The National Insurance Commission, NAICOM, has described the Index Based Agricultural Insurance, IBAI, as a relatively new financial instrument which aims at transferring agriculture risks from individuals or groups of farmers to risk carriers (Insurers).
The Commission also anticipates that the initiative will play key role in ongoing efforts by the present administration to diversify the Nigerian economy and create opportunities to promote agriculture business and employment in the last few years.
Barineka Thompson, Director, Inspectorate of NAICOM in a discussion paper presented in Benin, Edo state during the seminar for insurance journalists said that as part of its contribution to support government efforts in that direction, the Commission has played commendable role in the last couple of months in promoting access to Agriculture Finance and assurance of compensation on basis that are different from the conventional insurances to formers;
Speaking on the benefits of IBAI, Thompson stated that traditionally, when risks or a loss event such as a major drought, epidemics or other hazards affects a large population all at the same time or small rural farmers, and often in difficult circumstances, even over a relatively small area or region, assessing the losses of each individual insured party that is affected is not feasible, as the insurer will not have the resources to assess each claim individually in a short period even in the best conditions.
However, in an Index-Based System, when a claim is triggered for a specific area, all insured units (farmers) within a given geographical area and having similar characteristics, are compensated at the same payout rate, usually a percentage of the sum insured, on events specifically covered by the policy (usually those for which the proxy(ies) meet the specified triggers).
IBAI, according to Thompson is relatively new but innovative as it pays out benefits on the basis of a predetermined index example rainfall level, crop yield for loss of assets and investments, primarily working capital, resulting from weather and catastrophic events, without requiring the traditional insurance services.
The purpose is to compensate farmers in the event of a loss resulting from shared risks rather than individual risk associated with weather fluctuations, disease outbreaks or poor yield, the director explained.
IBAI in line with its structure is considered highly innovative with potentials to spur rural financial markets as financial institutions in Nigeria will be more willing to provide credit to rural and smallholder farmer’s households that have index based agricultural insurance policy because these households will be able to utilize insurance pay-out at the event of loss to repay their loans.
Weather insurance products could also be used by the financial institutions themselves to protect their portfolios against excessive loss due to defaults associated with extreme weather events.
Thompson also stressed that the scheme will support economic development.
“Natural disasters can depress economic output, damage infrastructure, and increase fiscal demands on government and donor organizations. Using weather insurance to manage the risk of catastrophic weather events will stimulate economic development by improving stability and opportunities for growth in the agricultural and financial sectors.
IBAI can have immediate impact on reducing vulnerability to weather risk by protecting rural livelihoods, thereby reducing poverty, protect the productive capacity of rural enterprises and farm households as well as protect financial institutions against Index Based Agric-related loan defaults”, He said.
On the other hand it will finance disaster relief and encouraging structured social safety net policies and expand rural finance through improved access and better terms of credit for farm households and agricultural enterprises.