Insurers in Ethiopia are becoming more hesitant to offer farm insurance, particularly as the country faces climate-related risks associated with El Niño. Smallholder farmers, who comprise nearly 20 million people, require more protection from droughts, floods, and other weather-related shocks. However, worsening conditions are driving up premiums, making it more challenging for governments and farming communities to justify the cost. The World Food Programme (WFP) representative in Ethiopia, Zlatan Milišic, notes that during El Niño seasons, payouts are triggered for farmers, but this also leads to higher premiums.
The agricultural insurance sector in Ethiopia remains underdeveloped, accounting for only about one percent of the insurance industry. Despite the high exposure to climate-related risks, with 91% of Ethiopians facing at least one shock between 2017 and 2021, coverage remains low. The delivery of insurance products is expensive, and existing products often do not match farmers' actual vulnerabilities. Fikru Tsegaye, executive officer of the Ethiopian Reinsurance Company (Ethio-Re), attributes the limited progress to the lack of a national institutional framework to coordinate initiatives and the scarcity of data.
The Ministry of Agriculture has recently established a Rural Finance Unit to mobilize resources and expand coverage. However, experts like Solomon Assefa, chief executive officer of Standard Insurance, believe that government subsidies and dedicated funding are necessary to expand the market. The shortage of local actuaries able to price farm products also hinders the growth of agricultural insurance. Insurers often rely on specialists and reinsurers abroad, which increases costs.
To make agricultural insurance more affordable, Fikru suggests that working at scale is crucial. A larger pool of premiums can provide greater capacity and reduce costs. The Ethiopian Reinsurance Company is exploring ways to expand coverage, including parametric insurance, which pays out when indicators such as rainfall cross set thresholds. This approach can lower the cost of verifying losses but requires closer coordination between government agencies, meteorological services, and insurers.
Donors, such as the WFP, are providing technical support and guarantee arrangements to encourage insurers and financial institutions to extend cover to vulnerable communities. The WFP facilitated $1.4 million in insurance payouts to 80,000 Ethiopian smallholders last year. The European Investment Bank's development arm, EIB Global, has announced a grant of up to €4 million to support climate-risk insurance for about 210,000 Ethiopian smallholders.
Experts like Tamrat Mengesha, an accounting and finance expert at Addis Abeba University, warn that a severe El Niño could place insurers under greater financial pressure. Widespread drought and flood losses could generate claims that insurers struggle to absorb, potentially leading to delayed payouts and eroding farmers' trust. Tamrat proposes sharing catastrophic risk between insurers and the government to avoid loading farmers with the cost.
To improve the accuracy of parametric insurance, Fikru emphasizes the need for closer coordination between government agencies, meteorological services, satellite-data providers, and insurers. Expanding coverage across regions and risk categories can also help spread exposure and build a larger premium pool for claims. The involvement of reinsurers like Zep-Re, Africa Re, and Ethio-Re remains limited due to the small size of the business.
Key points
- Insurers in Ethiopia are increasingly reluctant to offer farm insurance due to rising climate-related risks associated with El Niño.
- The agricultural insurance sector in Ethiopia remains underdeveloped, accounting for only about one percent of the insurance industry.
- Experts propose government subsidies, dedicated funding, and innovative approaches like parametric insurance to expand coverage and make agricultural insurance more affordable.
