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Towards Climate based Agricultural Insurance Reform in Nigeria

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					Towards a Climate-based Agricultural
        Insurance Reform in Nigeria


                                           By



   Ewah Otu Eleri ▪ Iregbu Kalu Uduka ▪ Ngodoo Akuto ▪ Precious Onuvae ▪ Onochie Anwara




 Presented at the Workshop on Legal and Regulatory Frameworks for Agricultural
Insurance Reform in Nigeria – Protecting Nigeria’s Farmers from Climate Change
                  Kano Hall, Transcorp Hilton Hotel, February 27, 2012




                                      March 2012
         Towards a Climate-based Agricultural Insurance Reform in Nigeria


                                  Acknowledgements



This paper was funded by the Government of the Federal Republic of German. Primary
research was conducted in collaboration with the Nigerian Meteorological Agency and
National Insurance Commission and funded under the Coalitions for Change Programme of
the UK Government Department of International Development.




                   Towards a Climate-based Agricultural Insurance Reform in Nigeria |   2
Contents
Acknowledgements ................................................................................................................................. 2
Acronyms ................................................................................................................................................ 4
National agricultural ambitions and challenges ...................................................................................... 5
The case for agricultural insurance reform ............................................................................................. 8
   The challenges of the Nigerian Agricultural Insurance Scheme ......................................................... 8
   Current and future agro-climatic scenarios ....................................................................................... 11
   The challenge of financing agriculture ............................................................................................. 17
The opportunities and challenges of climate index insurance .............................................................. 18
   How Climate Based Insurance Works .............................................................................................. 18
   Advantages of Climate Based Insurance .......................................................................................... 20
   Challenges of Climate Based Insurance............................................................................................ 21
Policy and Legislative Frameworks on Agriculture and Insurance ...................................................... 23
   The Agriculture sector ...................................................................................................................... 23
   The Insurance sector ......................................................................................................................... 24
   International agreement and obligations ........................................................................................... 27
International experiences in developing climate-based agricultural insurance schemes ...................... 28
   Case Studies of Index Insurance ....................................................................................................... 29
The view of Nigeria’s farmers on insurance in Nigeria ........................................................................ 32
Proposed components of Nigeria’s climate-based agricultural insurance reforms ............................... 43
   Expanding weather monitoring infrastructure and skills .................................................................. 43
   Legal and regulatory frameworks for agricultural insurance reforms............................................... 44
   Building the capacity of financial institutions .................................................................................. 45
   A programme on farmer education ................................................................................................... 45
Appendix: 1 Draft Bill for An Act to Amend the NAIC Act 1993 ....................................................... 46
Appendix 2: Location of NIMET weather stations, their coordinates and year of establishment ........ 48
References ............................................................................................................................................. 50




                                   Towards a Climate-based Agricultural Insurance Reform in Nigeria |                                          3
Acronyms
ACGSF      -    Agricultural Credit Guarantee Scheme Funds
ADP        -    Agricultural Development Programmes
AIS        -    Agricultural Insurance Scheme
CBN        -    Central Bank of Nigeria
FAO        -    Food and Agricultural Organization
GDP        -    Gross Domestic Product
ICEED -         International Centre of Energy and Environment Development
LFN        -    Laws of Federation of Nigeria
MDG        -    Millennium Development Goals
NAIC       -    Nigerian Agricultural Insurance Corporation
NAICOM     -    National Insurance Commission
NCRIB      -    Nigerian Council of Registered Insurance Brokers
NEEDS      -    National Economic Empowerment and Development Strategy
NIA        -    Nigeria Insurers Association
NIMET      -    Nigerian Meteorological Agency
NIRSAL     -    Nigeria Incentive Based Risk Sharing for Agricultural Lending
NSIF       -    National Social Insurance Fund
PMI        -    Primary Mortgage Institutions
UNEP -          United Nations Environment Programme
UNFCCC     -    United Nations Framework Convention on Climate Change
WMO -           World Meteorological Organization




               Towards a Climate-based Agricultural Insurance Reform in Nigeria |   4
National agricultural ambitions and challenges
Nigeria has set an ambitious target to become one of the top 20 economies in the world by the
year 2020. The Vision 2020 seeks to expand the country‘s GDP from US$212 to US$900
billion and achieve a GDP per capita of US$4000. The agricultural sector is strategic to
meeting the ambition of this economic blueprint. According to the Vision 2020, Nigeria seeks
to achieve ― “a technology driven agricultural sector that is profitable, sustainable and meets
the socio-economic aspirations of the nation”1. This sector specific vision will be delivered
with these broad aims:

Ensure food security. This goal seeks to achieve a three-fold increase in domestic agriculture
productivity by 2015 and six-fold increase by 2020; transform the Nigerian agricultural
production system to a substantially mechanized system by 2020; expand dairy production
and milk yield from the current less than 2000 kg to 5,000 kg per cow per lactation by 2015;
achieve 20% farm-gate storage, 75% commercial storage and 5% strategic reserves by 2020
and achieve a fully digital, green and bio technology driven agriculture by the year 2020.

Enhance generation of national and social wealth through greater exports and import
substitution. To achieve this goal, the country seeks to derive over 50% of the nation‘s
foreign exchange earnings through agro-industrial exports by 2020; and reduce the percent
level of food import (worth over $ 3billion per annum) by 50% in the year 2015 and by 90%
in the year 2020.

Enhance capacity building for increased industrialization and employment creation. This goal
seeks to reduce the post harvest loss of agricultural produce by an average of 50% in 2015
and 90% in 2020.

Enhance resource use efficiency. In achieving this goal the Federal Government will increase
the size of irrigated land from current 1% of cultivable land to 10% of cultivable land by
2015 and to 25% by 2020; review and further develop an agricultural land and water policy
that will address the problems of soil fertility, water availability, land and environmental
degradation by 2010; and increase area of land planted with diversified biomass including
economic species in agro-forestry programmes from current 3% to 10% in 2015 and to 20%
by 2020.

Enhance the development and dissemination of modern technologies. This goal seeks to
achieve an efficient agricultural extension delivery system which includes extension worker:
farmer ratio of 1:500 by 2020; and achieve the adoption of improved varieties/species of seed
and brood stock by 50% of the farmers by 2015 and 75% by 2020.

The agricultural sector is strategic to national economic development and contributes 42.1%
of the current GDP. It remains a major source of food and raw material for agro-industrial
processing and has strong links to employment, national income, market opportunities for
1
    Report of the vision 2020 national technical group on Agriculture and Food security, July 2009
                            Towards a Climate-based Agricultural Insurance Reform in Nigeria |       5
industrial production and strong potentials for poverty reduction and health improvement.
However, Nigeria agriculture faces tremendous challenges which include the following:

Small farm sizes and low agricultural yields. Of the available arable land, only 32 million
hectares (or 46 percent) are currently cultivated. More than 70 percent of the farming
population in Nigeria consists of smallholder farmers, each of whom owns or cultivates less
than 5 hectare of farmland (NARP 1994), but together accounts for 90 percent of the total
farm output. Many such farms are fragmented and poorly organized with serious implication
for higher costs and mechanization. Though the arable land in Nigeria is suitable for
cultivating most crop types, crop yields are far below their potentials. Nigeria has recorded an
average of 4 tonnes of agricultural product per hectare compared to 13-14 tonnes per hectare
in other countries of similar climatic pattern. For cereals alone, Nigeria’s yield per hectare is
1.6 tonnes, compared to world averages of 3.5 tonnes. Low yield, subsistence scale and
marketable surplus ranging between 0-25 percent are key characteristics of Nigerian
agriculture.

Figure 1: Cereal yields /Tonnes per hectare

                                             Cereal Yeilds
                                              Tons per Hectare
                                                       Series1
                          7.5

                                     3.8         3.5
                                                             2.1      1.7       1.6


                         Egypt      South      World       Zambia    Cote      Nigeria
                                    Africa    Average               d'Ivoire

Source: Adapted from CBN, Alliance for a Green Revolution, NIRSAL


Distorted land reform and weak agricultural services: The Land Use Act vested ownership of
land to states. This form of allocation distorts the land market, removes competition and
increases the possibility of corruption. Because small holder farmers often have no title deeds
they are unable to use them as collateral for accessing credits. As a result, access to
agricultural inputs has been sporadic. Additionally, fertilizer consumption in Nigeria,
estimated at 7kg per hectare, is one of the lowest in Sub-Saharan Africa. Estimates show that
there is currently one extension worker per 25,000 farm households in Nigeria, compared to
the Food and Agriculture Organization (FAO) best practice estimate of one extension worker
to 500-1000 farm households. There are also about 30,000 tractors for all 14 million farming
groups/households in Nigeria. In terms of agricultural processing, Nigeria loses significant
value of between 15-40 percent of its post-harvest output due to its inability to process most
of the farm produce.



                       Towards a Climate-based Agricultural Insurance Reform in Nigeria |   6
Weak linkages between agriculture and industry: As agriculture remains at the subsistence
level, the development of agricultural processing and allied industries have been weak. Poor
mechanisation and the scale of production have limited the scope for mechanisation and post
harvest industrialisation. As both mechanisation and agric-processing accelerates, the sector
will release labour to other sectors of the economy, and improve its overall contribution to
growth and development.

Limited access to improved technologies: Nigerian agriculture has had limited benefit of new
knowledge and technologies such as improved seeds, cuttings, breed, vaccines and
agrochemicals. Agriculture today is still characterized by the use of mainly hoes and cutlasses
as the principal implement for crop agriculture at the small-holder level. Related to
technological constraints are poor research and extension services as well as weak linkages
with farmers for the uptake of innovations in areas such as seeds, pest and diseases controls.

Infrastructure inadequacies: Nigerian agriculture is plagued by poor road network particularly
feeder roads, markets and storage/processing facilities as well as inadequate irrigation
facilities which limit agricultural production to only the wet season in many parts of the
country.

Poor access to credit and insurance: Access to agricultural finance has remained inadequate
as a result of the structure of the agricultural sector as well as broader issues within the
financial industry. One key issue with access to financial services is the perceived risk
associated with rain-fed agriculture and the lack of risk management schemes, such as crop
insurance. Although crop insurance exists in Nigeria, it covers less than 1% of the total
population of farmers. This is often applied when financial institutions impose them as a
condition for formal credit.

Increasing climate variability: The past years have recorded high frequency of climatic
variability. This increasing seasonal change in weather patterns is making it increasingly
difficult for non-irrigated farmers to plan on the basis of past trends. Coupled with the
weather related risk is the uncertainty of pest and disease outbreaks that are capable of wiping
out entire farms.




                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   7
The case for agricultural insurance reform
Agricultural insurance is important in providing a hedge against the several risks that farmers
face. Nigerian farmers are confronted by risks such as droughts, diseases, pests, floods,
windstorms, accidents, fire, theft, damage, and several other unplanned events. A crop
insurance product provides stability in farmer‘s income by underwriting the risks this group
faces.

Three important developments are driving the current need to reform agricultural insurance in
Nigeria. This is the failure of the Nigerian Agricultural Insurance Scheme to provide
expanded coverage to a significant proportion of farmers. Secondly, the rapidly changing
climatic patterns pose great challenges to the agricultural sector and underscore the
imperative of reform of the national agricultural insurance scheme. Finally, the decline in
access to bank lending to the agricultural sector also underline the need for reform. We shall
explore these driving forces more in detail.


