ii
Abstract
Micro insurance in Kenya is still undeveloped compared to micro credit and micro savings
due to the fact that it offers no immediate benefits to the insured. Insurance companies in
Kenya have been taking long to compensate their clients in the case of any peril and
therefore insurance is seen as a way of stealing the money from the citizens. This thesis
has looked into ways of making micro insurance locally available to both large and small
scale crop farmers. It has gone a step further to investigate ways of merging up micro
insurance and micro credit by using insurance as collateral to acquire loan. It was realized
that there is a possibility of selling an insurance contract to a buyer of a produce whereby
the farmer can later pay the premium after the harvest of the produce. Moreover, there is
a possibility of the harvest being used as collateral when it is in the warehouse of the
Kenya National and Cereals Produce Board (NCPB). This increases the creditworthiness
of the otherwise not qualifying-for-credit farmer as well as the produce being stored
waiting to hit the market highs in order to be sold for profit. To make use of the
technology, this paper calls for the development of a mobile application that will enable
farmers access information in real time on their mobile phones and thereby being able act
accordingly.
Keywords: Micro insurance, risk, risk management strategies, poverty, illiteracy, Kilimo
Salama, gender mainstreaming, microfinance.
iii
Abbreviations
MFI: Micro Finance Institution
BC: Before the Christian era
CBO: Community Based Organization
ASAL: Arid and Semi Arid Land
UAP: Union des Assurances De Paris
SFSA: Syngenta Foundation for
Sustainable Agriculture
IRA: Insurance Regulatory Authority
NGO: Non Governmental Organization
FSD: Financial Sector Deepening
IBWI: Index-Based Weather Insurance
ILRI: International Livestock Research
Institute
UN: United Nations
IMF: International Monetary Fund
KMD: Kenya Meteorological Department
UNESCO: United Nations Educational,
Scientific and Cultural Organization
GDP: Gross Domestic Product
MDGs: Millennium Development Goals
DFID: Department for International
Development
CCK: Communications Commission of
Kenya
SMS: Short Message Service
SIM-card: Subscriber identity module or
Subscriber identification module
CRB: Credit Reference Bureau
SACCO: Savings and Credit Co-
operative
SASRA: Sacco Societies Regulatory
Authority
Cap: Chapter
WSRI: Water Requirement Satisfaction
Index
CA: Conservation agriculture
ID: Identification Number
NDVI: Normalized Difference Vegetation
Index
NASA: National Aeronautical and Space
Administration
IBLI: Index Based Livestock Insurance
ICT: Information and Communication
Technology
IDMC: Internal Displacement Monitoring
Centre
BEP: Break Even Point
UKAID: United Kingdom Agency for
International Development
USAID: United States Agency for
International Development
NCPB: National Cereals and Produce
Board
SGR: Strategic Grain Reserve
EAC: East Africa Community
VaR: Value at Risk
WRS: Warehouse Receipting System
UNCTAD: United Nations Conference on
Trade and Development
MCK: Media Council of Kenya
iv
Table of Contents
1.
Introduction ... 1
1.1.
Background Information of Micro insurance
... 2
1.1.1.
Original idea
... 2
1.1.2.
Comparison of Crop and Livestock insurance's development between Kenya
and India
... 7
1.1.3.
Key stakeholders of micro insurance market in Kenya
... 10
1.2.
Statement of the Problem
... 14
1.2.1.
Illiteracy
... 14
1.2.2.
Unequal distribution of resources and its effects
... 15
1.2.3.
Gender mainstreaming and land access rights
... 19
1.3.
Importance of Micro insurance
... 21
2.
Economical and Political Framework ...23
2.1.
Need for Micro insurance for pastoralists and crop farmers in Kenya
... 23
2.2.
Role of Government and Financial Institutions in micro insurance
... 26
2.2.1.
Financial Inclusion Policy
... 26
2.2.2.
Banking Act
... 29
2.2.3.
Microfinance Act 2006
... 29
2.2.4.
Savings and Credit Co-operatives Act, 2008
... 30
2.2.5.
Insurance Act Cap 487 Laws of Kenya
... 31
2.3.
Index insurance`s concept in Kenya
... 33
2.3.1.
Kilimo Salama
... 33
2.3.2.
Livestock Insurance in Northern Kenya
... 35
3.
Assessment of risks faced by micro insurance schemes in Kenya ...37
3.1.
Human Resource Risk
... 37
3.2.
Political Risk
... 38
3.3.
Social Risk
... 38
3.4.
Operational Risk
... 39
3.5.
Financial/Economic Risk
... 39
4.
Gaps to be filled by providing Insurance and Credit to pastoralists and crop
Farmers ...41
4.1.
