Innovative Insurance Products for the Adaptation to Climate Change Project Ghana (IIPACC) Crop Insurance Feasibility Study 2010

Transcription

1 Innovative Insurance Products for the Adaptation to Climate Change Project Ghana (IIPACC) Crop Insurance Feasibility Study 2010 Prepared by: Charles Stutley Agricultural Risk Management, Insurance and Reinsurance Consultant August 2010 On behalf of

2 Table of Contents Executive Summary... 4 Chapter 1: Introduction The Need for Agricultural Insurance in Ghana Innovative Insurance Products for the Adaptation to Climate Change (IIPACC) in Ghana Scope and Objectives of the IIPACC Crop Insurance Feasibility Study Report Outline Chapter 2: Crop Risk Assessment for Ghana Framework for Crop Risk Assessment and Data Availability Overview of Agricultural Crop Production in Ghana Overview of Climatic Risk Exposures to Crop Production Relationship between Rainfall and District-level Crop Yields in Ghana Crop Production and Yield Portfolio Risk Assessment Next Steps and Recommendations for Future Risk Assessment Chapter 3: Access to Agricultural Credit and Crop Insurance in Ghana Access to Rural Finance in Ghana Supply and Demand of Agricultural Insurance in Ghana Chapter 4: Crop Insurance Product Opportunities and Challenges for Ghana Traditional and New Index Crop Insurance Products Named-Peril, Damage-Based Crop Insurance Individual Farmer Multiple Peril Crop Insurance Area-Yield Index Insurance Rainfall Deficit and Excess Rainfall Index Insurance Cocoa Catastrophe Disease Insurance Summary of Key Issues and Challenges for Product Development in Ghana Chapter 5: Institutional Framework for Agricultural Insurance in Ghana International Experience with Public-Private Partnerships in Agricultural Insurance. 87 Institutional Framework for Agricultural Crop Insurance in Ghana Coinsurance Pools in Agricultural Insurance Agricultural Insurance Delivery Models for Ghana Role of Government Chapter 6: Next Steps in the Planning and Design of a Crop Insurance System in Ghana Forward Planning for the Remainder of Forward Planning for Bibliography Annex 1 Organisations met in the Conduct of the IIPACC Feasibility Study Annex 2 Crop Risk Assessment Annex 3 Access to Agricultural Finance and Crop Insurance in Ghana Annex 4 Review of Agricultural Insurance Product Types Annex 5 Projects supported by German Development Cooperation

3 Abbreviations and Acronyms AIC ARD BASIX CRM CRMG CSSVD CSSVDU CUA CWII ENSO FAO COCOBOD FGD GLICO GoG GREL GTZ IIPACC IPA IRI ITFC MOFA MOFEP NAIS NIC MI MPCI NDVI NIB PSED RS SRID TSI TSU UNFCCC VREL WFP WII WINCROP WRSI Agriculture Insurance Company of India Ltd Agriculture and Development Department, World Bank Hyderabad-based microfinance group of companies involved in promoting sustainable rural livelihoods through financial and technical services including micro-crop weather index insurance Climate risk management Commodity Risk Management Group, ARD, World Bank Cocoa swollen shoot virus disease Cocoa swollen shoot virus disease Unit of the GCB Ghana Cooperative Credit Union Association Crop Weather Index Insurance El Niño Southern Oscillation Food and Agriculture organization of the United Nations Ghana Cocoa Board (GCB) Focus Group Discussion Gemini Life Insurance Company Government of Ghana Ghana Rubber Estates Limited Deutsche Gesellschaft für Technische Zusammenarbeit GmbH Innovative Insurance Products for the Adaptation to Climate Change Innovations for Poverty Action International Research Institute for Climate and Society, Columbia University Integrated Tamale Fruit Company Ministry of Food and Agriculture Ministry of Finance and Economic Planning National Agricultural Insurance Scheme National Insurance Commission of Ghana Microinsurance Multiple Peril Crop Insurance Normalised Difference Vegetation Index National Investment Bank Program for Sustainable Economic Development Remote Sensing Statistics, Research and Information Department, MOFA Total Sum Insured Technical Support Unit United Nations Framework Convention on Climate Change Volta River Estates Limited World Food Programme Weather Index Insurance Windward Islands Crop Insurance Company (1988) Limited Water Requirement Satisfaction Index - 3 -

4 Executive Summary Context 1. This report presents the key findings, conclusions and recommendations of an agricultural crop insurance feasibility study which was commissioned by NIC-GTZ Ghana under the Innovative Insurance Products for the Adaptation to Climate Change, IIPACC, project for Ghana and carried out between March and July The project Innovative Insurance Products for the Adaptation to Climate Change (IIPACC) was initiated to support Ghana to tackle the socio-economic costs and risks associated with climate change. It is funded by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety. IIPACC is being jointly implemented by the National Insurance Commission of Ghana (NIC) and German Technical Cooperation (GTZ). The project started in December 2009 and will run until June The main aim of IIPACC is to introduce innovative agricultural crop insurance products into the Ghanaian Insurance Market. IIPACC aims to assist the insurance sector in Ghana to develop and implement demand-oriented as well as economically sustainable insurance products to protect farmers against crop failure and financial losses caused by extreme weather events. 4. The objectives of the 2010 crop insurance feasibility study centred on: the conduct of a detailed risk assessment of the key climatic hazards and their impact on food crop and cash crop production in Ghana; to review the quality and availability of time-series data for risk assessment and rating purposes; to assess the demand for and current supply of agricultural insurance in Ghana, leading on the identification of possible crop insurance products and solutions for specific crop commodities. In addition this study included a review of the institutional issues and options for agricultural insurance in Ghana including the potential roles for public and private sectors. 5. There is no tradition of agricultural insurance provision in Ghana and therefore there are major technical, institutional, operational and financial challenges for IIPACC to assist the Ghanaian insurance sector to design and implement crop insurance products and programs. Agricultural Risk Assessment (Key Findings) 6. In Ghana agriculture is the dominant sector accounting for about 39% of Gross Domestic Product, GDP, providing employment to about 51% of the labour force or 4.2 million people and it is the largest foreign exchange earner. 7. Agriculture in Ghana is prone to a range of climatic hazards including most notably drought and excess rain/ flood, biological perils (pests and diseases) and natural hazards (bush fires). The south-west of Ghana has a tropical climate with high rainfall evenly distributed throughout the year, but in northern regions of the country average rainfall is much lower with a marked dry season and agriculture is exposed to a combination of droughts and floods. Bush fires are also a localised problem in many parts of the country and cause severe damage to cereals and food crops and cash crops such as cocoa, mango and cashew plantations. Localised windstorm has been reported as a problem in export bananas and also in rubber plantations. Pests and diseases of crops are a common problem in food crops and in cash crops and especially for tropical crops - 4 -

