TRADE, FINANCE AND INVESTMENT COMPETITIVENESS FINANCE EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Namibia Agriculture Disaster Risk Finance and Insurance Diagnostic Ajai Nair, Barry Maher, Qhelile Ndlovu, Andrea Stoppa, Chris Hoveka © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: iStock RobF73 >>> Contents Acknowledgments vii Foreword ix Executive Summary x 1. Introduction and Country Context 1 Macro and Socioeconomic Environment 2 Agriculture Sector 3 Financial Sector 5 2. Disaster Risk Finance: Introduction and Namibia Context 7 Namibia’s Disaster Risk Vulnerability and Impact of Climate Change 10 Institutional Framework for Disaster Risk Management in Namibia 11 Status of Disaster Risk Financing Instruments in Namibia 13 Financial Protection for Agriculture in Namibia 15 3. Agricultural Insurance for Smallholders in Namibia 19 Features of Agricultural Insurance Products 19 Public and Private Approaches to Developing Agricultural Insurance Markets 22 The Agricultural Insurance Market in Namibia 28 Market Segmentation and Peril Identification 29 Selecting Appropriate Agricultural Insurance Products 29 Implementing a National Agricultural Insurance Program 32 Providing Fiscal Support for a NAIP 33 4. Recommendations and Next Steps 35 Develop and Adopt a Risk-Layered Approach to Disaster Risk Financing 35 Support the Expansion of Access to Financial Services for Smallholder Farmers 37 Use Differentiated Approaches to Protect Smallholders and Subsistence Farmers 37 Support Development of Index Insurance Products for Livestock and Crops 38 Establish a National Agricultural Insurance Program as a PPP 38 >>> Contents Provide Adequate Fiscal Support to the NAIP 39 Next Steps 40 References 42 Annex A: Organizations Met by the Mission 45 Annex B: Disaster Risk Management Policy Framework 46 Annex C: Indices Based on Data Collected via Remote Sensing 47 Annex D: Parameters for Scenario Testing 50 >>> Boxes Box 1: Building Resilience through Financial Inclusion 17 Box 2: Basis Risk in Index Insurance 21 Box 3: International Examples of Government Support for Agricultural Insurance 26 Box 4: The Kenyan PPP Experience in Developing an Agricultural Insurance Program 27 >>> Figures Figure 1: Livestock Distribution North and South of the VCF 4 Figure 2: Total Livestock Production Value and Number Marketed 5 Figure 3: DRF Is a Core Part of Disaster Risk Management 7 Figure 4: Countries in Sub-Saharan Africa That Have a DRF Strategy or Are Preparing One 8 Figure 5: Four Core Principles of DRF 9 Figure 6: Historic Livestock Losses Due to Drought 11 Figure 7: Institutional Framework for Disaster Risk Management 12 >>> Figures Figure 8: Existing and Proposed DRF Mechanisms for Agriculture 13 Figure 9: Total Funding and Sources for Disaster Response Programs 15 Figure 10: Estimated Loss Due to Drought versus GRN and Humanitarian Disaster Support 16 Figure 11: Total Expenditure in Response to Disasters 17 Figure 12: Risk Layering at the Household Level for Communal Farmers in Namibia 18 Figure 13: Financial Inclusion of Farmers 18 Figure 14: Roles of Public and Private Sectors in Different Types of Agricultural Insurance 23 Programs Figure 15: Private Market Structure for Agricultural Insurance with No Public Support 24 Figure 16: PPP Organizational Structure for Agricultural Insurance 25 Figure 17: Potential Initial Institutional Structure for a NAIP in Namibia 32 Figure 18: Risk-Layering Approach with Recommended NAIP 36 Figure 19: Agricultural Insurance Products Recommended for Namibia and Related Initiatives 38 Figure C.1: Relative Evapotranspiration Anomalies in Namibia in 2019 and 2021 48 Figure C.2: Soil Moisture Anomalies in Africa in January 2023 49 >>> Tables Table 1: Next Steps to Operationalize Recommendations xiii Table 2: Land-Use Area and Number of Communal Households by Size of Holding 3 Table 3: Comparative Analysis of Multiple-Peril Crop Insurance, Area Yield Index Insurance, 20 and Weather Index Insurance Table 4: Features of Insurance Products Proposed for Smallholder Farmers 31 Table 5: Initial Costs for Product Development and Pilot Testing of Agricultural Index Insurance 34 Policies Table 6: Summary of Fiscal Costs per Year for NAIP 34 Table 7: Potential Risks and Mitigation Measures for the Development of a Successful NAIP 39 >>> Acronymns AMTA Agro-Marketing and Trade Agency ARC African Risk Capacity AYII area yield index insurance BoN Bank of Namibia DBN Development Bank of Namibia DRF disaster risk finance EIF Environmental Investment Fund of Namibia GRN Government of the Republic of Namibia M&E monitoring and evaluation MAWLR Ministry of Agriculture, Water, and Land Reform MoF Ministry of Finance MPCI multiple-peril crop insurance NAB Namibia Agronomic Board NAIP national agriculture insurance program NAM- Namibia Financial Institutions Supervisory Authority FISA NamibRe Namibia National Reinsurance Corporation NASRIA Namibia Special Risks Insurance Association NPCI named-peril crop insurance NPL nonperforming loan OPM Office of the Prime Minister PPP public-private partnership TWG Technical Working Group VCF Veterinary Cordon Fence WII weather index insurance EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< vi >>> Acknowledgments This report was prepared by a team that included Ajai Nair (Senior Financial Sector Specialist and Task Team Leader), Barry Maher (Senior Financial Sector Specialist and Technical Lead), Qhelile Ndlovu (Financial Sector Specialist, EFNRF), Andrea Stoppa, and Chris Hoveka (Consultants). Chris Hoveka supported the country engagement and wrote the introduction and country context chapter; Qhelile Ndlovu led the disaster risk finance assessment and wrote this chapter; Andrea Stoppa led the agriculture insurance assessment and wrote this chapter; and all authors contributed to the recommendations chapter. Dumisani Sihle Ngwenya, Economist, contributed to the country context chapter, and Gracelin Baskaran (Consultant) contributed to the agriculture finance analysis and helped improve the overall structure of the report. Magdeline Mmaserole Mabuela and Mariama Daifour Ba (both Program Assistants) provided administrative support. Charles Hagner copyedited and Bruna Sofia Simoes designed and supported the production of the report. The report was prepared under the guidance of Marie Francoise Marie-Nelly, Country Director, and Douglas Pearce, Practice Manager. This report could not have been prepared without the contributions of several institutions in Namibia, including the Ministry of Finance; Ministry of Agriculture, Water, and Land Reform; Office of the Prime Minister; and Namibia Financial Institutions Supervisory Authority (NAMFISA). The Namibia Agronomic Board, Agricultural Bank of Namibia, and Namibia Meteorological Service shared data that informed the preparation of the report, and the report benefitted from extensive consultations with the insurance industry and from insights shared by all entities that were met as part of the diagnostic mission (see annex A for full list) and further consultations. The authors wish to thank Floris Fleermuys, General Manager, Research and Policy at NAMFISA, for leading the engagement on behalf of the authority; Irene Shebo, Insurance Policy Adviser, for review inputs; and Engelberth Linyando, Insurance Policy Analyst, and Gizelle Job, Assistant, for facilitating the diagnostic mission. The authors also thank the Agriculture Insurance Technical Working Group members and industry representatives for the inputs they provided. Lastly, the authors would also like EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< vii to acknowledge the valuable review inputs provided by World Bank peer reviewers: Hardwick Tchale, Senior Agriculture Economist; John Plevin, Senior Financial Sector Specialist; and Brice Gakombe, Senior Financial Sector Specialist. This report was produced with funding support from Foreign, Commonwealth and Development Office of the Government of the United Kingdom through the Disaster Protection Program. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< viii >>> Foreword Namibia is highly vulnerable to climate shocks, particularly drought. These shocks have had a devastating effect on agriculture and infrastructure, and the frequency and intensity of these shocks have also been increasing. National states of disaster were declared in six of the last 20 years. Further, climate change is expected to further exacerbate Namibia’s vulnerability to climate shocks. Thus, there is an urgent need for Namibia to assess our readiness to responding to this challenge. It is in this context that I requested the World Bank to undertake a diagnostic to inform the design and implementation of an index-based agriculture insurance program targeting small-scale farmers. I would like to thank the World Bank management for accepting our request and the task-team that undertook the diagnostic for a thorough assessment and insightful recommendations. I welcome the expansion of the scope of the diagnostic to include a disaster risk finance assessment for the agriculture sector and the recommendations the report makes for Namibia to consider developing an national disaster risk finance policy and take actions to increase access to financial services for smallholder farmers. I also welcome the report’s recommendation to support agriculture insurance within the framework of a national program structured as a public-private partnership. I would also like to thank Namibia Financial Institutions Supervisory Authority for taking the lead in working with the World Bank on this initiative, the members of the Technical Committee for their contributions, and the wide range of public and private sector stakeholders who have contributed to the preparation of this report. The Ministry of Finance looks forward to working with the Ministry of Agriculture, Water, and Land Reform, the Office of the Prime Minister, the Namibia Financial Institutions Supervisory Authority, and other public and private sector stakeholders in translating the recommendations in this report to policies and programs that can help Namibia more effectively respond to the challenge at hand. Iipumbu Shiimi Minister of Finance & Public Enterprises EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< ix >>> Executive Summary Introduction and Country Context This diagnostic report was prepared in response to a technical assistance request from the Government of the Republic of Namibia (GRN) to support the design and implementation of an index-based agriculture insurance program targeting small-scale farmers. Based on initial consultations with the Namibia Financial Institutions Supervisory Authority (NAMFISA), the nonbank financial regulator and lead counterpart, it was agreed to expand the scope of the diagnostic to include disaster risk finance (DRF), with a focus on the agriculture sector. There is increasing consensus that agriculture insurance programs, particularly those that aim to protect smallholders, are best designed within a broader framework of DRF since only smallholder farmers linked to the market can be reached effectively through micro-level or retail agriculture insurance programs, while subsistence farmers would need to be protected using macro-level instruments or other DRF mechanisms. The diagnostic was undertaken in close coordination with key public and private sector stakeholders. Key public sector stakeholders consulted included the Ministry of Finance (MoF); Ministry of Agriculture, Water, and Land Reform (MAWLR); Office of the Prime Minister (OPM); NAMFISA; Development Bank of Namibia (DBN); Agricultural Bank of Namibia; Namibia Agronomic Board, Environmental Investment Fund, National Climate Change Commission, University of Namibia and Namibia Meteorological Service. Key private sector stakeholders consulted included Red Cross Namibia, select banks and insurance companies and farmers organizations. Agriculture plays a major role in the Namibian economy. The agriculture sector provides direct and indirect livelihood to over 70 percent of Namibia’s population. However, most farming activities are dependent on climate-sensitive subsectors, such as crop production and livestock farming. In 2021, the sector accounts for about 8 percent of GDP and employs about 23 percent of the workforce. The livestock and crop industry dominates the agriculture sector, accounting for 60 percent of agricultural GDP. The agriculture sector is dualistic; a large number of smallholder and subsistence farmers coexist with a relatively small number of medium- to large-scale commercial producers. The smallholder and subsistence farmers mostly operate on nontitle deed land held under a communal tenure system, and traditional methods of production are still predominant. The EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< x farming systems for these types of farmers are often mixed poor and vulnerable to cope with, and recover quickly from the systems that include small fields of crops, vegetables, and impact of shocks, thereby increasing their financial resilience. livestock for domestic consumption. The commercial sector A record number of countries across Sub-Saharan Africa is dominated by commercial cattle and small stock (mainly are developing DRF strategies because of the increasing sheep and goats) farming. appreciation of the role of the government in providing and enabling financial protection for strategic assets and Namibia has a well-developed financial system, but populations. smallholder farmers have limited access to finance. Namibia’s domestic credit to the private sector, at nearly 70 The current approach to DRF in Namibia relies fully on percent in 2021, is significantly higher than the average for risk retention, without use of risk transfer instruments. Sub-Saharan Africa (37 percent). Commercial banks are the This approach offers low financial protection and results in largest financiers of the agriculture sector, at N$5.8 billion a critical funding gap for moderate to severe shocks. The in 2021, amounting to 5.5 percent of their loan portfolio. National Disaster Fund is the main instrument used for the However, most of this credit is estimated to go to the large financial protection of farmers, while the food reserve is used commercial agriculture sector and agribusinesses. It is also to protect food-insecure households. The absence of risk- estimated that most of the lending of AgriBank, the state- transfer instruments and a significant reliance on contingency owned agricultural bank, which stood at N$2.9 billion in 2021, financing from the budget means development plans across goes to the commercial agriculture sector. Further, AgriBank’s multiple sectors are at risk of being compromised when faced financial performance remains concerning; over a quarter of with disasters. its loans were of nonperforming status in 2021. Further, fragmentation of instruments creates cost That said, the increasing participation of smallholder inefficiencies, and major constraints in operational capacity farmers in the formal financial system presents an result in costly delays. Managing multiple funds for the same opportunity to increase access to financing for this layer of risk duplicates costs and functions. Heavy use of in- segment. The World Bank’s Findex data shows that between kind support exacerbates the situation by creating high costs 2014 and 2021, the percentage of individuals receiving of logistics. The claims settlement process from the National payment for sale of agriculture commodities through the Disaster Fund is manual, paper-based, and cumbersome. financial institution increased from 12 percent to 54 percent, The emergency management units in MAWLR and OPM are and the share of recipients who only used cash decreased severely capacity constrained and possess little to no surge from 71 percent to 23 percent. capacity during times of shocks. Overall, it may take longer than two months for beneficiaries of the livestock marketing and fodders incentive programs to receive reimbursement. Disaster Risk Finance: An Overview Due to the absence of a comprehensive financial protection and Status in Namibia program, the agriculture sector faces a significant financial-protection gap. This diagnostic estimates the gap DRF involves prearranging financial resources to at about 95 percent. Between 2013 and 2019, GRN’s drought ensure predictable and timely access to funding for relief and recovery programs are estimated to have covered disaster response and early recovery, which is critical only 5 percent of total losses in the crop and livestock sectors. for fostering resilient development. DRF aims to improve Given the impact of climate change and limited alternative the effectiveness, and reduce the cost of disaster response coping mechanisms, there is a compelling need for the by planning ahead where funds come from and how they development of robust financial-protection mechanisms for will be implemented. This financial protection helps affected both commercial and communal farmers. governments, businesses, farmers, households, and the most EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< xi Scaling Up Agriculture Insurance for Weather and atmospheric data collected through remote sensing devices (that is, satellites, aircrafts, and drones) is Smallholders in Namibia also increasingly being used in agricultural insurance. Agriculture insurance is an important risk transfer Public sector support is critical for the initial market instrument to manage climate and other production risks development and for scaling up access and usage. in agriculture. When delivered as part of a comprehensive Initial support for market development includes setting up risk management approach, insurance can improve economic institutional structures that allow the public and private sector welfare through incentivizing better risk management behavior to collaborate effectively, providing financing for start-up and investments in higher yield production and smoothing of costs, including product development and initial rollout, and consumption. providing premium subsidies for scaling up access and usage. Governments may also need to make agricultural insurance Index-based insurance is the recommended approach a condition to access other publicly funded services, such as for Namibian agriculture. Index insurance is designed to agriculture credit by public sector banks, input subsidies, or pay out with reference to an indicator that is intended to be disaster support. a “proxy” for loss. In a smallholder context, index insurance tends to have many advantages over indemnity products, but In Namibia there is currently limited access to both it also has some drawbacks. The main shortcoming of index- indemnity and index-based agriculture insurance. based products is basis risk, which is the mismatch between Insurance is available only to commercial farmers and mainly the loss experienced by the farmer and the payout triggered for liability covers and for protecting assets (buildings, vehicles, by the insurance policy. Assessing the likelihood of basis risk and so on). However, interest in agricultural risk management events and defining how the consequences of such events is growing, and a range of insurance and other risk transfer will be handled are key prerequisites for determining whether options have been tested recently or are being considered. and how a proposed index insurance product should be NamibRe, the state-owned national reinsurer, is developing implemented. a sovereign drought insurance solution. The Namibia Special Risks Insurance Association (NASRIA) is developing a micro- Index-based agricultural insurance can be implemented at level livestock index solution based on rainfall measured “micro,” “meso,” and “macro” levels. At the micro level, the by weather stations for drought and flood, and Hollard, a insurance policyholders are farmers, while at the meso level, the commercial insurer, has tested a livestock index cover against policyholders are service providers, such as financial service drought based on a vegetation index. providers, farmers associations, and input suppliers, who are indirectly exposed to agricultural risks through the farmers they serve. At the macro level, insurance is sold to governments or relief agencies in development and disaster management. Recommendations As for any other insurance product, high-quality data is a The diagnostic makes six recommendations to strengthen key element for the design and implementation of index- DRF in Namibia and support the introduction and scaling based agricultural insurance. Area Yield Index Insurance up of agriculture insurance for smallholder farmers. These (AYII) requires the availability of appropriate time series recommendations are summarized below: of regional yield data and the possibility of implementing appropriate data collection procedures—usually based on 1. Develop and adopt a risk-layered approach to DRF: As in-field crop cuttings—while Weather Index Insurance (WII) a first step to developing a risk-layered approach to DRF, requires time series of weather data of suitable quality and a an in-depth review of existing risk finance instruments network of weather stations located in the appropriate sites. and operational procedures should be undertaken. This EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< xii will allow GRN to effectively harmonize, streamline, and channels typically include agriculture finance providers strengthen the risk-financing instruments and claims and agriculture input dealers. The number of farmers settlement operational procedures in Namibia and thereby that a program can reach would also depend on the enhance their efficacy in providing financial support farmer group segments targeted. Subsistence farmers to vulnerable households when faced with disasters. should be protected using other DRF mechanisms— GRN should also conduct a robust fiscal gap analysis to such as the National Disaster Fund—and potential estimate the financing gap that the government is exposed macro-level insurance programs. The National Disaster to in financing disaster response. Lastly, GRN should Fund, the primary instrument currently being used to consider developing a national DRF policy to provide support subsistence farmers, could be strengthened policy coherence for its various DRF programs, including by introducing a risk-based assessment in the annual the National Agricultural Insurance Program (NAIP) budgeting process and obtaining macro-level insurance or recommended by this diagnostic. A national DRF policy catastrophe protection, to increase the level of protection can set out GRN’s strategic priorities for financing disaster offered to individual farmers and ensure sustainability response. The policy would ideally highlight the segments of the fund. Further, the payouts from a macro-level of society whose support the government would prioritize insurance program could be integrated into the disaster in the event of future shocks; the current (and potentially relief activities of the government and distributed to the new) financing instruments upon which it intends to draw beneficiaries through already existing channels. to support these households; and the delivery mechanisms through which it intends to disburse funds. 