The challenges of the Nigerian Agricultural Insurance Scheme
The Nigerian Agricultural Insurance Scheme (NAIS) was established under the Nigerian
Agricultural Insurance Corporation (NAIC) Act Cap 89 (LFN) 1993. Section 3 of the Act
stipulated the following functions:

      To implement, manage and administer the Agricultural Insurance Scheme, established
       by Section 6 of the Act;
      To subsidize the premiums chargeable on selected crops and livestock policies from
       the grants obtained from the Federal and State Governments and the Federal Capital
       Territory, Abuja;
      To encourage institutional lenders to lend more for agricultural production having
       regards to the added security for their loans provided by the Act;
      To promote increased agricultural production generally in order to minimize or
       eliminate the need for ad-hoc assistance previously provided by governments during
       agricultural disasters
      To carry on insurance business on normal commercial basis and without subsidies on
       premiums as insurers of buildings, machineries, equipment and other items which
       form part of the total investment on farms and to re-insure this aspect of its operations
       through well established channels with reputable re-insurance companies;
      To operate other types of insurance business as may be permitted by the
       Commissioner of Insurance at competitive premiums; and
      To do anything or enter into any transaction which in the opinion of the Board is
       calculated to facilitate the due performance of its functions under this Act.

Section 6 of the Act established the NAIS under which pursuant to section 3(a) of the Act
exclusively mandates NAIC to implement, manage and administer the scheme. The general
objective of the NAIS according to Section 6(2) is to “protect the Nigerian farmer from the



                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   8
effects of natural hazards by introducing measures which shall ensure an indemnity sufficient
to keep the farmer in business.

Section 7 of the Act provides for eligibility for qualifying cover under the NAIS as:

         Such crops, livestock and other agricultural items and enterprises as the Corporation
          may, from time to time determine;
         On a commercial basis only, farm buildings, machinery and equipment which form
          part of the investment on the farm;
         Such other items as the Corporation may, from time to time deem necessary for
          giving effect to the objectives of the Scheme.

However, not all farmers can participate under the Scheme because Section 13 of the Act
specified the participating farmer as “a farmer whose crops or livestock is covered by
Section 7 of this Act may take out an insurance cover under the Scheme, but where the
farmer is also a beneficiary of an agricultural loan or credit from government, a bank or other
financial institution (in this Act referred to as “lending institution”) he shall take out an
insurance cover under the Scheme”.

This provision presupposes that any farmer exposed to risks or hazards other than those listed
under Section 7 and who does not enjoy any form of credit or loan from any lending
institutions is exempted from agricultural insurance provided under the Act and is therefore
on his own. Considering that about 88% of Nigerian farmers2 are currently relying on some
traditional saving and cooperative schemes that is outside the “lending institutions” is a clear
indication that the scope of coverage of the NAIS is limited and therefore not beneficial to
majority of those requiring such services. This situation perhaps partly explains the very low
(1%) agricultural insurance coverage achieved by NAIC since its inception in 19933.

The availability and sustainability of funding is critical to the operations and success of any
business enterprise. For NAIC, the availability of sustainable fund will determine its ability to
continually be responsive to growing demand for agricultural risk covers and introducing new
measures of reducing and managing risk. However, the sources of funding of the NAIC
appear to not only be unpredictable, but also unsustainable. Section 9(2) provides that the
Corporation “shall subsidize the premium payable under subsection (1) of the section at such
rate not exceeding 50% as it may from time to time determine” while Section 9(3) states that
“subsidy on premium referred to in subsection (2) of this section shall: Be paid to the
Corporation by the Federal Government and respective State Governments in the proportion
of 37.5% and 12.5% respectively and for a particular year to be paid within the first quarter
of the following year”.

Furthermore, Section 12 provides for bearing of losses between the Corporation and the
Federal Government to be up to 200% of its premium income in each class of insurance
covered under Section 7 for the Corporation and the Federal Government to pay for losses


    ICEED 2010, ICEED, 2010: Developing Climate Based Micro insurance: Nigeria Baseline Study
2

    ICEED 2010, ICEED, 2010: Developing Climate Based Micro insurance: Nigeria Baseline Study
3


                        Towards a Climate-based Agricultural Insurance Reform in Nigeria |   9
above 200% of premium income. However, the payments of these outstanding premium
subsidies from the Federal and State Governments are not and cannot be stable and assured at
all times, given the nature of government businesses in Nigeria. More so, most contributors to
the Reserve Fund created under Section 18 of the Act are in perpetual violation for non-
compliance5. With its low marketing drive, it is almost certain that without contributions to
the Reserve Fund, NAIC will be financially constrained to fully implement the NAIS.

While Section 18 of the Act provided for the Reserve Fund with initial authorized capital of
N200million for payment of indemnities under the Scheme, Section 20 stipulates that the
share capital of the Corporation shall be N9million, even though the NAIC 2009 Annual
Report and Accounts6 is reflecting N5billion as its authorized share capital. It must however
be reiterated that for any company to remain strong and competitive in a dynamic global
market place, it must have a solid capital base, sufficient to attract both investments and meet
its financial obligations.

That notwithstanding, the performance indicators for NAIC during the 2008-2009 year ended
indicated that of the N154.11million paid as gross claims for the year 2009, subsidized
agricultural insurance alone accounted for N139.90m4. While the report did not disclose
information on numbers of claims filed and details of those that remained unpaid, its 2001
annual report revealed that a total of 18,569 policies valued at N3.78bn were unwritten by
the Corporation. Of that figure, N8.9m was paid as claim to farmers, while in the same year
about 56 other claims valued at N17.25million were left unpaid5.

This development gives credence to the low perception of NAIC amongst industry players
and potential clients who often doubt their capacity to perform optimally. Others hold the
impression that because NAIC enjoys the monopoly of the implementation of the NAIS and
heavily subsidized by government, it has become complacent and do little to inspire farmers’
confidence. This and other factors perhaps informed the new Central Bank of Nigeria’s
initiative known as Nigeria Incentive Based Risk Sharing for Agricultural Lending
(NIRSAL), which is a holistic approach that tackles both the agricultural value chain and the
agricultural financing value chain.

Furthermore, when the concept of Universal Banking was introduced in Nigeria in 1999, part
of the restrictions removed between retail and commercial banking also allowed for the
integration of insurance markets in banking services. Even though the Universal Banking
concept has been scraped, it must be noted that based on that concept, some banks had gone
ahead to float subsidiary insurance companies to their main banking services with staff,
infrastructure and finance committed to providing insurance services. The protectionist
provision in the NAIC Act that allows NAIC to solely implement the NAIS runs counter to
the principles of the free market forces. Creating a level playing fields that will allow all
potential agricultural insurance providers compete in a free market, consistent with the
Federal Government’s free economy goals must be encouraged and enabling legal framework
that will extend subsidies to the private sector must be developed if the nation’s objective to

4
    Food and Agriculture Organization (FAO) available at: http://www.fao.org/tc/tca/work05/nigeriappt.pdf
5   (NAIC 2001) NAIC 2001 Annual Report

                              Towards a Climate-based Agricultural Insurance Reform in Nigeria |            10
attaining food security is to be achieved. Attainment of the food security goal is intrinsically
linked to a robust and effective agricultural insurance sector.

For the avoidance of doubt, it must be noted however, that nothing in the NAIC Act prohibits
the participation of the private sector in agricultural insurance in Nigeria, if such company is
granted license by Nigerian Insurance Commission (NAICOM). The eligibility of
participation in the insurance industry is clearly spelt out in the Insurance Act 2003 and
NAICOM issues licenses and regulates the industry. The NAIC Act however restricts
participation of other entities from the operation of the NAIS under Section 6 of the Act and
further empowers it, subject to the approval of the Minister, to make regulations for the
implementation and operations of the Scheme. Thus, even if NAICOM licensed a company to
offer agricultural insurance pursuant to its powers under the Insurance Act, such company
will be restricted by sections 3 and 6 of the NAIC Act to the extent of participation in the
NAIS.


Current and future agro-climatic scenarios
Much of the risks faced by Nigerian farmers stem from fluctuations in climatic conditions.
For instance, in this period between 2005 and 2009, climatic factors such as drought and
flooding amounted to N104.62 million, representing 68% of total payouts by NAIC in the
five years. This makes climatic factors a dominant source of risks faced by Nigeria’s farmers
in this particular period.

       Table 1: Claims settled by NAIC 2005-2009
                                   Amount (N) in Millions                           Total
                       2005       2006     2007      2008             2009      2005-2009
           Drought          14.85        3.34        5.00      6.40     23.77       53.35
           Flood             0.79        2.93        9.75     24.40     13.39       51.27
           Windstorm         0.60        0.07        2.02      1.73      1.05        5.46
           Accident          6.31        6.53        3.30     13.10      4.20       33.44
           Theft             0.09        2.49        2.83      5.26      0.05       10.72
           Total           22.65      15.35         22.90     50.88     42.46      154.24
       Source: National Agricultural Insurance Corporation.


The climate of Nigeria is largely tropical, characterized by high temperatures, high humidity
and intense heat. In some areas in the north, the mild winter permits the growing of winter
crops such as wheat, during the cool harmattan period between December to February.
Rainfall patterns show a south-north gradation, declining from over 3550mm in the Niger
Delta in the south to about 250mm in the Sahelian zone in the north. Topographic effects
create local rainfall patterns in high altitude areas of Jos Plateau, Mambilla Plateau, and the
Adamawa Mountains where rainfall varies between 1016 and 2000 mm.

On the basis of rainfall, the country is divided into four broad climatic regions: very humid,
humid, sub-humid and semi-arid. Within each region, substantial variations exist with respect
to amount and pattern of rainfall, altitude, soil types and types of vegetation, which permit
further division of these regions.

                       Towards a Climate-based Agricultural Insurance Reform in Nigeria |   11
Very humid and humid regions cover about 14 million hectares (Oshinowo, 1992). These
extend from the mangrove swamps of the coastal areas, passing through the lowland forest
belt and terminating in the northern limits of the derived savanna vegetation belt. The rainfall
ranges from 3500 to 2000 mm per annum. Most of the land in this region is cultivable. The
region includes Lagos, Ogun, Oyo, Osun, Ondo, Ekiti, Edo, Delta, Imo, Abia, Anambra,
Ebonyi, Enugu, Rivers, Bayelsa, Cross River and Akwa Ibom states. Erosion is a serious
problem in the region and soils are highly weathered and infertile. The major tree crops of the
region are cocoa, oil palm, rubber, kolanut, citrus and plantain. Major arable crops are roots
and tubers (yam, cassava and cocoyam), cereals (maize and rice) and grain legumes or pulses
(cowpea and pigeon pea). The region provides about 79% of the exploitable timber of Nigeria
(FMANR, 1992).

The sub-humid region lies to the north of the humid zone covering eight states namely, Niger,
Kwara, Kogi, Nassarawa, Plateau, Benue, Gombe and Taraba states. It occupies about 43
million ha. About 75% of arable area is not cultivated due to low population density. The
region thus offers the largest scope for expansion of cultivated areas in the future. The
vegetation consists of open forest in the south and savanna grassland in the northernmost
parts of the zone. Rainfall ranges between 2000 mm to 1000 mm. This region produces large
quantities of yam, cassava, sweet potatoes, sorghum, maize and rice. Also, cowpea, soybean,
groundnut, onion and sugar-cane are produced here6.

The semi-arid region which also includes arid sub-regions occupies the northernmost parts of
Nigeria, encompassing about 35million ha. It covers the states of Sokoto, Zamfara, Kebbi,
Katsina, Kaduna, Kano, Yobe, Borno, Adamawa, Jigawa and Bauchi. The semi-arid region
has Sudan and Sahel savannah types of vegetation, mainly consisting of grasses and woody
plants. Desertification is one of the major problems. Average annual rainfall varies between
500mm to 1200mm per annum, and may be as low as 200mm in its northern limits. At least
90% of the land in this zone would require irrigation in order to achieve its full production
capacity in vegetables, rice and wheat. Other important crops grown in the region are millet,
sorghum, cowpea, groundnut and cotton. Also this region is the major producer of livestock
and gum Arabic.