5 such as cocoa where black pod disease and cocoa swollen shoot virus, CSSVD cause major economic losses in the crop. 8. This study estimates that on average about 5.5% of the national value of production of the principle food crops are lost each year due to a combination of all climatic, biological and natural perils. An analysis has been conducted for the 8 main food crops grown in Ghana including maize, rice, cassava, yams, millet, sorghum, groundnuts and plantains of the variation in district-level production and yields for the past 18 years which suggests that on average Ghana can expect to lose about 5.5% of the value of production of these crops or US$ 228 million per year and as high as 12.2% (US$ 500 million) in a bad loss year such as occurred in 1992 (see figure below). Source: Author s analysis using CRAM model and SRID/MOFA crop yield data 9. Weather data and statistics are essential for conducting agricultural risk assessment for crop insurance design and rating purposes. For the purposes of designing and rating a Crop Weather Index Insurance, CWII, product it is necessary to have a minimum of years of uninterrupted accurate daily weather data (e.g. for rainfall, temperature, relative humidity etc). The Ghana Meteorological Agency (GMA) is responsible for measuring and recording weather parameters and has a network of about 175 weather stations distributed throughout the country. It is not known how many of these stations are fully operative, but it is understood few weather stations are automatic and many are in need of upgrading of their equipment. It also appears that the density of weather stations in the more northerly regions of the country may be inadequate for the purposes of a CWII program. In spite of these constraints, it appears that GMA is a very professionally managed organization and that it is able to provide quality time-series weather station daily rainfall and temperature data for many stations for between 30 to 49 years (i.e. back to 1960). Under this crop insurance feasibility study GMA has provided invaluable assistance to IIPACC in the form of access to weather data for 20 stations and this has enabled various preliminary analyses to be conducted of rainfall variability and relationship with crop production and yields. An important conclusion of this study is that the quality of the Ghana weather data meets the international standards required by underwriters for the design and rating of CWII products. 10. Time series disaggregated crop area, production and yield data are also required in order to assess the impact of key climatic and other perils on crop production and yields and this data is also required for the design and rating of any yield-based crop insurance and indemnity product. In Ghana the Statistics, Research and Information Department (SRID) of the Ministry of Food and Agriculture (MOFA) is responsible for - 5 -

6 the recording of seasonal crop acreage, production and yield data for all major food crops and also for horticultural crops in Ghana at district, regional and national levels. SRID adopts a statistically designed and systematic multi-stage sampling procedure for selecting individual farms in each district and sub-district and cluster throughout Ghana: sown area estimation is based on individual field survey using chain and GPS coordinates, while yield estimation at harvest is based on random sample crop-cuts. For this feasibility study SRID-MOFA has made available to IIPACC 18 years of seasonal district-level harvested area, production and yield data for all the principle food crops grown in Ghana including maize, rice, cassava, yams, millet, sorghum, groundnuts and plantains. This data has been used to conduct a national yield shortfall risk assessment and to evaluate the potential for introducing an Area-Yield crop insurance program into Ghana. The conclusions of this preliminary analysis are that the SRID system of districtlevel crop yield measurement is basically sound, but because of very limited resources the organization has had to reduce the density of sampling of crops yields to a point where the data are no longer statistically sound and that strengthening of the crop-cutting procedure would be required if this was to form the basis of any Area-yield crop insurance program for Ghana. 11. The availability of production and yield data is very limited for plantation tree crops and export cash crops. SRID does not maintain time-series production and yield data bases for plantation tree crops including cocoa, cashew, mango, citrus, rubber, and cash crops such as pineapple and this is a major drawback to conducting any formal risk assessment for these crops. 12. Almost all agriculture in Ghana is rain fed; annual rainfall varies from over 2,000 mm in the tropical south-west to an average of about 1,000 mm in the far north and the driest areas of the country with less than 900 mm per year are in the Greater Accra coastal region. There are only about 30,000 Ha of irrigated cropping in Ghana or less than 0.5% of total cropped area. In central/southern Ghana rainfall is distributed throughout the year and there are two cropping seasons, the Main crop season (from April to August) and the Minor Crop season (from September to November). In the northern parts of Ghana there is a marked dry season from November to February and there is only one crop season from May/June to September/October, although some latesown crops may be harvested into November/December. 13. The principal food (and also cash) crops in Ghana include maize, cassava, plantain, yams and groundnuts. Rice is also an important crop in the more northerly regions as are the more drought resistant crops of millet, sorghum and cow peas. Technology levels are low, many farmers do not have access to credit with which to purchase improved seeds and fertilizers and average yields for major cereals such as maize and rice are correspondingly low or about 1.7 MT/ha and 2.0 MT/Ha, respectively. 14. Drought and excess rain or flooding are the major risk exposures to maize and rice and food crop production in Ghana. In addition, farmers cited bush fires as a problem in these crops and also pests and diseases. 15. Ghana has traditionally been a major producer and exporter of Cocoa This crop is widely grown as a smallholder cash crop in the deciduous forest zone of Ghana. According to the farmers met during this study drought is not a problem in established cocoa plantations; rather pests and diseases are their main concern and these problems are accentuated by untimely or excess rain. Other important tree cash crops include rubber, mango, citrus, cashew, bananas and also export cash crops such as pineapple. Many of these crops are being produced under Contract farming or Outgrower scheme arrangements under which the Contractor provides a vertically integrated service from initial selection of planting material through to the processing and marketing of the out - 6 -

