is where more innovation is needed,” said Saliem Fakir, executive director of the African Climate Foundation. “Index based insurance is one of those innovations but in the end it depends on the scale and frequency of the climate risk and the financial costs on the insurance industry.”
Fakir noted that development aid has subsidised insurers in African countries, with recent cuts by the likes of USAID posing a new challenge to the sector.
Business Daily said most of the weather index insurance products in Kenya have so far been offered through donor-backed schemes, targeting arid and semi-arid lands.
Kramer said the idea of the new regulation was a good one, but that more clarity was needed on when the 10-day timeframe would start and how it would be enforced.
“For the policy to be effective, re-insurers need to be held accountable too, as they often cause at least some of the hold-up, especially in bad seasons, when insurers depend more on their re-insurance and when farmers need the liquidity most,” she said.
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