6
    National Agric Research Strategy Plan 1996 – 2010 by Bukar Shaib, Adamu Aliyu and J.S. Bakshi)

                                Towards a Climate-based Agricultural Insurance Reform in Nigeria |   12
Figure 2: Major agro-ecological zone in Nigeria




Evidence of climatic variability and change
In the period 1911 – 2007, Nigeria recorded significant decreases in rainfall. Other
observations include: late onset of the rainy season spreading to many areas in the country
since 1911; early cessation of the rains; shorter length of rainy season; shorter growing period
available for farming; and desertification conditions spreading, among other trends.


Figure 3: Late onsets of rains in a few places        Figure 4: Late on onset spreading




Source: A.C Anuforom, NIMET

Further, the country has experienced warmer hot seasons. March – May has had hot episodes
of heat waves as temperature increases of about 0.4-1.5oC with extreme ranges of 2.0 - 3.3oC


                      Towards a Climate-based Agricultural Insurance Reform in Nigeria |   13
being observed across the country. The result is warmer and more frequent hot days and
nights over most places.

There is also a higher rate of evaporation and evapo-transpiration. This has increased in
frequency, duration and intensity. The country has also witnessed late onset of rain and early
cessation of rain with wider spread leading to shortened length of rainy season. Further, there
is a shift in the occurrence of the little dry season, often referred to as the “August Break”
from August to mostly mid-July. There is also a pronounced reduction in annual rain by
about 15-20% in some places; while a few others maintained high values within the shortened
season resulting in floods.




                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   14
Figure 5: Rainfall variability in some states in the country

                                                                                                                                                                                                                   RAINFALL
                                                                                                                                                                                                                   VARIABILITY
                              3                                                                                                                                                                                                                                                                          3
                                                                                                                                                                                                                                                                                                                                                                                             Rainfall Anomaly over Kano
                                                                                                                  Rainfall Anomaly over Sokoto

                              2                                                                                                                                                                                                                                                                          2



                              1                                                                                                                                                                                                                                                                          1




                                                                                                                                                                                                                                                                                     Rainfall Anomaly
 Rainfall Anomaly




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     y = 0.024x - 0.6715



                              0                                                                                                                                                                                                                                                                          0




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                                                                                                                                                                                                                                y = -0.0108x + 0.3008



                        -1                                                                                                                                                                                                                                                                              -1



                        -2                                                                                                                                                                                                                                                                              -2


                                                                                                                                                                                                                                                                                                                                                                                                                           Years
                                                                                                                                         Years                                                                                                                                                          -3
                        -3



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                                                                                                                                                                                                                                                                     Rainfall Anomaly over Maiduguri


                                                                                                                                                                           2



                                                                                                                                                                           1
                                                                                                                                                       Rainfall Anomaly




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                                                                                                                                                                                                                                                                                                                                                                                                                                          2005
                                                                                                                                                                                                                                                                                                                                                                                                            y = -0.0144x + 0.401


                                                                                                                                                                          -1



                                                                                                                                                                          -2



                                                                                                                                                                          -3                                                                                                                                   Years




Source: A.C Anuforom, NIMET

Figure 6: Mean maximum temperature over Nigeria

                                                                                                                                                                                 Mean Maximum Temperature over Nigeria

                                              34
            Mean Maximum Temperature (oC)




                                              33
                                                                                                                                                                                                                                                                                                                                                                                                                              y = 0.0195x + 31.751

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Max
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Mean
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Linear (Max)



                                              32




                                              31
                                                             1951
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                          2003
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       2005




                                                                                                                                                                                                                                                           YEARS




                                                                                                                                 Towards a Climate-based Agricultural Insurance Reform in Nigeria |                                                                                                                                                                                                                                                                                                                      15
                                                                      MAXIMUM TEMPERATURE FOR SOUTHERN STATIONS

                            33


                                                                                                                                                     y = 0.0251x + 30.603
  MAXIMUM TEMPERATURE(oC)


                            32



                                                                                                                                                                                                                    TMAX
                            31                                                                                                                                                                                      MEAN
                                                                                                                                                                                                                    Linear (TMAX)




                            30




                            29
                                   1951
                                   1953
                                   1955
                                   1957
                                   1959
                                   1961
                                   1963
                                   1965
                                   1967
                                   1969
                                   1971
                                   1973
                                   1975
                                   1977
                                   1979
                                   1981
                                   1983
                                   1985
                                   1987
                                   1989
                                   1991
                                   1993
                                   1995
                                   1997
                                   1999
                                   2001
                                   2003
                                   2005
                                                                                                                 YEARS




                                                                                    Mean Surface Temperature over Nigeria

                             28




                            27.5
  MEAN TEMPERATURE




                             27                                                                                                                                                                                            dT
                                                                                                                                                                                                                    dt
                                                                                                                                                                                                                           year
                            26.5




                             26




                            25.5
                                   1951
                                          1953
                                                 1955
                                                        1957
                                                               1959
                                                                      1961
                                                                             1963
                                                                                     1965
                                                                                            1967
                                                                                                   1969
                                                                                                          1971
                                                                                                                  1973
                                                                                                                         1975
                                                                                                                                1977
                                                                                                                                       1979
                                                                                                                                              1981
                                                                                                                                                     1983
                                                                                                                                                            1985
                                                                                                                                                                   1987
                                                                                                                                                                          1989
                                                                                                                                                                                 1991
                                                                                                                                                                                        1993
                                                                                                                                                                                               1995
                                                                                                                                                                                                      1997
                                                                                                                                                                                                             1999
                                                                                                                                                                                                                    2001
                                                                                                                                                                                                                            2003
                                                                                                                                                                                                                                   2005
                                                                                                                                YEARS




Source: A.C Anuforom, NIMET

Over the same period, mean temperature over Nigeria has shown an increasing trend of about
0.001oC/month and 0.02oC/year and 0.2o C/decade and the coefficient of variability of 1.43%.
This has resulted to increased heat waves/stress, increased areas affected by drought,
wildfires, abortion in plants and animals, frequency and intensity of weather extremes, crops’
stress, including forests and livestock. In many instances, there is a growing trend of land
degradation and the introduction of new pests and diseases.

In projections developed by NIMET, in all three time slices (2020s, 2050s and 2080s) for two
scenarios based on various levels of CO2 concentrations, warming is evident in all time slices,
in all seasons and in all emission scenarios. There is no evidence of cooling in any of the
data. Warming is incremental with the time slices through the twenty first century, with
maximum warming in the last decades. The pattern of warming in both scenarios shows that
Nigeria features slightly more warming in the central interior and north than along the coastal
margin.

While there are no clear deviations in the volume of rainfall over the three time scales, there
is increased intensity and a shortening of the rainy seasons across the country. This outlook
will mean more intense floods and damages for the agricultural sector.




                                                                Towards a Climate-based Agricultural Insurance Reform in Nigeria |                                                                                         16
However, climate change will not be the lone factor driving the fortunes of the agricultural
sector. Other factors such as access to finance will be increasingly important.

The challenge of financing agriculture
Currently, agricultural lending represents only 1.4% of the total lending of banks in Nigeria
and has declined since 2006. This is significantly below the access to bank lending in other
developing countries. Several reasons account for the lack of access to bank credits. Some of
these include: lack of understanding of the agricultural sector; banks regard the sector as
highly risky, credit assessment processes are still poor while transaction costs have remained
high because innovative distribution channels are not often explored.

Figure 7: Share of Bank Credit by Sector (%) 2009




        Source: CBN, NIRSAL, A New Paradigm towards Improved Bank Lending To the Agricultural Sector


Developing countries such as Brazil, Mali and Burkina Faso lend over 10% to agriculture as
percentage of total loans. Nigeria’s agriculture lending is low relative to this benchmark
countries and the share of total lending is still declining.

Figure 8: Agriculture and Private Sector Credit

             Lendin to agriculture as a %               Trend in access to bank lending to
              of private sector credit, %               the agricultural sector (% of private
                                                                    sector credit)
                           Series1
                                                                         Series1
                                        18
                                                                   3.2
                                                        2.2
                            6                                                  1.4        1.4
               1.4

             Nigeria      Kenya       Brazil           2006       2007        2008       2009

SOURCE: adapted from CBN, Alliance for a Green Revolution in Africa: NIRSAL

                       Towards a Climate-based Agricultural Insurance Reform in Nigeria |       17
The opportunities and challenges of climate index insurance

Climate index insurance presents opportunities to manage disaster risks and food security
threats induced by climate variability in a manner that addresses the challenges of traditional
crop insurance. Some countries like India, Ethiopia, Malawi, Mongolia and Mexico have
already began pilot projects and implementation programmes for climate based index
insurance schemes.

Climate index insurance is linked with an objectively measurable index or indicator such as
rainfall, temperature, humidity, or crop yield rather than actual loss in conventional insurance
products. This index is correlated with the insured event and must use a data source that is
promptly, reliably, and inexpensively available and cannot be manipulated by either the
insurer or the insured. This type of insurance bases its indemnity payments on
indicators/indexes other than the loss itself. This differs from traditional crop insurance
policy which needs evidence of damage to the actual crop on the farm, or in the area of the
farm before an indemnity is paid. Traditional insurance has higher transaction, as well as loss
adjustment costs.

Index insurance schemes use meteorological measurements to determine indemnity
payments. Reliance on factors beyond the control of farmers and the risk adjusters (the
insurer) reduces the occurrence of moral hazards7 and adverse selection8. By implication it
reduces the need for field visits, eliminates the financial costs associated with these visits and
speeds up claim resettlement. Besides, because the insurance is based on a reliable and
independently verifiable index, it can be reinsured; allowing insurance companies to transfer
part of their risk efficiently to international markets (UNDP, 2007).

How Climate Based Insurance Works
The dividing line between the traditional form of crop insurance and the index based
insurance is that in the former indemnity is linked to individual case by case loss estimates
while the later indemnity is linked to an external, independent and fixed index/indicator like
the rain/temperature/humidity to determine payouts to insurance policy holders. In other
words, for index based insurance, indemnity is triggered when the data indicator reaches the
strike point or the agreed insurance activation threshold.

Index insurance has a defined threshold and a limit that establish the range of values over
which indemnity payments can be made. The threshold is the point at which payments begin.
Once the threshold is reached, the payment increases incrementally as the value of the index
approaches the limit. For example, an index insurance contract designed to transfer the risk
of drought would begin making indemnity payments if rainfall levels, as measured at an
agreed weather station, fall below the threshold9 over a defined time period (month/season).


7 Moral hazard arises when policyholders can, with their behaviour, increase the likelihood or magnitude of a loss.
8 Adverse selection occurs when there is asymmetric information between insurer and insured. It is the tendency of persons who
present a worse than average risk, to buy the insurance.
9
  Also known as the ‘upper trigger’ or the ‘strike’

                            Towards a Climate-based Agricultural Insurance Reform in Nigeria |                      18
Assuming that the sum insured is N40, 000 which is the maximum payout and the threshold
for payment is 140mm of rainfall and the limit is 100mm. When rainfall falls below 140mm
payments are triggered and made in line with the indemnity payment until the limit10 which is
the exhaustion point at 100mm is reached. If rainfall is less than 100mm the maximum
payment will be made. If it is above 140mm no payment will be made. See Figure I below.




                                       (N,
                                       000)


                                       60
                                                             Maximum
                                       50                    Payout
                                                                                        Financial Payout (Increment
                                       40                                               per mm)
                                       30
                                       Indemnity
                                       Payment
                                                                                               Threshold
                                       20                                                      Rainfall




                                       10
                                       0           20   40   60    80       100   120   140    160
                                                                   Rainfall
                                                                   (mm)



Figure 9:Payout structure for a Rainfall index insurance contract on drought


The premium rate for an index insurance contract is the same for each policyholder who has
the same contract, regardless of the actual losses sustained by the policyholder. The amount
of indemnity payment received however depends on the amount of liability purchased (the
value of the insurance). The indemnity payment is calculated by multiplying the calculated
payment rate by the amount of liability the policyholder has (Skees et al., 2006).