7 grower s output. These Outgrower schemes may offer interesting commercial opportunities to add on carefully designed and tailor-made crop insurance products and programs. 16. An analysis of the time series rainfall data shows that over the past 40 years, there has been a trend towards declining rainfall in nearly all years. This finding confirms the climate change studies which all predict that Ghana will experience major rainfall reductions throughout the country over the next 90 years and that average minimum and maximum temperatures will also increase significantly over this period. This will have major impacts on crop production systems and a decrease in maize and cassava production in more northerly regions and a switch to more drought resistant crops such as millet and cow peas. 17. The rainfall analysis also suggests that there is some influence of the El Nino Southern Oscillation (ENSO) in Ghana with below average rainfall in El Nino Years. In Ghana, 1983 is the worst El Niño year recorded in the past 50 years when 7 (39% of total) of the 18 weather stations recorded their lowest ever annual rainfall: at a national level major crop failure occurred and food aid had to be distributed to rural and urban households in much of the country. During the corresponding period there have been several major La Niña years including 1973/74, 1975/76, 1988/89, 1995/96 and 1997/98. The analysis of El Nino phenomena and food crop production and yields is only possible since 1992 and in this case there has only been 1 strong El Nino in 1997/98 and the impact on reduced crop yield is not very strong across most districts and crops. Further analysis of ENSO impacts on crop production and yields will be carried out in the next stages of the IIPACC project. 18. A detailed analysis has been conducted of the relationship between district average yields for all 8 food crops and total annual and seasonal rainfall for the past 18 years. The results of this analysis show an extremely high and direct correlation between maize yields and rainfall in many districts in Eastern Region this finding suggests that the operation of a CWII drought index cover for maize may be very appropriate in Eastern Region. In other important maize growing regions such as Brong Ahafo and Ashanti, the relationships are less strong between maize yield and rainfall. Similar findings also apply to other rain fed crops such as rice, millet, sorghum and groundnuts where negative correlations between rainfall and yield, especially in the northern most regions of Ghana, suggest that in many cases the problem is not of too little rainfall (drought), but of excess rain and flooding. Northern Ghana faces a major river flood exposure as evidenced by the floods of 2007 and Although Ghana lies outside any tropical cyclone belt, localized windstorm and tornados have on occasions caused very severe damage in commercial export bananas and also in rubber plantations owned by members of the GREL Rubber Outgrowers scheme in Western Region. Supply of and Demand for Agricultural Crop Insurance in Ghana 20. There is no tradition of crop insurance in Ghana. Ghana has a competitive and growing non-life insurance market which offers a wide range of general property and casualty insurance lines and speciality lines of insurance. However, to date no insurance company has underwritten a retail market crop or livestock insurance product. Insurance companies have had little or no exposure to agricultural insurance, they lack the technical experience to design and rate such products and in view of the perceived high risk exposures of agriculture, coupled with problems of potential adverse selection and moral hazard and finally the very high costs of administering policies for small farmers they have not entered this class of insurance to date

8 21. The insurance companies met under this feasibility study, have been very supportive of the IIPACC initiative and have indicated their potential support if a commercial case can be demonstrated and that they can be confident in the actuarial rates which are determined for the crop insurance products and finally that reinsurance protection can be guaranteed. 22. In additional to the IIPACC project, there are currently two other CWII initiatives in Ghana. Since 2009 Innovations for Poverty Action, IPA, a US based NGO has been conducting action research into the demand for and effectiveness of rainfall index insurance for maize farmers in selected districts of Northern Region. In 2008 IPA designed a CWII index product in conjunction with farmers called Takayua Rainfall Insurance which provides cover against excess rainfall and rainfall deficit (drought). The voluntary CWII program has been marketed to farmers for 2 years: in year one cover was provided at zero cost, but in 2010 a series of differential premium rates ranging from 1% to 14% of sum insured have been introduced to test farmer s demand for and ability to pay for crop insurance. 23. The IPA action research study has shown that the demand for the Takayua crop insurance is very high at an actuarially fair rate of between 8% to 9.5% being purchased by 42% and 40% respectively of farmers who were offered these premium rates. This study shows that where there a crop insurance product is designed that protects against a major climatic peril, farmers are willing to afford the often very high premium rates for this cover. 24. MicroEnsure, an international microinsurance intermediary which specialises in the design and implementation of microinsurance products targeted at the rural poor, is keen to work with IIPACC on the development of agricultural insurance products in Ghana. MicroEnsure is working in 10 African and Asian-Pacific countries including Ghana and has been piloting CWII products for drought, excess rain and typhoon winds in several of these territories. 25. This feasibility study has shown that farmers perceived constraints to agricultural crop production vary according to the crop commodity and to their location and centre on their lack of access to rural finance, marketing constraints and low sales prices for crop output, a lack of on-farm storage facilities, bush fires, and pests and diseases rather than climatic perils per se. These findings clearly suggest that if crop insurance is introduced in isolation without consideration of these other production constraints, the program is likely to fail. Rather there is a need to introduce crop insurance as part of a bundled program with production credit, seeds and fertilisers and preferably with output marketing assistance. The findings also suggest that crop insurance may be a relatively low priority for many farmers in Ghana. 26. Farmer s demand for crop insurance included the climatic risks of drought, excess rain, flood and wind and crop pest and disease cover and protection against bush fires. For some crops the focus group discussion, FGD, meetings identified a relatively clear demand for crop insurance against key climatic perils of drought and or flood damage including drought for maize, rice and pineapples, or windstorm cover in rubber plantations. Cocoa and citrus producers were interested in purchasing pest and disease cover in these crops. There was a very strong demand by farmers for bush fire cover. Crop Insurance Product Options for IIPACC 27. Under this feasibility study a preliminary assessment has been conducted of the potential to develop a range of traditional indemnity-based crop insurance products and also new parametric crop weather index (CWII) products for the major food and plantation crops grown by Ghanaian farmers and a summary of the potential suitability of each product is shown in the table below

