THE ROLE OF AGRICULTURAL INSURANCE IN MITIGATING AGRICULTURAL RISKS IN NIGERIA

CHAPTER ONE INTRODUCTION 1.1 Background of the Study Agriculture, in many of the emerging economies, is connected with the rest of the economy and important to the growth and development. This interdependence highlights the importance of agricultural productivity as a key determinant of social progress. According to Ndor, Bawa, and Mensah (2020), the way that societies raise agricultural production fundamentally shapes their development path. Somadina & Ayode (2023) outlined that agriculture is fundamental to the sustenance of life and is the bedrock of economic development, especially in the provision of adequate and nutritional food vital for the human survival, development and materials for industry. It is then divided into crop production, forestry, livestock, and fishing. In Nigeria, agriculture has historically played a central role in Nigeria’s socio-economic development. Prior to the discovery of crude oil in the 1950s, Adegbite & Machethe (2020) averred that agriculture was the backbone of the Nigerian economy, contributing significantly to GDP, employment, and foreign exchange earnings. Cash crops such as cocoa, palm oil, groundnuts, and rubber were major export commodities, while subsistence farming provided food security for the population. During this period, Nigeria was self-sufficient in food production and a leading exporter of agricultural products in the global market. In the account of Sodiq & Yakubu (2020), there was sustained emphasis on agriculture to the extent that Nigeria was a major exporter of such agricultural products as palm produce, cocoa, groundnut, cotton and rubber. In addition to these cash crops, the national agricultural system was able to produce enough of food crops like yam, cassava, maize, millet, sorghum and soya beans to the extent that there was almost no need for food importation. Hitherto, agriculture accounted for over 60% of the Nation ‘s Gross Domestic Product (GDP). Conversely, agriculture unlike the industrial sector, has always been a risky business. The variations in productivity induced by nature cannot be fully accommodated by farmers. It is true that since time immemorial farmers have devised measures to limit these risks: crop rotation and diversification, intercropping, use of low yield but stress tolerant varieties, tillage systems, share tenancy, contractual inter-linking, development of non-farm sources of income such as handicrafts and handlooms, socio-cultural strategies which distribute risks within the extended family, and informal financial arrangements. However, while these measures continue to be helpful, the problem of residual risks remains. In addition, the farmers are subject to the common risk of a catastrophe and the aggregate group risk has still to be confronted. This covariability of risks reduces the efficacy of traditional measures. According to Uzondu & Achimenye (2021) agriculture is extremely susceptible to a wide range of risks including climate change, pests and diseases; shaking the market as well as natural disasters. These risks have a significant impact on the productivity of farmers (especially smallholders), which can affect the wider agricultural sector's growth. The Food and Agriculture Organization (FAO, 2020) reports that most farmers in Nigeria have neither access to financial instruments to cushion them against losses nor a business case to build more resilience to these risk. Highlighting the importance of effective risk management strategies and long-term solutions in helping to increase agricultural production to ensure sustainable food security, Reyes, Eliasa, and Haackerb (2020) detail this vulnerability, as do Augeraud-Veron, Fabbri, and Schubert (2019). According to recent reports, agricultural insurance has become the important tool in reducing the financial burden of such unexpected and uncertain events. It acts as a risk mitigation and protection instrument that protects farmers, herders, and governments against financial loss due to events that pose a risk to agricultural productivity including natural disasters (Uzondu & Achimenye, 2021). That includes covering climate extremes like droughts, floods and unseasonably heavy rains, plus protection from crop diseases and pest infestations. By providing financial compensation during a crisis, agricultural insurance acts as a risk management tool that sacrifices the short-term benefit of compensation in exchange for long-term survival of the agricultural industry, even when the stresses are beyond their control. Swaleh & Moeed (2019) emphasized that agricultural insurance helps farmers in obtaining financial compensation from crop failures and other farming related risks. It also serves as insurance, providing farmers with coverage for the worst-case scenarios we call drought, flood, pest infestation, etc. • In Nigeria, relatively underdevelop agricultural insurance schemes with limited coverage and low uptake. Low uptake is partly due to lack of awareness, high premiums and low insurance provider trust limiting potential of agriculture insurance as a risk mitigation strategy. The Nigerian government has made attempts to promote agricultural insurance through the Nigerian Agricultural Insurance Corporation (NAIC). The modern insurance sector can play a major role here, and considerably strengthen the security of farmers (UNCTAD, 1994; World Bank, 2005). The growth strategy for most agriculture-based economies should therefore be anchored in improving the productivity of the agricultural sector, particularly of food staples. Agricultural risk management, including agricultural insurance, can contribute to raising the productivity of agriculture by helping farmers and herders invest in more productive, but sometimes riskier, agricultural business activities. Additionally, while the Nigerian government has sought to encourage the expansion of agricultural insurance through various policies, these efforts is focused on improving insurance products that are tailored to the unique needs of small-scale farmers. 