Agricultural Insurance Gives Nicaraguan Farmers Opportunities to Keep Growing

Weather risks during the last 30 years have interrupted sustainable growth in the agricultural sector in Nicaragua. From 1972 to 1998, 28 major natural disasters have been recorded in Latin America and the Caribbean, of which 9 (almost one-third) took place in this small Central American country. The relative increasing frequency and severity of natural phenomena and their impact on agriculture has caused financial institutions to give higher lending priority to large- and medium-sized farmers who can support their loans by offering collateral.

To protect the poor against catastrophic weather events, the public sector adopted, with support from the donor community, a reactive weather risk management strategy. These ad hoc mechanisms include aid by the National Natural Catastrophe and Emergency Commission to poor rural households that are exposed to weather risk and support from local NGOs for farmer compensation and emergency projects. These programs supported many households after the 1994 drought in the Northwestern region, floods in the aftermath of Hurricane Mitch in 1998, and excessive rainfall during Hurricane Felix in 2007.

Since natural catastrophes (specifically, drought or excess precipitation) impede lenders’ ability to provide adequate and timely credit for production, a public-private partnership has developed and tested an insurance scheme to insure weather‐related risks in Nicaraguan agriculture with the aim of expanding credit levels to a broader base of producers. The approach—index-based weather risk management—has been applied previously as a social safety net in Mexico and as insurance for farmers and herders in diverse countries, including India, Malawi, and Mongolia. In Nicaragua, the partnership has sought to (1) raise awareness and understanding about the scope and limitations of index‐based insurance in Central American agriculture, (2) design and market‐test prototype insurance contracts, and (3) begin to build local and regional capacity to carry on this work.

In 2006, the Instituto Nicaragüense de Seguros y Reaseguros (INISER) and Seguros LAFISE (respectively, a public and a private insurance company), along with the World Bank’s Agricultural Risk Management Team, designed a pilot program for index-based weather insurance. This program aimed to cover groundnut and rice paddy production if rainfall was insufficient or excessive. The insurance companies selected these crops for logistical and economic reasons. Because the insurance could be linked to available credit, the insurers could reduce the administrative costs associated with retailing the product and pass these savings along to agricultural producers. In addition, insurers chose groundnut and rice farmers who were concentrated in areas with enough agricultural statistics and weather stations to support the data requirements for designing index-based insurance and related operations.

The pilot program was developed in stages. Initially it targeted medium- and large-sized farmers to reach premium projections efficiently with fewer farmers. This strategy allowed the insurance companies to assess the initial operations and, if needed, adjust them for the following crop season to reach smaller farmers more easily.

As a result of this innovative weather index insurance instrument, more than 4,600 manzanas (3,220 hectares) planted with groundnut and rice paddies have been protected against extreme deviations in precipitation since 2007, and some formal lenders have been reducing their interest rates to those who have purchased an insurance policy.

Additionally, other institutions—like the recently created state-owned development bank (Banco Produzcamos), the Ministry of Agriculture, the Nicaraguan Institute of Agricultural Technology (INTA), and the Nicaraguan Association of Private Insurers (ANAPRI)—have supported the creation of the Agricultural and Livestock Insurance Committee.  This committee aims to coordinate activities between the private and public sectors to develop and extend the benefits of agricultural insurance, primarily for small- and medium-sized grain farmers.

A Nicaraguan farmer explained his rationale for acquiring an insurance policy: “I don´t hesitate to spend money to purchase an insurance contract, because I know that I will sleep peacefully at night and I will wake up in the morning knowing that if something happens to my crop, the insurance policy will cover the losses…but, most importantly, no one will come after my land to cover my debts.”

Although the insurers’ profits have been small, insurers believe these contracts have had an excellent demonstrative and market effect for the next agricultural season, when they plan to launch a more aggressive marketing campaign for the insurance product. However, the insurers´ initial experience suggests the need to design:

1. Simpler contracts for farmers who can afford the cost of insurance premiums. The use of simpler contracts could help farmers to understand the type of risk covered and the level of coverage provided by the insurance policy. Currently, index-based insurance contracts for groundnut and rice are very sophisticated and typically lead to a poor understanding of the issues mentioned above, especially in Nicaragua, where the use of agricultural insurance is not common.
2. Contracts for public sector programs to protect very poor farmers against catastrophic events for which commercial insurance is not likely to be available. Additionally, farmers in some regions suffer from low profit margins for agricultural production and high risk exposure. The only affordable solution for insurance companies is to cover low-frequency but high-severity events.

To date, the pilot project in Nicaragua has revealed that:

• Transferring capacity to local stakeholders requires a steep learning curve.
• The leadership of a local insurer is key to a successful pilot.
• It is beneficial to have the early involvement of banks and microfinance institutions (MFIs) that have business incentives to reduce weather risks.
• Information (specifically, production, financial, and weather data) is an important prerequisite for any program to become successful.