Farmer- Bank
... 44
4.2.
Farmer- Contract buyer
... 44
4.2.1.
Challenges faced by the buyer in the market
... 44
v
5.
Development of a concept that will see NCPB as a delivery channel for index
based insurance to farmers in rural Kenya ...47
5.1.
Purchase of a contract
... 47
5.2.
Linking Warehouse Receipting System (WRS) to the NCPB's buyer contract
... 49
5.3.
Way Forward
... 50
6.
Conclusion and Recommendations ...55
7.
Appendix ...57
1
1. Introduction
With the current global financial situation, poor households are finding themselves in a
position where it is hard for them to counter the risks and negative economic impacts they
encounter. The middle-class households are also facing these challenges, but in more
intense manner, since they are actually joining the league of the poor as their conditions
worsen day by day. This is attributed to the lack of both know-how and machinery to be
employed in alleviating poverty in the developing countries. Despite the fact that
governments, non-governmental organizations (NGOs), donors, development agencies
and other stakeholders share the same interest by getting involved in fighting against
poverty, there is a lot to be done as far as insuring lives, assets and other properties of the
poor are concerned.
The 21
st
century has come with phenomena such as globalization, technical advances
and innovations as well as negative catastrophies such as global warming which have led
to losses of lives and properties. Developing countries have not been able to combat
these natural and man-made calamities as opposed to their developed counterparts
because they are not prepared to curb these disasters in one way or another. Donors,
development agencies and governments have been employing different mechanisms for
example providing incentives for the poor in terms of investments through Micro Finance
Institutions (MFIs) but little has been done in utilizing insurance as a poverty eradication
tool.
2
1.1. Background
Information of Micro insurance
1.1.1. Original
idea
The concept of insuring is not new as it has been in use since about 3.000 BC when
Chinese businessmen involved in retail trade with their investment partners were looking
for ways of maximizing the rate of return from exported goods. They thereby went a step
further and came up with a way of minimizing loss of goods on transit and if this would
happen, then they would look for ways of sharing the cost of losses and hence insurance
was developed. (Microinsurance Network, 2012)
Since then, there have been tailor-made changes to suit circumstances and environments
in which the people in need of insurance live in. For instance, The Great Fire of London
which consumed over four-fifths of the whole city, destroyed 13,000 buildings and ruined
two-thirds of English empire's wealth on September 2, 1666. Due to the city's disaster
unpreparedness, the British government instituted a law that each home had to cover the
main fire with a large metal bowl (hence couvre-feu. Couvre for cover and feu for fire
which led to today's "curfew" laws) and put off all candles before going to sleep. This and
other disaster-preparedness strategies like municipal fire brigade made the companies
that were at risk to form insurance companies. (Klein, 2012)
As the years went by, insurance spread to other parts of the world due to its demand. By
late 19
th
century, it was perceived as a tool that cushions the poor man's financial
constraints. (Churchill, 2006, p. 20) Among those who had a chance of benefiting from
insurance were factory workers in the 1800s. The affluent people saw no need to have
insurance since they were well off financially and hence their wealth could absorb the
shock. However, the rich started to realize that they are at risk of losing their wealth due to
the ever increasing prices of goods and services and they started to resort to insuring their
properties. This insurance's high demand from both the poor and rich came with
limitations such as fraudulence and raised costs which translated to high premiums. To
curb these short comings, bureaucratic regulations and requirements were introduced and
therefore the poor had competitive disadvantage hence it was no longer appropriate and
effective for them. (Churchill, 2006, p. 24)
3
Micro insurance, which according to Google Insight for Search is widely known in
India,(Google, 2012) is basically insuring the low-income persons who live in risk-prone
areas where they are susceptible to many dangers that can threaten their day to day
undertakings. It is a new development in microfinance which has seen its evolution in
terms of reaching out to poor people who cannot afford the access to traditional banking
and insurance services in the developing countries. Together with (micro)savings and
(micro)credit, (micro)insurance plays a very vital role in microfinance mix by providing
financial services to the poor. (Morelli, 2010, pp. 12) With the ever changing climatic
condition, the uncertainties for the production of agricultural products have been left for
speculation. This is attributed to the fluctuation of availability of food and earnings
because of variation of rainfall and its distribution in the agriculturally productive areas in
developing countries. In a setting where the people residing in these areas are not
accessing savings, credit and insurance, they may be in trouble to balance between
consumption in times of high yields and low production because they might not know
whether and when a loss might occur. This can in turn cause a short term but strongly-felt
inadequacies of nutrients that have negative effects in their health as well as permanent
negative economical growth of the people in question.