Table 2: Types of Indexes used to base insurance
S/N          Index used                                      Risk insured
1            Rainfall                                        Drought, Flood
2            Temperature and humidity                        Late blight disease
3            Wind speed and shaking                          Hurricanes, Cyclone and earthquakes
4            Vegetation remote sensing                       Droughts
5            River level                                     Early flooding of rice fields
6            Simple weather parameters                       Drought, flood, extreme temp. ,weather-linked crop
                                                             diseases, fog, humidity

10
     Also known as the ‘lower trigger’ or the ‘exit’

                                   Towards a Climate-based Agricultural Insurance Reform in Nigeria |                 19
7      Area yield                        Drought
8      Area livestock mortality          Large livestock losses due to severe weather

Index insurance products can be developed on the basis of changes in rainfall, temperature
and humidity, wind speed, vegetation remote sensing, river level, area yield, etc. See table 2.


Advantages of Climate Based Insurance
Climate based insurance schemes have a number of advantages. These benefits include the
following:

Less adverse selection and reduced moral hazard: As indemnification is not based on
individual losses, the insurance provider can calculate the risk more easily and more
accurately, without depending on the information provided by the insured. Instead,
indemnities are based on widely available information. This eliminates the asymmetry of
information between the insurer and the insured.

Reduced administrative cost: Index-based insurance policies can reduce administration cost
significantly: not only do expensive on-farm inspections to assess the individual risk
exposure and costly individual loss assessments become redundant, but the standardisation of
contracts and easier claims settlement also make index based insurance schemes much more
cost-efficient.

Standardised and transparent structure: Index-based insurance contracts can be uniformly
structured, which not only reduces insurance design costs but also increases the number of
potential distribution channels.

Availability and negotiability: Being standardised and transparent, the contracts can be traded
in secondary markets by the insurance company, which facilitates risk transfer and portfolio
diversification. Index-based insurance can also be used to transfer the risk of widespread
correlated agricultural production losses more easily to the international reinsurance market.

Flexibility and adaptation: In contrast to traditional agricultural insurance products, which
cannot usually be tailored to the individual needs of farmers in a certain region, index-based
policies allow insurers to provide tailor-made solutions without extensive work on the
product design.

Broader target group: Index-based insurance policies can be sold not only to farmers to hedge
their agricultural risks but also to other players affected by weather events (agricultural
traders, banks, shopkeepers, labourers, etc.).

Unproblematic linking to microfinance: Index contracts can easily be made part of a
comprehensive package of services facilitating risk management, such as microfinance,
technical assistance (fertilisers, seeds, and pesticides), advisory services, transport and

                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   20
marketing facilities. In India, for example, a leading seed company bought small rainfall
insurance policies to attach them to their seed packages. In some countries, cooperation with
microfinance institutions has led to lower interest rates for farmers by transferring the loan
default risk to the insurance market11.

Challenges of Climate Based Insurance
Climate based insurance schemes do not present a silver bullet that resolves all the
bottlenecks of traditional agricultural insurance schemes, it faces a number challenges that
include the following:

Basis risk: One of the major challenges of index-based insurance solutions is the portion of
risk that is not correlated with the measured index, called “basis risk”. As indemnification is
not based on actual losses, but triggered by the index, there is a potential mismatch between
the insurance payout and the actual losses of the farmer. If a regional weather event does not
trigger the cover, an insured farmer will get no compensation even though he is heavily
affected by this event (basis risk)12. This will significantly impact the acceptance of insurance
as a risk management tool, because people will not understand why they have to pay
premiums when they receive nothing in return despite high individual losses13. Insurance
providers therefore have to make sure that they establish close long-term partnerships with
their clients and that the trigger is highly correlated with the experienced losses. Another way
to address this challenge is to ensure that clients are as close to the weather station providing
the data as possible – the recommended 30km radius may therefore be reduced to 20km
radius. Without sufficient correlation between the index variable and losses, the basis risk
may be too high and index-based insurance may not be an effective risk management tool. A
flip side of this scenario is that, if the weather event triggers payouts, but the insured farmer
is not seriously affected, he will be over-compensated.

Reputational risk for (re)insurance companies: As a result of the basis risk phenomenon and
its implications for the farmers, (re)insurance companies face a considerable reputational risk.
If insured farmers experience large losses without being compensated because the index
threshold is not triggered, insurance companies will be blamed. In developing countries,
where agricultural losses threaten the livelihood of farmers and their families, the lack of
indemnity payments has severe consequences. Reinsurance companies will therefore face a
high reputational risk which may not only involve agricultural insurance policies but other
product of the company they insured. Negative mouth-to-mouth propaganda destroys any
trust that an insurance company may have built up over a long time.

Simplicity versus reduction of basis risk: When designing an index-based insurance scheme,
insurance companies have to choose between a simple trigger structure (leading to lower
design and administration cost) and reducing the amount of basis risk to be borne by the

11
    United Nations Conference on Trade and Development: Issues of agricultural insurance in developing countries, May 1994.
12 Stoppa, Andrea: Weather-based index insurance for developing countries, Eschborn 2007.
13 Munich Re Foundation; Loster, Thomas: Together we can beat the drought trap in the 2006 report of the Munich Re

Foundation, Munich 2007.


                            Towards a Climate-based Agricultural Insurance Reform in Nigeria |                   21
insured farmer. Products with only one trigger lead to an “all or nothing” situation for the
farmer, who carries a relatively large basis risk in this case. The more triggers defined in the
scheme, the more complicated and costly the insurance policies are for farmers, who at the
same time benefit from a reduced basis risk. The design of index-based insurance schemes is
therefore crucial, requiring careful consideration and several consecutive pilot tests.

Forecasts: If index-based insurance contracts can be bought at any time throughout the year,
forecasts can cause a situation of short-term asymmetric information about the likelihood of
an event in the near future. This creates the potential for inter-temporal adverse selection.
Insurers usually avoid this problem by only offering the policies up to a certain date, before
weather forecasts for the critical crop period can be taken into account for the purchase
decision.

Micro conditions: Frequent, localised events which would often trigger payouts make the
application of index-based contracts difficult. According to reinsurance experts, micro
climates do not play a critical role in index-based insurance schemes, as they rarely exist and
are usually incorporated in the index. Other micro conditions such as different compositions
of the soil, an uneven terrain (windward or leeward position of the field) may also lead to
different crop yields under the same weather conditions which cannot be adequately reflected
by index-based insurance products. Depending on the extent of the losses, other risk
management tools may be more appropriate in this case.

Weather cycles and short-term trends: Weather cycles changing the probability of the insured
events (e.g. El Niño) as well as small scale, short-term trends of only a few years could
undermine the actuarial accuracy of the premium calculation, posing a risk to the financial
viability of the insurance provider.

Timing risk: The sensitivity of plants varies heavily depending on the vegetation period, e.g.
wheat and corn need rainfall at different times. Therefore, triggers should not only be based
on absolute values during longer periods. It is more important to factor in when exactly
rainfall, soil moisture, temperature reach a certain value.

Unsuitability of index insurance for certain crops: Not all crops can be insured with climate-
index insurance. Available models are only able to cover certain crops like rice, maize and
wheat. Tuber crops that dominate Nigeria’s staple foods such as yam and cassava cannot be
insured using existing models.




                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   22
Policy and Legislative Frameworks on Agriculture and Insurance
The Nigerian agricultural and insurance sectors are governed by a mixture of national
policies and legislations. Nigeria has also acceded to a number of international agreements
and treaties which implementation may directly or indirectly impact on the delivery of
agricultural and insurance services.

The Agriculture sector
The Agricultural Policy of Nigeria (1988)14: The policy aims at the attainment of self
sustaining growth in all the sub-sector of agriculture as well as the realization of the structural
transformation necessary for the overall socio-economic development of rural areas. The
implementation of this policy has been weak and successive governments have watched the
steady decline of agriculture. Though there were several attempts to re-activate the sector,
little was done to fundamentally address the socio-economic causes of the decline.

Agriculture is on the Concurrent List in the Nigerian Constitution and allows for unilateral
initiatives by the State governments, some of which are not aligned with Federal
government’s policies. This creates inconsistency and disincentive for investment in the
sector. Furthermore, while some of these policies are dormant, others do not have the full
buy-in of critical players in the sector. This is often an impediment to investments in the
sector.

The New Policy Trust on Agriculture (2002): aims to provide “greater support for the
underlying philosophy of allowing the private sector and market forces to dictate the pace of
development in the agricultural sector, while government at all levels is restricted to
facilitating roles, support services and providing the enabling environment for agricultural
growth”15. The main features of the new Policy are:

        1) Evolution of strategies to ensure self-sufficiency and improve the level of technical
           and economic efficiency in food production. This is to be achieved through (i) the
           introduction and adoption of improved seeds and seeds stock (ii) adoption of
           improved husbandry and appropriate machinery and equipment (iii) efficient
           utilization of resources (iv) encouragement of ecological specialization and (v)
           recognition of roles and potentials of small scale farmers as the major producers of
           food in the country.
        2) Reduction of risks and uncertainties in agriculture to be achieved through introduction
           of a more comprehensive agricultural insurance scheme. This will reduce the natural
           hazard factor militating against agricultural production and security of investment.
        3) Nationwide unified and all-inclusive extension delivery system under the Agricultural
           Development Programs (ADPs)
        4) Active promotion of agro-allied industry to strengthen the linkage effect of agriculture
           on the economy.


14
 FMARD, 1988, The Agricultural Policy of Nigeria: Federal Ministry of Agriculture and Rural Development.
15
     FGN, 2002, Federal Government of Nigeria: The New Policy Trust on Agriculture.


                               Towards a Climate-based Agricultural Insurance Reform in Nigeria |          23
     5) Provision of such facilities and incentives as rural infrastructure, rural banking,
        primary health care, cottage industries etc. This will encourage agricultural and rural
        development and attract youths (including school leavers) to go back to the land.

Despite these policies and attempted implementations of these policy documents, it is noted
that the performance of the agricultural sector has been very slow and hardly improved, and
in fact has been declining..

The National Economic Empowerment and Development Strategy (NEEDS) (2004): The
NEEDS was Nigerian’s home grown poverty eradication strategy which aimed to enhance
national economic development through the promotion of agricultural activities by seeking to
earn at least US$3bn from export of cassava and related agricultural products by 2007 16.The
NEEDS suffered the same fate with other previous government plans from lack of
implementation and outright abandonment. This strategy was subsequently replaced by the
Vision 2020.

The Vision 2020: This long-term economic development programme aims to ensure food
security by increasing domestic agricultural productivity six folds by 2020; enhance greater
exports and import substitution; efficient resource management; and enhance capacity
building and dissemination of modern technologies16.

Other national policies on agriculture like the National Land Resources Policy (guidelines for
sustainable use of agricultural lands); National Agricultural Mechanization Policy and
National Cooperative Development Policy have also been important. However, while all
these policies affect agriculture, none of them have had a clear implementation strategy and
have often failed. Furthermore, because there are no legislations empowering their
implementations or compliance, they continue to remain mere policies, with no force of law
to ensure compliance of the stated objectives.

The Insurance sector
The Insurance Act (2003): This Act was repealed by the Insurance Act No. 2 of 1997. The
Act provides for the classification of insurance business; sets the conditions for
commencement of business by prior- registration with the National Insurance Commission
(NAICOM) and set minimum capitalization for insurance companies. Even though
agricultural insurance is not listed as one of the classes of insurance covered by section 2 of
the Insurance Act, sub-section 5 and 6 of the section empowers NAICOM upon satisfaction
of certain conditions to       authorize an insurer to “transact any new category of
miscellaneous insurance businesses”.

