Pilot Insights | Driving Climate Resilience for Smallholder Farmers in Kenya Through Smart Contract Weather Index Insurance
This post is the second of a two-part series; our previous post introducing the pilot is here.
Written by: Betty Wambeti Muriithi (Digital Financial Services Manager, Mercy Corps AgriFin), Lillian Alexander (Senior Impact Advisor, Mercy Corps Ventures), and Patrick Sampao (Digital Inclusion Specialist, ACRE Africa)
Insights in brief
- Smart contract integration into weather index insurance drastically reduces payout times | This pilot reduced payout times by 97%, from an industry average of 45 days to 24 hours
- Smart contract automation enables and increase in coverage amount | This pilot increased coverage amount by 27% for smallholders compared to the previous season
- Smart contract transparency increases trust | Over half of participating farmers reporting increased trust in insurance
- Improvements made through smart contracts leads to improved quality of life | 40% of farmers reported that smart contract insurance improved their quality of life
- Smart contract integration drives commercial value | Based on the success of the pilot, ACRE Africa has made a groundbreaking commitment to put all parametric insurance products on blockchain
The Context
Smallholder farmers produce a third of the world’s food. They are the backbone of the agricultural sector which is the second-largest source of employment globally. We know that access to financial services is key to enabling the productive potential of smallholder farmers, but financial services targeting this group are often inefficient or ineffective, leading to low interaction and uptake. As smallholder farmers are among the most climate-vulnerable groups on the planet, access to financial services is particularly critical to address the growing impacts of climate change on land use and crop yields. Insurance can be a big part of the solution, but innovation and investment remain notoriously slow in this industry, with admin-intensive claims processes, low levels of transparency, and lengthy payout times that often don’t even begin until the end of season, all of which threaten smallholder farmers’ ability to respond to, and withstand, extreme climate shocks. To address these challenges, we turned to smart contracts and decentralized finance (DeFi).
In January 2021, we collaborated with ACRE Africa, Etherisc, Mercy Corps AgriFin, Ethereum Foundation, and Chainlink Foundation to test smart contract automation for weather index insurance with over 12,500 smallholder farmers in Kenya, driving both climate resilience and financial inclusion. Through this pilot, for the first time at scale, Etherisc’s Ethereum-based smart contract platform was integrated into ACRE Africa’s existing weather index insurance product, Bima Pima, to measure the impact on operational costs, streamline and simplify payouts, and automate claim status inquiries. This solution incorporated real-time meteorological data sourced from the Africa Rainfall Climatology satellite with M-Pesa’s mobile payment capability, so that during an extreme weather event, the policies could be automatically triggered — facilitating fair, transparent, and timely payouts. By integrating crop insurance indexed to local weather conditions with smart contracts on a blockchain, ACRE Africa was able to enhance transparency for farmers on the front end and reduce payout times for eligible policies through back end integration.
The Pilot
Between February — May 2021, ACRE Africa employed a team of village-based agents to recruit and onboard farmers across 11 counties in Kenya via a physical Bima Pima scratch card containing a unique policy code. Each policy cost Ksh50 in premium and offered up to Ksh500 in coverage — covering the equivalent of one bag of inputs (seeds). Farmers could choose to purchase one or multiple policies, paying the premiums using M-Pesa mobile money. Ninety-seven percent of farmers surveyed from the pilot reported that the policy cost was not burdensome and 77% of farmers felt that ACRE Africa’s insurance was “good” or “very good” value for money.
Once activated, the Bima Pima policies initiated satellite monitoring of weather conditions at each farmer’s GPS location. In the event of extreme weather conditions, the policies were automatically triggered and farmers received payouts directly on their phones via the M-Pesa mobile money platform. Through this pilot we also enabled mid-season payouts — a first for crop insurance where payouts are usually processed at the end of the season. Farmers were now able to have visibility throughout their policy term using a query function (via USSD messaging) to check their policy status with the service provider.
Through this pilot, we explored three key questions:
- Can smart contract automation minimize operational overhead for insurance companies, thereby increasing the coverage value for farmers?
- Can blockchain-based insurance contracts increase trust by providing transparency to clients?
- Can faster payouts and mid-season payouts improve farmer resilience to weather shocks?