4. Support the development of index insurance products for livestock and crops: Index insurance products are 2. Support the expansion of access to financial services recommended for Namibia to cover both livestock and for smallholder farmers: Access to a broad range of crop-production risks. Products to be developed and financial services is critical to help households optimally tested include WII covers based on vegetation, soil- manage risks they are able to retain. Further, agriculture moisture, and evapotranspiration indices measured via insurance often needs to be bundled with agriculture remote sensing, and AYII based on ground measurements credit for it to be delivered at scale. Notwithstanding the of yield. The initial crops to be targeted by index insurance increasing participation of smallholder farmers in the products could be pearl millet and maize. formal financial system through their use of accounts to receive payments, their access to agriculture credit 5. Establish a national agricultural insurance program remains extremely limited. The 2021 Country Private (NAIP): Support for the development of agriculture Sector Diagnostic makes several recommendations to insurance is best delivered within the framework of a help improve access to finance for smallholder farmers. comprehensive NAIP. Adopting a NAIP approach can be These include establishing a window for agribusiness particularly useful in integrating public and private sector under the credit guarantee scheme managed by efforts, and this can be done effectively through a public- DBN, strengthening the availability of reliable data on private partnership (PPP) structure. The NAIP should smallholder farmers, and supporting the entry of fintech/ also have a well-designed communication strategy that agtech players to provide new financial products. clearly communicates not only the advantages of index insurance but also its risks, particularly basis risk. Pilot 3. Use differentiated approaches to protect smallholders testing can greatly contribute to the assessment of the and subsistence farmers: Agricultural index insurance quality of the products and should be implemented in the programs should focus on smallholder farmers who are areas in which the quality of data is the highest. Lastly, a linked to the market. The size of this group that can be robust monitoring and evaluation framework is necessary feasibly reached would depend on available or potential to track the performance and implementation progress of channels for distributing the products developed. Such the NAIP and help mitigate key risks. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< xiii 6. Provide adequate fiscal support to the NAIP: Public up phase at approximately US$1 million and the costs funding would be needed for both the start-up phase for the scale-up phase to range between US$1 million and the scaling-up phase of the NAIP. In the start-up and US$4.5 million per year at full rollout. The lower phase, public funding will be needed to support product estimate relates to the program covering only communal development, improve yield-data collection, strengthen smallholders with over 5 ha (approximately 31,000) and infrastructure, and cover the operating costs of dedicated the premium rates being relatively low, while the higher institutions and farmers’ awareness raising and education. estimate foresees communal smallholders with over 2 ha In the scaling up phase, the largest component of support (approximately 95,000) being reached and premium rates needed is likely to be for premium cofinancing, which that are relatively high. would be key in making insurance more affordable for farmers. The scenario analysis undertaken for the Table 1 sets out the next steps that are suggested as a diagnostic estimates the costs for GRN for the start- sequenced approach to operationalize the recommendations. >>> Table 1: Next Steps to Operationalize Recommendations Action Responsibility Timeframe Disaster Risk Finance a. Establish technical working group (TWG) for DRF MoF Immediate b. Conduct review of risk instruments and fiscal gap analysis DRF TWG Short term c. Develop and adopt DRF policy MoF Medium term MoF/BoN and d. Establish TWG to develop agriculture finance action plan. Medium term MAWLR Agricultural Insurance a. Engage the insurance industry to plan for the development of agricultural Agriculture Insurance Immediate insurance market (AI) TWG NAMFISA, MoF, and b. Secure budget allocation for start-up phase of program Short term MAWLR c. Set up NAIP institutional framework GRN/NAMFISA Short term d. Issue new regulation or modify the draft microinsurance regulation for index insurance and for potential aggregations of insurance companies (for NAMFISA Short term example, co-insurance agreements) e. Define the process for developing selected index insurance products and AI TWG Short term support product development activity f. Product testing and rollout plans AI TWG Medium term g. Implement product testing Industry Medium term Short term = 6 to 12 months. Medium terms = 12 to 18 months EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< xiv 1. >>> Introduction and Country Context This diagnostic report was prepared in response to a technical assistance request from the Government of the Republic of Namibia (GRN) to support the design and implementation of an index-based agriculture insurance program targeting small-scale farmers. Based on initial consultations with the Namibia Financial Institutions Supervisory Authority (NAMFISA), the nonbank financial regulator and lead counterpart, it was agreed to expand the scope of the diagnostic to include disaster risk finance (DRF), but still with a focus on the agriculture sector. This was done given both GRN’s interest in protecting both group of farmers and the increasing consensus that agriculture insurance programs, particularly those that focus on smallholders, are best designed within a broader framework of DRF. This is the case since only smallholder farmers linked to the market can be reached effectively through agriculture insurance programs, while subsistence farmers would need to be protected using other instruments. Further, even among smallholders who can be reached through agriculture insurance, some risks cannot be viably transferred to agriculture insurance markets. The diagnostic was undertaken in close coordination with key public and private sector stakeholders. A World Bank Group team travelled to Windhoek from May 31 to June 8, 2022, to undertake stakeholder consultations for the diagnostic. Key public sector stakeholders consulted included the Ministry of Finance (MoF); Ministry of Agriculture, Water, and Land Reform (MAWLR); Office of the Prime Minister (OPM); NAMFISA; Development Bank of Namibia (DBN); Agricultural Bank of Namibia; and Namibia Meteorological Service. Key private sector stakeholders consulted included select banks and insurance companies and select farmers organizations. (See annex A for the full list.) The diagnostic also benefitted from an extensive review of documents and data shared by stakeholders. This diagnostic is envisaged as the first phase of a potential two-phase technical assistance program. Building on the diagnostic, a second phase of support could potentially EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 1 support GRN to design specific interventions to strengthen However, growth slowed considerably since 2016 due in the agriculture risk–financing space and, as needed, to weak performance in key sectors of the economy and implement policy reforms and institutional changes to this end. government fiscal consolidation. In the period leading up to the COVID-19 pandemic in 2020, GDP growth averaged The report is structured as follows: Chapter 1 presents -0.2 percent, affected by fiscal adjustment as the government an overview of the macro- and socioeconomic environment, sought to rebalance public finances, severe drought, lower financial sector, agriculture sector, and agriculture finance commodity prices, reduced investment, and weak growth in key landscape in Namibia. Chapter 2 presents an overview of DRF, trade partners (Angola, South Africa). The pandemic induced Namibia’s exposure to disasters, particularly for the agriculture the steepest economic contraction since independence; sector, and their impact and discusses Namibia’s institutional real GDP declined by 8.1 percent. GDP rebounded over framework and current approach to DRF. Chapter 3 presents 2021 and 2022, growing by 3.5 percent and 4.6 percent, an introduction of agriculture insurance, the agriculture respectively, but output remains below pre-pandemic levels insurance landscape in Namibia, and the diagnostic’s findings. and the rebound was not broad based. The fiscal situation Lastly, chapter 4 presents the diagnostic’s recommendations has deteriorated substantially over the last decade, reflecting and suggested next steps. expansionary policies over 2010–15, subdued growth in the years immediately prior to the COVID-19 shock, and the impacts of the pandemic, including lower receipts from the Macro and Socioeconomic Southern Africa Customs Union pool in 2021–22. Public debt, including guarantees, has increased from about 27 percent of Environment GDP in 2012 to 73 percent in 2022. Namibia gained political independence in 1990, after Most socioeconomic indicators have improved, but more than a century of colonial rule, first by Germany Namibia remains one of the most unequal countries in from 1884 and then South Africa from 1915. Located in the world. When Namibia gained independence in 1990, the the southwestern part of Africa, Namibia is one of the least new government inherited a country characterized by high densely populated countries in Africa. It covers an area of levels of poverty and income inequality, but the country has 318,261 square miles, and its population is about 2.5 million seen one of the fastest reductions in poverty in Sub-Saharan (2017). It is bordered by Angola to the north, South Africa to Africa, from 37.5 percent in 2004 to 28.8 percent in 2010 and the south, Zambia to the northeast, Botswana to the east, and further to 17.4 percent in 2016. In the early 1990s, income the Atlantic Ocean to the west. inequality as measured by the Gini coefficient was estimated at around 0.70. Progress in reducing income disparity has Since independence, Namibia has shown remarkable been steady since then, with the Gini coefficient gradually signs of political stability and prudent macroeconomic declining to 0.60 in 2004, 0.58 in 2010, and 0.56 in 2015 management, which helped the country achieve moderate (Namibia Statistics Agency: NHIES Report 2015/2016). economic growth and social progress. The annual real Despite this progress, Namibia remains one of the most GDP growth rate from 2010 to 2015 was strong, averaging unequal countries in the world. Deep underlying challenges 5.4 percent. This robust growth was underpinned by sound persist, undermining the prospects for further advancement, macroeconomic policies and buoyant activity in the mining and the pre-independence history of the systematic exclusion sector, government spending, and expansion of credit to the of the Black majority from full participation in economic private sector. Income per capita increased gradually since activities continues to shape the economy, constraining the independence through this period, largely due to mining, country’s economic and social progress. services, fishing, and commercial livestock farming, which fueled sufficient improvement in the GDP for Namibia to be Namibia scores well in cross-country political reclassified in 2009 as an upper-middle-income country. comparisons. The World Governance Indicators rank EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 2 Namibia in the 76th percentile on the Political Stability/ Agriculture Sector Absence of Violence indicator, the second-best position in Africa. The 2021 Ibrahim Index of African Governance ranks Agriculture plays a major role in the economy. The Namibia eighth among 54 countries on overall governance, agriculture sector provides direct and indirect livelihood to over with a score of 64.1, well above the continental average of 70 percent of Namibia’s population. However, most farming 48.9. Namibia’s lowest scores were in the Human Development activities are dependent on climate-sensitive subsectors, such and Sustainable Economic Opportunity indicators, where the as crop production and livestock farming in 2022. The sector country ranks eleventh and seventh, respectively, crystalizing accounts for about 8 percent of GDP and employs about 23 Namibia’s ongoing challenges to address income inequality percent of the workforce. The livestock and crop industry and socioeconomic development. dominates the agriculture sector, accounting for 60 percent of agricultural GDP (NSA 2023). Local grain production includes Gender equality and the empowerment of women have maize, wheat, and pear millet. Horticulture products include been the cornerstones of Namibia’s development agenda grapes, cabbages, watermelons, potatoes, onions, and dates. since gaining independence in 1990. At independence in 1990, the new government inherited a country characterized The agriculture sector, however, is dualistic: a majority of by a long history of discrimination not only based on race smallholder and subsistence farmers coexist with a relatively but also on gender. In the post-independence years, small number of medium- to large-scale commercial the government has made various efforts to strengthen producers. Most smallholder and subsistence farmers operate women’s rights by according gender equality the status on a nontitle deed land held under a communal tenure system, of a constitutionally guaranteed fundamental right and by and traditional methods of production are still predominant. Table subsequently passing progressive gender-based laws in 2 presents the distribution of communal farming households from order to ensure full participation of women in all spheres of the 2013–14 agriculture census. Further, the Namibia Agronomic life, including full political representation. As a result of these Board (NAB) subdivides communal farmers into “subsistence initiatives, the literacy rate among females currently stands farmers,” with farm sizes up to 5 ha, and “smallholder farmers,” above 88 percent, and more girls are enrolled in all levels of with farm sizes above 5 ha.1 The farming systems for subsistence education than boys. Women’s representation in parliament farmers are often mixed systems that include small fields of has steadily increased. In 2021, women held over 44 percent crops, vegetables, and livestock for domestic consumption. The of the seats in the National Assembly, up from 18 percent in subsistence sector suffers from poor-quality yields and land 1994 and 26 percent in 2014. degradation, overgrazing, water scarcity, and an overall lack of investment in upgrading production, which contributes to low incomes and poverty. >>> Table 2: Land-Use Area and Number of Communal Households by Size of Holding Land Use Categories Total Annual Crop Tree Crop Fallow Land Grazing Land Woodland/Forest Other Land Average Average Average Average Average Average Average Size of No. HH No. HH No. HH No. HH No. HH No. HH No. HH Area per Area per Area per Area per Area per Area per Area per Holding Reporting Reporting Reporting Reporting reporting Reporting Reporting HH (ha) HH (ha) HH (ha) HH (ha) HH (ha) HH (ha) HH (ha) < 0.50 34734 0.09 10310 0.2 34 0.04 2442 0.21 750 0.07 132 0.22 21064 0.03 0.51 - 1.0 18382 0.75 14284 0.76 14 0.55 1885 0.72 816 0.79 189 0.75 1188 0.75 1.01 - 2.0 42710 1.5 35365 1.51 - - 2431 1.42 2005 1.42 920 1.5 1982 1.48 2.01 - 5.0 72304 3.19 59595 3.16 - - 1964 3.04 4209 3.4 1609 3.37 4911 3.4 5.01 - 27929 6.69 18481 6.54 - - 919 6.97 4784 7.12 682 6.5 3029 6.94 10.0 10.01+ 13354 27.64 3917 37.57 - - 659 22.23 4491 19.69 690 22.7 3465 28.73 Total 209244 4.13 141952 3.68 48 0.19 10301 3.14 17055 8.23 4223 6.41 35369 3.98 Source: NSA (2019), table 3.5. 1. Personal communication from the NAB, November 2022. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 3 The commercial sector is dominated by cattle and sheep competitive, with some links to smallholder producers south of farming, particularly south of the Veterinary Cordon Fence the VCF and limited links to those north of the VCF. Farmers (VCF)2 while the communal sector is dominated by cattle north of the VCF face high barriers to participation in the high- farming (figure 1). Notably the goat herd size has increased value beef export value chain, including high transaction costs while the sheep herd size has decreased over the last two related to quarantine and vaccination of cattle, as well as high decades, likely due to drought as goats are hardier than sheep. transportation and logistics costs that further limit the extent of The commercial sector is export oriented, productive, and more their market participation. >>> Figure 1: Livestock Distribution North and South of the VCF North of VCF South of VCF Sheep Pigs Pigs 8% 2% 0% Cattle 30% Sheep 43% Cattle Goats 53% 37% Goats 27% Source: World Bank analysis based on data from MAWLR and the agricultural statistics bulletin. The total livestock production value has been on an to the market. Roughly 55 percent of Namibian smallholder upward trend over the last 20 years, but notable drops livestock farmers are north of the VCF. These farmers occurred in 2012, 2014, and 2016 corresponding to water experience a range of barriers to participation in the export scarcity and drier years. The number of large stock marketed beef value chain, including high transactions costs and fees has fluctuated over the years, while the number of small stock for animal quarantine and vaccination and high transport and has been declining since 2003 (figure 2). There is evidence logistics costs. On the other hand, the area south of the VCF of marginal downward pressure on domestic livestock is free of foot-and-mouth disease and export oriented. The prices during times of drought and a slight upward pressure zone is home to 4,000 commercial farmers, who manage 52 on livestock prices in periods immediately after droughts. It percent of the national herd, and 65,000 communal farmers, is important to note that these figures are mostly from the who manage just 8 percent of the national herd. commercial sector, as communal farmers have limited access 2. The area south of the VCF is free of foot-and-mouth disease. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 4 >>> Figure 2: Total Livestock Production Value and Number Marketed Total Production Value Total Marketed 1,600 6,000 1,400 5,000 Number, thousands 1,200 4,000 1,000 800 3,000 N$, millions 600 2,000 400 1,000 200 0 - 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Large stock Small stock Large stock Small stock Source: World Bank analysis based on data from MAWLR and the agricultural statistics bulletin. Financial Sector both Fitch and Moody’s have downgraded Namibia. These factors likely contributed to the decline in Namibia’s domestic Namibia has a well-developed financial system. In the credit to the private sector, from 71 percent of GDP in 2019 to post-independence years, the financial system has undergone 69.4 percent in 2021. Nonetheless, this is significantly higher structural changes, leading to an upgrade of legal and regulatory than the average for Sub-Saharan Africa (36.9 percent). frameworks. The Banking Institutions Act of 1998 provided Nonperforming loans (NPLs) in the banking sector, which the legal framework for banking operations, with the BoN as had been increasing since 2016, hit an all-time high of 6.4 the supervisory authority. In 2001, NAMFISA was established percent in 2021 but have since fallen to 5.6 percent in 2022. to regulate and supervise nonbank financial institutions. Nonetheless, short- to medium-term risks remain significant However, the two development finance institutions—the DBN as banks could face an increase in NPLs due to the rise in and AgriBank, the state-owned agriculture bank, both of which household and corporate defaults due to overall monetary do not take deposits—are not regulated by either regulator. policy tightening and increase of interest rates in 2022. Also, due to delays in recognition of asset quality deterioration, data The banking sector is sound and profitable but faces on banks’ NPLs, profitability and capital ratios may not fully short- to medium-term risks arising out of the pandemic reflect the impact of the COVID-19 crisis. and recent monetary tightening. The banking sector in Namibia had assets equivalent to 81 percent of GDP in In contrast to most countries, the nonbank financial 2021. It comprised eight banks and a branch of a foreign institution sector in Namibia is much larger than the banking institution. Tightening monetary policy conditions banking sector. Its size was about 201 percent of GDP in globally coupled with back-to-back sovereign credit rating 2021. Retirement funds, with assets of about 116 percent of downgrades have increased the cost of credit. Since 2020, GDP, constituted the largest subsector. Insurance industry EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 assets composed 40 percent of GDP, and collective investment under its no-collateral lending scheme (AFDB 2022). Further, schemes were 34.2 percent of GDP. The insurance industry AgriBank’s financial performance remains concerning; NPLs included 14 insurance companies and one reinsurance form nearly a quarter of its portfolio. company. Financial inclusion in Namibia has also expanded   significantly since 2014, although there seems to have been some slippage due to COVID-19. The 2021 Findex survey finds that 71 percent of adults have an account with a financial institution or a mobile money service, a significant growth over 59 percent in 2014 but a reduction from 81 percent of adults in 2017. Individuals who reported having an account at a financial institution increased from 58 percent in 2014 to 77 percent in 2017 but decreased to 65 percent in 2021. Individuals making or receiving digital payments increased from 45 percent in 2014 to 71 percent in 2017 but declined to 66 percent in 2021. Notwithstanding the relatively developed state of Namibia’s financial sector, access to finance remains a key binding constraint for smallholder farmers. Although Namibia’s financial system is relatively well developed, smallholder farmers have limited or no access to credit, limiting their ability to provide the needed inputs and services and to invest in needed infrastructure. The challenges of access to finance by smallholder farmers stem from both supply-side and demand-side issues. On the demand side, lack of collateral (due to the historic legacy of exclusion and the lack of land titling on communal land), low productivity, and frequent climatic shocks are key factors. On the supply side, factors include the highly concentrated nature of the Namibian commercial banking sector and limited outreach by the publicly owned AgriBank among communal farmers. In 2021, N$5.8 billion in commercial bank loans went to the agriculture and fisheries sector, amounting to 5.5 percent of the commercial loan portfolio (Bank of Namibia 2021). Most of this credit was estimated to go to the large commercial agriculture sector and agribusinesses. AgriBank, the public sector lender, provides a smaller volume of financing to the sector; as of March 2021, the bank’s portfolio amounted to N$2.9 billion. AgriBank also finances primarily the commercial agriculture sector and provides only a limited amount of financing to small-scale farmers and rural agribusinesses EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 2. >>> Disaster Risk Finance: Introduction and Namibia Context DRF involves prearranging financial resources to ensure predictable and timely access to funding for disaster response and early recovery. DRF aims to improve the effectiveness of, and reduce the cost of, disaster response by planning ahead where funds come from and how they will be implemented. This financial protection helps affected governments, businesses, farmers, households, and the poor and most vulnerable to cope with, and recover quickly from, the impact of shocks, thereby increasing their financial resilience. It reduces the cost of response by binding partners to agreed-upon objectives, decision processes, and implementation modalities and by promoting greater discipline, transparency, and predictability in post-disaster spending. DRF contributes to sustainable and resilient development. It is a critical component of a comprehensive approach to disaster risk management that complements risk reduction, preparedness, and recovery measures. Risk finance instruments can contribute to risk reduction and preparedness—for example, by pricing risk and establishing clear rules of responsibility for managing risk and for bearing the costs for post-disaster response. Similarly, by reducing damage and the subsequent recovery cost, risk-management measures reduce disaster-related contingent liabilities (figure 3). >>> Figure 3: DRF Is a Core Part of Disaster Risk Management Source: World Bank (2012). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 Across Sub-Saharan African countries, there is an national DRF strategies. (See figure 4.) Meanwhile, Kenya is increasing appreciation of the role of DRF in fostering now evaluating the performance of its strategy and preparing resilient development and the role of the government in for a second phase. Malawi is expected to undertake a medium- providing and enabling financial protection for strategic term review of its strategy imminently, while Mozambique is in assets and populations. Consequently, since 2021 to date, the early implementation phase of its strategy (Government of a record number of more than 10 countries are developing Malawi 2020; Republic of Mozambique 2022). >>> Figure 4: Countries in Sub-Saharan Africa That Have a DRF Strategy or Are Preparing One Source: Authors. The core principles of DRF that have emerged from over trigger early action. Innovation in digital technology and big a decade of implementation and learning by countries data, such as Earth Observation, is enabling more robust around the world provide a framework that helps and timely analytics to inform investment decisions and decision-makers evaluate policy decisions and financial financial products. mechanisms to ensure that DRF strategies meet policy objectives. Figure 5 summarizes the four core principles. The application of these principles may differ from one country to another as well as by sector. Within the agriculture sector, timing needs, disbursement mechanisms, and risk-layering approaches may further differ, depending on strategic priorities for protection. Financial protection of food security and livelihoods may require less but more rapid funds, while the protection of agriculture assets may require more but less rapid funds. Effective DRF is underpinned by data and analytics to assess probable impacts, prioritize planning, and EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 >>> Figure 5: Four Core Principles of DRF Source: World Bank Group (2019). To plan effectively, it is important to consider the speed times higher than the cost of keeping the core herd alive, and and volume of funds required and ensure that funds the cost of support to drought-affected households increased are available quickly when—and only when—they are from US$50 after four months to US$1,300 after six to nine required. Governments require access to immediate liquidity months (Clarke and Vargas Hill 2013). for emergency response and the maintenance of essential services until additional funds become available. While less For financial preparedness to improve development money is required for the relief phase, timeliness is more outcomes, it is as important to consider how money critical and may require trade-offs in cost and reliability. For reaches beneficiaries as where it comes from. example, parametric-based solutions enable speed and cost Governments require dedicated mechanisms and expertise less, but funds may not completely reflect the losses (basis to allocate, disburse, and monitor funds for response and risk). Meanwhile, concessionary loans may be reliable but take recovery effectively. Strong collaboration between the ministry time to arrange. Ensuring the rapid mobilization of funds has of finance and the public entity tasked with spending post- been shown to reduce humanitarian costs and save money. disaster funds—such as disaster agencies and ministries of A cost-benefit analysis of DRF for small-scale agricultural agriculture—is crucial. In addition, the disbursement system producers found that US$1 invested in rapid response reduced must balance the fast disbursement desired by policy makers humanitarian spending by US$2.9. The analysis further found with the transparency and accountability required by the public that the cost of restocking a core herd of sheep was three and donors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 International experience has shown that combining climate change. Since 1990, Namibia has experienced at different instruments to protect against events of different least 12 years in which half of the country received below- frequency and severity is the most cost-efficient way average rainfall, resulting in meteorological droughts. Based to mobilize prearranged finance, as no single financial on probabilistic risk assessments, 31 percent of the total instrument can address all risk. This approach, known as population and about 33 percent of GDP, or US$3.6 billion, risk layering, ensures that cheaper sources of money are on average is affected by drought per year, and both are used first and that the most expensive instruments are used estimated to increase significantly in the future. Flood is very for extreme events. For example, (parametric) insurance is localized, affecting on average about 15,000 people every usually not cost-effective against recurrent low-cost events. year, or 0.6 percent of the total population (UNISDR 2018). A risk-layering strategy also matches the sources of risk and Further, the increase in losses due to climate change is the needs of the beneficiaries to the characteristics of the expected to be larger at lower return periods, which suggests different instruments in terms of funding amount, frequency of that a combination of risk-financing instruments balancing payment, speed, reliability, and cost of capital. retention and transfer would be more sustainable. Drought is a major threat to Namibia’s livestock sector. On Namibia’s Disaster Risk Vulnerability average, the sustainable stocking rate throughout Namibia has halved over the last 100 years, and livestock farmers have a and Impact of Climate Change degraded resource base, which is no longer resilient to severe droughts, as experienced in the last decade. Approximately Namibia is one of the driest countries in Sub-Saharan 60 million ha is available for grazing, but most of the land Africa and is highly vulnerable to external shocks. Namibia is severely degraded; nearly 40 million ha is covered with is particularly susceptible to frequent spells of drought and thickened bush that reduces the amount of forage available floods because of the variability in the weather patterns. Low for livestock production (World Bank and IFC 2022). to very low mean annual rainfall, high variability in rainfall, and very high evaporation rates combine to limit water supplies Frequent periods of droughts have caused significant severely. Between 2011 and 2019, the country experienced losses to the livestock sector. Prolonged drought between several episodes of droughts and floods with devastating 2012 and 2019 caused losses of between N$2 billion and N$3.6 effects on agriculture and infrastructure. In 2011, Namibia was billion to the commercial livestock sector and between N$3.4 hit by the worst floods in the country’s history; over 500,000 billion and N$4.8 billion for communal livestock farmers (figure people were affected, and infrastructure and residential 6). While commercial farmers incur higher productivity-related houses were destroyed. In 2013, a devastating drought costs, communal farmers face higher mortality-related losses. hit the country, leading to crop failure and poor livestock This is driven by several factors. Firstly, communal farmers have conditions. As a result, over 300,000 people were considered a lower level of productivity to begin with. Secondly, communal food insecure and had to receive emergency food assistance farmers in the north, who hold the bulk of the national herd, from the government. In 2019, another severe drought hit the have limited access to the market. GRN’s livestock marketing country, killing about 60,000 livestock and causing about two- incentive, which is provided after declaration of disaster and thirds of crops to fail. Droughts have become more successive only upon proof of sale, is ineffective at incentivizing effective and are increasing in severity; 2019 was recorded as the driest livestock herd management to limit mortality loss due to in 90 years. National states of disaster were declared in six of drought. Communal farmers account for an increasingly larger the last 20 years.3 proportion of the total livestock in Namibia, accounting for 79 percent of total cattle in 2019, up from 69 percent in 2010. The portion of the population and GDP affected by Overall, the total stock has been declining due to drought- disasters has increased significantly over the last two induced mortality since 2016. Droughts have a modest impact decades and is projected to increase further due to on crop production, compared to the livestock sector. 3. In 1992–93, 1995–96, 2012–13, 2013–14, 2015–16, and 2018–19, based on the Disaster Risk Management Act (2012). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 >>> Figure 6: Historic Livestock Losses Due to Drought 1.4 1.2 1 0.8 N$, billions 0.6 0.4 0.2 0 2013 2014 2015 2016 2017 2018 2019 Mortality loss commercial Mortality loss communal Productivity loss commercial Productivity loss communal Source: Authors, based on data from MAWLR. Note: This analysis includes losses due to livestock mortality and productivity losses (hike in fodder price coupled with a drop in market price due to distress selling). Rural communities, the northern region, and the poor Agriculture is the sector most vulnerable to climate change, throughout Namibia are the most vulnerable to the followed by water, tourism, and health. Recent droughts have negative impacts of climate change. About 43 percent of had a significant impact on poverty, with the income loss up to the population lives in poverty, and rural areas (59.3 percent) 28 percent in some affected areas (World Bank, forthcoming). are poorer than urban areas (25.3 percent). Notably, current Consequently, poor subsistence farmers face drought- and future drought risk is concentrated in the northern and induced food insecurity. The resulting malnutrition is worsened central belt. Overall, the northern region has the highest by water scarcity induced disease outbreaks, such as cholera level of poverty, specifically Kavango West (79.6 percent), and hepatitis E. (Sanitation levels are 65 percent in urban and Kavango East (70.0 percent), and Kunene (64.1 percent). 25 percent in rural areas.) The poor continue to be trapped in This is because adaptive capacities among these vulnerable a cycle of poverty, which worsens with each drought. Namibia groups are very low. This vulnerability is exacerbated by is ranked as a medium-risk country by the Notre Dame–Global existing marginal or lacking delivery of adequate services to Adaptation Initiative Country Index, which summarizes a remote areas, as such endeavors are generally considered country’s vulnerability to climate change in combination with prohibitively expensive. In addition, the dualism of the its readiness to improve resilience.4 agriculture sector, with its marked differences in access to credit, markets, and inputs, accentuates the socioeconomic vulnerabilities of rural population in Namibia. Institutional Framework for Disaster Namibia ranks among the highest in the world in terms of Risk Management in Namibia disaster mortality, relative to population size (Kapuka and Hlansy 2020). These results stem from a combination of high Institutional capacity for disaster risk management and vulnerability and low capacity to cope. Most of the population financing is limited. Disaster risk management is handled by is reliant on rain-fed agriculture and natural resources. the Directorate for Disaster Risk Management under OPM; 4. Countries are ranked from 1 (lowest risk) to 182 (highest risk). Namibia ranks 107, with high vulnerability (121 of 128) and medium readiness (109 of 192). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 climate risk management is handled by the National Climate or Hydrology Services) to the Directorate for Disaster Risk Change Committee under the Ministry of Environment; Management. The Meteorological Service further lacks and drought risk management is handled under MAWLR. regional presence, specialists, and equipment. Hydrology These institutions are guided by different policy frameworks Services has limited infrastructure and equipment, limited with different reporting structures. In addition, the existing human and financial resources, and weak collaboration with legislation does not make clear provisions for linking crucial other institutions on early warning. technical institutions (for example, the Meteorological Service >>> Figure 7: Institutional Framework for Disaster Risk Management Source: Authors, based on interviews with GRN officials. The National Emergency Management Committee, matters. At the regional, constituency, and village levels, which is chaired by the secretary to the cabinet and responsibility for drought emergency management currently includes representation from 20 line ministries and resides with Regional Emergency Management Units, several nongovernmental organizations, is a national Constituency Emergency Management Units, and Village policy-making and coordinating body. It is supported by Emergency Management Units. In addition, the National Food the Emergency Management Unit in OPM, which acts as Security and Nutrition Council, supported by the Food Security its secretariat, and the Namibia Early Warning and Food and Nutrition Technical Committee and Secretariat, as well as Information System, which provides information on the status other national coordinating structures, such as the National of food production and stocks in the country. The Namibia Early Land-Use and Environment Board, are responsible for Warning and Food Information System is also responsible coordinating functions related to drought-recovery programs for gathering, analyzing, and reporting on drought-related and long-term drought mitigation. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 Status of Disaster Risk Financing than two months for beneficiaries of the livestock marketing and fodders incentive programs to receive reimbursement. Instruments in Namibia The claim-settlement process from the National Disaster Fund is manual, paper based, and cumbersome. The emergency The current approach to DRF relies on risk retention management units in MAWLR and OPM are severely capacity without use of risk-transfer instruments.5 Figure 8 presents constrained. There is no leverage effect, and the budget is left existing and proposed risk-financing instruments in a risk- exposed, which may compromise development plans across layered framework for Namibia. GRN’s current approach offers multiple sectors. A notable development is the emergence of low financial protection and results in a critical funding gap the use of parametric solutions to fund humanitarian response, for moderate to severe shocks. Further, major constraints in through the Red Cross Society’s forecast-based financing operational capacity result in costly delays. It may take longer programs for drought and flood. >>> Figure 8: Existing and Proposed DRF Mechanisms for Agriculture Low frequency/high severity Agricultural insurance Sovereign insurance Limited. Unaffordable for small-scale Not available Risk Transfer farmers Government-backed credit guarantee Drought (2022), Flood (2023) Revolving funds backed schedules Humanitarian funding by GRN guarantees AgriBank: Bridge funding, restocking loans, loan Proposed under National restructure (guarantees 80% of loan at Drought Policy and Strategy no fees to farmers) High frequency/low severity National National Donor relief Risk retention National Disaster Fund Strategic Food Drought Funds Reserve Fund Disaster appropriation Supplementary budget MAWLR: emergency fund Source: Authors, based on interviews with GRN officials. Note: Boxes highlighted in blue indicate instruments that GRN currently has in place and is using, while white boxes indicate instruments that are not yet in place or used by GRN. The National Drought Fund is proposed under the pending National Drought Policy and Strategy. The box highlighted in yellow indicates that this instrument is in place but under review. GRN’s use of multiple uncoordinated risk-retention are used periodically, particularly for severe drought years. instruments creates inefficiencies, which further limit the Key instruments include the following: scale of support to farmers. The National Disaster Fund is the main instrument used for financial protection of farmers, while • The National Disaster Fund was established by the the food reserve is used to protect food-insecure households. Disaster Risk Management Act (2012) for the development Donor-relief funds provided by institutions affiliated to MAWLR and promotion of disaster risk management. It is managed 5. Annex B summarizes laws, policies, and strategies relevant to Namibia’s approach to disaster risk management. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 by the Directorate for Disaster Risk Management under Board, which contributed a total of N$20,000 in 2019 and OPM. It is financed from the national budget and donor N$730,000 in 2020. partners. Funds may accrue and may be invested. If funds are insufficient to meet disaster-related costs, an advance • Disaster appropriations have been used to provide may be made from the national budget (N$134 million in emergency funds to MAWLR from the national budget. 2021–22). The broad scope of the fund, which includes About N$580,000 was provided during the 2019–20 fiscal research, capacity building, and training on disaster year, and a further N$988,000 and N$2.5 million have risk management, as well as capital expenditures such been budgeted for the 2021–22 and 2022–23 fiscal years, as the acquisition of land and construction of buildings, respectively. compromises its efficiency as a DRF instrument. Overall, GRN’s risk-financing instruments are limited • A National Drought Fund is proposed in the pending in terms of coverage and operate in a fragmented way, National Drought Policy and Strategy to meet obligations which increases operational costs. In addition, the funds with respect to food security, agriculture, and water-supply are fully reliant on the national budget and donor contributions services in disaster drought years. The objective is to avoid for replenishment. The proposed National Drought Fund the disruptive effects of emergency budget reallocation and will increase fragmentation as well as operational costs and to speed up mobilization of funds. It is proposed that the will require up-front investment in risk finance expertise. drought fund will be managed by MAWLR and financed by GRN could improve the efficacy of its existing risk-financing the national budget, a percentage of agriculture industry mechanisms by consolidating or integrating the multiple funds. levies (collected by the NAB and Meat Board of Namibia), direct contributions from farmers in normal rainfall years, GRN funds disaster response predominantly through and international donor contributions. The fund would be the National Disaster Risk Management Fund followed legislated for, a permanent institution, and managed by an by the contingency reserve. Figure 9 shows that funding independent board. Funds would be invested until such from the contingency reserve has been substantial in the time as they were required. The fund is expected to be last five years, ranging between 30 percent and 87 percent about N$100–200 million and would operate in parallel to of the contingency reserve. This creates significant potential the existing National Disaster Fund under OPM. budgetary strain if other contingencies materialize within the same year. Despite the rising incidence of disaster events and • The National Strategic Food Reserve is used for the the prolonged drought between 2012 and 2019, humanitarian provision of food relief to disaster-affected communities. It funding has been low. Excluding the 2019–20 fiscal year, is funded through the national budget, and procurement is when GRN received N$115 million, on average GRN received done through the Agro-Marketing and Technology Agency humanitarian support of N$1.4 million per year between (AMTA). The reserve currently has a total storage capacity 2013 and 2021, equivalent to 1 percent of the contingency of 21,900 metric tons, which is insufficient to meet national reserve and covering less than 2 percent of total losses. The food-security needs for six months. In addition, the amount of funds allocated to the Disaster Risk Management reserve has faced funding constraints. During the 2020– Fund and the contingency reserve fluctuates widely and is not 21 fiscal year, funds available procured grain equivalent risk based. The budgeting process could be strengthened by to 20 percent of the reserve’s storage capacity. There is incorporating a climate risk assessment for key sectors, such a need to increase the storage capacity to 67,000 metric as agriculture. Funding for disaster relief and support has tons to meet national food-security needs for six months. declined over the last five years to less than N$200 million from an annual average of over N$300 million between 2013 • Donor reserve funds are mainly affiliated to MAWLR and 2017. and include the NAB (N$14,000 in 2019) and Meat EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 >>> Figure 9: Total Funding and Sources for Disaster Response Programs 800 700 600 500 N$, millions 400 300 200 100 0 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 National disaster fund Humanitarian funding Emergency fund Disaster appropriation Contingency reserves Average Source: Authors, based on data from MoF. Note: The National Disaster Fund is under OPM. The Emergency Fund is an emergency account under MAWLR. The disaster appropriation refers to budgetary allocation for the purchase of grain for the National Strategic Grain Reserve. Financial Protection for Agriculture in As figure 10 shows, between 2013 and 2019, GRN’s drought- relief and recovery programs are estimated to have covered Namibia only 5 percent of total losses in the crop and livestock sectors. Given the impact of climate change and limited alternative The agriculture sector faces a significant financial coping mechanisms, there is a compelling need to develop protection gap, estimated at about 95 percent, due to the robust financial protection mechanisms for both commercial absence of a comprehensive financial protection program. and communal farmers. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 >>> Figure 10: Estimated Loss Due to Drought versus GRN and Humanitarian Disaster Support 1,400 1,200 Crop loss 1,000 N$, millions Livestock loss 800 Crop support 600 Livestock support 400 Humanitarian support 200 0 2013 2014 2015 2016 2017 2018 2019 Source: Authors, based on data from MoF and OPM. Multiple drought-relief programs under OPM and MAWLR widespread events. Nearly 70 percent of those who received exacerbate the fragmentation and poor targeting of the drought-relief assistance following the 2015–16 drought were national social-protection system.6 Multiple ministries not in areas hit by the drought, which suggests substantial deliver services through multiple programs to the same leakage. In contrast, 93.3 percent of those who received households. Drought-relief programs include food transfers drought relief were in the areas hit by the 2018–19 drought, to households whose livelihoods are affected by drought; which was more widespread (World Bank, forthcoming). financial and production support to crop and livestock farmers; and water-supply programs (for human consumption and GRN’s drought support is dominated by food support. As access to new grazing areas). Livestock programs include (a) figure 11 shows, over the past nine years, on average, food fodder and salt subsidies; (b) a marketing incentive scheme support accounted for 49 percent, livestock support 21 percent, that pays farmers an incentive for every livestock unit that they and crop support 6 percent. Marketing incentives form the bulk sell, up to certain limits (this is meant to encourage farmers of livestock support, which presupposes access to market and to reduce the number of livestock on the range); (c) support limits communal farmers’ access to protection. Although out- for transporting cattle and leasing emergency grazing; and of-hand transaction mechanisms have been put in place to (d) subsidized loans for drought recovery. Crop programs address this challenge, northern communal livestock farmers for subsistence and commercial farmers include (a) drought- remain disadvantaged. The government could consider recovery inputs and a services voucher scheme (this includes digitizing payments as part of the national DRF strategy, to the provision of seed and fertilizer as well as pest-control reduce cost of response and deepen financial inclusion, which services); (b) crop-damage subsidies; and (c) subsidized has been shown to strengthen financial resilience among poor loans or deferring loan repayments for drought recovery. households (Moore et al. 2019). Overall, drought-relief and social-protection programs seem to be poorly targeted, particularly for less 6. Social protection consists of cash transfers, food support, in-kind assistance, social care services, and community-based development programs for marginalized groups. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 >>> Figure 11: Total Expenditure in Response to Disasters 450 400 350 300 N$, millions 250 200 150 100 50 0 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 Livestock support Cro p support Food support Logistics Source: Authors, based on data from MoF and OPM. Risk layering can also be applied at the household level after a shock (box 1). To ensure effective use of risk-layered to strengthen household resilience. International experience financial services, it is essential to tailor products to the specific and emerging research on the role of financial services in needs of the farmers to be targeted by a program. Farmers can enhancing the climate resilience of households show that be segmented based on their existing vulnerabilities and levels households require a range of services both before a shock and of financial literacy or capability. (See figure 12.) BOX 1: BUILDING RESILIENCE THROUGH FINANCIAL INCLUSION Low-income households are particularly vulnerable to shocks but the least prepared to cope with and recover from the impact of shocks. The effects of climate change exacerbate vulnerability. Financial inclusion can enable households to manage risk before a shock and to recover after a shock occurs. This builds resilience—the ability to mitigate, cope with, and recover from shocks and stresses without compromising future welfare. Evidence suggests well-designed financial products and services can play a role in increasing low-income families’ resilience by helping them to be prepared for risk, reduce risk, increase investment in the face of risk, and respond when a shock occurs. Before a Shock After a Shock Investment in the face Risk preparedness Risk reduction Responding to shocks of risk Liquid accounts, savings Lower barriers to credit and Digitization can lower costs of groups, and behavioral nudges goal-based savings may informal risk sharing and social may enable households to Insurance can lead to more encourage adoption of risk- protection to help households build precautionary savings to productive investments. mitigating technology and affordably access funds when shocks smooth consumption after a reduce exposure to shocks. occur. shock. Source: Moore et al. (2019). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 >>> Figure 12: Risk Layering at the Household Level for Communal Farmers in Namibia Source: Authors, using data from the NSA (2019). The increasing use of formal financial institutions by farmers linked to the market) into an account at a financial Namibian farmers suggests that a key requirement institution jumped by 42 percentage points (from a low 12 to expand access to financial services by farmers is percent to 54 percent). When those who received payments to increasingly being met. As shown by figure 13, which is a mobile money account are included, this increase jumps to 49 based on World Bank’s Findex data, between 2014 and 2021, percentage points (from 13 percent to 62 percent). The share of the percentage of individuals who reported receiving payments agriculture payment recipients who only used cash dropped by for the sale of an agricultural commodity (a good proxy for 48 percentage points, from 71 percent to 23 percent.7 >>> Figure 13: Financial Inclusion of Farmers Into a financial institution account Through a mobile phone In cash only 0 10 20 30 40 50 60 70 80 2014 2017 2021 Source: Findex. 7. Findex defines agricultural payment recipients as “respondents who report personally receiving payments from any source for the sale of agricultural prod- ucts, crops, produce, or livestock in the past year.” This is a good proxy for full-time and part-time farmers, who have at least some linkages to the market. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 3. >>> Agriculture Insurance for Smallholders in Namibia Agriculture insurance is an important tool for transferring risks out of farming communities. Agriculture is exposed to a large number of risks, and this makes farming incomes significantly uncertain. Thanks to their experience in dealing with adverse conditions, farm households and rural communities have developed various strategies for managing risks. However, traditional risk-management arrangements lead to a suboptimal allocation of resources and frequently fail to provide adequate protection in severely adverse circumstances (Hazell, Pomareda, and Valdes 1986). If appropriately structured and implemented, insurance can represent a useful tool for transferring risk outside of the farming communities, helping to stabilize agricultural incomes and to incentivize farmers to use resources more efficiently. Features of Agricultural Insurance Products A first way to classify agricultural insurance products is to distinguish between indemnity- based and index-based products. Indemnity insurance policies are contracts in which compensation is based on measured loss or damage, while index insurance contracts pay out with reference to an indirect indicator intended to be a “proxy” for loss or damage (CABFIN 2017). The index approach has many advantages in smallholder agriculture, where operating indemnity products is very challenging, but it also has some relevant drawbacks. The main shortcoming in index insurance is basis risk, which can be defined as the mismatch between the loss experienced by the farmer and the payout triggered by the insurance policy.8 Assessing the likelihood of basis risk events and defining how the consequences of such events will be handled are key prerequisites for determining whether a proposed index insurance product should be implemented. 8. See box 2 for a more detailed discussion on basis risk in index insurance. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 The following are the main typologies of indemnity-based crop insurance products: On the side of index products for crops, there are two • Named-peril crop insurance (NPCI), which can be either main categories: “single peril” (for example, hail) or “combined perils” (for • Weather index insurance (WII): Contracts that, for a example, hail + frost + wind), in which payments are specified area, provide the same payouts to all farmers issued on the basis of a percentage of assessed damage according to the value of an index based on a weather • Multiple-peril crop insurance (MPCI), in which payments variable (for example, rainfall, temperature, wind speed, are established on the basis of loss of yield generated and so forth) by a comprehensive set of perils (some exclusions may • Area yield index insurance (AYII): Contracts that, for a apply) specified unit area of insurance (UAI), provide the same • Revenue insurance, in which the yield-loss component payouts to all farmers against an estimated reference of an MPCI cover is complemented by a price coverage average yield (the “yield index”) of the area element9 >>> Table 3: Comparative Analysis of Multiple-Peril Crop Insurance, Area Yield Index Insurance, and Weather Index Insurance Moral Claim Transaction Hazard and What Is It? Basis Risk Settlement Costs Adverse Time Selection • A traditional indemnity insurance product against Multi- all perils peril crop Individual farm High High Low Medium • Payouts are determined insurance through a farm-level loss assessment process • Based on average losses Area-yield at the regional level, Multiple farms index rather than farm level Medium Low Medium Medium in an area insurance • Often based on crop- cutting experiments • Based on weather parameters (such as Weather index Multiple farms rainfall, temperature, or Low Low High Low insurance in an area soil moisture) correlated with farm-level yields or revenue outcomes Source: World Bank Group (2015). 9. Strictly speaking, revenue insurance products should be considered hybrid indemnity-index products since the price component of the coverage is usually based on aprice index, such as found in a commodity market. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 Insurance products for livestock as well can be classified as • Business-interruption policies for catastrophic (epizootic) indemnity based and index based. The following are the more diseases, which are covers designed to indemnify both traditional indemnity products for livestock (CABFIN 2017): loss of animals following the outbreak of a catastrophic • Standard accident and mortality insurance, which typically epidemic disease and the reduction or loss of income insures individual animals against accidental death or arising out of a ban on the sale of animals or animal injury requiring slaughter due to various named perils, products (meat, milk, eggs, and so on) for up to 12 months such as fire, lightning, aircraft and explosion, smoke, flood after the event. and windstorm, subsidence and landslide, and so forth. • Livestock production can be also covered by other special Standard mortality covers generally exclude risks such as types of indemnity insurance covers, such as transit diseases (especially epidemic diseases), theft, and other insurance, exhibition insurance, loss-of-use insurance, difficult-to-monitor risks. carcass removal and destruction, and the like. • All-risk mortality insurance, which is a type of coverage available only in advanced agricultural production contexts, Index insurance principles are also used to develop extends the standard accident and mortality insurance to covers for livestock. However, the most common approaches include named diseases and, in certain cases, epizootic or for livestock index products target pasture availability, rather Class A diseases (for example, foot-and-mouth disease), than direct damage to the animals.10 Indices to proxy pasture theft and straying, veterinary expenses, third-party liability, growth can be developed on the basis of weather data or on and other special types of risk. estimated biomass levels.11 BOX 2: BASIS RISK IN INDEX INSURANCE Basis risk is a key constraint for index insurance, and it can give rise to underpayments or overpayments, compared to the intended payment. In its widest sense, basis risk is the difference between the loss experienced by the farmer and the payout triggered. However, identifying the differences between losses and payouts received by the farmers can be complex. Such differences depend on the index insurance methodology on which the coverage is based. For example, a weather index insurance contract is not structured to cover pest and disease losses. Therefore, losses generated by such perils should not be compensated by a weather index insurance contract, and, accordingly, lack of payouts following a pest or disease attack should not be considered basis risk events. A key dimension of index insurance is the distinction between average losses experienced in the coverage area as a whole (covariate risk) and losses experienced by individual farmers (idiosyncratic risk). Causes of basis risk could be related to the distance from the point of measurement of the indexed variable and the geography or size of the unit area of insurance (spatial-basis risk), or to the timing of the start of crop season, which may differ from the measurements established in the index insurance contract (temporal-basis risk). If parameters such as triggers and exits are incorrectly calibrated, or the relationship between the index measurement and the crop yield is not clear, basis risk may be attributed to product design (product-basis risk). Source: IFAD (2017), modified. 