9 Crop Insurance Product Design Opportunities for Ghana CROP Area (Ha 000) Total Values (GHS Million ) Key Peril Potential to Insure? Cocoa 1,750 1,641 SSVD (disease) Cat. Cover for Govt. Rubber Windstorm YES (micro or meso) Oil Palm ? NO Type of policy suitable for Ghana Aggregate Excess of Loss of Trees Named-peril (Damage-based) Pineapples Drought YES (micro or meso) Weather Index? Mango 1 4 Xs. Rain flowering, Wind Possibly (micro) Weather Index Cashew Bush fire, drought NO Citrus Pest & Disease NO Sub-Total Cash Crops 2,216 2,862 Maize Drought (flood) YES (micro or meso) Cassava 886 1,773? NO Rice Drought (flood) YES (micro or meso) Yam 379 2,126? NO Plantain 325 1,283 Windstorm YES (micro or meso) Sorghum Drought? Possibly Millet Drought? Possibly Groundnuts Drought? Possibly Sub-Total Food Crops 3,284 6,666 Total Crops Ghana 5,499 9,528 Source: Author based on survey findings (2009 Area and Valuation figures taken from Chapter 2) Area-Yield Index / Weather Index Area-Yield Index / Weather Index Named-peril (Damage-based) Area-Yield Index / Weather Index Area-Yield Index / Weather Index Area-Yield Index / Weather Index 28. Named peril damage-based windstorm insurance cover would be technically feasible for tree crops including rubber, bananas and plantains. There appears to be considerable demand for windstorm insurance cover for rubber trees grown by the Rubber Outgrowers and Agents Association, ROAA, which supplies Ghana Rubber Estates Limited, GREL, the main commercial latex rubber producing processing and export company in Ghana. ROAA currently has 2,791 members growing about 11,000 Ha of rubber trees mainly located in 7 districts in Western Region and 7 districts in Central Region. Rubber production represents a major investment as the trees take 7 years to come into latex production and the total investment by ROAA members is over US$ 20 1 million investment. In the event of windstorm damage leading to snapping of the rubber tress individual ROAA members incur major financial losses in terms of the costs of replanting their trees and in 7 years of lost revenue. ROAA has asked IIPACC to assess further the potential to design a named peril windstorm cover for its members. The main technical challenge for this product will be the availability or otherwise of historical crop windstorm damage data at a disaggregated (preferably individual farmer) level in order to set the deductibles and rates on this product. In addition, at least one of the major export banana producing companies in Ghana has incurred severe windstorm damage in the past and this sector may be interested in a windstorm insurance policy. 29. It may be feasible to design Area-Yield Index Insurance for maize and rice, and possibly for other cereals such as sorghum and millet and also groundnuts. This area- 1 [We still need to check investment costs and per hectare value of latex production] - 9 -

10 yield multiple peril crop index product may be of interest to farmers as a means of gaining access to rural finance and could also be of interest to the Rural Banks as a way of protecting their credit portfolios against catastrophe drought induced crop failure and default by farmers on loan repayments. This product could also be marketed through the leading input suppliers such as WIENCO. WIENCO through its Masara N Arziki Association is targeting 50,000 maize farmers over the next 5 years to improve the supply of locally produced maize. WIENCO provides association members all necessary inputs of seeds and fertilisers on credit which is repaid after harvest and potentially faces a major exposure to drought and/or flood induced yield reduction or crop failure. Areayield index insurance and/or rainfall index insurance may therefore be of considerable interest to WIENCO to protect its lending to maize farmers. The key factors that will determine if an Area-yield index product can be introduced for these crops include (a) the level of accuracy of the SRID/MOFA historical yield data given the fact that the number of sample crop cuts per crop and per district has been significantly reduced in recent years because of resource constraints and (b) whether SRID-MOFA can increase the density of crop-cuts to meet underwriter s minimum requirements for accuracy in area-yield estimation. 30. Rainfall-Index (excess or deficit) insurance could also be an option for rain-fed crops such as maize and rice grown in districts which exhibit close correlations between rainfall and yields and where there is a good density of functioning GMA weather stations. These products may again be considered either at a micro-level (individual farmers) or as a meso-level banking financial portfolio protection cover or marketed as a meso-level financial or business interruption cover to input suppliers for example, WIENCO under its Maize Masara N Arziki input-prefinancing (credit) program. 31. Rainfall-Index (drought) could be developed for pineapple growers located in the Central Region of Ghana and who face major losses in extreme drought years which appear to be related in part to ENSO-El Niño phenomena. 32. It may be feasible to design an excess rain index (and possibly wind) policy for mangoes grown in Ghana. In this case it is recommended that IIPACC focuses on specialist mango producer/export schemes, for example the Integrated Tamale Fruit Company, ITFC, organic mango farmer s outgrower scheme in Savellugu-Nanton District in the Northern Region. ITFC has an outgrower scheme for over 2,000 mango growers and their investment loans to growers are estimated at about US$ 14 million. Mango growers face problems of excess or untimely rainfall leading to abortion of the flowers and reduced mango fruit set, wind damage in mangoes and finally bush fires. It should be technically feasible to design an excess rainfall cover for mango growers. 33. Aggregate excess of loss damage cover against CSSVD in Cocoa. CSSVD is a major disease of coca trees in Ghana and it can only be controlled effectively by eradication of the affected trees. COCOBOD, the Ghanaian Cocoa Board, operates a financial compensation scheme for cocoa farmers to enable them to replant CSSVD affected plantations. COCOBOD is interested in finding out whether it would be possible to purchase an aggregate excess of loss insurance program to protect them against catastrophe CSSVD losses which would exceed their CSSVD compensation budget. Given crop underwriters reservations over insuring pests and or diseases in crops it would be important to obtain early agreement from interested local insurers and reinsurers to the design and implementation of such a product. This product can only be designed if the COCOBOD is able to provide additional years of historical CSSVD damage data and which is required to design and rate a catastrophe excess of loss cover. 34. A major challenge for IIPACC going forward in 2010 will be to quantify more clearly the demand for such crop insurance products in Ghana, the potential portfolio financial projections (sums insured and premiums and expected claims) and thus the commercial opportunity for Ghanaian underwriters and their reinsurers