Economic growth is enhanced by the provision of microcredit to the poor in order for them
to make a step ahead in coming out of poverty whereas micro insurance helps in the
sustainability of the said growth and hence prevents the poor from going back to the same
poverty (Lloyd's, p. 7). For this reason, there is always a direct relationship between these
three services which, in most cases, do not function when one is missing. The biggest
challenge is that micro insurance is still undeveloped. This is because the insurance
providers are providing the product in a limited amount, the consumption of the product is
low and the laws protecting the consumers are still under evolution in most countries. The
following figure summarizes microfinance mix which helps the poor to conduct business in
a very small scale.
4
Besides insuring agricultural products, Micro insurance also includes life insurance, health
insurance and (other) property insurance as these play important roles in the lives of the
poor as briefly discussed below.
1.1.1.1. Life insurance
This type of insurance is presently most widely known for its success and has been able
to be applied in different parts of the developing countries because it's concept is the
same (Schaerer, pp. 311) : In case of death of a breadwinner of the family, the cost of
their funeral is to be met and more so there is a need for continued finances to meet the
basic needs and education for the entire family. (Roth, McCord, & Liber, 2007, p. 2)
However, there is a limitation to insuring lives in that the insurance company cannot
exactly do the approximation of life expectancy of a particular policy holder (Wilhelm,
2008, p. 7).
Microfinance
Savings
Credit
Insurance
Figure
1: Elements of Microfinance (Cheriyan, Mukherjee, & Haider,
2006, p. 56)
5
On the other hand, the advantage of life insurance is that the insured event is objectively
viable, that is to mean a person is either alive or dead. (Churchill, 2006, p. 69) As a
matter of fact, life insurance should be integrated with funeral insurance which is also by
far the most needed type of a product by the poor in developing countries. The costs of
burial are high considering that a person may have died either after a short illness or has
been sick for quite a while. All the same, the family has to deplete all their resources and
savings in order to meet such expenses. Moreover, life expectancy in developing
countries is lower compared to their developed counterparts and therefore there is a high
demand for this type of insurance and the same is always rising for this product.
1.1.1.2. Health insurance
Due to low living standards and poor conditions of living, the low-income populations are
susceptible to risks that appertain to health. Illnesses form part of day to day concerns to
the poor and therefore this type of insurance is widely in demand across all developing
countries. Health problems have two issues when it comes to losses due to illness. First,
the cost of treatment is always high and second, when a breadwinner falls sick, there will
be a loss of labor since the sick person needs somebody to take care of them either on
part-time or full-time basis. Bearing in mind that this happens in developing countries
where there is abundance of labor and scarcity of capital, they will therefore lose their
major factor of production. To add on these challenges, there are three other limitations
that make health insurance's cost of to be high and least available product for the poor.
The limitations are:
Moral hazard: This arises when insured people abuse the usage of their
insurance cover by extending it to more services that are not stipulated in the
insurance contract. This happens for instance when an insured is reluctant to take
precautionary action in a risky event thinking that the insurance coverage will meet
the damages caused after all.
6
Adverse selection (also known as anti-selection): This occurs when a risk profile
of the group insured is worse than what would be expected in the general
population. A good example is when a group of insured people all of a sudden
having a high number of sick people than expected while other groups are having
healthier members. Another example is when people who came together to form a
group in order to qualify for insurance cover is not a reflection of a true pre-existing
group, and sick persons have formed a group for the purposes of gaining
insurance benefits. (Churchill, 2006, pp. 6869)
As a measure to curb adverse selection, exclusions can be done. For instance a
livestock insurance policy might decline to cover cattle which are already suffering
from disease. Waiting period can also be done in the sense that there should be a
buffer time of one month or more between the time the insurance cover is
supposed to start and the time the insured is purchasing the cover. This will in turn
reduce the risk that someone whose cow is about to die will purchase the cover.
(Roth & McCord, pp. 89)
Fraud: This is the main challenge in health insurance since it happens to all
insurance clients regardless of their income. This means that fraud in health
insurance happens in developed countries as well as in developing countries. High
percentages of these cases have been reported to have happened by insurance
holder obtaining coverage for persons not covered by the scheme through
impostures and other kinds of ill motives. (Churchill, 2006, p. 69) Moreover, this
vice is of great challenge in developing countries where it is hard to prove the
insurer's identity, their health status and even their exact age because many
people do not know their age as they do not possess birth certificates due to lack
of health facilities near them. (Wilhelm, 2008, p. 7)
7
1.1.1.3. Property insurance
Among the basic needs that the poor is entitled to is shelter apart from food and clothing.