10. An interesting index insurance experience for livestock has been developed in Mongolia, where payouts were triggered by a “mortality index.” See DeAngelis (2013). 11. For more details on livestock index insurance, see, for example, World Bank Group (2015). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 Lastly, agricultural insurance, particularly in its index- Index insurance can also be designed on the basis of based version, can be implemented at different application data collected through remote sensing devices, and this levels, generally identified as “micro,” “meso,” and is being used more and more in agricultural insurance “macro,” depending on the nature of the policyholder. programs. Remote sensing data can be collected through • At the micro level, the policyholders (the insurer’s satellites, aircrafts, and drones and can be used to develop customers) are farmers, households, or small-business pure weather index products (such as, for example, rainfall owners who purchase insurance to protect themselves index products based on precipitation levels estimated from potential losses caused by adverse weather events. through satellites) or to develop products that measure Micro-level policies can also be distributed to farmers variables that are directly related to the growing conditions by organizations such as financial service providers, of the crop (hence resembling more closely an area-yield farmers associations, input suppliers, processors, or index). The most common remote sensing approaches nongovernmental organizations. In addition to having adopted in index insurance for agriculture include rainfall wider outreach to the target group than most insurers, estimates, vegetation indices (NDVI, fAPAR, LAI, fCover, and these intermediaries also have vested social or so forth), evapotranspiration estimates (actual and relative commercial interests in protecting themselves and their evapotranspiration), soil moisture, and estimation of cultivated smallholder clients against weather risk. For example, area and productivity based on synthetic-aperture radar (SAR) insuring farmers can help financial service providers, data. Each approach will differ by the type of variable that can input suppliers, and other intermediaries manage their be described, the spatial and time resolution, and the amount risk of default by farmers. This in turn can help unlock of historic data available. development opportunities for poor smallholders, such as access to credit or higher-quality inputs. Remote sensing applications to agricultural insurance • At the meso level, the “aggregators” mentioned above are relatively new, and the industry is still on the learning can act as the policyholder. At this level, insurance can curve. Their potential for addressing some of the key problems be structured through a policy issued to the organization, in the implementation of crop and livestock insurance is very but with payout rules that could either directly or indirectly strong, particularly in reference to the chronic lack of yield and benefit farmers—for example, to alleviate mass loan weather data and the challenges of ground-based monitoring defaults in a microfinance institution. of remote areas. However, the ability to capture variation in • At the macro level, insurance can also be sold to aid productivity to an acceptable degree needs to be tested in governments and relief agencies in development and every specific implementation case. disaster management. As for any other insurance product, a key element for Public and Private Approaches to the design and implementation of agricultural insurance is data. Data availability is indeed critical and influences the Developing Agricultural Insurance selection of the products that can be adopted. For example, AYII Markets requires the availability of appropriate time series of regional yield data and the possibility of implementing appropriate Given the distinctive features of agricultural production data-collection procedures—usually based on in-field crop activities, developing agricultural insurance markets cuttings—while weather index insurance requires time series presents numerous challenges. In the first place, not all of weather data of suitable quality and, when based on ground insurability conditions hold in agriculture,12 and there are measurements, a network of weather stations located in the well-documented obstacles that hinder the development appropriate sites. of agricultural insurance markets (Skees and Hartell 2006). Agricultural risks are generally “correlated”; therefore, the 12. Insurability conditions, as presented by Skees and Hartell (2006), quoting Rejda (2001), are the following: (a) determinable and measurable loss, (b) accidental and unintentional loss, (c) calculable expected frequency and magnitude of loss, (d) potential insureds can be accurately classified into roughly homogeneous pools, and (e) large number of independent exposure units. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 diversification effect that insurers count upon does not hold. international level, both the “entirely public” and the “entirely Then there are asymmetries in information (that is, the different private” approaches to implementing agricultural insurance parties of the contract have different level of information about (figure 14) have shown their limitations. The set of possible the object of the coverage) that lead to “adverse selection” arrangements for agricultural insurance PPPs is broad, and and “moral hazard” effects. There are also structural features there is no predefined approach to be prescribed; each of agricultural production that generate high transaction costs country should identify the solution that best suits its specific for underwriting, monitoring, and loss-adjustment activities. All needs. Also, effective agricultural insurance typically requires these elements have traditionally generated a market failure the involvement of several stakeholders, including local in agricultural insurance, and viable markets for this class of insurers, reinsurers, distributors, farmers organizations, and products hardly develop unless there are specific conditions government departments/agencies. The distributors could or dedicated support is provided. include commercial and other banks (agricultural, rural, and cooperative), microfinance institutions, and agribusiness Experience shows that agricultural insurance models companies, including input suppliers. Government based on public-private partnerships (PPPs) contribute departments and agencies that could have a role include the to a more effective and efficient intervention. Different insurance regulator, ministry of finance, ministry of agriculture, operational models have been tested in various countries, planning ministries, the meteorological service, and other and after decades of tests and experiences at the research and specialist institutes. >>> Figure 14: Roles of Public and Private Sectors in Different Types of Agricultural Insurance Programs Source: Iturrioz (2010). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 Agricultural insurance programs can be structured around is no involvement of public institutions, except for regulatory different types of organizational frameworks. A completely purposes. In this type of structure, farmers may be provided private structure can be suitable for countries that have very with insurance policies by different types of agents (direct sales specific structural and risk profiles or for programs that target agents, brokers, input suppliers, banks) that offer products on mainly localized and independent perils (for example, hail or behalf of insurance companies that have acquired protection fire). Figure 15 illustrates a case in which the structure of the from reinsurers. program is entirely managed by the private sector and there >>> Figure 15: Private Market Structure for Agricultural Insurance with No Public Support Source: CABFIN (2017). In a PPP approach, the public sector can take a lead in Figure 16 presents a hypothetical structure in which the public different areas. These include a very light engagement, in sector is heavily involved in various roles—from providing which the government provides some technical support, from financial support and public reinsurance (ministry of finance) a simple aggregation of staff of selected ministries up to the to planning, collecting, and disseminating data; providing development of a governmental agency for agricultural risk education and training (ministry of agriculture); developing management. Government participation in an agricultural dedicated legal frameworks and regulations (regulator); insurance PPP can be further enhanced by taking an active and providing special assistance in case of disaster events role in financing reinsurance, as happens in various countries (disaster authority)—all feeding into a dedicated “Agricultural (Mexico, Morocco, Spain, the United States, and so on).13 Risk Management Agency” that coordinates the entire system. 13. See Mahul and Stutley (2010) for a detailed analysis of public support to reinsurance of agricultural risk management schemes. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 >>> Figure 16: PPP Organizational Structure for Agricultural Insurance Source: CABFIN (2017), modified. The insurance industry can also interact with the underwriting decisions. Key examples include Spain and government and farming communities in different ways. Turkey, where insurers have formed not only a pool but also Insurance companies can work independently but can also a specialist managing agency (Agroseguro for Spain and develop different types of integrated structures that go from Tarsim for Turkey) that is responsible for policy issuance a simple market association to a co-insurance pool, and up and claims management. “Specialist agricultural insurance to a single national insurance entity. Co-insurance pools are companies” are entities established to have responsibility arrangements in which several insurance companies work for all business related to agriculture in a specific country. together to issue insurance policies for specific products. Many specialist agricultural insurance companies exist A group of insurers decide that an insurance policy for a internationally. Examples are the Compagnie Nationale new or difficult class of insurance can be issued as a joint d’Assurance Agricole du Sénégal in Senegal and the (“co-insurance”) policy, where each insurance company is agricultural insurance company formed in each province of named as carrying a certain share of the overall risk. The Canada. These companies may be state owned or formed pool can appoint a lead insurer to be responsible for taking with joint state and private sector shareholding. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 25 Public financial support is a critical element for a for insurance. Box 3 provides examples of public financial successful implementation of agricultural insurance. support for agricultural insurance, and box 4 presents the Public financial support to agricultural insurance is usually Government of Kenya’s wide-ranging support for developing composed of funds for premium cofinancing and of resources the agricultural insurance market in the country. allocated to the improvement of the enabling environment BOX 3: INTERNATIONAL EXAMPLES OF PUBLIC FINANCIAL SUPPORT FOR AGRICULTURAL INSURANCE • Provision of agricultural insurance premium subsidies: In high- and middle-income countries, some level of premium subsidy is the most popular form of financial support, especially in support of multiple-peril crop insurance—for example, in Brazil, Canada, China, India, Japan, Mexico, Portugal, South Korea, Spain, Turkey, and the United States—although it is notably absent in some countries, including Australia, New Zealand, and South Africa. Due to budget constraints, premium subsidies are less common in low-income countries, but they are important in countries that have developed structured agricultural insurance programs, such as Kenya, Morocco, the Philippines, and Senegal. • Reinsurance support: Government supplies reinsurance support in Canada, South Korea, and the United States and provides favored access to state reinsurance funds or companies in Brazil, Mexico, and Spain. • Administrative and operational expenses support: This form of government financial support is provided in India, the Philippines, South Korea, and the United States. • Governments may also provide subsidized access to other government departments, such as meteorological departments, statistics, training, and education, as well as enabling legislation. • Promotion of agricultural insurance pools and supporting agencies or technical support units: for example, in China, Malawi, Mongolia, Spain, Thailand, and Turkey. In addition, public funding can also support the development of insurance products, the collection of yield data, the strengthening of infrastructure, cover operating costs of dedicated institutions, and consumer education for farmers. Source: Mahul and Stutley (2010), modified and updated. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26 BOX 4: THE KENYAN PPP EXPERIENCE IN DEVELOPING AN AGRICULTURAL INSURANCE PROGRAM Starting in 2014, the Government of Kenya, with the support of the World Bank, has actively supported the development of crop and livestock insurance for smallholder farmers under a PPP between the government and private sector insurance companies. The government tenders the business, and prequalified insurance companies compete for the business either singly or as part of an insurance consortium (pool of co-insurers). Government support has been mainly in the form of premium subsidies on the crop and livestock insurance programs, but also through insurance literacy campaigns, implemented by the Insurance Regulatory Authority, and through assistance to strengthening agricultural insurance data and statistics. Kenya Crop Area Yield Index Insurance Program The State Department of Agriculture of the Ministry of Agriculture, Livestock, and Fisheries (SDA-MALF) has worked closely with the private sector insurers to develop an AYII program that was rolled out in 2016–17. The AYII program is underwritten by a pool of co-insurers led by APA Insurance. The Government of Kenya provides support to the program in the form of 50 percent premium subsidies, while SDA-MALF has assisted the private insurers to define the unit areas of insurance; to collect historic crop production and yield data to construct the area yield indices; through insurance awareness creation for county governments and farmers; and in the conduct of end-of-season crop-cutting experiments. The AYII program is closely linked to the government’s e-fertilizer program and has been bundled with seasonal loans, most notably through the One Acre Fund. To date, well over half a million smallholder farmers in Kenya have been supported and benefitted by the AYII program. Kenya Livestock Insurance Program With the support of the World Bank, the Government of Kenya launched the Kenya Livestock Insurance Program (KLIP) in the 2015–16 short-rains season. The program is implemented by the State Department of Livestock of the Ministry of Agriculture, Livestock, and Fisheries. This insurance program is based on a satellite pasture drought index insurance cover using a vegetation or forage availability index (NDVI). Under KLIP, the government purchases an annual drought insurance cover from private insurance companies on behalf of vulnerable pastoralists. The government fully funds (subsidizes) the annual premiums for nearly 20,000 vulnerable pastoral households located in eight northern drought-prone counties of Kenya. Even though the livestock insurance is purchased by the government, insurance companies pay claims directly to the beneficiaries in the event of a payout triggered by drought. Payouts are made into beneficiaries’ bank accounts or their mobile money accounts. The cost of the annual premium subsidies for the Government of Kenya is about US$2.1 million. Such volume of premiums from the government-supported initiative makes the agriculture insurance market attractive and may encourage private sector insurers to invest and further develop the market in the future. Between 2017 and 2020, northern Kenya experienced drought conditions caused by the El Niño/La Niña Southern Oscillation that triggered KLIP payouts of approximately US$7.5 million, benefiting more than 28,000 pastoralists and their family members. Source: Authors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 27 Like other population groups, farmers are generally The Agricultural Insurance Market in unfamiliar with insurance principles and modalities and, therefore, may not be able to assess rationally Namibia the opportunities offered by insurance. In addition, smallholders tend to follow traditional risk-management In Namibia, access to agriculture insurance is currently strategies, which may provide acceptable protection for the limited. Insurance is available only to commercial farmers and more frequent low- to medium-impact events and may lead mainly for liability covers and for protecting assets (buildings, the farmers to consider insurance as an unnecessary cost. vehicles, and so forth). Supply of covers for crops and livestock- Smallholder farmers also need to make income allocation production risks is very limited. The main players in the market choices for their limited resources and may frequently lack the for agricultural insurance are Santam, Hollard, Corporate cash to purchase insurance. Lastly, in case of major shocks, Guarantee (through alternative risk-transfer arrangements), farmers may also expect to receive government relief, and Old Mutual, Western National, and MMI. this further reduces motivation to purchase insurance. All of this typically leads to most farmers not being willing to buy Interest in agricultural risk management is growing, agriculture insurance, particularly if it is retailed as a stand- and a range of insurance and non-insurance risk- alone product. transfer options have been tested recently or are being considered. These options cover micro-, meso-, and macro- Most of the schemes that have reached a high penetration level interventions and include both indemnity and index have conditional requirements that bundle insurance approaches. The micro-level interventions being considered with other support programs or services that farmers include multiperil mortality risks for livestock (so far limited to need. Nearly universal agricultural insurance coverage commercial farmers only); an index cover based on rainfall has been achieved in Greece because the purchase of measured by weather stations for drought and flood risks agricultural insurance is required to be eligible for support for livestock (NASRIA); a revolving fund financed by farmers provided to farmers by the Common Agricultural Policy of the and linked to input provision for drought risk (NAB); and a European Union. In the United States and Spain, farmers vegetation index–based drought cover for livestock (Hollard). that do not enroll in the agricultural insurance schemes are A meso-level drought index cover (based on rainfall measured not eligible for disaster relief support. In India, the massive at meteorological stations) for lead firms in select crop supply scale of around 50 million farmers insured under the Pradhan chains has been tested recently in the Kavango East and West Mantri Fasal Bima Yojana scheme (IBEF 2023) is driven Zambesi region (above the VCF). Lastly, macro-level drought by the mandatory requirement to purchase insurance when covers based on a soil moisture index and on vegetation or applying for input credit from public sector banks. In Kenya adequacy-of-water requirement indices are being proposed, (box 4), the increase in agricultural insurance take-up from respectively, by the Namibia National Reinsurance Corporation practically nil to over 750,000 policies sold per year is due to (NamibRe) and the African Risk Capacity (ARC). a combination of premium support (50 percent cofinancing) and the role of “aggregators,” such as One Acre Fund, Apollo NamibRe, the state-owned national reinsurer, is developing Agriculture, and Kenya Seed Company, which request farmers a sovereign risk-transfer product. The product aims to to purchase insurance with the provision of inputs or input allocate part of the liability to which GRN is exposed in case loans (Biese, McCord, and Gopalakrishna 2021).15 Lastly, of major drought events to the reinsurance market (NamibRe in Zambia, agriculture insurance scaled exponentially when 2022). The policy would be based on a high-resolution soil it was bundled with a public scheme to provide subsidized moisture index, and the government would pay a premium agriculture inputs, increasing from less than 20,000 policies to to obtain such a cover. Part of the risk originating from the over 900,000 policies in one year (World Bank 2019).16 transaction will be retroceded to the international reinsurance market and would be locally intermediated by NASRIA. 