Sub-section 6 sets out the conditions upon which NAICOM could grant license to conduct
businesses in accordance with sound insurance principles: having competent and
professionally qualified persons and meeting the public policy interest.



16
 FGN, 2004, National Economic Empowerment and Development Strategy available at
www.cenbank.org/out/publications/guidelines/rd/2004/needs.pdf

                          Towards a Climate-based Agricultural Insurance Reform in Nigeria |   24
National Insurance Commission (NAICOM): This was established by the National Insurance
Commission Act Cap 53 2004 with responsibility among other things to ensure the effective
administration, supervision, regulation and control of insurance business in Nigeria. The
Commission is empowered to set standards, approve rates of insurance premiums to be paid
in respect of classes of business, regulate the industry and advise the Federal Government on
related insurance matters. The Commission is further empowered to receive complaints
against any industry player and take appropriate measures.

Nigeria Agricultural Insurance Corporation (NAIC): The Corporation was established by the
NAIC Act to implement the Nigerian Agricultural Insurance Scheme (NAIS) under the Act.
A detailed review and the performance of the Corporation had already been made above.

It however needs to be reiterated that the implementation of the NAIS has not been most
helpful to the potential beneficiaries of the Scheme, mostly poor rural farmers. The NAIC
Act is monopolistic (in the implementation of the NAIS), heavily reliant on government
subsidies and by its own admission contained in its Mission Statement that it provide
“insurance cover to farmers who invest their resources in agriculture against some perils …..”
and not ALL perils. Since the agricultural value chain ranges from inputs producers, farmers,
agro dealers, agro-processors, industrial manufacturers and trade exports, it is clear that
“some perils” covered by NAIC do not cover the entire agricultural value chain. It is also
doubtful whether climate-related hazard events are covered, since what constitute such events
have neither been defined nor dealt with through regulations by NAIC.

Similarly, despite its powers to make regulations under Section 34 of the NAIC Act, no such
regulations have been made on new emerging risks induced by extreme weather events.

Beyond the traditional crop and live stocks that the NAIC covers, Section 3(f) of the Act
empowers it to undertake and operate other types of insurance businesses as may be
permitted by the Commissioner of Insurance. The opportunity for NAIC to expand its
business to include other activities in the agricultural value chain is enormous, but not fully
exploited. That almost 120 million Nigerians (mostly low-income earners) are uninsured
indicate the existence of a huge low-income insurance market that must be catered for. For
this gap to be fully optimized, existing insurance opportunities in the agro-processing; agric-
input and suppliers; industrial manufacturers; trade and exports; pension and personal
insurance for workers in the sector; transportation of agricultural products; warehousing and
storage, health and housing; technological infrastructures including capacity building within
the sector must be exploited. The enabling legal environment must be developed to open
these opportunities for the private sector to explore and utilize for the growth and
development of agriculture in Nigeria.

Chartered Insurance Institute of Nigeria, Act Cap 11, (LFN 2004): This was established by
the Chartered Insurance Institute of Nigeria. It is charged with amongst other things: to
determine the standards of knowledge and skills to be attained by persons seeking to become
members of the Institute; to publish and generally regulate the practice of the profession.



                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   25
The expertise, competence and knowledge of practitioners in this particular
sector/profession will determine the quality of service delivery of the industry and to a great
extent, the success of the agricultural insurance scheme or other related insurance
programmes.

Nigeria Insurers Association (NIA): This was established in 1971 as an umbrella organization
for all insurance companies in Nigeria. The NIA upholds and promote internationally
accepted industry standards and its main goal is to protect and advance the common interests
of insurers in the country by “creating and sustaining a positive image for the insurance
industry and contributing to legislation and decisions made by Government and other public
authorities in the best interest of the industry in particular, and the national economy in
general”.17

The NIA has played crucial roles in the reforms of the National Social Insurance Fund
(NSIF), the National Health Insurance Scheme and its members have provided pioneer
leadership to both the Nigerian Insurance Corporation (NICON) and the Nigeria Reinsurance
Corporation (NigeriaRE).

It is therefore expected that NIA can play a major role in efforts to provide innovative
insurance products against extreme weather related risks and the expansion of the agricultural
insurance sector.

Institute of Loss Adjusters of Nigeria (ILAN): The body was formed in 1981. Its mission is
“to educate not just its members, the public, the insurance industry and the insured of the
important role played by Loss Adjusters in ensuring the impartiality in the adjustment of
losses”18. It provides technical insurance services in determination of claims and settlement
through investigations and other risk assessments.

The Institute could play vital roles in the enlightenment of members of the public on climate-
related risks and the innovative schemes being deployed to reduce and manage those risks.

Nigerian Council of Registered Insurance Brokers (NCRIB): This was established by
Nigerian Council of Registered Insurance Brokers Act No 21 of 2003 with objectives to
“establish and maintain a central organization for Insurance Brokers and generally do all such
things as may, from time to time, elevate their status and safeguard and advance their interest
and procure their general efficiency and proper professional conduct, with a view to ensuring
for the community, the existence of a class of Insurance Brokers who can be relied upon as
being trustworthy and duly qualified to perform their responsible duties”19. The Council is
potentially capable of making any new insurance product a success with its outreach and
understanding of the market.

The Central Bank of Nigeria (CBN): The CBN was established to perform supervisory roles
including monetary, exchange rate regulations, banking supervision and other financial


NIA, 2010 available at www.nigeriainsurers.com
ILAN 2010 available at www.nigeriailan.org
19
   NCRIB, 2010) www.ncrib.net/about.htm

                            Towards a Climate-based Agricultural Insurance Reform in Nigeria |   26
institutions supervision. The bank operates a number of development finance iniatives
including the Agricultural Credit Guarantee Scheme Funds (ACGSF), Agricultural Credit
Support Scheme and Claim Settlement activities. The ACGSF guarantees credit facilities to
farmers by banks up to 75% of the amount in default net of any security realized. Loans
granted under this Scheme must be insured by NAIC.

The CBN has recently introduced the Nigerian Incentive Based Risk Sharing System for
Agricultural Lending (NIRSAL). This project recognizes the underfunding in the agricultural
sector and seeks to provide a holistic approach that tackles both the agricultural value chain
and agricultural financing challenges. NIRSAL will specifically encourage bank lending
throughout the agricultural value chain by offering them strong incentives and technical
assistance20.

The NIRSAL also has an insurance facility component that will expand agricultural insurance
coverage beyond products currently offered by NAIC and help reduce credit risk and increase
lending across the entire value chain. The success of the insurance component of the
NIRSAL will however require the breaking of the statutory monopoly currently being
enjoyed by NAIC and the operation of the NAIS.

International agreement and obligations
Nigeria is a party to the United Nations Framework Convention on Climate Change
(UNFCCC), Food and Agricultural Organization (FAO) and World Meteorological
Organization (WMO). The UNFCCC21 process has resulted in an agreement for the
establishment of a mechanism to address risks of loss and damages associated with climate
change. The decision provides for a risk management framework that includes insurance.
The establishment of an International Insurance Facility with compensation and rehabilitation
component for climate related risks under the UNFCCC has provided potential additional
sources of financing which can support domestic measures. The Convention has further
created a platform for the sharing of climate/weather related data and institutional
strengthening for adaptation and related activities including micro-insurance.22

The Food and Agricultural Organization (FAO) recognizing the likely impacts of climate
change on agriculture particularly in developing countries have developed a tool kit, ‘Data,
Tools Methods for Climate Impact Assessment in Agriculture and Planning of Climate
Change Adaptation’ to design weather based indices for crop insurance23

The World Meteorological Organization’s (WMO) Disaster Risk Reduction Programme
launched in 2003. This comprise Catastrophe Insurance and Bond and Weather-indexed
Insurance and Derivatives) as one of its three pillars of approaches; the two other pillars
being Risk Assessment and Risk Reduction. Access to climate data and information in the
design of such innovative climate-related insurance products is important. Therefore,

20
     (CBN 2011) NIRSAL BRIEF at www.cenbank.org/out/2011/publications/dfd/NIRSALbrief.pdf
21
     (UNFCCC 2010): The Bali Action, Copenhagen Accords and Cancun Agreements at www.unfccc.int/php
22
     UNFCCC 2010, The Bali Action, Copenhagen Accords and Cancun Agreements at www.unfccc.int/php
23   FAO, 2010, http://www.fao.org/nr/climatepag/aw-z-en.asp

                             Towards a Climate-based Agricultural Insurance Reform in Nigeria |       27
NIMET, Nigeria’s focal point to WMO must be supported to leverage the WMO’s expertise
for national decision-making and development of strategies.

Public-Private Sector Partnership Initiative is being formed to promote better risk assessment
practices through the development of non-proprietary information on climate change and
investment in risk management initiatives. The UNEP Finance Initiatives currently has a
total of 179 banks and 84 insurers who have committed to integrating environmental
considerations into all aspects of their operations. Similarly, the US National Flood Insurance
Program24 the Caribbean Disaster Pool are examples of new financial products used for
hedging against the risk of weather-related losses for commercial activities. Within Africa,
the experiences and lessons from Ethiopia and Malawi could be valuable25.


International    experiences   in                                           developing                   climate-based
agricultural insurance schemes

Over the past few years, there is a growing interest in developing climate-based agricultural
insurance programmes that address the increasing loss and damage arising from weather-
related disasters. Developments within the United Nations Framework Convention on
Climate Change have particularly given momentum to this process. However, several
government and private sector actors have seen an opportunity to scale up access to
agricultural insurance through climate-based approaches.

Developing sustainable risk management strategies for climate change adaptation has
gradually gained international attention. Throughout the international climate talks,
negotiators have posed series of questions about how risk reduction and insurance could be
put into action in the context of a post-2012 UNFCCC adaptation strategy. Today, insurance
occupies a central place among the UNFCCC mechanisms for addressing loss and damages
associated with climate change.

The purpose of the insurance mechanism include: supporting developing country Parties in
building resilience by addressing the risks associated with climate-related extreme weather
events; providing compensation and rehabilitation for loss and damage resulting from
climate-related slow-onset events, including sea level rise, increasing temperatures and ocean
acidification. In detailing the operation of this mechanism, the emerging agreement specifies
that it will consist of an International Insurance Facility, as well as a Compensation and
Rehabilitation component for climate-related slow onset events. This will be funded through
the financial mechanism of the Convention.

In 2008, the Geneva Association comprising world CEOs of leading insurance companies
launched a study on ‘Climate Change and Possible Economic Impacts on Insurance’26.

24
  Burton and Yohe, 2003, Insurance for climate change: Opportunities for Private-Public       Partnership Initiatives to share losses
and promote adaptation.
25
   ICEED, 2010
26 This was an overarching study that first revealed the impacts of climate change on insurance and possible solutions



                              Towards a Climate-based Agricultural Insurance Reform in Nigeria |                          28
Efforts have since intensified to increase the awareness and practicability of index insurance
as a risk management mechanism for poor farmers.

Today, several of the world’s leading insurance and reinsurance firms have products that
target this market. Development agencies including the World Bank, World Food
Programme, International Labour Organisation, Organisation for Economic Cooperation and
Development (OECD), regional development finance institutions have all developed sizable
climate insurance programmes.

Case Studies of Index Insurance
A number of successful index insurance schemes are emerging within Africa and beyond.
Countries like Malawi, Ethiopia, India the Philippines have all established successful
programmes.