11 Institutional Considerations 35. It is likely that the development of any market-based crop insurance products and programs in Ghana will require the active collaboration by the private and public sectors under some form of private-public partnership agreement, PPP. It is unlikely that the private commercial insurers in Ghana will be willing to commit resources to the high start-up costs involved in establishing the necessary crop insurance infrastructure to design, implement and manage the proposed new crops insurance scheme by themselves and that they will require assistance from government and other public and private institutions. One challenge for IIPACC is to define an appropriate agricultural insurance strategy and institutional framework relying on strong public-private partnerships which would include both the private commercial insurers and the rural lending institutions (banks, cooperatives, MFIs) and other service institutions. 36. This report provides a review of international experience with public, private and PPP agricultural insurance schemes and compares the performance of highly subsidised schemes with those that do not provide any premium or other financial subsidies. This chapter also makes recommendations for an appropriate institutional framework and identifies the potential roles for the public and private stakeholders which have shown an interest in supporting this initiative to date. Under start-up situations, such as in Ghana, where there is currently no agricultural insurance supply, government can play a very important role in creating agricultural insurance infrastructure including: providing insurers with access to crop production and weather data and statistics, investment in increasing the density of automated weather stations through to strengthening of the crop-cutting and yield estimation procedures. This report recommends that governments should be cautious about offering financial support in the form of premium subsidies and or reinsurance protection. 37. The potential benefits of forming a local coinsurance pool to underwrite the proposed crop insurance program are reviewed in this report. In emerging economies where this is no tradition of crop or livestock insurance or rural insurance infrastructure, a pool coinsurance program may be a much more attractive and cost-effective proposition for commercial insurance companies than if they were to try to operate independently. The potential benefits of an Insurance Pool include the ability to underwrite a much broader and larger book of business and the potential to achieve a much better geographical spread of risk, than if the each company were operating independently; economies of scale in the costs of developing new products and programs and in underwriting risks and in adjusting claims where a single lead coinsurer is appointed (or a separate Technical Support Unit is created) to administer the business on behalf of the pool members. There are also major potential cost savings in the purchasing of reinsurance protection for a pooled coinsurance program. 38. Private Commercial Insurers in Ghana do not have rural branch networks costeffectively to market and underwrite and adjust smallholder crop insurance policies and it will therefore be necessary to identify suitable rural distribution networks through which they can channel crop insurance to farmers. In Ghana there appears to be considerable potential for Commercial Insurers to enter into a Partner-Agent relationship with rural organizations (e.g. Commercial Banks, Rural Banks, MFIs, Input Suppliers and Outgrower schemes) which have an existing rural distribution network and a large farmer membership. 39. The bundling of agricultural insurance with credit provision and input supplies through the Rural Banks and or the MFIs and input suppliers needs to be considered carefully under the planned IIPACC project for Ghana. There appears to be a major need in Ghana to improve farmers access to rural finance if they are to invest in improved seed and fertiliser technology and to thereby increase their production and yields and farm incomes. The bundling of crop insurance with credit and input supplies

12 has been shown in many parts of the world to provide a win-win for farmers, credit providers and insurers. The farmer gains access to seasonal crop credit, lending institutions are more willing to lend to small farmers because their loans are protected by crop insurance and finally the insurer benefits from (a) anti-section is reduced, (b) there is less need for pre-inspections (c) the costs of promoting and marketing the agricultural insurance program are reduced and (d) the insurance uptake and spread of risk and premium volume is generally much higher than under a purely voluntary program. 40. There appears to be scope in Ghana to develop both individual farmer micro-level crop insurance and also to design meso-level financial products aimed at protecting the credit portfolios of the rural banks and input suppliers. This report also shows that several rural banks and input suppliers and outgrower associations all of which provide farmers with production or investment credit, may be interested in a meso-level or aggregate product to protect their seasonal crop credit-loan portfolios against catastrophe climate induced yield losses which might result in farmers inability to repay their loans. Next Steps in the Planning and Design of Crop Insurance in Ghana 41. The final chapter of this report outlines a provisional plan for the design and implementation of a crop insurance system for Ghana between 2010 and It is proposed that this preliminary plan would be presented to a workshop in Ghana in October 2010 and if local stakeholders approve the proposals they would then need to draw-up a detailed business plan and budget for the design and implementation of a PPP system for crop insurance in Ghana. 42. In August 2010 IIPACC plans to conduct further detailed follow-up work with the companies and crop insurance opportunities identified in this report in order to confirm their potential demand for crop insurance and to establish more clearly the commercial crop insurance opportunity and estimates of sums insured and premiums and expected losses associated with crop for a build-up plan over the next 3 to 5 years. 43. It is planned to hold a stakeholder workshop in October 2010 following which the interested private sector and public sector parties will need to take decisions about whether they wish to proceed with the planning and design of a crop insurance system for Ghana. The formation of a Steering Committee is recommended at an early stage, to oversee the planning and design of an agricultural insurance system for Ghana and to coordinate inputs from the public and private sectors. In addition it is recommended that local stakeholders form a Technical Support Unit (probably attached to the insurance companies) which would assume direct responsibility for the technical planning and design of the crop insurance scheme and products/policies for Ghana. 44. It is anticipated that planning and design for a new crop insurance system for Ghana will take 12 to 15 months to complete and that implementation start-up would commence with the 2012 Main Crop Season. In the meantime, however, local stakeholders, in conjunction with IIPACC, will need to consider whether it is feasible to launch a pilot crop insurance scheme for one or possibly more identified client/crop/product types in the Main Season Decisions on any pilot project for 2011 would need to be taken by local stakeholders in August

