The National Insurance Commission (NAICOM) has identified that the implementation of the Index Based Agricultural Insurance (IBAI) would enhance agricultural productivity, create employment opportunities, as well as, play key role in ongoing efforts by the present administration to diversify the Nigerian economy in the next few years.
IBAI is a relatively new financial instrument which aims at transferring agriculture risks from individuals or groups of farmers to risk carriers (Insurers). Director, Inspectorate of NAICOM, Barineka Thompson, in a discussion paper presented recently, disclosed that the Commission in view of this has played commendable role in the last couple of months in promoting access to Agriculture Finance.
Speaking on the benefit, Thompson stated that IBAI 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, 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.
Mr. Thompson noted that IBAI though relatively new is innovative as it pays out benefits on the basis of a predetermined index, giving instances of 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.
He explained that IBAI aims at compensating 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.
According to him, “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.
“It will finance disaster relief and encourage structured social safety net policies and expand rural finance through improved access and better terms of credit for farm households and agricultural enterprises.
“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.”