Insurtech | Scaling Crop Microinsurance: How Does “Who Pays” Impact Scale?
This series is produced by Mercy Corps Ventures in partnership with CASE at Duke University. Each article explores the challenges the microinsurance industry faces to scale to support more than 600 million smallholder farmers around the world in becoming financially included and more climate resilient.
Find out more about the project here, and stay tuned for the full series of six articles here.
Our Key Takeaway
Subsidy should not be a dirty word when it comes to crop microinsurance. In addition to the subsidy funding needed to ease market entry and test new products, the main enabler of scale for smallholder crop insurance will be the availability of premium subsidies — the nature of which will depend largely on the type of crop and the impacts of climate change.
“The big limiting factor for [crop] insurance markets [in developing countries] is financial. You can tinker around the edges and give technical support and actuarial support and incorporate things like remote sensing, but you’re not fundamentally going to change anything unless you push more money into the system and dramatically increase payout amounts via products that are affordable for farmers. This is what we’ve learned in the U.S. and Europe with much wealthier farmers; why would we expect the need to be any different for smallholders?” *
Colin Christensen, Global Policy Director, One Acre Fund
One of the biggest challenges to scaling crop microinsurance is creating a financial model that will make insurance a sustainable and impactful product for smallholder farmers. Many interviewees spoke to the need for “more money in the system.” To get there, and enable impact at scale, we see four key questions the industry needs to tackle:
- Strategic Investments: What investments can help accelerate the development and continued improvement of the crop microinsurance model?
- Premium Subsidies: How can subsidizing premiums play a critical role in unlocking scale?
- The Payer(s): What are the roles of different entities, including governments and corporations, in providing this risk protection for smallholders?
- Shifting Mindsets: What are other ways that we could frame ongoing philanthropic or government investments in mitigating smallholder risk?
Strategic Investments:
What investments can help accelerate the development and continued improvement of the crop microinsurance model?
Our insurtech interviewees pointed to three key areas where they have seen governments, donors, and sometimes other stakeholders support the development of the crop microinsurance market, tackling challenges that the insurtechs cannot tackle on their own:
Market entry
Grant funders and governments have played key roles in helping to ease the entry of crop insurtech enterprises into new regions. Examples include the Gates Foundation funding Pula to collect and share market entry data in Nigeria to help others replicate similar models, and country governments creating more favorable taxation policies, or “regulatory sandboxes” (which essentially allow enterprises to experiment on a small scale before jumping through all of the regulatory hoops). Many opportunities remain for donors and governments to create more favorable environments for private enterprises looking to mitigate risk for smallholders, and to “even the playing field” as Acceso COO Rob Johnson puts it. “[Developing] countries don’t have the plethora of subsidies that modern economies have, like roads, input boutiques, well-functioning financial sectors, off-takers with robust structures. All of these are subsidies in disguise. We need to give people a leg up to get into the game.”
Product development and innovation
Our interviewees shared examples of donors, governments, insurance industry partners, and buyers providing funding and R&D to support the development and testing of new crop microinsurance products. Insurtech WRMS recently received a grant (along with local partners) from the InsuResilience Solutions Fund to scale up a farm-level yield assurance product. WRMS hopes it will propel growth by unlocking sufficient scale to attract venture capital funds. The Insurance Development Forum is bringing together insurance industry and development partners to share experience and data from climate microinsurance pilot projects, with the goal of creating more robust and sustainable offerings — even among competitors. And multinational beverage company, AB InBev, financed a pilot through insurtech OKO, to test the feasibility of providing an insurance product to their farmer suppliers.
Distribution and uptake
Interviewees spoke to the ways in which governments and development partners could better support insurance distribution efforts. This included awareness and education efforts for farmers and microfinance institutions, and how input suppliers and offtakers (i.e., those who contract with farmers to buy their goods) could help provide access to their farmer customers. Corporate stakeholders are also providing support for distribution and uptake. Examples include buyers embedding insurance products into contracts with farmers, and mobile network operators like Orange in Mali providing insurtech partner OKO with in-kind marketing support and assistance in creating a strong customer journey.
Investing in premium subsidies is another key way to enable scale, although there is some debate among investors and donors around the strategic nature of them. The next section dives into this topic, as most entities actually doing the work of crop microinsurance and supporting smallholder farmers believe it is one of the keys to reaching more smallholder farmers with better products.
Premium Subsidies:
How can subsidizing premiums play a critical role in unlocking scale?