13 Chapter 1: Introduction The Need for Agricultural Insurance in Ghana 1.1. In Ghana agriculture is the dominant sector accounting for about 39% of Gross Domestic Product, GDP, providing employment to about 51% of the labour force or 4.2 million people and it is the largest foreign exchange earner Ghana is located outside the World s hurricane belts and active earthquake or volcanic zones: however it faces an appreciable exposure to droughts and floods, particularly in the northern regions of the country. Ghana is ranked very low on the global hot spot scale of natural hazards: it is classified as the 95 th most exposed country to 2 or more hazards (drought and flood) with 15.2% of its geographical area at risk and 11.6% of its population face a mortality risk to these two perils 3. Between 1900 and 2010 the country has recorded 3 major drought disasters, the most severe occurring in 1983 when 12.5 million people or 50% of the population were affected by the drought: a total of 11 flood disasters have been recorded over the same period with a highest loss of life of 145 persons in the 5 July 1995 flood event and the highest economic losses of USD 75 million occurred under a flood event in July Agriculture in Ghana is prone to a combination of natural, climatic and biological perils. The south-west of Ghana has a tropical climate with high rainfall evenly distributed throughout the year, but in northern regions of the country average rainfall is much lower with a marked dry season and agriculture is exposed to a combination of droughts and floods. Bush fires are also a localised problem in many parts of the country and cause severe damage to cereals and food crops and cash crops such as cocoa, mango and cashew plantations. Localised windstorm has been reported as a problem in export bananas and also in rubber plantations. Pests and diseases of crops are a common problem in food crops and in cash crops and especially for tropical crops such as cocoa where black pod disease and cocoa swollen shoot virus, CSSVD cause major economic losses in the crop. Agricultural insurance is one risk management instrument that may have a role to play in mitigating against major climatic-induced crop production and income losses for Ghana s farmers Ghana is very vulnerable to climate change. By 2100, the mean daily temperature is expected to increase by three degrees Celsius and rainfall to decline between 9% and 27%, with increasing seasonal and spatial variations. Its effects higher temperatures and a higher frequency and intensity of droughts and floods as well as other weather related events pose risks for farmers. Despite various technological advances, climatic conditions are still key factors for agricultural productivity. 2 Ghana Statistical Service, GSS (2008). Ghana Living Standards Survey: Report of the Fifth Round (GLSS 5). Figures are based on the average share of GDP from 2000 to World Bank (2005) Natural Disaster Hotspots: A Global Risk Analysis. Disaster Risk Management Series No 5. The World Bank, Washington DC. 4 Source:"EM-DAT: The OFDA/CRED International Disaster Database, - Université catholique de Louvain - Brussels - Belgium". For a disaster to be recorded one or more of the following criteria must apply: i) 10 or more deaths; ii) 100 or more people affected, iii) a call was made for international assistance, iv) a state of emergency was declared

14 1.5. Access to rural finance is a major constraint for Ghana s predominantly small farmers 5. Lending by the commercial banks, development banks and the microfinance institutions including rural and cooperative banks is very low as these lenders have traditionally regarded agriculture as being too risky and this perception has been influenced by the poor performance of agricultural loans provided by the main lending agencies to agriculture, the development banks. The lack of access to crop product credit is a major constraint to adoption of improved crop production technology (certified seeds, fertilisers and plant protection chemicals). Agricultural insurance has been shown to be a way of increasing small farmers access to seasonal loans in countries such as India and the Philippines and may have a similar role to play in Ghana Although agriculture is one of the most important sectors in Ghana, there is no tradition of agricultural crop or livestock insurance in the country. Ghana has a stable insurance environment which is regulated by the National Insurance Commission, NIC, and both the life and non-life insurance sectors are growing rapidly. However, to date no insurance company has ever offered any agricultural insurance products and there is a local lack of knowledge and experience in the design and rating and underwriting and adjusting of claims for this class of business. In addition insurance companies do not have rural branch networks to market and administer crop insurance for the country s predominantly small farmers. There are therefore a number of technical institutional and operational challenges which will need to be addressed if agricultural insurance is to be introduced into the Ghanaian insurance market. Innovative Insurance Products for the Adaptation to Climate Change (IIPACC) in Ghana 1.7. The project Innovative Insurance Products for the Adaptation to Climate Change (IIPACC) was initiated to support Ghana to tackle the socio-economic costs and risks associated with climate change. The project is funded by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety. It is jointly implemented by the National Insurance Commission of Ghana (NIC) and German Technical Cooperation (GTZ). The project aims to develop and introduce agricultural crop insurance solutions in Ghana. The project started in December 2009 and will run until the end of June 2013 (see Annex 5) The overall objective of the IIPACC project is to introduce innovative agricultural crop insurance products into the Ghanaian Insurance Market. IIPACC aims to assist the insurance sector in Ghana to develop and implement demand-oriented as well as economically sustainable insurance products to protect farmers against crop failure and financial losses caused by extreme weather events IIPACC plans to facilitate the development and piloting of suitable agricultural crop insurance products (including both traditional indemnity based and index based products). This will be achieved through ongoing mentoring support to the insurance companies and by facilitating linkages with international reinsurance companies. To date IIPACC has held several rounds of discussions and meetings with leading agricultural reinsurers including MunichRe and SwissRe relating to the development of agricultural insurance and reinsurance in Ghana. IIPACC is also seeking ways of strengthening insurance infrastructure, potentially through investment in meteorological equipment as well as in improved data collection and analysis. IIPACC also includes components for education and 5 The lack of access to credit is highlighted by MOFA (2007) as a key constraint to agricultural production

15 training for relevant stakeholders including insurers, delivery agents and farmers and assistance to its implementing partner NIC in legal and regulatory aspects IIPACC will assist both the private and public sectors to get engaged in the area of agricultural crop insurance and to support the development of agricultural insurance products in the future. The results of the project are intended to contribute to improvements in farmers income and food security and their access to credit. Scope and Objectives of the IIPACC Crop Insurance Feasibility Study NIC-GTZ have adopted a phased project approach to the development of crop insurance solutions for Ghana starting with a Feasibility Study which adopts a systematic framework to study and analyse the technical, institutional, operational and financial issues, challenges and options for introducing a new crop insurance system in Ghana. The specific components of this study include: Review of agricultural insurance supply and demand in Ghana: As there is no tradition of agricultural insurance provision in Ghana by the commercial insurance companies there will be a major challenge actively to engage these companies in the planning and design of any future crop insurance products and programs for Ghana. Under the current study some initial farmer focus group discussions were conducted to elicit farmers potential interest in both traditional and new index crop insurance products, but it is recognized that further demand-assessment work will be required before proceeding to the detailed design and rating and implementation planning of any crop insurance programs. Agricultural risk assessment: An initial crop risk assessment is presented which draws on available weather and crop production and yield data. It is intended to assist policy makers and insurance practitioners in the design and rating of crop and livestock insurance. Risk assessment is a precursor to developing any viable agricultural insurance product(s) for Ghana. Agricultural insurance product development: On the basis of the risk assessment exercise and the series of farmer group discussions for major commodities, a preliminary identification has been made of the key crops and perils which may lend themselves to a crop insurance solution, along with recommendations on the type of crop insurance product (traditional indemnity based and/or index covers) that might be suitable for Ghana. Such products could be further researched and developed and piloted in the second phase of this project. Institutional framework and challenges for agricultural insurance: The development of a sustainable market-based agricultural insurance program in Ghana is likely to require some form of public-private partnership, PPP. This component of the study draws on the Author s international experience of public and private agricultural insurance models coupled with the findings of the discussions with GoG, private commercial insurers and financial institutions and farmers and presents an institutional framework, organizational structure, and specific roles and options for the potential stakeholders to consider The Feasibility Study was implemented between March and July 2010 by a team of consultants consisting of Mr Augustine Adongo (Local Agricultural and Private Sector Development Specialist), Professor Ramatu Al-Hassan (Professor for Agriculture at the University of Ghana) and the author Mr Charles Stutley (International Agricultural Insurance Specialist). The NIC team consisted of Mrs. Nyamikeh Kyiamah (Commissioner) and Mr Isaac Buabeng (Head of Marketing). The GTZ team consisted of Mr Steffen Felix (Acting

