Insurance bundled with loans
Maximizing smallholder farmer uptake of insured loans
The need for agricultural insurance cannot be understated, and with a whopping 97% of smallholder farmers in sub-Saharan Africa being uninsured (as at 2018), accessibility is priority. To this end, bundling insurance with loans has become a popular choice.
Enter Pula, which has so far distributed insurance to over 1.7 million smallholders in Nigeria, thanks in part to a collaboration with the Central Bank of Nigeria in offering insured input loans. These efforts aside, uptake of insured input loans remains low. To address barriers to uptake, Pula - in partnership with Busara - recently conducted research in Northern Nigeria to understand the attitudes and perceptions of smallholder farmers toward insurance bundled with input loans. Nearly 1,700 farmers were surveyed using scripts that described insured loans indifferent ways. Specifically, the research aimed to answer these questions:
1. Does bundling insurance with a loan program make it more appealing to farmers?
2. Does it matter what type of organization the insurance is associated with? (Farmers were asked to choose between government, insurance companies, banks, local farming associations, or national farming associations).
3. Do social cues impact farmer perceptions toward insured loans?
4. Does altering the framing of what insurance is protecting change perceptions toward insured loans?
5. What style of explanations of insurance encourages the most uptake of insured loans?
Findings from the study were summarized under three main themes: desirability, trust, and perceived risk.
Farmers’ willingness to register and recommend insured loans was used as a measure of desirability. At the very least, attractiveness of insured loans was high because of the need for loans. However, some scripts improved desirability more than others: (i) by how the insured loans were explained, and; (ii) the type of organization offering the loan. Willingness to register was 5% higher when insurance was explained in a story-like manner, while an increase of at least 6% was estimated when national farming bodies were described as “taking care” of insurance, compared to other organizations.
Trust is the main driver of insurance uptake, especially for individuals who have little experience with financial service products. Similar to desirability, national farming associations elicited greater trust from farmers, resulting in 7% higher uptake of insurance bundled with loans.
Framing — the choice of words used to describe what insurance protects - plays an important part in building trust. When insurance was framed as protecting livelihoods instead of crops or individuals, average trust levels in benefitting from insurance rose by at least 12%. Similarly, the level of satisfaction in the protection insurance offered during a bad harvest was estimated to rise by 8% among farmers who received the livelihood framing, compared to the crop or self-protection framing.
Farmers provided a risk rating for the insured loan programs presented across the different scripts. The use of social norms - behavior and beliefs that are generally acceptable in society - significantly reduced average risk ratings. Our social norm scripts highlighted the number of other farmers that had registered for an insured loan, making it seem more socially acceptable. Risk ratings were predicted to fall by at least 15% among farmers that received the social norm script. Among the farmers who felt the program was risky, the fear of being cheated, distrust of people involved with the program, and doubt in input quality were the most common reasons for this.
Uptake of insured input loans in Northern Nigeria boils down to who provides the insurance, and how the product is communicated. With the former, partnership and communication through trusted farming organizations can increase desirability and trust. The latter requires explanations that emphasize the process of how insurance works, or story-based examples of insurance, to improve the perceived value of insured loan programs, and reduce perceived risk.
A summary of key findings from the study is available here. In December, 2021, Pula and Busara held a webinar to discuss in detail the results of this study. In case you missed it, the video is available here.