More farmers are expected to take up insurance following a bill which seeks to increase productivity and provide a safety net.
The Insurance (Amendment) Bill, 2018 was submitted by National Assembly Finance Committee chairman Joseph Limo on behalf of Treasury to amend the Insurance Act and introduce index-based insurance.
Under index-based insurance, the amount of money compensated to farmers and livestock keepers will be measured by environmental conditions or the index that is bound to cause agricultural production losses.
Possible indices include drought or floods and yields. It will also lead to the uptake of drought-resistant seeds.
The principal object of the bill is to amend the Insurance Act to address the adverse selection and high cost of loss assessment related to traditional indemnity-based agriculture insurance by providing for index-based insurance as an alternative.
This seeks to reduce moral hazard, adverse selection, underwriting and claim assessment costs while speeding up claim settlements,” the bill states.
Alpha Africa asset managers investment analyst Daniel Kuyoh said the amendment is a move by the government to make the country remain at a favourable level of production without food insecurity as experienced in the last long drought.
“The government is trying to get itself out of the obligation of paying off farmers when drought-related agricultural or livestock losses occur. It has to make sure that the index is independent for pricing to be clear and the insurance to serve its purpose,” Kuyoh said.
More than 75 per cent of Kenyans are entirely dependent on agriculture for their livelihood and as a source of income.
World Bank estimates six out of 10 people depend on farming, livestock and fisheries.
However, they are often at risk of low returns due to uninsured extreme weather conditions.
Disaster relief has cost the government on average Sh4.2billion a year over 12 years and donors Sh8.1 billion mostly on food aid, the World Bank has said.
Government and independent estimates place the value of livestock in Northern Kenya alone at Sh46 billion, a huge insurable industry.
The weather uncertainty brings potential for agricultural insurance, which is still considered niche in Kenya. The Association of Kenya Insurers estimates agricultural insurance accounts for four per cent of gross written premiums, which totalled Sh362.5 million in 2015, up from Sh270.4 million in 2014.
Crop insurance accounted for 59 per cent of GWPs, while livestock insurance made up 41 per cent. Claims incurred were Sh118.8m, down from Sh175.8 million in 2014.
The proposal of the amendment was first announced by CS Henry Rotich while presenting the 2018-19 Budget Statement.
Rotich said the Kenya insurance sector has heavily relied on traditional indemnity-based insurance which has had challenges due to the requirement for assessment of losses to be conducted before any payment is made.