1.2 Statement of the Problem The Nigerian agriculture sector has been grappling with hazards for several decades, this inturn have impeded its expansion and sustainability. According to the research of Olaniyan, Oyinbo, and Abdulsalam (2021), climate change increasingly threatens global agricultural productivity, with Nigeria identified as one of the most vulnerable nations to its effects. Erratic precipitation patterns, severe weather phenomena, and shifting growth seasons are already disrupting agricultural operations nationwide, resulting in heightened uncertainty and management challenges in farming outcomes. Aina and Omonona (2020) assert that this heightened unpredictability necessitates innovative risk management solutions, with agricultural insurance emerging as a pivotal instrument for assisting farmers in adapting to these evolving conditions. Jellason and Sabrina (2021) assert that promoting sustainable agricultural practices via insurance enhances productivity and farmer incomes while bolstering resilience to climate change; agroforestry, organic farming, and climate-smart agriculture are exemplary methods for enhancing soil fertility and mitigating greenhouse gas emissions. Ogunjimi & Adeola (2020) highlighted that the Nigerian insurance business contends with poor infrastructure, insufficient product offers, and a lack of confidence, which restricts its capacity to adequately address agricultural risks. These issues are exacerbated by the insufficient collaboration among essential stakeholders: government agencies, insurers, and farmers. According to Umeh, Martins, and Bassey (2023), despite various initiatives by the government and private insurers to encourage agricultural insurance, the adoption rate remains significantly low, particularly among smallholder farmers. Furthermore, there is a paucity of research evaluating the factors contributing to this low adoption and the effectiveness of agricultural insurance in mitigating agricultural risks. Several of the assessed obstacles to insurance acceptance require further investigation, including elevated premiums, distrust in insurers, inadequate infrastructure, and insufficient financial literacy (Epetimehin, 2020, agricultural insurance in Nigeria). Moreover, without clarifying these gaps, it is challenging to assess the role of agricultural insurance in mitigating the risk of Nigerian farmers and enhancing agricultural productivity. Against this backdrop, the study seeks to investigate the role of agricultural insurance in mitigating agricultural risk in Nigeria 1.3 Research Objectives and Aims This study will mainly aim at investigating the role of agricultural insurance in mitigating agricultural risk in Nigeria. The specific objectives of the research will include: i. To assess the forms of agricultural risks faced by Nigerian farmers ii. To identify types of agricultural insurance products available to farmers in Nigeria. iii. To evaluate the impact of agricultural insurance on farmers' ability to recover from agricultural losses in Nigeria. iv. To assess the effectiveness of existing agricultural insurance schemes in mitigating agricultural risks. v. To identify the factors affecting the effectiveness of agricultural insurance schemes in mitigating agricultural risks for farmers in Nigeria. 1.4 Research Questions Base on the research objectives, the study will answer the following questions i. What are the forms of agricultural risks faced by Nigerian farmers? ii. What are the types of agricultural insurance products available to farmers in Nigeria? iii. What are the impact of agricultural insurance on farmers' ability to recover from agricultural losses in Nigeria? iv. How effective are the existing agricultural insurance schemes in mitigating agricultural risks? v. What are the factors affecting the effectiveness of agricultural insurance schemes in mitigating agricultural risks for farmers in Nigeria? 1.5 Research Hypothesis The following null hypotheses will form the proposition of this study H₀1: There is no significant impact of agricultural insurance on farmers' ability to recover from agricultural losses in Nigeria. Ho2: Existing agricultural insurance schemes have no significant effect on mitigating agricultural risks for farmers in Nigeria. Ho3: There are no the significant factors affecting the effectiveness of agricultural insurance schemes in mitigating agricultural risks for farmers in Nigeria. 