Developing weather products in Ethiopia: In Ethiopia, a pilot on index insurance using
rainfall was developed. The main partners for this project were the World Bank’s Commodity
Risk Management Group (CRMG) and Ethiopian Insurance Corporation (EIC). A feasibility
study was carried out with a focus on three main issues (i) availability and analysis of
weather data to determine feasibility of index-based insurance (ii) identifying a risk taker to
underwrite the contracts (iii) finding a company or institution to deliver the contract to
farmers.

The study involved identifying pilot areas, crops and cooperatives, carrying out market
research to determine the major risks and the demand for insurance, designing contracts to
meet the needs of farmers, testing the contracts, marketing them and establishing agreements
between participants. It finally involved implementing and monitoring the projects. Weather
data, yield data, input from farmers and agronomic information on the crops were used to
design a weather index that closely predicted yield losses. Before the product was offered to
farmers, CRMG hosted a number of training sessions with local and national EIC employees
and a local agent from the Ministry of Agriculture. The sessions aimed to ‘train the trainers’
on the product and guidance on marketing it to their potential clientele. The Ethiopian
meteorological department supplied weekly weather data of rainfall at Alaba, where the pilot
was carried out. Nevertheless the major challenges to this project was identified as lack of
data, weak delivery channels, limited linkages to finance and a lack of capacity (technical
skills for the new product) within Ethiopian insurance companies and banks.

Climate-based insurance in Malawi: Another pilot was developed in Malawi using rainfall
index for drought. The main partners in this project included the World Bank, MicroEnsure,
International Research Institute (IRI) and other local stakeholders. The project targeted poor
groundnut farmers in Malawi. The goal was to cover the risk of drought using a weather
index insurance scheme. Certified groundnut seeds produced higher yields but purchasing it
required finance that the farmers did not have.

Banks were also unwilling to lend to these farmers due to the risk of their inability to pay
back if there was a drought. To build farmers lending credibility therefore, National Small
Holder Farmers Association (NASFAM) in conjunction with the Insurance Association of

                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   29
Malawi and with technical assistance from the World Bank and MicroEnsure designed an
index based weather insurance contract that would payout if the rainfall needed for groundnut
production in four pilot areas Kasungu, Nhkotakota, Lilongwe North, and Chitedze fell short
or exceeded the agreed threshold.

As a direct result two banks, Opportunity International Bank of Malawi (OIBM) and Malawi
Rural Finance Corporation (MRFC), agreed to lend farmers the money necessary to purchase
certified seed if the farmers agreed to buy weather insurance. The contract was designed such
that, when there was drought that triggered a payout from the insurance contract, the money
was paid directly to the bank in order to offset the farmers’ loan. When there is no drought
the farmers benefit from selling the higher value production. Farmers now invest in higher
yield groundnuts and the banks too have increased their lending portfolio.

India’s example of climate based insurance: India also had a pilot using rainfall index for
drought. The main partners in this project included ICICI Lombard General Insurance
Company1, the World Bank, IFC, BASIX and ACE Group Reinsurance. This pilot
emphasizes the possibility of a rewarding partnership between the government and the private
sector and it targeted groundnut and castor farmers.

It was characterized by intensive interactions with clients, both to help them understand the
product and to get detailed feedback from them after the first season, in order to improve the
product. Before the implementation of this pilot, the National Agriculture Insurance Scheme
(NAIS) also offered insurance to local farmers.

However, farmers saw the benefits of the index insurance provided by the private sector as
being better than the one provided by government through the NAIS. The major reason for
the preference was the difference in time for settlement of claims. Although there were a
limited number of weather stations and insufficient weather data, private data providers set up
over 500 automatic weather stations on behalf of insurance companies, across the country.
Also, premiums for private contracts were not subsidized and were therefore higher than the
NAIS contracts (6–14% of the sum insured versus 2–3.5%). To address this price
discrepancy, some State Governments in 2007 began subsidizing climate based insurance
products offered by private insurance companies, paying 40–50% of the premium. The
subsidy applied only to products bought by farmers voluntarily and not to products bundled
with loans.

Weather based insurance in the Philippines: the Philippines have weather insurance policies
mostly against typhoons and flooding. The main partner is MicroEnsure. This is a global
insurance intermediary dedicated to serving poor households and the rural market with an
affordable and suitable range of insurance products. The company began operating in the
Philippines in February 2007 and are one of MicroEnsure’s largest subsidiaries. The
company partners with over 20 Micro Finance Institutions (MFIs) providing cover to 900,000
individuals through a range of insurance products including personal accident, life, micro
housing, funeral, loan redemption, hospitalization. MicroEnsure Philippines rolled out a new
product in 2011 called Dry Day Weather Index Insurance. The unique characteristic of this

                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   30
product is that the payouts are based on the number of consecutive dry days - with a specific
definition of what a dry day is based on meteorological analysis.

Since climate based insurance products are currently sold at the microinsurance level,
Philippines tapped into their already well developed and organised microinsurance market. A
workable microinsurance can be organized much like a Mutual Benefit Association MBA27
as practiced in the Philippines for instance. (See box 1). It may be a set of institutions
working together, like insurers collaborating with microfinance institutions to provide
insurance to the poor. The product may also be provided by an organization that conducts
other activities, like an agricultural cooperative that also provides insurance to its members.
The general principle is for a scheme to be of interest in the context of social protection.

Centre for Agriculture and Rural Development Mutual Benefit Association (CARD MBA)
is the microinsurance arm of CARD and the biggest mutual benefit association in the
Philippines. CARD MBA was officially licensed in 2001 by the Insurance Commission
(IC). CARD MBA was formed to promote the welfare of marginalised women, extend
financial assistance to its members in the form of death benefits, medical subsidy,
pension/retirement savings and loan redemption, and actively involve its members in the
direct management of the association. It also includes formulation and implementation of
policies and procedures geared towards sustainability and improved services. The
immediate clientele of CARD MBA is the microfinance clients of CARD Inc. and CARD
Bank, Inc. All of them are women aged 18 to 60 years old. Men were initially excluded
from the membership but are also covered by the life insurance as legal spouses. All of
them also came from low-income groups as criteria of the MFIs. CARD gradually moved
to cover other low income households who were not members of CARD, offering savings
and insurance packages. The clients meet once every week. At each of these meetings they
contribute Php 20 (N75) amounting to Php 80 a month (N300). This covers for life
(husband and all legal children below 21), health, calamity, retirement benefit and
accident. At the retirement age of 70, 50 percent equity value is paid as retirement benefit,
20 percent goes to administrative expenses, 25 percent goes for claims payment and 5
percent as registration fees of the center. CARD MBA works a 24 hour claim process based
on a principle of 1-3-5 day target. A percentage is paid upon notification while the
remaining amount due to the client is paid upon validation of the incidence within 3 or 5
days maximum. This model works because CARD knows their members by places, faces
and names through their center leaders.

Box 1: A microinsurance case study of CARD MBA in the Philippines

A microinsurance scheme differs from programmes that provide statutory social protection to
formal workers. Membership is not compulsory (but can be automatic). The members
contribute, at least partially, the necessary premiums to pay for the benefits. Since their
capacity to contribute is often low, the coverage provided by these schemes is (in the absence
of subsidies) limited at the initial stage with coverage for a limited number of risks and low
27A mutual benefit association are made up of clusters of people with similar needs and or social characteristics. In the
Philippines, an MBA must secure a license from the Insurance Commissioner before commencing operations and this will make
them subjected to the supervision of the Commissioner. It must also have an actuary.

                            Towards a Climate-based Agricultural Insurance Reform in Nigeria |                    31
levels of benefits. Demand for the type of coverage may also be influenced by the
geographical location of the clients (e.g. demand for coverage may be significant for
livestock and crop coverage in rural areas).


The view of Nigeria’s farmers on insurance in Nigeria
The following are the key findings of a survey of opinions of Nigeria’s farmers on insurance.
The survey was conducted in major agro-ecological zones of the country. The overall
objective is to provide a solid knowledge base to determine the feasibility of introducing
climate based crop insurance products to poor farmers in Nigeria. The survey was conducted
in Abia, Benue, Ondo and Niger states using structured questionnaires. About 400 farmers
were interviewed, majority of who belonged to cooperatives in their communities.

The survey provides an overview of the profile of the farmers, major farm crops, the type of
risks experienced, existing coping mechanisms and their willingness to pay for climate based
micro-insurance products if given the opportunity. Below are the key findings from the
survey:

Gender of farmers: About 69% of farmers surveyed are males while 31% are females. In
Abia 68% are males, 32% are females; in Niger 80% are males, 20% are females; in Benue
67% are male, 33% female; in Ondo 61% are males, 39% are females. During the survey
organized farmer groups like the agricultural development programme and cooperatives were
also used as respondents.

                                                        Gender of Farmers
                                90
                                80
            No of Respondents




                                70
                                60
                                50                                                                        Male
                                40
                                30                                                                        Female
                                20
                                10
                                 0
                                        Niger           Abia               Benue        Ondo
                                                               Survey States

Age bracket: 41% of the farmers surveyed are under 40 years, while 59% of them are above
40 years of age.




                                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   32
                                                                         Age bracket
                        No of responses %   100

                                             80

                                             60

                                             40                                                                 17-40

                                             20                                                                 41-above

                                              0
                                                  Niger          Abia                Benue             Ondo
                                                                        Survey states




Area of farming: From the survey 75% of farmers in the survey areas are engaged actively in
yam production. About 65% also produce cassava while at least 58% engage in the farming
of maize. Rice farmers constitute 52% of the farming population while only 26% of farmers
are engaged in tomatoes and other vegetable farming. In all, 13%, 6%, 4%, 4% and 3% of
farmers engage in soya beans, groundnut production, guinea corn, cocoa and oil palm
farming respectively. Of all the crops, more farmers engage in yam farming in all the states
surveyed. Farmers engaged in yam farming are 91%, 71%, 86% and 50.5% in Niger, Abia,
Benue and Ondo states respectively.

In all the states surveyed, farmers are substantially engaged in farming of Nigeria’s staple
food, including maize, rice, yam, and cassava. Benue State has 53% of its farmers in soya
beans production, 24% groundnut and 14% guinea corn. Ondo has 14.4% engaged in cocoa.
Few other farmers also engage in palm oil, benniseed, water melon, beans and garden egg.

                                                                        Main area of farming
                       100
   No of responses %




                        80
                        60
                        40
                        20
                         0




                                                                                     Survey states

                                                                   Niger      Abia       Benue       Ondo




                                                   Towards a Climate-based Agricultural Insurance Reform in Nigeria |   33
Educational background: From the study, 14% of all the farmers completed higher education,
34% completed secondary school, 13% did not complete secondary school and 17%
completed primary school respectively. 18% of the surveyed farmers have no education. At
least 6% have either vocational or some form of special education.

                                        Level of Education of Farmers
                       50
                       45
   No of responses %




                       40
                       35
                       30
                       25
                       20
                       15
                       10                                                                         Niger
                        5
                        0                                                                         Abia
                                                                                                  Benue
                                                                                                  Ondo



                                              Level of education




Risk and Risk Management Strategies

Weather risks: Drought is the most frequent risk across the surveyed areas - with 62%
identifying drought as the most severe risk. Flood represents 55% while heavy rain is 48%
across the area surveyed. Strong wind and pests has 45% and 4% occurrences respectively.
Other risks such as fire constitute 1%.

Flood risk is more in Abia and Niger States with 89% and 81% respectively. Drought is more
severe in Benue and Niger States with 91% and 91% occurrences. (Niger has extreme levels
of flood and drought). Strong wind is also more frequent in Niger with 76%. Heavy rainfall is
also a risk faced by farmers in Abia 68%, Benue 54%, and Ondo 63%.