“It’s perfectly accepted that agriculture in developed countries is subsidized, but we think that agriculture for smallholder farmers in the middle of Africa should be completely self-sustaining and profitable? I don’t think that logic holds. So, it might not be the answer that investors or development agencies are looking for, but it might be one of the answers that they need to hear.”
— Rose Goslinga, Co-Founder & Co-CEO, Pula
The need for insurance premium subsidies is not the same for all smallholder farmers. For some, subsidies may serve more of a social safety net function. For others, subsidies may serve as more of a catalyst for resilience and adaptation (and may not be needed long term). When thinking about premium subsidies, it’s important to keep these two main groups in mind:
- Smallholders in loose value chains. For the smallest and poorest smallholders, who grow staple crops primarily for consumption, insurance is well-positioned to encourage more investment in inputs to lead to better yields, and to keep the farmer from falling deeper into poverty during a bad season. Insurance could also be used as a more proactive social safety net when it covers yield and helps to ensure some level of stable income, alongside other social assistance or assistance from groups like One Acre Fund or myAgro. In both scenarios, interviewees believed that these smallholders would need premium subsidies indefinitely. There are many ways in which governments and donors subsidize the livelihoods of these smallholder farmers, whether proactively or reactively, and using an insurance instrument could be one way to do so efficiently — although it can only be one piece of a larger set of solutions.
- Smallholders in structured value chains. For smallholders who are part of more structured value chains, insurance is well-positioned to help them maintain or grow a sustainable income and provide a safety net in bad seasons. For those who grow crops that could be part of a structured value chain but are not yet competitive, premium subsidies may be needed until the farmer gains more traction.
Interviewees were quick to warn us that, despite their potential, subsidies do not make up for subpar insurance products and inadequate distribution strategies. They emphasized the importance of getting the product and distribution right in order to have subsidies play a productive and sustainable role.
But, climate change…
Another key factor that will impact the need for premium subsidies for all groups, long term, is the increasing risk of climate change (and the accompanying increasing premiums to cover that risk). One Acre Fund’s Christensen explained the way in which increasing climate events will impact premiums for all farmers, potentially making them too expensive for even the most profitable: “The need for risk mitigation — whether it’s just the input costs coverage or the actual social safety net side of insurance — is only going to increase as climate change makes weather patterns more unpredictable. Due to the costs of covering more weather disasters, reinsurers are either going to have to pull out of markets or raise prices, making products even less affordable. We are already seeing signs of this, and it’s not unique to Africa. You see home insurance prices increasing in California because of the wildfire threat. This could push the already precarious livelihoods of smallholders over the precipice of viability.”
A couple of interviewees suggested that subsidies or guarantees for reinsurers may also be necessary to keep them in the crop insurance market and keep costs reasonable. Mark Kahn, Co-Founder and Managing Partner of India-based agriculture technology VC Omnivore reflects, “I think, in general, agriculture insurance subsidization is far cheaper than some of the less impactful interventions on the public balance sheet. Do I think that climate change could hike premiums? Yeah, sure. And I think eventually we might start seeing public subsidy at the reinsurance level to allow that risk to be better born — or maybe more regulation at the reinsurance level. ”
The Payer(s):
What are the roles of different entities, including governments and corporations, in providing this risk protection for smallholders?
Government-subsidized crop insurance programs
“I’m not ashamed to say we depend on subsidies for this business. It’s an expensive type of coverage. Crop insurance is often 10% the worth of what you’re insuring. And smallholder farmers will never have the money to pay for that. It will never work without government intervention. In France, crop insurance is subsidized at 60%.”
— AXA Emerging Customers’ Project Manager, Quentin Gisserot, on premium subsidies
Several governments have crop insurance programs that provide some premium subsidies for participating farmers. These programs can make it more affordable to cover smallholders, although most of them only cover inputs (as opposed to providing more protection by covering projected yields). Many interviewees spoke about the importance and challenge of these national programs, particularly the national insurance service in India (Pradhan Mantri Fasal Bima Yojna, or PMFBY), which was launched in 2016.