16 Programme Coordinator, IIPACC), Mr Peter Joy Sewornoo (Jnr. Economist) and Mr Mark Fynn (Agricultural Finance Advisor, Market-Oriented Agriculture Programme). Two field Missions were conducted in March and May 2010 and a series of workshops were held by NIC-GTZ both at the start of the first mission in order to brief interested stakeholders on the objectives of the IIPAAC project and on completion of the second mission to present the preliminary findings, challenges and options for crop insurance in Ghana. Extensive field visits were conducted in the main crop producing regions of Ghana and farmer Focus Group Discussions, FGD, were held with farmers representing the key plantation crops, cash crops and food crops grown in the country in order to elicit their constraints to production and also their potential demand for crop insurance. These field visits also included meetings with rural banks and input suppliers and other rural service organisations. Meetings were also held with key public sector ministries and organisations involved in agriculture and private sector stakeholders from the insurance, banking and microfinance and input service sectors (Annex 1 contains a list of organisations and individuals met during the IIPACC feasibility study) NIC-GTZ and the Consultants wish to use this opportunity sincerely to thank all the organisations which were met during the conduct of this IIPACC crop insurance feasibility study for their assistance and cooperation. Report Outline The remainder of this report is set out in 5 Chapters. Chapter 2 presents a preliminary agricultural risk assessment for Ghana drawing on available time-series climatic and production and crop production and yield data. The risk assessment is intended to identify the main food and commercial crops grown by farmers in these provinces and to quantify the key climatic risk exposures which can potentially lead to catastrophe crop losses of economic consequence to farmers and which may lend themselves to some form of crop insurance solution. Chapter 3 presents a review of the supply and demand of agricultural finance and agricultural insurance in Ghana. Chapter 4 reviews the agricultural insurance product design opportunities and challenges for Ghana, including both traditional indemnity-based crop insurance products and the new range of index-based solutions. Chapter 5 presents an institutional framework for agricultural insurance in Ghana including recommendations for a public-private partnership and draws on international experience where appropriate. This chapter reviews the potential roles of the private insurance companies, the commercial and rural banks and MFIs and farmer institutions and finally the role that government might play in supporting the introduction of agricultural insurance. Finally, Chapter 6 sets out the next steps for key stakeholders to consider in the planning and design and implementation of crop insurance in Ghana

17 Chapter 2: Crop Risk Assessment for Ghana Framework for Crop Risk Assessment and Data Availability Framework for Risk Assessment 2.1. To date, in Ghana, there has been no formal risk assessment for crop insurance purposes of the key climatic, biological and natural perils and their impact on crop production and yields and farm incomes The key objectives of agricultural crop risk assessment include: Risk identification and quantification of the key natural, climatic and biological perils affecting crop production in the selected country and regions and to classify these according to their frequency and severity into: Independent risks: e.g. fire and hail which result in localised croplosses; Intermediate risks: e.g. excess rain, frost; Highly correlated (systemic) risks: such as drought and flood and windstorm in crops, which have a potential to impact over wide geographical area causing catastrophe losses. Risk Mapping to define homogeneous crop risk zones; Risk Modelling to quantify the catastrophe exposure to target crops and insured crop portfolios and to aid crop rating decisions; To use the outputs of the risk assessment to define a risk financing strategy including insurance and reinsurance structuring for the planned crop insurance portfolio This Chapter presents a preliminary risk assessment of weather risks and their impact on crop production and yields in Ghana. This chapter starts with a review of data availability in Ghana for risk assessment purposes. This is followed by an overview of crop production systems in Ghana, the main cash export crops and food crops and production and yields and climatic constraints to production including an analysis of rainfall data and the relationship to national and departmental crop production and yields. The chapter also presents the results of a Crop Risk Assessment Model, CRAM, which uses time-series district-level production and yield data to estimate values of risk, expected losses and expected claims costs for eight crops grown in Ghana including maize, rice, sorghum, millet, groundnuts, cassava, yams and plantains The risk assessment presented in this chapter is intended to aid policy makers and planners in Ghana to identify the key crops and exposures to loss and which might be selected for future pilot crop insurance programs. It is stressed, however, that this preliminary work must be followed up by a more detailed risk analysis during the pilot project planning and design stage