                            Towards a Climate-based Agricultural Insurance Reform in Nigeria |   34
                                                Weather risk faced by farmers
                          100
   No of responses %



                          80

                          60

                          40

                          20

                            0
                                Flood       Drought      Strong          Heavy         Others           Fire    Pest    Less rain
                                                          wind           rainfall
                                                                              Risk type

                                                         Niger      Abia            Benue    Ondo


Frequency of occurrence: From the survey, 46% of the farmers say the various weather risks
they face occur occasionally. About 38% confirmed that the risks are often, 11% say it is
very often while 4% do not know how frequent the risks occur.


                                        Risk occurrence within the last 3 years
                          80
   Occurrence of risk %




                          60
                          40
                          20
                           0
                                        Niger                     Abia                          Benue                  Ondo
                                                                             Survey states

                                                very often       Often         Occassionally        Dont Know


Impact of risk: From the survey, 38% of respondents said the impact is fairly significant.
About 37% reported that weather risks are significant, while 17% said it is very significant.
Only 7% said the impact of the risk is not significant. At state level, 100% of farmers in
Niger said the risks are significant but with different levels of impact. About 82% in Abia,
98% in Benue and 86.6% in Ondo confirmed that these risks are significant.




                                           Towards a Climate-based Agricultural Insurance Reform in Nigeria |                 35
                                         Impact of risk on farmers livelihood
                       60
                       50
   No of responses %




                       40
                                                                                                                  Niger
                       30
                                                                                                                  Abia
                       20
                                                                                                                  Benue
                       10
                                                                                                                  Ondo
                        0
                             Very significant   significant   Fairly significant Not significant   I dont know
                                                               Impact of risk


Coping mechanisms: In the survey, 77% of the farmers used saving as a coping mechanism.
About 61% said they reduced expenditure while 53% borrowed from friends and relatives.
Only about 32% sold their property, while 34% borrowed from local community banks or
cooperatives. Several farmers combine coping mechanisms.



                                                   Coping mechanism of farmers
                       120
   No of responses %




                       100
                        80
                        60
                        40
                        20                                                                                       Niger
                         0                                                                                       Abia
                                                                                                                 Benue
                                                                                                                 Ondo




                                                              Coping mechanism


Membership of association: From the survey, 88% of farmers surveyed belong to one or two
associations. Among the states, 89%, 73%, 92%, and 98% belong to associations in Niger,
Abia, Benue and Ondo, respectively.




                                          Towards a Climate-based Agricultural Insurance Reform in Nigeria |     36
                                                 Membership of Associations
                       150
   No of responses %


                       100

                        50                                                                                              No
                                                                                                                        Yes
                         0
                                    Niger              Abia                    Benue              Ondo
                                                               Survey states


Benefits from association: From the survey, 77% of the total survey population secure loans
from their associations when faced with risks. About 52% receive support from association
during funeral. In all, about 50% and 26% receive support during sickness and marriage
ceremonies respectively. About 30% receive compensation for crop loss from their
associations. However most of the farmers utilize a combination of these coping mechanisms.


                                                  Benefit of the Association
                       100
   No of responses %




                        80
                        60
                        40
                        20
                         0
                             F. F. Asst F.F Asst F.F Asst     Loan    Crop loss Finan. Gift Farming   provide   Training
                             when sick during    during                Comp                   Info     inputs
                                        funeral marriages

                                                    Niger      Abia     Benue      Ondo


Income fluctuation and weather risks: In the study, 80% of the surveyed population admit
that their income fluctuates due to weather risks. In all 17% of the farmers surveyed did not
attribute income fluctuation to weather related risks. About 88% in Niger, 83% in Ondo, 79%
in Abia, and 71% in Benue admitted to income fluctuation as a result of weather risks.

Knowledge and use of insurance

Farmers who have heard about insurance: The word insurance is common amongst farmers.
72% of farmers surveyed are sure of having heard about insurance. However, this does not
mean the farmers understand how insurance works.




                                       Towards a Climate-based Agricultural Insurance Reform in Nigeria |          37
                             Farmers who have heard about insurance

 100
  90
  80
  70
                                                                                      Yes
  60
  50                                                                                  No
  40                                                                                  Somehow
  30
                                                                                      Dont know
  20
  10
   0
             Niger                Abia                  Benue               Ondo


Understanding the concept of insurance: Only 11% of the total surveyed population
understands the concept of insurance very well. About 50% have some vague understanding
of the insurance concept, while only 20% have some knowledge of of insurance products.


                   farmers understanding of insurance
 80
 70
 60
 50
                                                                              Niger
 40
                                                                              Abia
 30
 20                                                                           Benue

 10                                                                           Ondo
  0
       Very well      Well      Not very well      Dont       No response
                                                understand it
                                                   at all


Willingness to attend insurance training: From the survey, a good majority are willing to
learn more about insurance services. About 77% are willing to attend any training to acquire
more knowledge on insurance.




                       Towards a Climate-based Agricultural Insurance Reform in Nigeria |   38
                             Willingness to know more about insurance
                       100
                        90
                        80
   No of respondants




                        70
                        60                                                               Niger
                        50                                                               Abia
                        40
                                                                                         Benue
                        30
                        20                                                               Ondo
                        10
                         0
                               Yes         No        Maybe     Dont know      No
                                                                           response




Knowledge of climate based insurance: From the survey, only one farmer has heard of
climate based insurance products. Only one farmer out of about four hundred surveyed had
crop insurance. All others neither have crop insurance nor have heard of climate based
insurance products.

Experience with insurance products: Only 13% of the respondents have ever had any form of
insurance, while 11% currently have one insurance or the other. A whole 61% of the
surveyed farmers never had insurance in the last three years.

                                             Farmers with insurance in the last 3 years
 100

  80
                                                                                                              Niger
  60
                                                                                                              Abia
  40
                                                                                                              Benue
  20                                                                                                          Ondo

       0
                         Yes-have now    Yes-used to have   No-never had     Dont know      No response


Reasons for not using insurance: Most farmers have a combination of reasons for not using
insurance products. Some 22% claimed they could not use insurance products because they
inadequate understanding of how it works, while 26% attributed it to poor awareness. Poor
accessibility was the reason for not having insurance covers for about 17% of respondents.
For 8%, it was a matter of trust while 6% complained about the high cost of premiums. Only
8% complained of long compensation process.



                                        Towards a Climate-based Agricultural Insurance Reform in Nigeria |   39
                                        Reasons for not using insurance
     100
      90
      80
      70
      60
      50
      40
                                                                                                    Niger
      30
      20                                                                                            Abia
      10                                                                                            Benue
       0
                                                                                                    Ondo




Willingness and ability to pay for insurance products

Household average monthly income: Only 22% of the respondents have a monthly income of
above N50, 000; 25% have less than 50,000. About 34% have an average monthly income of
less than 20,000, while 3% have less than N5000 monthly income.

                          Farmers average monthly income %
                 60
                 50
   Farmers (%)




                 40
                 30                                                                                         Niger
                 20                                                                                         Abia
                 10
                                                                                                            Benue
                  0
                      less than N5000     less than        less than       less than   N50000 and           Ondo
                                           N10000           N20000          N50000       above
                                                      Monthly income (N)




Household average monthly expenditure: Only 4% of the respondents have a monthly
expenditure of 50,000 and above; 17% spend less than N50, 000, while 19% spend less than
N20, 000. About 31% have a monthly expenditure below N10, 000 and 30% spend less than
N5000.



                                  Towards a Climate-based Agricultural Insurance Reform in Nigeria |        40
                                 Average monthly expenditure of farmers
                  70
                  60
   % Of Farmers



                  50
                  40                                                                                 Niger
                  30
                                                                                                     Abia
                  20
                  10                                                                                 Benue
                   0                                                                                 Ondo
                             less than      less than      less than       less than   N50000 and
                              N5000          N10000         N20000          N50000       above
                                                                Amount in Naira




Farmers with extra cash: Just 51% constantly have extra cash after monthly expenditure,
while 42% have extra cash few times after expenditure. Only 4% spend all their monies
within the month and 3% do not know if they have extra cash.

                                         Do you have extra cash at any time?
                  80

                  60
   Responses %




                                                                                                            Yes
                  40
                                                                                                            No
                  20                                                                                        Few times
                   0                                                                                        Dont know
                                 Niger                  Abia               Benue           Ondo
                                                               Survey states


Usage of extra cash: Of the surveyed farmers, 66% save their extra cash, 22% invest the extra
cash while 9% buy assets.

                                            What do you do with the extra cash?
                  100.0
   Responses %




                                                                                                                  Buy assets
                   50.0
                                                                                                                  Invest
                       0.0                                                                                        Save
                                    Niger                 Abia                 Benue          Ondo                Dont know
                                                                  Survey States


Willingness to buy insurance with extra cash: From the survey, 69% of farmers are willing to
buy insurance with their extra cash. About 13% are not interested at all and will not buy
                                         Towards a Climate-based Agricultural Insurance Reform in Nigeria |                41
insurance while 17% are undecided. But 26% of farmers prefer their local thrift contribution;
24% prefer saving in the bank while 23% are contented with their membership of cooperative
societies. About 12% consider buying land as more profitable than insurance. However, 15%
of these farmers just don’t believe in insurance.


                                       Reasons for not buying insurance
 14
 12
 10
  8                                                                                                              Niger
  6                                                                                                              Abia
  4
                                                                                                                 Benue
  2
  0                                                                                                              Ondo
                Our religion   I prefer to     Buying land is I prefer thrift    Prefer my        I just dont
                   forbids     save in the     more secure contribution         cooperative      believe in it
                 insurance        Bank                                              ass.


Monthly amount farmers are willing to pay: As many as 55% are willing pay N2000 for crop
insurance in a month. Another 23% could consider paying N5000, while 11% indicate that
they can only pay as much as 1000.




                     Monthly amount farmers are willing to pay for crop
                                       insurance
                90
                80
                70
   Response %




                60
                50                                                                            Niger
                40
                30                                                                            Abia
                20                                                                            Benue
                10
                 0                                                                            Ondo
                     N2000 &   N5000     N10000       N30000      None         No
                      below                                                 response
                                             Amount in Naira




                                Towards a Climate-based Agricultural Insurance Reform in Nigeria |               42
Proposed components of Nigeria’s climate-based agricultural
insurance reforms

A climate-based agricultural insurance reform programme in Nigeria may rest on four
important building blocks. These include the expansion of existing weather monitoring
infrastructure and skills; the reform of legal and regulatory frameworks; the building of
capacity within insurance companies and other financial institutions; and a programme on
farmer education.

Expanding weather monitoring infrastructure and skills
The Nigerian Meteorological Agency (NIMET) has the statutory responsibility of observing
weather, making forecasts and advising Government and the general public on all aspects of
meteorology. The organisation is the authoritative and statutory custodian of long-term data
on the Nigerian climate. NIMET in its operational capabilities has the following:

      1 Central Forecast Office and 4 Independent Forecast Offices
      54 Synoptic Stations, 20 Agrometeorological Stations
      1 Agrometeorological Experimental Farm
      500 Rainfall Stations, 2 Upper Air Stations
      2 Ozone Stations and
      40 Automatic Weather Observing Stations (AWOs)




Figure 10: NIMET Network of Stations

The WMO requires its 187 member countries to ensure adequate monitoring of its weather by
ensuring that the gap between two weather stations does not exceed 50 km. NIMET is yet to
attain this level in the station network density. In Malawi, a radius of 20-30 km was adopted
in the implementation of its climate-based agricultural insurance scheme.

