RE: “Govt moves to review policy to integrate agriculture insurance” (The New Times, August 9). Promoting agriculture insurance is a noble effort but it also demonstrates a general lack of understanding of how insurance industry works.
It also probably explains why insurance penetration remains low.
There is talk of climate risks as a virgin area to be exploited by insurance companies. Some officials at the insurance regulator have suggested similar things in the past. Yet, these are risks which can easily to bankruptcy of insurance companies.
Generally speaking, acts of nature are usually excluded from insurance policies all over the world. These include flood, quake and climate related exposures such as hail or drought. Insurance companies can sometimes agree to insure some of these risks if the chance of them happening is small and their occurrence low. Even when they agree to do so, they impose a high deductible.
Using floods as an example, if someone’s house in, say Nyabihu, is destroyed by floods and the value of the house is Rwf1 million, the deductible (part of the loss insured himself is supposed to cover) could be Rwf100,000.
However, if an insurance company knows that Nyabihu is prone to floods, it will decline to offer flood coverage there.
So, this brings me back to the concept known in the industry as “adverse selection against the insurer”. This is when an insured applies for insurance coverage when there is likelihood of a large loss happening in a couple of months or even the year after.
For instance, trying to insure a house you built four meters from a river bank on a flat land. Similarly, for any insurance company to offer drought coverage in Nyagatare, an area prone to prolonged drought, would do so knowing that it is being selected against and it would be suicidal.
Just imagine the number of frequent claims it would be dealing with. There is also the issue of the deductible, which most Rwandans will not appreciate So, I do not see how traditional insurance will solve the plight of our farmers in Nyagatare, other than the government devising something else for them.
Note: I am an insurance expert, and not connected in any way with insurance companies in Rwanda and therefore not speaking for them.