14. The translation of Pradhan Mantri Fasal Bima Yojana is “Prime Minister’s Crop Insurance Scheme.” 15. It is interesting to note that 90 percent of premium volume is generated through the “bundling” approach, while direct retail supported by the govern- ment with education, awareness and enrollment campaigns generates only the remaining 10 percent (Biese, McCord, and Gopalakrishna 2021). 16. A relevant example of lack of scale-up is the case of Ghana, where, despite remarkable preparation and implementation work supported by the German development agency, the lack of premium support and of a conditional requirement led insurance take-up to lag at low levels (Ankrah et al. 2021). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 28 Index insurance for agriculture is currently not regulated Based on the perils discussed in chapter 2, support for in Namibia. To allow index-based insurance products to the development of insurance covers needs to focus on be offered in the market, NAMFISA may be able to use the drought risk exposure for grazing cover for livestock, and regulatory sandbox approach currently under consultation. pearl millet and maize cultivation. Husbandry of large and Also, since there is no disaggregated reporting requirement for small animals is a fundamental component of the livelihood of agriculture insurance, specific data for this class of insurance the communal farming environment; hence, it should be one products is currently not available from NAMFISA. of the targets of the envisaged risk-transfer activity.17 Crop cultivation is equally important, as it provides local communities with staple food inputs. The main crop-production activities Market Segmentation and Peril among communal farmers are mahangu (pearl millet), maize, and sorghum.18 Pearl millet covers nearly 80 percent of the Identification grains area, while maize (15 percent) and sorghum (8 percent) share the rest. (Wheat is cultivated on only 1 percent of the GRN’s primary interest in agriculture insurance in Namibia total cereal area.) Hence, pearl millet and maize could be the is to protect “communal” smallholder farmers. As mentioned main targets of an insurance program that intends to service in chapter 1, a clear distinction is made in Namibia between the majority of the crop-farming population. communal and commercial farmers, with the former referring to farmers who farm in communal land and the latter referring to In the Namibian communal farming context, crops and those who farm in titled land. And, according to NAB, a further livestock farming are carried out in the same productive distinction is made between “communal subsistence farmers,” environment and largely by the same households. with farm sizes up to 5 ha, and “communal smallholder farmers,” According to the last census, 62 percent of households are with farm sizes above 5 ha. engaged in both crop and livestock activities.19 This is different from other countries in Africa, where crop and livestock To identify the right set of farmers to be targeted by an activities targeted by insurance programs are carried out in agricultural insurance program, the segmentation between separate environments by different parts of the population (for smallholders and subsistence farmers should be verified. example, farmers versus pastoralists in East Africa). This is a It is generally agreed that agricultural insurance programs relevant dimension to consider while designing products for should target smallholder farmers, while subsistence farmers communal smallholders in Namibia. should be protected using other DRF mechanisms—such as the National Disaster Fund in Namibia—or other macro-level insurance programs. Agricultural insurance programs are usually not an appropriate solution for subsistence farmers due Selecting Appropriate Agriculture to these farmers not being linked to the markets and thereby Insurance Products having limited capacity to contribute to insurance premiums. In the Namibian context, the key question is whether all farmers International experience indicates that indemnity-based that operate farms below 5 ha are actually “subsistence insurance is not well suited to the risk-transfer needs of farmers,” or whether it would be more appropriate to classify smallholder farmers; hence, the most feasible options as subsistence farmers those that operate smaller farms (for for them are index-based insurance products. Indemnity example, less than 2 ha, according to the NSA classification insurance requires pre-inspections, collection of individual in table 2). production history records, and in-field assessment of losses and is also significantly exposed to moral hazard and adverse 17. According to the Namibia National Farmers Union: “In Namibia livestock makes a major, although largely underestimated, contribution to rural devel- opment. They produce food, enhance crop production and provide additional economic goods and services as well as cash income. The inclusion of livestock diversifies and increases total farm production and income, provides year-round employment and disperses risk. Sales of livestock products provide funds for purchasing crop inputs and for financing farm investments. Livestock often form the major capital reserve of farming households and, in general, enhance the economic viability and sustainability of a farming system. Despite communal areas constituting about 41 percent of the total land mass, being home to two-thirds of the country’s population and supporting over 81 percent of the national herd, livestock production in the communal areas is still extensive and characterised by low productivity and communal livestock farmers especially in the NCA are still marginalised” (NNFU 2022). 18. Data from correspondence with MAWLR. 19. Table 3.1 in Namibia Census of Agriculture 2013/2014: Communal Sector Revised Report. June 2019. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 29 selection. All these elements make indemnity products more challenging to operate in a smallholder farming context. Therefore, insurance products based on an index approach are more likely to be feasible and scalable. Further, index insurance products that use data collected via remote sensing can remove the constraints generated by the lack of adequate coverage of the territory by ground-level weather stations. For livestock, vegetation indices or soil moisture or evapotranspiration index–based products that use remote sensing data seem most feasible. These products can focus on the amounts of pasture available for animal grazing or on the level of water available for pasture growth. Both approaches have their strengths and weaknesses, and the merits of vegetation indices, such as NDVI, and other indices such as soil moisture and evapotranspiration need to be assessed in the operational context of Namibia and the most promising one adopted. (See annex C for details on these indices.) For crops, in the short term, soil moisture or evapotranspiration index–based products seem most feasible. The key risk for crop production in Namibia is drought, and soil moisture indices are specifically developed to monitor the water content of the soil, which is directly correlated with the level of water available for crop production. Evapotranspiration indices include an estimation of potential water demand by the crops and are also used to monitor drought. While remote sensing–based index insurance products are likely to be more feasible to implement in the short run, the feasibility of AYII for crops should also be tested in the medium term. AYII typically provides a comprehensive coverage for crops, including a wider set of production risks. However, AYII requires more complex yield-estimation support activities, which are currently not in existence in Namibia.20 Such data-collection activities would need to be established specifically by the public service or by dedicated private service providers. Therefore, an implementation of AYII in the short term may not be feasible. 20. Personal communication from MAWLR. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 30 >>> Table 4: Features of Insurance Products Proposed for Smallholder Farmers Soil Moisture or Vegetation Soil Moisture or Area-Yield Micro-Level Index Micro-Level Index Evapotranspiration Micro-Level Index Coverage for Communal Coverage for Communal Index Coverage for Communal Smallholder Crop Farmers Smallholder Livestock Farmers Smallholder Crop Farmers Communal smallholder livestock Communal smallholder crop Communal smallholder crop farmers (not including subsistence farmers (not including subsistence farmers (not including subsistence Target farmers) mainly located above the farmers); potentially also for farmers); potentially also for segment VCF (red line) commercial farmers without commercial farmers without premium support premium support Application Micro-level coverage (the Micro-level coverage (the Micro-level coverage (the level policyholders are the farmers) policyholders are the farmers) policyholders are the farmers) Risk Drought Drought All risks affecting the average yield covered of the area Index-based, remote sensing soil Index-based, remote sensing soil Index-based; yield assessed on Insurance moisture or vegetation index moisture or evapotranspiration area basis through sample crop approach index cuts Private insurance companies, Private insurance companies, Private insurance companies, Ministry of Finance (financing), Ministry of Finance (financing), Ministry of Finance (financing), Responsible potential intermediaries/distribution potential intermediaries/distribution Ministry of Agriculture (or agents channels channels external service provider) for yield assessment, potential intermediaries/distribution channels Potential partial premium subsidy Potential partial premium subsidy Potential partial premium subsidy Risk up to a number of livestock heads up to 10 ha up to 10 ha financing to be determined • Tested and effective index Effective index insurance Comprehensive coverage including insurance approach approach for transferring drought a wide set of production risks • Compared to applications in risk; recently growing, thanks to Pros/ other countries, potentially technological innovation that has advantages easier in Namibia, given the significantly improved resolution of prevalence non-pastoralist data livestock husbandry" As per any index insurance • As per any index insurance Given the need to estimate product, potential occurrence of product, potential occurrence average yields per area units, basis-risk events to be minimized of basis-risk events to be operationally more laborious than a Cons/ through accurate contract design minimized through accurate simple weather index challenges and definition of insured areas contract design and definition of insured areas • Appropriate mainly for drought risk " Source: Authors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 31 Implementing a National Agricultural significant proportion of farmers prioritized by GRN; (b) provide comprehensive and integrated coverage in synergy with Insurance Program existing DRF programs; (c) target specific farmer segments; (d) potentially include interventions at different levels (that Support for the development of agriculture insurance is is, farmer level, aggregator level, and sovereign level); and best delivered within the framework of a comprehensive (e) help strengthening infrastructure and data collection and national agricultural insurance program (NAIP). As management. discussed previously, several countries that support agriculture insurance for their farming communities have taken An effective public-private institutional structure is this approach. Adopting a NAIP approach can be particularly critical for a successful NAIP. Figure 17 illustrates a potential useful in integrating public and private sector efforts. To be program structure that GRN could consider implementing. effective, a NAIP would need to do the following: (a) reach a >>> Figure 17: Potential Initial Institutional Structure for a NAIP in Namibia Source: Authors. Note: The graphical representation of a potential institutional framework for a NAIP in Namibia shows two different insurance-retailing models: (a) insurance directly retailed to farmers, and (b) insurance bundled with agricultural credit or production inputs and retailed through financial service providers or input suppliers. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 32 On the public sector side, the NAIP should include both significant levels of drought risk in Namibia, it is expected a high-level steering committee and an interministerial that premium rates for agricultural insurance policies will technical support unit. The high-level steering committee be high. Therefore, premium cofinancing would be key in should include key government policy makers and identify making insurance more affordable for farmers. As is the the policy objectives, define the amount of resources to be case in most countries that operate public agricultural allocated to the program, and provide general guidance on insurance programs, supporting the cost of insurance policy-level issues. The interministerial technical support unit would have a relevant impact on the uptake of the covers. should focus on implementing the orientations of the steering This would probably be a necessary condition, although it committee, oversee the operational activities of the program, may not be a sufficient one. Public funding will also need and interact with the private sector components of the program. to be allocated to support product development, yield-data collection, strengthening of infrastructure, and covering Key private sector participants in a NAIP are the insurance the operating costs of dedicated institutions and costs of and reinsurance companies. The insurance companies farmers’ awareness raising and education. should interact primarily with the interministerial technical support unit, in order to receive guidance on program Lastly, a robust monitoring and evaluation (M&E) system features and implementation procedures, and they would in is a key requirement to track the performance and turn provide feedback on the operational requirements of the implementation progress of a NAIP. The implementation program. Such interaction could take place in a public-private of a robust M&E system allows assessment of the program’s technical working group. Reinsurance companies would inputs and outputs, timeliness, effectiveness, and impact; it provide reinsurance capacity and, potentially, also technical also facilitates information sharing, decision-making, and support for product design and implementation. The insurance periodic reviews to address any new challenges and emerging industry may or may not decide to work in a specific market issues. Specific areas that M&E needs to focus on are product aggregation form. An international advisory team could be performance (with particular attention to basis risk in index also set up to provide policy advice and technical support insurance programs), service quality, product satisfaction, and to the public and private sector participants. Such a team economic impact (in particular, measuring whether the program could potentially be supported by multilateral and/or bilateral enables participating farmers to maintain their consumption development agencies and comprise experts in agricultural levels following major events, and whether farmers are able risk management and finance. to get back into production rapidly). A robust M&E system can also help stakeholders to identify and mitigate proactively key Strengthening the quality of agriculture and farmer data risks that can be faced by even a well-designed, adequately is critical for the success of a NAIP. High-quality data is the funded, and effectively implemented NAIP. backbone of any agriculture insurance program, and GRN and the private sector would need to collaborate to maximize data- collection outcomes. The availability of high-quality agricultural Providing Fiscal Support for a NAIP and farmer data is critical for insurers to be able (i) to measure losses, (ii) to design reliable products, (iii) to transfer risks to A costing exercise was carried out to estimate the reinsurance markets, and (iv) to deliver payouts. In addition, potential cost of a NAIP for Namibia during the start-up data is needed for continual monitoring and assessment of and scale-up phases. Initial costs for developing a NAIP the products. would target expenses for (a) institutional building, (b) product research and development, and (c) product testing and piloting A NAIP would also enable GRN to provide effective and (including a small premium cofinancing component). Table 5 efficient multiyear public funding necessary to finance presents these cost estimates and assumptions. various components of a NAIP. The largest component of such support is likely to be premium cofinancing. Given the EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 33 >>> Table 5: Initial Costs for Product Development and Pilot Testing of Agricultural Index Insurance Policies Estimated Costs (Million US$) Start-up and operational costs for interim unit for coordinating product development and pilot testing 0.1 Development of selected insurance products 0.2 Identification of pilot areas and data collection 0.1 Implementation of pilot tests: 2023-24 and 2024-25 crop seasons (tests on 3-5% of target area, including 0.6 premium support) Initial budget allocation for product development and pilot testing (total) 1.0 Source: Authors. A costing exercise was also undertaken for the scale- assumed is N$3000 per hectare. Annex D provides details on up phase, under various scenarios. The scenario testing the parameters and scenarios considered for estimating the used the following parameters: (i) the subsidy levels, (ii) costs for GRN during the scale-up phase. the farmer segments to be targeted, (iii) the potential take- up progression, (iv) the potential premium rates, and (v) the The costing exercise produces a wide range of potential values to be insured. The farmer segment scenarios include fiscal costs for GRN. Table 6 presents the overall costs households that farm more than 5 ha of land, a maximum of per year for NAIP for the two target farmer group segments, 31,673 households being targeted, and households that farm including both livestock and crop insurance, and under low, above 2 ha of land, an estimated 95,477 households being medium, and high premium rate scenarios. The results indicate targeted. The exercise assumes 50 percent subsidy levels up that at full rollout, depending on the farmer group segment 10 ha and a 10 percent uptake growth per year. The to firstAuthors. Source: targeted and premium-rates charged by the market, costs for premium rates range from 5 percent to 15 percent for crops and GRN could range from US$1 million to US$4.5 million per year. from 4 percent to 10 percent for livestock, and