Poor people usually live in semi-permanent structures which are prone to flood, fire and
other natural hazards. Most of them do not even hold title deeds to prove their right of
ownership of the lands they live in, a situation which complicates the facts even more.
Some might have lost their title deeds because of corruption and lack of clearly defined
property rights and ownership of such assets. When a catastrophe occurs, the
government more often than not seizes what is left of the land, people's houses and other
structures as well as agriculturally productive land. In such cases, the voices of the poor
cannot be heard and to make matters worse, they are not be in a position of getting
compensation for their property's losses but instead they are just left to count their losses.
(Wilhelm, 2008, pp. 78)
According to a survey done by The MicroInsurance Centre, LLC, in 2007, 99.3% of low-
income people in the hundred poorest countries were without property insurance. (Roth et
al., 2007, pp. 3435) This clearly indicates that the demand for property cover is less than
that of life and health insurance. Apart from property insurance for example crops and
livestock being expensive and their claims being difficult to validate, there are other major
factors that hinder the poor in getting property insurance coverage. For this reason, this
thesis is motivated to identify the barriers of crop and livestock insurance and try to come
up with possible concrete solutions to these problems that can be adjusted in Kenya as a
means of poverty alleviation strategy. Its objective is to investigate ways of diversifying
delivery channels in order for micro insurance to reach many farmers since crop and
livestock insurance has been on high demand lately in Kenya. To help in gauging how
Kenya's crop and livestock insurance is doing, it is of high significance to first assess how
the countries which have been in the forefront in embracing micro insurance are faring on.
1.1.2.
Comparison of Crop and Livestock insurance's development between
Kenya and India
Micro insurance development in India came to being because of a series of past natural
calamities that India has been going through over a long period of time. As if that is not
enough, innovation of new micro insurance coverage is coming up due to the challenges
that India is currently facing.
8
In 2001 for example, an earthquake which preceded flood in the previous year (2000)
made the managers of a large portfolio in the Indian state of Gujarat to admit that natural
perils pushed micro insurance program beyond its elasticity. Eight years down the line,
there was another catastrophe that hit southern part of India. Tropical Cyclone Nisha
caused flooding which affected over 200 villages leaving more than 15,000 losses. This
made huge financial losses and indicated that India was in dire need of developing new
micro insurance products appropriate to the situation as the country was still new to micro
insurance. (Morelli, 2010, pp. 3940)
Apart from Community Based Organizations (CBOs) and private entities providing
insurance schemes for the poor in India, initiatives that are patronized by the state are
chipping in and are of a significant role in furthering the development of micro insurance.
On the contrary, Kenyan micro insurance products like health and life have just kicked off
and are still being tried on as pilot projects. (Matul, Titan-Jaleran, & Kelly, p. 5) However, it
should be noted from here that the two countries cannot be directly compared because
every country has its own specific challenges which need tailor-made adjustments when it
comes to developing the right product for them. For the purpose of this thesis, the
comparison between agricultural micro insurance in India and Kenya is targeted in
providing an overview of the same in the both countries.
The Indian government has invested in agricultural insurance because most of the low-
income Indian population is attached to agriculture in one way or another. As opposed to
Kenya where the issue of agricultural insurance is relatively new, India has been dealing
with crop insurance since its independence in 1947 and it has been undergoing a myriad
of barriers that have seen slow but sure positive growth over the years. These problems
are the same universal challenges that are being faced by any other micro insurance
sectors as discussed earlier; fraud, adverse selection and moral hazard. A striking
challenge of high administrative costs has also been experienced in micro insurance field
and that explains the reason why private insurers have not been able to venture into micro
insurance in order to provide it to the poor. As for the case of livestock insurance, India
has been doing well compared to the other parts of the developing world because of the
obvious reason of religion. Vices like fraud, which in other countries are rampant is not a
big challenge in India. It is rarely heard of a case whereby a farmer would slaughter
livestock and claim that it was stolen because of social issues that appertains slaughtering
of livestock. (Allianz AG, GTZ, & UNDP, pp. 1718)
9
Similar to India, Kenya is one of the leading countries in Africa in the production of
agricultural goods. Agriculture is the main foreign exchange earner in Kenya and therefore
it is the backbone of Kenya's economy lending about 30 percent of the Gross Domestic
Product (GDP) as evident by the figure 2 below.