Quentin Gisserot, a project manager for global insurance company AXA’s Emerging Customers business, shares his perspective: “I personally find that India’s national crop insurance scheme [PMFBY and the Weather-Based Crop Insurance Scheme] is one of the most powerful in emerging markets — but it’s also interesting to note that nobody’s really happy about the scheme in India. The insurance companies are complaining that the government is late in paying the premiums. The government is considering that it is too expensive for them, and the farmers are concerned that they’re being forced to pay for something that they wouldn’t want to pay for, even though it is subsidized as high as 80–90% by the government. It’s really the overall challenge of crop insurance: it’s an expensive and complex product.” As it’s currently structured, the PMFBY program is also relatively inflexible, which has made product innovation a challenge and partnerships with corporates (e.g., buyers) a challenge. It may very well be that as a government insurance program spurs market development, the program must evolve at a similar pace to maximize outcomes and sustainable growth.
For now, many of the crop insurtech enterprises born over the past several years are finding ways to maximize the benefits of national insurance schemes and work around or iron out the challenging parts (e.g., the timeliness of payouts). But the commitment of governments to subsidize crop insurance is key to getting more of these innovative enterprises entering the market and generating impact. As the Microinsurance Network’s 2020 Landscape report notes, “Crop and livestock insurance have grown dramatically in some countries where there is government support and subsidies. However, schemes without government support have largely not achieved scale.”
Regardless of whether or not governments take a proactive role in supporting crop insurance for smallholder farmers, they will inevitably be called in as the “reinsurer of last resort,” as described by SwissRe’s Head of Middle East & Africa, Public Sector Solutions, Mario Wilhelm. “If everything fails or in a drought situation, it’s the governments who have to step in. And oftentimes they were not aware of insurance as an instrument that could allow them to transfer the risk to the insurance industry.”
Evolving role of corporate partners
Corporate entities who rely heavily on smallholder farmers for their business, such as those selling inputs or purchasing crops, have the opportunity — perhaps even the mandate — to help ensure the resilience of their farmers. Other businesses, such as banks and mobile network organizations, are also finding a role to play in the crop microinsurance value chain. In the annex to this article, we capture some of the partnerships we saw between insurtech and corporate (and medium-sized) entities, and the value propositions for each of the parties involved.
Shifting Mindsets:
What is another way that we could frame ongoing philanthropic or government investments in mitigating smallholder risk?
Governments, donors, and other stakeholders need to understand the needs and purpose of subsidies for different populations, and shift their perceptions of the role of subsidies from an unsustainable handout to more of a “value for money” framework. As discussed in CASE’s Scaling Pathways: Financing for Scaled Impact and Taking Control of the Value for Money Narrative: How Innovative Metrics Are Making Impact Part of the Financial Equation, the goal of full financial sustainability can sometimes be in conflict with the impact an enterprise is trying to achieve — especially with customers at the base of the pyramid. But this doesn’t mean organizations can’t preserve impact and still work toward a high level of financial sustainability — they just need to engage a metric that helps them demonstrate the social return on the philanthropic dollars still needed (i.e., subsidies). This idea translates well to the use of crop insurance and associated subsidies to serve smallholder farmers in loose supply chains. There are numerous organizations using philanthropic capital to try to keep these smallholders from falling deeper into poverty, and to help bolster their resilience and earning potential. Could the provision of some philanthropic or government capital to subsidize crop insurance for this population reap more returns than some of the other donor or government-funded programs? The answer is likely yes.
For smallholders who are part of structured value chains and need some premium subsidies as they work toward more competitiveness, the value for money can be quite significant. As agriculture social enterprise Acceso’s COO Rob Johnson explains, “Does this value chain have a path to competitiveness? A path to sustainability? For example, sorghum for breweries. It might not be cost competitive when they first start planting, but if there is a path to sustainability — and they just need an even playing ground because at the time imports are less expensive — then a subsidy makes sense. The end game analysis has to be there. If peanuts are still not cost effective ten years in, then we have to rethink some of these subsidy mechanisms we’re using.” In the case of a crop not having a sustainable foreseeable future, as in Johnson’s example, the value for money of an ongoing subsidy would be considered in the context of other social safety net and poverty alleviation efforts.
Many questions remain about the potential for crop microinsurance to bolster the resilience and adaptation of smallholder farmers, and the type of financial model that can sustainably enable the impact. In our final article, we’ll weave together takeaways and learnings from the series to lay out key questions for the future of crop microinsurance.
Click here for this article’s annex: “The Evolving Role of Corporate Partners in Scaling Crop Microinsurance.”
This article was written by Kimberly Langsam, CASE at Duke, and Jane Choi, CASE consultant, and released in November 2021.
*Unless otherwise noted, all quotations in the articles are from interviews conducted by Kimberly Langsam and Jane Choi between May and August 2021.