insured value >>> Table 6: Summary of Fiscal Costs per Year for NAIP Premium Rate Scenarios Low Medium High (Million US$) Total costs per year (targeting At program inception 0.4 0.4 0.5 households that farm more than At full program rollout 1.0 1.8 2.5 5 ha) Total costs per year (targeting At program inception 0.4 0.6 0.8 households that farm more than At full program rollout 1.7 3.1 4.5 2 ha) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 34 4. >>> Recommendations and Next Steps This chapter summarizes the main recommendations of the diagnostic. The first two recommendations relate to strengthening Namibia’s overall DRF approach, and the following four recommendations relate to supporting the development of agriculture index insurance. The chapter concludes with a set of sequenced next steps for GRN’s consideration. Develop and Adopt a Risk-Layered Approach to Disaster Risk Financing An in-depth review of existing risk finance instruments and operational procedures is critical to develop a cost-effective risk-layered financing approach. An in-depth review of risk finance instruments will give the MoF a complete picture of the various risk-financing instruments currently being implemented by the government, help identify areas of redundancy, and enable review of the scope of the multiple contingency funds to ensure that they are appropriate and focused on the key policy priorities of GRN. Based on this review, actions can be taken to harmonize, streamline, and strengthen the risk financing instruments and claims settlement operational procedures with the objective of enhancing their efficacy in providing financial support to vulnerable households. GRN could consider building surge capacity within OPM and MAWLR, as well as the feasibility of scaling up cash support using mobile money to reduce high logistics expenditures. Conducting a robust fiscal gap analysis can help the MoF in estimating the financing gap GRN is exposed to in relation to the financing of disaster response. Under such an analysis, historic disaster losses are collated and a statistical distribution is fitted to the historic relief costs. A Monte Carlo simulation is performed using the statistical distribution to produce an EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 35 indicative distribution of future relief costs. The distribution of avoid fragmentation and ensure the different mechanisms future relief costs can then be compared against the existing complement each other and support other relevant policy risk financing that GRN has available to finance response, priorities. The policy would highlight the segments of society to understand the fiscal gap for minor, medium, and severe whose support the government would prioritize in the event disaster events.21 of future shocks; the current (and potentially new) financing instruments upon which it intends to draw to support these A national DRF policy can help GRN provide policy households; and the delivery mechanisms through which it coherence for its various DRF programs, including the intends to disburse funds. Moving forward, the policy would NAIP. A national DRF policy can set out GRN’s strategic support the MoF in prioritizing the allocation of funds to priorities for financing disaster response. The MoF is ideally specific assets or populations based on its policy priorities. placed to lead the development of this policy. Developing a Figure 18 presents a risk-layering approach that incorporates DRF policy can help strengthen the efficiency and efficacy the agriculture insurance program recommended for Namibia. of public expenditure. A comprehensive strategy would help   >>> Figure 18: Risk-Layering Approach with Recommended NAIP Low frequency/high severity Sovereign parametric insurance Agricultural index insurance (NAIP) For livelihood protection of subsistence farmers For semi-commercial or market linked Risk Transfer and food security for poor households smallholder farmers Credit guarantees and revolving funds backed by GRN guarantees Contingency Credit Facilities Integrate proposed and existing GRN schemes High frequency/low severity National Strategic Food Risk retention National Disaster Fund Reserve Disaster appropriation Supplementary budget Source: Authors. Note: Boxes highlighted in blue indicate instruments that GRN currently has in place and is using, while the white boxes indicate instruments that are not yet in place or used by GRN. 21. An example of a fiscal gap analysis, performed in South Africa, can be found at World Bank (2022). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 36 Support the Expansion of Access to Use Differentiated Approaches Financial Services for Smallholder to Protect Smallholders and Farmers Subsistence Farmers Increasing access to a broad range of financial services Agricultural index insurance programs should focus on for smallholders is critical for several reasons. As smallholder farmers who are linked to the market. The discussed in chapter 2, access to a broad range of financial size of this group that can be feasibly reached would depend services is critical to help households optimally manage the on available or potential channels for distributing the products risks they can retain. Further, as discussed in chapter 3, the developed. Such channels typically include agriculture value proposition for agriculture insurance is significantly finance providers and agriculture input dealers. The number increased when bundled with access to credit. Unfortunately, of farmers that a program can reach would also depend on as discussed in chapter 1, access to credit for Namibian the farmer group segments targeted. The scenario analysis farmers, particularly communal farmers, remains extremely undertaken by the diagnostic presents two scenarios based limited. Increasing access will require addressing the demand- purely on available data on distribution of households farming and supply-side constraints. On the demand side, a key on communal lands, ranging from under 32,000 (households constraint that would need to be addressed is increasing the farming over 5 ha) to over 95,000 (households farming over 2 productivity of communal smallholder farmers and expanding ha). Further, at least in the initial phase, the livestock farmers the number of farmers who have access to formal markets. that can be reached are likely to be those that are south of This is particularly relevant for the 55 percent of Namibian the VCF. smallholder livestock farmers who are north of the VCF, but it is also relevant for the rest of smallholder farmers south Subsistence farmers should be protected using other of the VCF. On the supply side, there is a need to improve DRF mechanisms—such as the National Disaster commercial bank and Agribank’s offerings to the communal Fund—and potential macro-level insurance programs. smallholder sector and expand financial service providers Based on international good practice, farm-level agricultural serving the sector beyond the banking sector. insurance programs are usually not an appropriate solution for subsistence farmers.22 Micro-level insurance may not be GRN should consider developing an action plan to a cost-optimal or viable option for subsistence farmers due to support expansion of access to finance for smallholder farmers not being linked to the markets and limited capacity farmers. The action plan can build on the recommendations to contribute to insurance premiums. This is compounded made by the 2021 Country Private Sector Diagnostic (IFC by insurers’ lack of efficient distribution channels to reach 2022) to improve access to finance for smallholder farmers, subsistence farmers, which results in a high cost of distribution which included establishing a window for agribusiness under per policy. The National Disaster Fund, the primary instrument the credit guarantee scheme managed by DBN, strengthening currently being used to support subsistence farmers, could be availability of reliable data on smallholder farmers, and strengthened by introducing a risk-based assessment in the supporting the entry of fintech/agtech players to provide new annual budgeting process and obtaining macro-level insurance financial products. The action plan could also benefit from or catastrophe protection, to increase the level of protection a dedicated agriculture finance diagnostic. World Bank has offered to individual farmers and ensure sustainability of the undertaken such diagnostics in several countries in Africa, fund. Such an arrangement would complement the proposed including Rwanda, South Africa, and Zambia. NAIP for smallholder farmers. Further, the payouts from a macro-level insurance program could be integrated in the disaster relief activities of the government and distributed to the beneficiaries through already existing channels. 22. See, for example, World Bank (2011), 56. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 37 Support Development of Index testing of index insurance products based on remote sensing data is recommended for livestock and crops, and for crops Insurance Products for Livestock and the recommendation is also to test a product based on area Crops yield (AYII). Based on hectarage of crop-production data, it is recommended that pearl millet and maize be the initial target Based on the analysis presented in chapter 3, index crops. The features of the index products recommended are insurance products are recommended for Namibia to summarized in more detail in table 4 in chapter 3. cover both livestock and crop-production risks. The >>> Figure 19: Agricultural Insurance Products Recommended for Smallholder Farmers and Potential Macro Cover for Subsistence Farmers Livestock Crop Macro-level soil moisture index: NamibRe Subsistence farmers (Government safety net) Micro-level Micro-level soil moisture/ Smallholder farmers (Government safety net) area-yield (Commercial evapotranspiration Insurers) (Commercial Insurers) Short-term Medium-term Source: Authors. Establish a National Agricultural The NAIP should have a well-designed communication strategy that clearly communicates not only the Insurance Program as a PPP advantages of index insurance but also its risks, particularly basis risk. As illustrated in box 2 in chapter 3, As discussed in chapter 3, support for the development the main shortcoming of index insurance is basis risk, which of agriculture insurance is best delivered within the is the difference between the losses experienced by the framework of a comprehensive NAIP. Adopting a NAIP farmer and the payouts triggered by the policy. Basis risk can approach can be particularly useful in integrating public and be minimized through appropriate product design and the private sector efforts, and this can be done effectively through development of a solid database for agricultural production a public-private institutional structure. data, but it cannot be eliminated. The NAIP’s communication EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 38 strategy and materials should clearly communicate this risk M&E system allows for the assessment of the program’s inputs together with the advantages this approach presents. Pilot and outputs, timeliness, effectiveness, and impact; it also testing can greatly contribute to the assessment of the quality facilitates information sharing, decision-making, and periodic of the products and could be implemented in the areas in reviews to address any new challenges and emerging issues. which the quality of data is the highest. Equally important, it allows for the mitigation of key risks that a NAIP would face. Table 7 lists some of the key risks that the Lastly, a robust M&E framework is necessary to track the program can be exposed to and the potential measures that performance and implementation progress of the NAIP can be adopted to mitigate such risks. and help mitigate key risks. The implementation of a robust >>> Table 7: Potential Risks and Mitigation Measures for the Development of a Successful NAIP Risks Mitigation Measures • Develop a dedicated institutional structure in which the public and private sectors can interact and Lack of the requirements and concerns of the private sector can be addressed participation by • Provide fiscal support to agricultural insurance to make the business proposition more sustainable the insurance • Establish accurate agricultural regulation to generate a clear and incentivizing operational industry environment • Identify the appropriate farmer segment to be targeted Lack of take-up • Link insurance with a conditional requirement or value proposition from farmers • Reduce the cost of the covers for farmers through dedicated fiscal support (mainly premium cofinancing) • Carry out appropriate design of the products (particularly for index insurance) • Carefully consider triggers and exits of insurance products, in particular in regard to the Poor understanding of farmers of the coverage provided performance of • Set up a structured and well-planned testing activity for new products, and test different potential the insurance approaches comparatively products • Carefully monitor and evaluate the results of the testing activity • Strengthen data collection Issues in • Set up a dedicated and effective institutional framework to manage the program long-term • Establish high-level effective public governance of the agricultural insurance program sustainability of • Carefully assess fiscal cost requirements to support the program and make long-term commitments the program Provide Adequate Fiscal Support to strengthen infrastructure and cover the operating costs of dedicated institutions and costs of farmers’ awareness raising the NAIP and education. In the scaling-up phase, the largest component of support needed is likely to be for premium cofinancing. As discussed in chapter 3, public funding would be Given the significant levels of drought risk in Namibia, it is needed for both the start-up phase and the scaling-up expected that premium rates for agricultural insurance phase. In the start-up phase, public funding will be needed to policies will be high. Therefore, premium cofinancing would support product development, improve yield-data collection, be key in making insurance more affordable for farmers. As EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 39 is the case in most countries that operate public agricultural Red Cross, which is piloting Forecast-based Financing for insurance programs, supporting the cost of insurance would droughts and floods. This would ensure wide stakeholder have a relevant impact on the uptake of the covers. This would buy-in and strengthen coordination. probably be a necessary condition, although it may not be a sufficient one. 2. Conduct a review of available risk instruments and their operational procedures and cost drivers. This The costs for GRN for the start-up phase are estimated review could consider the cost-to-benefit ratio of in-kind at approximately US$1 million, while the costs for the support versus the high cost of logistics and building scaling-up phase would depend on several factors. As surge capacity within OPM and MAWLR, as well as the discussed in chapter 3, initial start-up costs for developing a feasibility of scaling up cash support using mobile money NAIP would target expenses for (a) institutional building, (b) to reduce high logistics expenditures. The review could product research and development, and (c) product testing be led by the Directorate of Economic Policy Advisory and piloting (including a premium cofinancing component Services (EPAS) of the MoF, working very closely with for three years). The costs for the scaling-up phase would OPM and MAWLR. depend on several factors, including (i) the subsidy levels, (ii) the farmer segments to be targeted, (iii) the potential take- 3. Conduct a fiscal gap analysis to determine the up progression, (iv) the potential premium rates, and (v) financing needs, the current financing gap, and the values to be insured. The scenario analysis undertaken potential instruments and mechanisms to address this shows that the cost for GRN could range from US$1 million gap. Subject to this analysis, GRN may consider options to to US$4.5 million per year at full rollout. The US$1 million strengthen the existing instruments, such as the National per year cost relates to the program covering only communal Disaster Fund, and adopt additional instruments, such as smallholders with over 5 ha (approximately 31,000) and low a risk transfer solution or sovereign parametric insurance, premium rates, and the US$4.5 million per year cost relates to sustainably increase protection to subsistence farmers to the program covering communal smallholders with over who may not be a viable customer segment for micro- 2 ha (approximately 95,000) and high premium rates. Both level insurance under the proposed NAIP. This analysis scenarios assume that 80 percent of the grazing and cropped could be conducted under the guidance of the TWG and area of these farmers would be covered at full rollout. informed by the funding gap analysis methodology in the guidance note on conducting a disaster risk finance diagnostic (Benson, Mahul, and Alton 2017). Next Steps 4. Establish a TWG to develop an agriculture finance action plan. Similar to the TWGs established for The following steps are suggested as a sequenced approach to agriculture insurance and recommended for DRF, this operationalize the recommendations for DRF and agriculture TWG should also be a multisector group that could be insurance made in this report: led by the MoF or BoN and include both agriculture sector entities (MAWLR, NAB, Namibia Meat Board, and AMTA) Disaster Risk Finance and financial sector entities (BoN, NAMFISA, commercial banks, AgriBank, and DBN). The TWG can be informed 1. Establish a technical working group (TWG) and an by the key available analytical and policy reports, such action plan to develop a risk-layered DRF strategy. as the Country Private Sector Diagnostic, and new ones, Such a multisector working group would be led by the such as an agriculture finance diagnostic. MoF and consist of all relevant ministries and agencies, including academia, civil society, and development partners, as well as humanitarian partners such as the EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 40 Agriculture Insurance 4. Establish regulations for index insurance and for potential aggregations of insurance companies (for 1. The NAMFISA-led TWG engages with the insurance example, co-insurance agreements) (short to medium industry to plan for the development of the agricultural term). The use of index-based insurance products insurance market (immediate to short term). The for agriculture in the Namibian market is currently not discussion should focus on reviewing the set of targeted regulated, and the adoption of a regulatory sandbox stakeholders, the productive activities to be covered, approach or of specific regulation would be required. and the types of products to be developed. A critical Similarly, should the insurance market plan to develop activity would be to engage with insurance companies commercial aggregations to supply agricultural insurance, to assess their interest in developing the agricultural specific regulation may need to be developed. insurance market and whether the interested insurers intend to consider potential forms of collaborations and 5. Define the process for developing the selected synergies (for example, co-insurance agreements) within index insurance products, and support the product the framework of a national program. In addition, the development activity (short to medium term). The public and private stakeholders should carefully discuss index insurance products suggested in this report are and identify potential entry points/conditional currently unavailable in the Namibian market, and requirements that can allow insurance to scale up among dedicated research and development activities would the targeted segments of the population. be required. The steering committee and the technical support unit, in concert with the interested insurance 2. Secure funds for the start-up phase of the program companies, should identify the modalities for developing (short term). Initial costs for developing a NAIP would the technical solutions identified. In particular, it should be relatively contained and would target expenses be agreed whether the development work should be for (a) institutional building, (b) product research and promoted and coordinated by the public-private technical development, and (c) product testing and piloting working group, or if it should be carried out individually (including a small premium cofinancing component). For by each of the interested insurance companies or by a the following phases of program development, budget potential aggregation of insurance companies. allocations would need to cover more substantial amounts for (i) farmers’ enrollment and registration, (ii) insurance 6. Plan to test products and roll them out (short to awareness and education costs, (iii) premium cofinancing, medium term). In parallel with the development of the and (iv) strengthening of yield-data collection. selected insurance products, a plan should be devised for testing the products and for rolling them out. 3. Set up the components of the NAIP institutional framework (short to medium term). The key components of the agricultural insurance program would be (i) the steering committee, which would provide high-level policy decisions and oversight; (ii) the interministerial technical support unit, which would be responsible for implementing the orientations of the steering committee, for overseeing the operational activities of the program; and (iii) the public- private technical working group, in which the exchange of information and the negotiations between the public and private components of the scheme would take place. