Financial Protection for Agriculture Increasing the financial resilience of rural households Why is financial protection important to reduce poverty and increase shared prosperity? Financial losses from natural disasters The Disaster Risk Financing and Insurance continue to rise. Developing countries and their Program (DRFIP) leads the dialogue on low-income populations experience the financial resilience as part of the World Bank greatest impacts. Group’s effort to support vulnerable countries in better managing disasters and climate shocks. How we support governments Poverty remains a predominantly rural problem, with a majority of the world’s poor located in rural areas1 and engaged in agricultural practices. Agriculture is a risky business, and a large shock can be especially devastating for poor households. One approach to building rural resilience and smoothing shocks suffered by the rural poor is to promote agricultural insurance. But few pilot agricultural insurance schemes have scaled up successfully; hence insurance has had little impact on the resilience of rural livelihoods. Experience suggests that sustainable, scaled-up agricultural insurance programs should be based on an equal partnership between the public and private sectors. The DRFIP, through its through its work on agriculture aims to support client countries in implementing sustainable, cost‐ effective public-private partnerships in agricultural insurance, with the larger goal of increasing rural households’ financial resilience. The DRFIP’s work on agriculture fits within countries’ broader agricultural risk management strategy, focusing on three key outcomes: 1. Governments create an enabling environ- 2. Governments better understand both ment for the private sector by clearly de- short- and long-term financial costs of fining the private sector’s role to support supporting agricultural insurance programs. the provision of public goods and insurance interventions, and contribute to the global knowledge agenda. 3. Sound monitoring and evaluation processes are established for agricultural insurance programs, adding to the growing evidence base supporting agriculture insurance interventions and contribute to the global knowledge agenda. 1 1 See A. de Janvry, E. Sadoulet, and R. Murgai, “Rural Development and Rural Policy,” in Handbook of Agricultural Economics, vol. 2, part 1, ed. Bruce Gardner and Gordon Rausser (Elsevier, 2002), 1593–1658. It is estimated that 76 percent of the poor in low- and middle-income countries live in rural areas. Prem Sangraula, Shaohua Chen, and Martin Ravallion, “New Evidence on The Urbanization of Global Poverty,” Policy Research Working Paper 4199, World Bank, Washington, DC, April 2007. What we do The Disaster Risk Financing and Insurance Program (DRFIP) builds upon international best practice for successful large-scale agriculture insurance programs, which offers two key lessons: (i) Both the public and private sectors must be actively engaged, since approaches led by a single sector tend to fail; and (ii) To increase its sustainability, agricultural insurance must form part of a broader agriculture risk management framework. Drawing upon these lessons, DRF for Agriculture offers technical support to governments through six key activities: 1. Financial agricultural risk assessment 2. Public institutional capacity building ensures that any agricultural risk trans- helps countries understand how insur- fer solutions are consistent with govern- ance principles and tools can promote ment’s agricultural risk management social objectives, and helps to clarify plans. the respective roles of the public and private sectors in an insurance part- nership. 3. Working with governments on data for 4. Actuarial and technical capacity de- agricultural insurance supports coordi- velopment supports design, pricing, nated market investments in collecting, risk financing, and monitoring and auditing, and managing data of insurable evaluation of agricultural insurance quality. This provides a foundation for af- programs. fordable, reliable protection against large agricultural shocks. 5. Crowding in private sector financing, 6. Design and implementation of a mon- capacity, and expertise through work itoring and evaluation framework al- with the private sector helps to develop lows for meaningful assessment of the sustainable agricultural insurance pro- agricultural insurance program’s wel- grams. fare impact. Partnership with the U.S. Agency for International Development and Global Facility for Disaster Risk and Reduction In July 2015, the U.S. Agency for International Development and the Disaster Risk Financing and Insurance Program of the World Bank, through the Global Facility for Disaster Reduction and Recovery (GFDRR), signed a partnership on DRF for Agriculture to support client countries in implementing sustainable, costeffective public-private partnerships in agricultural insurance, with the larger goal of increasing rural households’ financial resilience. The World Bank Group’s Disaster Risk Financing and Insurance Program (DRFIP) is a joint program of the World Bank’s Fi- nance and Markets Global Practice and the Global Facility for Disaster Reduction and Recovery (GFDRR). As a leading partner of developing countries, it helps governments, businesses, and households manage the financial impacts of disaster and cli- mate risk without compromising sustainable development, fiscal stability, and well-being. FINANCIAL PROTE C TION FOR AGRI CULTURE Impact MONGOLIA KENYA Background: The agricultural sector, and more specifically livestock, Background: In Kenya, over 75 percent of farmers are smallholder subsis- forms a core part of the Mongolian economy, supporting at least half tence farmers or pastoralists who are highly vulnerable to the economic ef- the population with an important source of income, job and food secu- fects of drought, flooding, and other natural disasters. According to the Ken- rity, and a means of investing and storing wealth. Nevertheless, herd- yan government, damages from drought amounted to $12.1 billion between ers make up a large percentage of the poor and are vulnerable to harsh 2008 and 2011, with the livestock sector accounting for 70 percent of these winters (known as dzuds). Between 1999 and 2002, one-third of the damages. In 2014, in an effort to address farmers’ vulnerability, the govern- national herd was lost in successive dzuds, crippling rural households. ment of Kenya sought partners’ technical support in understanding the op- Our engagement: Between 2005 and 2015, a World Bank Group lend- tions available for large-scale crop and livestock insurance. ing operation supported the government of Mongolia in the design and Our engagement: Since 2014, DRFIP worked with local partners (Interna- nationwide launch of the Index-Based Livestock Insurance Program tional Livestock Research Institute and Financial Sector Deepening Kenya) (IBLI). Support focused on (i) investments in livestock mortality data; to provide the government of Kenya with technical assistance in the design (ii) the creation of an innovative Contingent Debt Facility (CDF), of a crop and livestock program. In October 2015, the Kenyan government which the government could draw upon in the event of large losses; launched the Kenya Livestock Insurance Program (KLIP) to protect pasto- (iii) raising awareness of insurance (a new concept for the majority of ralists against climate shocks in two counties. In March 2016, the govern- herders); (iv) institutional capacity building; and (v) monitoring and ment launched an area yield index insurance (AYII) to protect semi-com- evaluation. mercial maize farmers in three counties. Impact: In 2010, a harsh winter (known as a dzud) impacted 80 percent Impact: In October 2016, 14,000 vulnerable households from six counties of Mongolia’s territory and 97,500 households. Approximately 9.7 mil- (Turkana, Wajir, Tana River, Marsabit, Isiolo, and Mandera) were selected to lion head of livestock, with an estimated value of US$477 million, were benefit from livestock insurance cover. The government paid premiums of lost. In response, the government of Mongolia triggered the CDF, drew about K Sh. 167 million (US$1.7 million) for annual cover lasting from October down funds, and with private sector insurers made a payout of US$1.3 2016 to September 2017. In February 2017, the Kenyan government an- million to more than 4,000 households to offset financial losses. nounced that about 12,000 pastoralists were eligible for payouts amounting to K Sh 215 million (US$2.2 million). This represents the largest insurance payout to vulnerable households in Africa to date. The government of Kenya plans to expand KLIP to the remaining arid and semi-arid counties and to offer cover to about 65,000 vulnerable pastoralists by 2020. It hopes to cover about 87,000 farmers under the AYII program by 2020. Olivier Mahul Barry Patrick Maher omahul@worldbank.org bmaher@worldbank.org www.worldbank.org/drfi