1.6 Significance of the Study The study will have useful practical implications for policymakers, insurers, and farmers in Nigeria. The study will shine a light on the challenges in agricultural insurance uptake, and how better products could be designed and distributed for smallholder farmers. The results will also guide the formulation of policies aimed at raising awareness of agricultural insurance, thus encouraging higher uptake of the product by farmers in Nigeria. The study will also allow insurers to better understand the levels of trust and financial literacy issue farmer's face and develop tailored products. Another tangible contribution of the study will be the potential to promote the economic resilience of Nigerian farmers. Thus, through analysing the role of agricultural insurance in mitigating risks and cushioning the adverse effects of natural disasters, pests and diseases, the study will showcase how insurance can promote the long-term viability of agriculture in Nigeria. The result can be improved food security, more reliable incomes for farmers and higher agricultural production, all of them important for national economic growth. Theoretically, the finding has a role to play in enhancing the general agricultural risk management structure in Nigeria. The study will aim to make way for well-reasoned recommendations to strengthen an existing insurance scheme and analyze ways to improve uptake of insurance so that India will have a comprehensive mechanism of agricultural risk management through insurance. Such recommendations might be instrumental to improving the efficiency of agricultural insurance systems in Nigeria and improving their impact to farmers when needed. The study will also provide a references material for students and researchers who wish to conduct further studies on related topic 1.7 Scope of the Study This study broadly examines the role of agricultural insurance in mitigating agricultural risks in Nigeria. In terms of content, the study focuses on key aspects of agricultural insurance, including the types of risks faced by farmers, available insurance products, their impact on recovery from agricultural losses, and the effectiveness of current insurance schemes. The study also identifies factors affecting the success of agricultural insurance policies. Geographically, the study is limited to Ethiope-East Local Government Area of Delta State. The study will specifically focus on farmers in Ethiope-East Local Government Area of Delta State. The research will examine both subsistence and commercial farmers across different agro-ecological zones, highlighting variations in insurance adoption and effectiveness across the Local Government 1.8 Limitations of the Study While this study aims to provide valuable insights into the role of agricultural insurance in mitigating agricultural risks in Nigeria, certain limitations must be acknowledged. This study is constrained by the availability and reliability of data on agricultural insurance adoption and its effectiveness. Many farmers, especially smallholder farmers in rural areas, may have limited records of their experiences with agricultural insurance. The study will rely on primary data collection through surveys and interviews, which may be subject to response bias, recall bias, or inaccurate reporting. Also, even though efforts will be made to gather relevant information from farmers, insurers, and policymakers, some data gaps may arise due to inconsistencies in record-keeping or reluctance by stakeholders to disclose financial details. Additionally, there is a limitation in the geographical coverage and sample representation of the study covering only Farmers within Ethiope-East Local Government Area of Delta State. Given that Nigeria has a diverse agricultural landscape with varying climatic conditions, risk factors, and levels of insurance penetration, it may be difficult to generalize the findings to all regions of the country. Despite these limitations, the study remains valuable in providing a broad understanding of agricultural insurance in Nigeria and its potential to improve financial resilience in the agricultural sector. 1.9 Operational Definition of Key terms Agricultural Sector: The agricultural sector refers to the segment of an economy that involves the cultivation of crops, rearing of livestock, fishing, and forestry. It encompasses all activities related to food production, processing, and distribution, contributing to economic growth, employment, and food security. Insurance: Insurance is a financial arrangement that provides protection against financial loss due to unforeseen events. It involves an agreement between an insurer and an insured party, where the insured pays a premium in exchange for compensation or coverage in case of specified risks, such as damage, accidents, or natural disasters. Agricultural Risk: Agricultural risk refers to uncertainties and potential losses associated with farming activities due to factors such as climate change, pest infestations, disease outbreaks, input price volatility, and fluctuating market demand. These risks can impact farm productivity, profitability, and food supply chains. Agricultural Insurance: Agricultural insurance is a specialized form of insurance designed to protect farmers, agribusinesses, and stakeholders in the agricultural sector from financial losses due to risks such as crop failure, livestock disease, adverse weather conditions, and market price fluctuations. It serves as a risk management tool to ensure income stability and investment security in agriculture. Risk Mitigation: Risk mitigation refers to the strategies and measures implemented to reduce the likelihood and impact of potential risks. In agriculture, risk mitigation involves adopting techniques such as insurance coverage, improved farming practices, diversification of crops and livestock, and investment in climate-resilient technologies to minimize financial losses and enhance sustainability.