                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   43
The Nigerian Meteorological Agency has the national mandate for meteorological data
collection, collation, storage and analysis. Another equally important mandate of NIMET is
the provision of weather data to all stake holders (aviation, military, environment, agriculture
etc.) in Nigeria and linkage with the WMO and other international agencies on global issues
concerning climate and climate change. As the repository of all weather observatory data,
NIMET also has a coordinating and supervisory role over all other weather data generating
institutes in Nigeria. The supervisory roles include aspects of capacity building and standards
for equipment and data collection. The weather data collection by NIMET is domiciled at air
strips and airports mainly located at state capitals across Nigeria.

NIMET has the following historical data:

        S/no   Type of data           Number of year
        1      Rainfall               over 100 years
        2      Temperature            over 60 years
        3      Sunshine hours         over 60 years in some stations
        4      Solar Radiation        over 60 years in some stations
        5      Evaporation            over 60 years
        6      Wind                   over 60 years
        7      Soil Temperature       over 60 years


In expanding weather monitoring infrastructure and skills the following recommendations
have been made:

       Nigeria must investigate the possibilities of using the next generation of weather
        monitoring technologies, especially satellite services and advanced modelling to
        achieve more accurate and cost-effective agro-meteorological services.
       Nigeria must quadruple its present capacity of weather monitoring stations – from 54
        Automatic Weather Stations to at least 200 stations. Other weather monitoring
        equipments should also be increased.
       A rehabilitation programme to ensure the effective working of existing stations
        should commence.
       Linkages for weather data collection between NIMET and educational institutions,
        research institutes and other relevant governmental agencies must be strengthened.
       The upgrade of skills of NIMET and other research agencies in data collection,
        storage and sharing must be given priority. For instance, qualified agro-
        meteorologists are required at the zonal/agro-ecological zones to ensure proximity to
        farmers; and
       Development of statistical data, weather and crop risk indices and modelling risk
        exposure skill building should commence.

Legal and regulatory frameworks for agricultural insurance reforms
The following legal and regulatory interventions are needed:
       The NAIC Act should be appropriately amended to allow for either private sector
        participation in the implementation of the Agricultural Insurance Scheme under
                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   44
       Section 6 of the Act. The NAIC can either continue to provide agricultural insurance
       or (ii) be saddled with regulating and coordinating agricultural insurance sector. This
       study therefore recommends the passing of an act to amend the NAIC Act 1993. A
       draft legislation is annexed;
      Supporting NICOM to develop the regulatory environment for index and parametric
       insurance products;
      Ensure that the relevant financial management systems are adequate;
      Training of finance sector supervisory staff;
      Educating public officials; and
      Capacity-building at the industry level.

Building the capacity of financial institutions
The primary goal is to assist Nigerian financial institutions by providing and facilitating
access to required skills and development of commercial products. This can be done through:

      Providing training to staff to enhance the delivery mechanisms for products as well as
       underwriting, product development and sophisticated risk control tools;
      Launch of local risk transfer markets by bundling risks for the international
       reinsurance market, assist in developing contracts, regulatory filings and developing
       customised technologies for the support of local markets; and
      National training programmes for a broader set of market players, including banks,
       microfinance institutions and cooperatives to enhance retail capacity.

A programme on farmer education
There is a strong potential market for climate based insurance products in Nigeria as
evidenced by the research findings in the four pilot states. The following steps will contribute
to developing this market:

      There is need for intensive training and awareness creation for farmers to enable
       better understanding of the concept of climate based insurance. This will allow
       farmers appreciate and accept climate insurance as an option for agricultural risk
       management. This will also facilitate farmer’s trust for insurance companies.
      Harnessing existing structures to serve as delivery channels will improve accessibility
       of the product to rural farmers. Farmer groups and cooperatives present an
       opportunity to reach a large number of farmers. Financial institutions can liaise with
       cooperatives and bundle insurance policies with loans.
      The micro-insurance market in Nigeria should be developed. Policy and regulatory
       frameworks should be built to allow the growth of microinsurance in Nigeria.
      It is necessary to develop insurance products that will provide cover for mixed
       farming systems. Product design policies should cover a variety of risks in a single
       contract as farmers experience more than one weather risk during a farming season.
      Pricing for the products should be affordable. The majority of the farmers surveyed
       are willing to buy insurance with their extra cash if the insurance product is very
       attractive. Fixing premium in consultation with farmers will increase their willingness
       to pay because any agreed premium will depend on their ability to pay.



                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   45
Appendix: 1 Draft Bill for An Act to Amend the NAIC Act 1993


RE: DRAFT BILL FOR AN ACT TO AMEND THE NIGERIAN
AGRICULTURAL INSURANCE CORPORATION ACT.
Pursuant to the recommendations of the report of the review of policy and
legal framework on agricultural insurance, two separate amendments are
being suggested:

   (i)     To amend Section 3 of the NAIC Act by inserting a proviso
           which will allow private sector to participate in the
           implementation of the Agricultural Insurance Scheme under
           Section 6 of the Act or
   (ii)     Amend the entire Section 3 by substituting the existing
           functions with new sets of functions that will give NAIC
           regulatory and supervisory powers on agricultural micro
           insurance businesses.

           These new role will allow private insurance companies
           desirous of offering agricultural insurance cover to apply for
           micro-agric insurance licence from NAIC and be subject of its
           control and supervision. This will be without prejudice to
           NAICOM’s power on all insurance regulation. NAIC will no
           longer offer retails agricultural insurance services any more,
           but will however provide re-insurance to those micro
           insurance companies.

           The adoption of either of the above options will determine the
           extent of amendment that will be proposed on the NAIC Act.
           It will also require detail consideration of the effects of such
           amendments.
           That notwithstanding, below are drafts of the two amendment
           for further discussions.

A Bill for an Act to Amend the Nigerian Agricultural Insurance
Corporation Act Capt N89, Laws of the Federation of Nigeria 2004
by providing for the participation of the Private Sector in the
Agricultural Insurance Scheme


1. The Nigerian Agricultural Insurance Corporation Act Cap N89 LFN                Title
   2004 is hereby amended as follows, that is:
    For sub-paragraph (a) of section 3 therefore, there shall be                  Amendment
       substituted the following new subsection, that is -
       (a) “Supervise the operation of, and administer the Agricultural
Insurance Scheme established by section 6 of        this Act”

2. A new proviso is inserted immediately after sub-paragraph (g) of
   section 3 that is-

                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   46
        “provided that nothing in this section  shall be interpreted
to mean the exclusion of private insurance      companies in the
implementation of the       Agricultural Insurance Scheme under
Section 6 of the     Act.”
   The Act shall be referred to as the Nigerian Agricultural                        Citation
       Insurance Corporation (Amended) Act 2011


A Bill for an Act to Amend the Nigerian Agricultural Insurance
Corporation Act Capt N89, Laws of the Federation of Nigeria 2004
by exercising regulatory powers over Micro-agricultural Insurance
services and institutions

   Section 3 thereof, shall be substituted the following new section that
   is:
   (a) Licence and encourage the emergence and growth of viable
       agricultural micro-insurance institutions to service the whole
       agricultural value chain at all levels in Nigeria.

   (b) Promote and encourage the private sector development of
       agricultural insurance services and institutions


   (c) Regulate, supervise and control the activities by micro-insurance
       companies licensed under the Act or any relevant law relating to
       agricultural insurance.

   (d) To collaborate with other relevant government institutions and
       entities in the promotion and development of related agricultural
       insurance programmes that ensures effective operation of the
       Agricultural Insurance Scheme.

   (e) Undertake agricultural re-insurance business for micro-insurance
       companies.

The Act shall be referred to as the Nigerian Agricultural Insurance Corporation Citation
(Amended) Act 2011




                      Towards a Climate-based Agricultural Insurance Reform in Nigeria |   47
Appendix 2: Location of NIMET weather stations, their coordinates and year of
establishment


S/N   Station         State           Latitude        Longitude Elevation        Year       of
                                                                (m asl)          Establishment
1     Abeokuta        Ogun            07:10’N         03:20’E   104              1981
2     Abuja           Abuja           09:15’N         07:00’E   343              1982
3     Akure           Ondo            07:06’N         04:50’E   375              1979
4     Asana           Delta           06:10’N         06:48’E   97.5             1996
5     Bauchi          Bauchi          10:17’N         9:49’E    607.7            1941
6     Benin           Edo             06:19’N         05:06’E   77.8             1942
7     Bida            Niger           09:06’N         06:01’E   144.3            1941
8     Birnin Kebbi    Kebbi           12:30’N         04:12’E   220              *
9     Calabar         Cross River     04:58’N         08:21’E   61.9             1941
10    Enugu           Enugu           06:28’N         07:33’E   141.8            1941
11    Gusau           Zamfara         12:10’N         06:42’E   463.9            1952
12    Gombe           Gombe           10:17’N         11:09’E   505              2000
13    Ibadan          Oyo             07:26’N         03:54’E   227.2            1907
14    Ibi             Traba           08:11’N         09-45’E   110.7            1948
15    Ijebu Ode       Ogun            06:50’N         03:56’E   77               1974
16    Ikeja           Lagos           06:35’N         03:20’E   39.4             1955
17    Ikom            Cross River     05:58’N         8:42’E    119              1972
18    Ilorin          Kwara           08:29’N         04:35’E   307.4            1946
19    Iseyin          Oyo             07:58’N         03:36’E   330              1981
20    Jos             Plateau         09:58’N         08:54’E   4215             1979
21    Kaduna          Kaduna          10:36’N         07:27’E   645.4            1941
22    Kano            Kano            12:03’N         08:12’E   472.5            1941
23    Katsina         Katsina         13:01’N         07:41’E   517.6            1941
24    Lagos Roof      Lagos           06:27’N         03:24’E   14               1964
25    Lagos Marine    Lagos           06:26’N         03:25’E   2                1992
26    Lokoja          Kogi            07:47’N         06:44’E   62.5             1942
27    Maiduguri       Borno           11:51’N         13:05’E   353.8            1951
28    Minna           Niger           09:37’N         06:32’E   256.4            1936
29    Makuri          Benue           07:44’N         8:32’E    112.9            1942
30    Nguru           Yobe            12:53’N         10”28’E   343.1            1959
31    Ogoja           Cross River     06:40’N         08:48’E   117              1976
32    Ondo            Ondo            07:06’N         04:50’E   287.3            1941
33    Onitsha         Anambra         06:09’N         06:47’E   67               1975
34    Oshogbo         Osun            07:47’N         04:29’E   302              1956
35    Oshodi –agro    Lagos           06:30’N         03:23’E   19               1980
36    Owerri          Imo             05:29’N         07:00’E   91               1974
37    P/Harcourt      Rivers          04:51’N         07:01’E   19.5             1941
38    Pottiskum       Yobe            11:42’N         11:02’E   414.8            1941
39    Shaki           Oyo             08:40’N         03:23’E   268.2            1984
40    Sokoto          Sokoto          13:01’N         05:15’E   350.8            1943
41    Uyo             Akwa Ibam       05:30’N         07:55’E   38               1981
42    Warri           Delta           05:31’N         05:44’E   6.1              1943

                     Towards a Climate-based Agricultural Insurance Reform in Nigeria |   48
43   Yelwa           Kebbi          10:53’N         04:45’E       244          1943
44   Yola            Adamawa        09:14’N         12:28’E       186.1        1942
45   Zaria           Kaduna         10:36’N         07:27’E       110.9        1969
46   Umuahia         Ebonyi         05:31’N         07:29’E       *            *
47   Eket            Cross Rivers   04:33’N         07:68’E       *            1990
48   Lafia           Nasarawa       08:29’N         08:31’E       *            *
49   Awka            Anambra        06:12’N         07:04’E       *            *
50   Jalingo         Taraba s       08:52’N         11:22’E       *            *


*    Data not available but established in less than 5 years.




                   Towards a Climate-based Agricultural Insurance Reform in Nigeria |   49
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                       Towards a Climate-based Agricultural Insurance Reform in Nigeria |      53

				
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