Figure 2: Kenya's Economic Structure (Mumo, 2012, pp. 113)
Interestingly, between 7 and 8 percent of Kenya's land surface is arable despite the fact
that 15 percent of 580,367 Km² is fertile and has enough rainfall to enable farming to take
place. (IMF, 2008, p. 63) Agricultural sector is employing 75 percent of the national labor
force in Kenya and over 80 percent of Kenya's population of 40,513,000 (The World Bank,
2012) people live in the rural areas and derive their livelihoods, directly or indirectly from
agricultural sector. This is a clear indication that agriculture is at a focal point not only in
poverty reduction but also serving the purpose of improving food security. (Olila & Atieno,
2007, p. 3) Cereals (maize, wheat, sorghum, rice, millet) which form the main part of the
staple food in Kenya had been increasing in productivity from 2002 to 2006. Industrial
crops mainly tea and coffee have also been recording a positive growth during the same
period as well. (IMF, 2008, p. 64)
30%
1%
1%
15%
3%
5%
15%
3%
21%
6%
Agriculture
Fishing
Mining
Manufacture
Eletricity and water
Construction
Wholesale and retail
Hotels and restaurants
Transport and
communication
10
However, despite the fact that livestock production is one of the major activities in Kenya's
agricultural sector, pastoralist areas still experience the highest rates of poverty which
makes it hard for human development and the access to basic amenities and services
compared to other areas. As if that is not enough, pastoralists are situated in Arid and
Semi Arid Lands (ASAL) where environmental and climatic conditions are major threats to
their livestock and therefore their livelihoods.
Farmers are generally depending on weather for the health of their crops and livestock. As
a matter of fact, global warming has made weather the primary uncertainty in agriculture.
As a result, extreme weather conditions such as floods and prolonged, severe droughts
have made farmers try to be creative in the sense that they diversify their risks. This is
done either by growing crops that are not responsive to these extreme weather conditions
or practicing mixed cropping- an exercise of growing two or more crops in order to spread
the risk just in case one crop experience a problem due to the weather conditions.
According to the farmer's view, this works but more often than not, this strategy reduces
average productivity, constraining the farmer's power to generate backlogs for the next
crisis. This disposition tends to make farmers not to move out of the poverty circle. (Matul,
McCord, Phily, & Harms, 2010, pp. 45) However, when a farmer has insured his or her
produce, they will be able to transfer the risk in such a way that the effect of loss in case
of adverse weather conditions will not be as hard-felt as it would be if the produce are not
insured.
1.1.3.
Key stakeholders of micro insurance market in Kenya
A low-income family may experience hardship when they are deprived of food and source
of income required to provide them with enough nutrition in the event of an agricultural
loss. Many of these families are extended families who do not have access to financial
assistance during tough economic times or financial crises. Instead, they turn to their
relatives, fellow village mates or organize a fundraising to meet their needs. More often
than not, they will not be in a position to come out of poverty because as soon as one
problem is solved, another one arises and this, as discussed earlier, completes a poverty
circle that is hard to be broken. With the persistence of poverty, the family might be forced
to withdraw children from school and many children may be forced to work to help the
family out of the situation resulting in child labor.
11
Furthermore, the family may be forced to sell their long term assets in their possession for
example land and livestock in order to solve these problems. Crop and livestock micro
insurance may be the best solution for cushioning the problem in the short to medium
term, while the family adjusts to other measures to survive. Moreover, it can also help the
farmers to access credit from banks and other MFIs. This will be further discussed in
details in the following Chapters of this thesis. It is therefore, at this point, important to
identify the key players of micro insurance and their roles in crop and livestock micro
insurance in the Kenyan context.
Key players and their functions
Policy holder: Also known as the consumer or the insured, this is a farmer who buys a
policy by paying premium in order to insure his or her crops and livestock.
Insurance companies (Insurers): This forms part of an important stakeholder when
providing micro insurance products to the farmers. Insurance companies can be either
large international insurance groups which have been active in developed economies or a
joint venture between an international insurance company and a local insurer. However,
on the rise are also small Kenyan insurance companies coming together for the purpose
of venturing into this new market of crop and livestock insurance in Kenya. One of the
examples is UAP insurance company entering into an agreement with Switzerland-based
NGO- Syngenta Foundation for Sustainable Agriculture (SFSA) and mobile operator,
Safaricom to introduce Kilimo Salama insurance scheme. Kilimo Salama- a Kiswahili word
for "safe farming"- is an insurance pilot program that was established in the year 2010 to
insure crop farmers against drought in Kenya. (EurekAlert, 2011) This will be discussed in
details in Chapter 2.3.1 of this thesis.
Reinsurance companies: Reinsurance companies are investing in micro insurance by
co-operating with other NGOs to research, get involved in pilot schemes and sponsor
conferences on micro insurance. Their main aim however, is to provide insurance to the
insurers in order for the insurers to be able to cushion themselves in case there is a risk of
immense losses. (Wilhelm, 2008, pp. 910)
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