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 41 References AFDB (African Development Bank). 2022. “Namibia: Agricultural Bank of Namibia Loan (P-NA-HA0-001).” Project Appraisal Report, December 2022. https://www.afdb.org/en/documents/namibia-agricultural-bank-namibia-loan-project-appraisal- report. Ankrah, D. A., N. A. Kwapong, D. Eghan, F. Adarkwah, and D. 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Plano de Protecção Financeira contra Desastres 2022 a 2027. https://www.mef.gov.mz/index. php/publicacoes/politicas/planos-estrategicos/1754-plano-de-protccao-financeira-contra-desastres-2022-a-2027. Skees, J. R., and J. Hartell. 2006. “Innovations in Risk-Transfer Markets in Agriculture for Natural Hazards” in Risk Management in Agriculture for Natural Hazards. Rome, Italy: Istituto di Servizi per il Mercato Agricolo Alimentare (ISMEA), 2006. Steduto, P., T. C. Hsiao, E. Fereres, and D. Raes. 2012. Crop Yield Response to Water. FAO Irrigation and Drainage Paper No. 66. Rome: Food and Agriculture Organization of the United Nations. https://www.fao.org/3/i2800e/i2800e.pdf. UNISDR (United Nations Office for Disaster Risk Reduction). 2018. Disaster Risk Profile: Namibia. Savona, Italy: CIMA Research Foundation, 2018. World Bank. 2011. Weather Index Insurance for Agriculture: Guidance for Development Practitioners. Agriculture and Rural Development Discussion Paper 50. November 2011. https://documents1.worldbank.org/curated/ en/590721468155130451/pdf/662740NWP0Box30or0Ag020110final0web.pdf. World Bank. 2012. Disaster Risk Financing & Insurance in the Disaster Risk Management Framework. Disaster Risk Financing and Insurance Case Study. Washington, DC: World Bank Group. https://documents1.worldbank.org/curated/ en/330121467997014193/pdf/97452-BRI-Box391476B-PUBLIC-framework-DRFI-DRM-Concept.pdf. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 43 World Bank. 2022. Disaster Risk Finance Diagnostic: South Africa. Washington, DC: World Bank. https://www. financialprotectionforum.org/publication/disaster-risk-finance-diagnostic-south-africa. World Bank. Forthcoming. “Social Protection in Namibia: Spending and Performance Analysis.” World Bank and IFC (International Finance Corporation). 2022. Roadmap for Sustainable Livestock Value Chains in Southern Africa. Washington, DC: World Bank. World Bank Group. 2015. Kenya: Toward a National Crop and Livestock Insurance Program. Background Report. Washington, DC: World Bank Group. https://openknowledge.worldbank.org/handle/10986/24444. World Bank Group. 2019. Agriculture Finance Diagnostic: Zambia. Washington, DC: World Bank Group. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 44 >>> Annex A: Organizations Met by the Mission Ministries 1. Office of the Prime Minister (OPM) 2. Ministry of Finance (MoF) 3. Ministry of Agriculture, Water, and Land Reform (MAWLR) Agencies 4. Namibia Financial Institutions Supervisory Authority (NAMFISA) 5. Agro-Marketing and Technology Agency (AMTA) 6. Namibia Agronomic Board (NAB) 7. University of Namibia (UNAM), Faculty of Agriculture 8. Namibia Meteorological Service 9. National Climate Change Commission 10. Environmental Investment Fund of Namibia (EIF) 11. Red Cross Namibia Farmers Organizations 12. Namibia Agricultural Union (for commercial farmers) 13. Namibia National Farmers Union (for communal farmers) Insurers and Reinsurers 14. Namibia Special Risks Insurance Association (NASRIA) 15. Hollard Namibia and Hollard Mozambique 16. Santam 17. MMI 18. Old Mutual 19. Corporate Guarantee 20. Namibia National Reinsurance Corporation (NamibRe) Banks 21. AgriBank 22. Development Bank of Namibia (DBN) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 45 >>> Annex B: Disaster Risk Management Policy Framework Status and Alignment with the Proposed NAIP Embedded within a Comprehensive Policy/Strategy DRF Strategy Disaster Risk Management Act 10 of • Enacted and in force. 2012 • Provides for the National Disaster Fund as a key instrument for financial protection against low to moderate losses. This is critical for a sustainable macro-level drought insurance solution and could complement a micro-level index agricultural insurance scheme. • Makes provision for line ministries to make budgetary allocations for disaster risk management at the national and subnational levels. However, this is not being implemented. Namibia National Drought Policy and • Drafted in 1996 but not adopted. Strategy of 1997 • Currently under review for adoption in 2023. • Calls for an efficient, equitable, and sustainable approach to drought management and financing of drought response. In line with Namibia’s National Agricultural Policy. National Resilience Building Strategy • Aims to institute integrated and systematic planning for risk management and and Action Plan (2022–30)23 to build resilience to future risks across sectors between 2022 and 2030. • Aligned to the Sendai Framework for Disaster Risk Reduction (2015–30), which complements financial protection. • Identifies limited government funding for disaster response and management and the unpredictability of humanitarian funding as impediments to building resilience. The strategy proposes a Resilience Building Fund, in addition to a range of other resource-mobilization methods, such as catastrophe insurance and a contingency fund. The proposed national DRF strategy seeks to address this by establishing a cost-optimal risk-layering approach that links prearranged funds to disbursement mechanisms. • Recognizes the private sector and PPPs as critical to sustainable development. The proposed program is based on a PPP. Namibia’s Vision 2030; 5th National • Focused on inclusive socioeconomic development. The proposed program Development Plan (2017/18–2021/22); covers all segments of smallholder farmers and aims to foster digital financial Harambee Prosperity Plan (2021–25); inclusion. Regional Planning and Development • Aims to mainstream climate resilience into national development planning. Policy of 1997 23. Resilience refers to capacity of individuals, households, communities, and the nation to anticipate and prepare for, withstand, respond to, and re- cover from shocks and stresses. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 46 >>> Annex C: Indices Based on Data Collected via Remote Sensing Vegetation Indices24 Time series of optical satellite data from sensors such as SPOT-VGT, Proba-V, NOAA/METOP-AVHRR, and MODIS have been used for many years to monitor and map vegetation anomalies over large areas and to assess major damage caused by extreme climatic conditions. Thanks to the frequent availability of these images, they are used for monitoring crop growth and development. One drawback is their rather coarse spatial resolution; pixel sizes vary between 250 m and 1 km, although, increasingly, high-resolution images (10–20 m) are becoming available. Crop monitoring with optical satellite images can be hampered by persistent cloud cover, but special techniques, such as profile smoothing or data fusion, may offer a solution to this problem. The best-known vegetation index is the Normalized Difference Vegetation Index (NDVI). It is a simple product based on the combination of the measured reflectances in the red and near-infrared parts of the spectrum. NDVI is a good indicator of the amount and the condition of the vegetation. More advanced indicators include the fraction of Absorbed Photosynthetically Active Radiation (fAPAR) and the Leaf Area Index (LAI). Compared with NDVI, these model-based, biophysical variables often show a better correlation with crop yield and primary production. Insurance programs based on vegetation indices, mainly NDVI, are implemented on a sizable scale in Canada, Ethiopia, India, Kenya, Spain, and the United States. In most cases, these are grassland or livestock products insuring against drought. As NDVI is a good indicator of vegetation vigor (or health) and yield, it is suitable for index-based insurance to provide cover against drought or other perils that are affecting crop yield (for example, those pests or diseases that have a visible impact on the plants’ health condition). The relationship between NDVI and crop yields, however, is highly variable, depending on crops and regions. It also assumes that sufficiently long time series of accurate and preferably fine-scale yield data are available for calibration, which, in practice, may be problematic, especially in developing countries. Evapotranspiration Estimates25 Evapotranspiration (ET) is the sum of evaporation and plant transpiration from Earth’s land and ocean surfaces to the atmosphere. Evaporation accounts for the movement of water to the air from sources such as the soil, canopy interception, and water bodies. Actual ET (ETa) is a function of the water demand by the crop (potential ET or ET0) and the water reserves in the soil. ETa can be derived from satellite observations using two different approaches. The most common approach is to use land surface energy balance models. Input to these models consists of visible, near-infrared, and thermal infrared observations from satellite sensors such as Meteosat or MODIS, whether or not complemented with weather station data. The second approach relies on the ability of satellite-based vegetation indices to trace the crop growth and estimate the basal crop coefficient (Kcb)—that is, a crop- specific conversion factor needed to adjust potential ET (estimated from weather station data) to the crop-specific ETa. Relative 24. IFAD 2017 25. IFAD 2017 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 47 evapotranspiration (ETr) is derived by dividing ETa by ET0. ETr provides an indication of plant water availability in the root zone and can be considered a measure of actual plant water use. ET is a key variable that plays a strategic role in water-resource management, agriculture, ecology, and climate change. ET is a good indicator for agricultural drought. The Food and Agriculture Organization addressed the relationship between crop yield and water use in the late 1970s, proposing a simple equation by which relative yield reduction is related to the corresponding relative reduction in ET (Steduto et al. 2012). ET products are usually made available on an 8- to 10-day basis. The spatial resolution varies from roughly 1 km to 3 km. Depending on the satellite observations used, the time series can go back up to 35 years. Figure C.1 shows relative evapotranspiration anomalies in 2019, a drought year, and 2021, a normal year. >>> Figure C.1: Relative Evapotranspiration Anomalies in Namibia in 2019 and 2021 2019 2021 Source: Developed by eLEAF for this report. Soil Moisture Indices In the context of drought risk monitoring, soil moisture closes a critical gap between rainfall deficit and the response of the land surface (for example, vegetation health). Particularly, the water available to the root zone of crops is a critical indicator for agricultural production. Currently, there are various satellite sensors with different technologies. Most of them rely on microwave remote sensing, either via radar (active sensors sending down microwave beams and recording the backscatter) or radiometers (passive sensors analyzing the electromagnetic radiation from Earth’s surface). There are surface and root-zone soil moisture datasets, single- and multi-sensor products, near real-time products, and long archives dating from 1978 to the present (with relatively large gaps until 1992). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 48 Even the combination of soil moisture from a sensor with a high spatial resolution and another sensor with a high temporal resolution is possible. Long time series are a big advantage for drought risk assessment, because they allow the calculation of robust anomalies. In combination with machine learning, soil moisture can be used to predict near-future vegetation health. However, several limitations, such as the performance of soil moisture retrieval over sandy soils or dense vegetation, require expert knowledge. >>> Figure C.2: Soil Moisture Anomalies in Africa in January 2023 Satellite-derived Root-zone Soil Moisture Anomaly (January 2023) Source: Department of Geodesy and Geoinformation, Technical University of Vienna EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 49 >>> Annex D: Parameters for Scenario Testing Subsidy Levels To estimate the fiscal costs of a NAIP for Namibian smallholders, it was assumed that GRN will incentivize the policies with a 50 percent subsidy level. The 50 percent premium subsidy level is applied frequently since it reduces the cost of expensive insurance covers while still leaving farmers with the responsibility of paying for a significant amount of the cost of the coverage. Where governments have opted to select insurance as a key agricultural policy intervention and to pursue full coverage of the farming population, subsidy levels are actually higher, reaching up to 80–90 percent of the premium cost (for example, India, Morocco, and the United States). Insurance premium cofinancing that may be provided by GRN could be granted for up to the first 10 ha of any farm (that is, only the first 10 ha of each farm would be eligible for premium cofinancing). Such capping is recommended to make public support more targeted and efficient. That said, such a measure may lead to strategic behavior of farmers to segment their farms in 10 ha units in order to receive more support. The potential effectiveness of the capping measure and the impact of the potential strategic behavior need to be assessed by the Namibian policy makers, who, based on the knowledge of the local context, will be able to foresee the merits of such a measure. Additional public costs for product development, yield-data collection, strengthening of infrastructure, and covering the operating costs of dedicated institutions and the costs of farmers’ awareness raising and education are projected according to support levels estimated for other countries. For the case of crops, the amount is projected to be relatively stable over time, since some costs will be increasing in parallel with the expansion of the scheme (that is, yield estimation), while other costs will tend to decline (for example, infrastructure, awareness raising, and so forth). For livestock, the amounts are lower than for crops and are actually decreasing, since the yield-data collection carried out for crop covers will not be required. Some of the public support costs may indeed be common to both the crop and the livestock schemes, and more accurate estimations will need to be developed if GRN decides to progress toward the implementation of the program. Target Farmer Segment and Size of Areas to Be Insured The targeted farmer segments of the program could be the “communal smallholder farmers” who manage farms between 5 and 10 ha or between 2 and 10 ha. Accordingly, the identification of the aggregate hectarage that could be targeted by the insurance program has been carried out based on table 2, which presents the land use area and number of households by size of holding reported in the 2014 National Census for Communal farmers (NSA 2019). The data presented groups according to different land sizes, with the segmentation also including brackets between 2 and 5 ha, between 5 and 10 ha, and above 10 ha, which are in line with the conditions listed above. Accordingly, the area that could be targeted for crop insurance is estimated at 159,752 ha, and the area that could be targeted for livestock insurance is estimated at 85,552 ha. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 50 The costing projections for livestock insurance were carried out based on the area of grazing land and not on the number of livestock heads. This is because (a) a segmentation of livestock numbers per household is unavailable, nor it is known how many heads per households would characterize subsistence and smallholder farmers; and (b) as opposed to the cases of other African livestock insurance programs, in Namibia, livestock husbandry is not based mainly on pastoralism. Therefore, the land that a household uses for livestock grazing can be considered proportional to the livelihood extracted from livestock production. Insurance Take-Up The potential progressive increase in take-up of agricultural insurance policies depends on many different conditions. The increase rate will depend mainly on the type of “entry point/conditional requirement” for farmers targeted in the program, if any. Progression of penetration of insurance can go from 1 percent to 95 percent in one season if there is a stringent mandatory condition (for example, Zambia, India, and so forth), or it can stay low, only a few percentage points, even in the presence of an appropriate institutional framework but with no clear value proposition for the farmers (for example, Ghana). Given that GRN is motivated to promote agricultural insurance as an effective policy tool, the increase rate for purchasing insurance is set at 10 percent per year. However, the assumption that 10 percent of the eligible hectares will be insured in the first year of implementation may be considered optimistic, and it could be revised to lower levels (for example, to 5 percent in the first years of the piloting stage). In the same line, a 10 percent rate of expansion per year could be considered low if appropriate entry points for agricultural insurance are identified, and it could be revised upward. Currently, the assumptions on the rate of penetration are generic and are not based on specific policy orientations. Prior to implementation, scenarios will have to be updated to situations that better reflect the potential developments according to actual policy guidelines and also depending on the potential entry points identified. Premium Rates For the purposes of this analysis, the premium rates are based on the cost of agricultural insurance products in contexts similar to Namibia. No detailed yield or mortality databases were accessible for the current analysis. Therefore, it was not possible to provide estimates of the expected loss costs for the insurance products discussed or account for the potential variability of insurance rates according to different areas, production activities, and varying coverage levels. Hence, potential insurance premium levels to be considered for estimating the aggregate cost of the program were based on knowledge of costs in situations that resemble the operational environment of Namibia. Scenarios for a range of “low,” “medium,” and “high” rates were used. For crops, these were 5, 10, and 15 percent, respectively, and for livestock, these were 4, 7, and 10 percent, respectively. Premium rates for livestock are lower, since livestock are more resilient than crops with respect to drought, which is the main peril to be covered. Values Insured A key parameter to be identified for the definition of the costing projections is the value insured per hectare. Given the significant predominance of pearl millet in communal smallholder farming, the average value insured per hectare has been set at N$3,000, which is roughly the current price of the average yield of pearl millet per hectare (0.6 tons).26 It is worth noting that 0.6 tons per hectare is an extremely low average productivity level, and that protection granted by the insurance cover on the basis of such a productivity reference may be quite low. Lacking specific information, the same reference insurance value has also been used for the areas used for livestock grazing.27 26. In many cases, the approach to determine a reference value to be insured is to consider production costs per hectare. The value could therefore be adjusted based on the actual production costs or by estimating them at 70 percent or 80 percent of production revenues. 27. This is also a parameter for which further information would be useful. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 51