18 Data Availability and Limitations 2.5. Data for Crop Risk Assessment. There are three types of data which are commonly used in the assessment of climatic risk in crop production (a) time series weather data (b) crop damage and/or production loss data by cause of loss for each crop and which may also include estimates of the financial value of the damage or losses and (c) crop area, production and yield data: the analysis of variance in time-series crop production and yield data is commonly used to design and rate multiple-peril crop insurance, MPCI, programs Ghana appears to have an efficient national Meteorological Agency which has cooperated greatly in the provision of time-series weather data to IIPACC under this crop insurance feasibility study. Ghana appears to have an efficient meteorological service which is managed by the Ghana Meteorological Agency, GMA, which replaced the Meteorological Services Department in There are about 175 rainfall measurement stations throughout the country ranging from synoptic weather stations recording rainfall, relative humidity, temperature, solar radiation, and wind speed etc through to simple manual rainfall gauges: weather station density is highest in the south and centre of the country, but is relatively low in the north. GMA faces resource constraints and it is understood that some of their weather station equipment is in need of upgrading and replacement. A list of 75 main weather stations is given in Annex Under this feasibility study GMA have provided IIPACC with access to daily rainfall and temperature data for 20 weather stations located in all the main agroecological regions of Ghana. A list of the 20 weather stations, their locations and number of years of daily rainfall data and percentage of missing daily rainfall values are presented in Annex 2.2. Two of the stations would not be suitable for the design and rating and operation of a crop weather index namely, Navarongo (Upper West Region) because the time series rainfall data terminate in 1978 and Akatsi station (Volta Region) because there are only 9 years available data which is below the minimum requirement of 20 to 25 years data. For the remaining 18 stations there is between 30 and 49 years of uninterrupted time series daily rainfall data, the quality of which appears to be good with a very low percentage of missing data or usually less than 1% of values and which could be used to design and operate crop weather index insurance, CWII, programs for too much (excess rain) or too little rainfall (drought). In this feasibility study the rainfall data has been subjected to simple analyses to identify regional difference, central tendency, variability, trends, influence by El Nino phenomenon and correlation with district-level crop yields. So far no work has been conducted on designing and rating rainfall index products. In addition GMA has kindly provided daily maximum and minimum temperature data for the 20 weather stations: to date time constraints have prevented any analysis of the temperature data, but given the fact that climate change studies have identified a definite warming trend over the past 25 years in Ghana as well as predictions that average temperatures may increase significantly by 2010, in the next Phase of the IIPACC project the temperature data will need to be analysed. Finally GMA has provided daily average wind speed and maximum gust data for 3 stations, Akuse, Takoradi and Saltpond, and some provisional analyses have been conducted on these data In Ghana, the National Disaster Management Organisation, NADMO, is responsible for monitoring and recording damages to agriculture arising from natural perils including floods and droughts. NADMO does not, however, maintain a national computerized data-base of historical damages by cause of loss in crops and therefore it has not been possible to access or use crop damage data in this report. At an international level, The Centre for Research on the Epidemiology of Disasters (CRED) maintains an international disaster database on the occurrence and affects of natural disasters from 1990 to present 6. Some limited data is presented in Annex 2.3 for Ghana. Another useful source of information 6 The CRED EM-DAT natural disasters database is available at:

19 on flooding is the Dartmouth Flood Observatory which maintains a large flood event database from 1985 to date and again this database could be analysed to extract specific events which have affected Ghana Time-series crop area, production and yield data are available for major food crops at district and regional level from the Statistics, Research and Information Department (SRID) of MOFA. SRID-MOFA is charged with the seasonal recording of seasonal crop acreage, production and yield data for all major food crops and also for horticultural crops in Ghana. SRID adopts a statistically designed and systematic multi-stage sampling procedure for selecting individual farms in each district and sub-district and cluster throughout Ghana: sown area estimation is based on individual field survey using chain and GPS coordinates, while yield estimation at harvest is based on random sample crop-cuts. The methodological design is very rigorous. However, staffing and resource constraints have meant that over the past decade SRID has had to reduce its farmer and crop sampling density in each district to a level whereby sample estimates are no longer statistically robust (high potential for sampling error) Under this study IIPACC has analysed 18-year ( ) time-series annual crop production and yield data for all major cereal and field crops for the 10 regions and 138 districts in Ghana. Data were obtained for the 8 most important food crops grown in Ghana including, maize, rice, millet, sorghum, groundnuts, cassava, yams, plantains. There are, however, several drawbacks of the data. To begin with the data were not in a consistent data-base format and it was therefore necessary to re-enter all values into an excel data-base. This data entry process identified a series of errors in the data including implausible area, or production or yield entries at district level and in some cases evidence that district yields are based on the same estimated yield for several consecutive years as opposed to being based on crop-cutting results. More seriously there have been a series of crop district boundary changes over the past 18 years in Ghana with the result some districts have been amalgamated and others have been sub-divided and areas added to new districts. Every attempt has been made to allocate the 18-year area, production and yield data to the correct district, but it is recognized that further work is required on the data to ensure consistency. Another issue is that the recorded area is based on the harvested area and not the sown area and therefore where sown areas are 100% damaged, these are not reported or included in the computation of actual yields Crop Production and Yield data are only available for the Main cropping season and not the Minor cropping season. Due to resource constraints, it is understood that SRID only conducts one crop area, production and yield crop-cutting exercise per year which coincides with the single cropping season in northern Ghana and the Main cropping season (April to August) in the rest of the country. In central and southern regions of Ghana where two annual crops (e.g. maize) may be grown, SRID does not conduct yield estimation for the Minor Crop season (September to November) and it is not possible therefore to analyse crop yields for the Minor Season. SRID has advised that the 18-year harvested area, production and average yield data at district, regional and national levels only represents the single crop season for northern Ghana and the Main cropping season in central and southern Ghana. Further validation work on this data, by IIPACC, is required Although there are drawbacks in the available SRID-MOFA crop area, production and yield data, this time-series data has enabled a series of useful analyses to be conducted. To date, preliminary analysis have been made of (i) the district, regional and national distribution of crop exposure (value at risk) by crop type, (ii) annual variation in crop production and yields both for individual crops and regions to identify crops and areas of higher yield variability risk and at an aggregate portfolio level and (iii) to conduct simple correlation analysis with El Niño and rainfall variables. Furthermore if the crop-cutting yield

20 estimation procedures at district-level can be strengthened this might form the basis of an Area-Yield Index insurance program. Overview of Agricultural Crop Production in Ghana Location, Population and Economy Ghana is located in West Africa: for administrative purposes the country is divided into 10 Regions and 138 Districts. (See location Map in Figure 2.1). The country has a total geographic area of 92,100 sq miles (238,537 sq kilometres) and is about 650 km N-S and 350 to 400 E-W. The total population in mid 2008 was about 23.4 million and with a population growth rate of 2.7% is expected to rise to 42 million people by In 2009, Gross Domestic Product was GHC 21.8 billion (US$ 15.5 billion) (EIU ). Per capita income in Ghana was US$ 520 in 2006 compared to US$ 810 in Nigeria and US$ 930 in Ivory Coast. (Axco 2008). Figure 2.1. Administrative Map of Ghana showing Regions and District boundaries Ghana s economy is highly dependent on Agriculture and in 2005 agriculture, forestry and fisheries accounted for 36% of GDP, followed by services (30% of GDP), industry (25% of GDP and other (9% of GDP). Cocoa is the most important crop accounting for nearly US$ 0.91 billion of export earnings in 2006 or 28% of total export earnings, followed by forestry (6% of export earnings). Other important sectors include mining with 7 Economic Intelligence Unit (2010) Country Report: Ghana