Cedric Stephens | High-tech insurance solution for local farmers shows promise

The data collection phase of a 20 to 24-week project designed to foster the development of insurance capacity, specifically for local farmers and investors in the sector, was recently completed. The analysis and processing of the data will be ending soon.

Despite a consistent record of failure in the provision of insurance coverage for members of the farming community in the past, the initial results from the pilot project, which began during the last quarter of 2021, suggest there is a high probability of success this time around.

Farming is a risky business. Jamaican banks are notoriously risk averse. Businessman Gassan Azan’s comments last year about his inability to get loans from commercial banks to fund his Lakes Pen, St Catherine, venture is par for the course. He was quoted as saying: “Not one dollar has been loaned to this project by the banks.”

Mr Azan and his partners, according to the Jamaica Observer, plan “an $11-billion, state-of-the-art agricultural development on 400 acres of land that is to be rolled out over several phases. The project includes 25 acres of greenhouses, 50 acres of orchards and open fields in the first instance. When it is up and running, the project will enhance Jamaica’s involvement in the global ready meals market, which was estimated at US$219.69 billion in 2018”.

AGRICULTURAL RISKS

The pilot project will soon be entering the product-design stage. If it is successful, and insurance coverage becomes available, banks and other lenders should have one less excuse not to make loans to the sector.

The insurance facility should help them to manage more effectively some of the risks associated with farming and, possibly, to begin making loans to commercial farmers. These things could help spur economic growth.

Lenders and insurance companies are close allies and often share the same parents. There is evidence to support this in the existing structure of the local financial system. A similar situation exists overseas. For example, the sanctions that are being imposed on Russia for its invasion of Ukraine have prevented Russia from accessing the global financial system to access capital and/or to transfer risks to Western insurance markets.

A 2010 World Bank report described agricultural risks in Jamaica as “very high”. They were grouped into production risks, market risks, and other kinds of risks. Included in the latter category were personal, health, property, and financial risks. It is very difficult to predict when they will occur or their intensity. Climate change is also complicating the situation.

Either singly, or collectively, these risks have the potential to hamper the income-earning capacity of farmers.

Losses and damage to Jamaica’s agricultural sector caused by natural catastrophes are huge. According to a 2020 report from the Food and Agriculture Organization of the United Nations covering the period 1994 to 2010, the impact of hurricanes, tropical storms, floods, bush fires, and drought generated losses in Jamaica’s agriculture sector of US$165 million. In annual terms, this amounts to around US$11 million per year (approximately $1.65 billion per year at the current exchange rate).

Fast-forward to 2021, the losses could be averaging $150 million to $160 million each month. To put those numbers in perspective, the total allocation to the Ministry of Agriculture & Fisheries in the 2022/23 budget for recurrent expenditure was $10.2 billion. The Jamaican government, clearly, in the absence of insurance, has been unable to provide the financial resources to compensate farmers for the losses they have suffered over the years.

In April 2018, in ‘Insurance as a Farming Tool’, I wrote that historically, Jamaica suffers losses due to natural disasters of about two per cent of gross domestic product annually, and that between 2001 and 2010, the impact of natural disasters was estimated at $113.7 billion, according to the Planning Institute of Jamaica.

Given this history and these data, here’s why the present efforts to develop a local agricultural insurance capacity are likely to succeed when other attempts in the past have failed.

• A local private-sector-led project group, working in association with colleagues in Asia and Europe comprising experts in artificial intelligence, machine learning, computational risk modelling, crop modelling, remote sensing, satellite systems engineering, insurance, reinsurance, crop insurance, data analytics, and Big Data and other specialities, has been engaged during the last four years in exploring the use of technological interventions to solve the insurance supply-side problems.

• The multidisciplinary, multicultural team has deployed cutting-edge technologies and knowledge, that have been successfully applied in Asia, to address local problems and to fill in information gaps.

• Group members have expended thousands of man-hours conducting research.

• The group is working in collaboration with a global insurance brand with expertise in crop insurance.

• Members of the project group plan to hold a series of discussions with stakeholders to get feedback when work on the preliminary product design has been completed.

• There is a likelihood of obtaining grant funding to implement the project, if the pilot project is successful.

• The lessons learned from the private-sector designed insurance scheme for coffee farmers, where problems were encountered in quantifying claims post-catastrophe, often in inaccessible terrain will be avoided in the structure of the proposed programme.

The proposed target group for the coverage will be ‘aggregators’ like financial institutions.

- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com or business@gleanerjm.com