After successfully rolling out the improved insurance product to over 12,500 maize farmers (of which 88% were new ACRE Africa customers) during Kenya’s 2021 long rains season, we have generated key insights to these three questions.
Insight 1: Smart contract automation facilitated increased coverage value for farmers
Blockchain technology has applicable use cases in the agriculture sector, with direct benefits to both crop insurance providers and smallholder farmers. Smart contracts significantly improved operational efficiencies for ACRE Africa, with 40% of claims processed within 24 hours after the policies were triggered.
Policy payment triggers were pre-programmed onto the blockchain based on farmer location, rainfall levels at that location, and the premium amount paid per farmer, so that when rainfall was insufficient or exceeded the set threshold amount, coverage was automatically issued without smallholders needing to submit a claim manually. This level of automation improved the unit economics for distributing insurance, as ACRE Africa could drastically reduce staff hours on manual claims processing, reassigning the three actuarial staff previously required to new roles within the organization, and therefore decrease the cost of the product and enabled a 27% increase in coverage amount for smallholder farmers compared to the previous season.
Insight 2: Smart contract automation yielded greater trust and transparency
Smart contracts significantly bridged the gap between the end of the agricultural season and receipt of payouts by farmers; an essential factor to increase trust and uptake of crop insurance products. Farmers who received payouts were more likely to report improvements in their quality of life and increased trust in the insurance product, and reported that they were more likely to purchase a crop insurance policy from ACRE Africa in the next agricultural season. Farmers who received a payout were twice as satisfied with the Bima Pima insurance product (NPS=16) compared to farmers who did not receive a payout (NPS=8).
“The use of blockchain-based smart contracts for weather index insurance has helped ACRE Africa to improve engagement with farmers who take up our policies through enabling them to have visibility of their cover at any given time during the season. We are also now able to issue payouts at the midpoint of the season, a product feature that is changing the perception of crop insurance among the farmers we serve”.
Muthithi Kinyanjui | Head of Partnership & Market Systems, Acre Africa
ACRE Africa employed a hybrid model, balancing touch and tech to reach, and consistently communicate with, the pilot policyholders. Human touch points were enabled through ACRE’s village-based agent network to initially educate and onboard farmers. Farmers were also given a physical scratch card to serve as a tangible token of value for the insurance policies purchased. Digital communication through USSD and SMS messaging complemented the in-person component by allowing ACRE Africa to maintain regular contact with policyholders throughout the duration of the agricultural season. This two-way communication over the season not only enabled ACRE Africa to push out updates on the timing of, and eligibility for, payouts but also allowed farmers to submit status queries on their individual policies. Forty-four percent of surveyed farmers reported using the SMS tool to check the status of their insurance policy, 80% of whom did so at least once a week throughout the season. An interesting additional insight was that female farmers are less likely to trust insurance products, reflected in the 70% of total query function users being women.
Touch: “One of their agents took time and explained to our group about anything that was not well understood.” Pilot Participant (male, 73)
Tech: “The company regularly sends SMS’s updating me on the policies, which were comprehensive.” Pilot Participant (female, 42)
By automating the insurance policies via smart contracts, ACRE Africa was able to improve the timing and client awareness of payouts — compared to the previous agricultural season, 58% of participating farmers reported improvements in onboarding, communication, and access to information about their insurance policy. This resulted in increased trust among customers, with around half (53%) of participating farmers reporting increased trust in insurance — a strong outcome given that insurance is a notoriously difficult product to sell both psychologically and to low-income smallholders.
Insight 3: Blockchain integration enabled a 64% reduction in average payout time, improving farmer resilience to weather shocks
In addition to increasing operational efficiencies and bolstering client trust, the use of blockchain technology enabled ACRE Africa to significantly cut down on the amount of time required to process and pay out claims for eligible farmers. In the pilot season, payouts were made within an average of five days, compared to an average of 14 days in ACRE Africa’s previous season, and an industry standard of 30–60 days. This impressive outcome is a win-win as it reduced administrative costs and staff time on ACRE’s side, while also getting funds into farmer’s pockets early enough for them to either buy new seeds and replant, or to ensure late-season crop losses were not detrimental to their livelihoods.
“After the payouts I was able to buy bean seedlings, which I planted. Thanks to Bima Pima’s compensation I got a good harvest and now I can provide food for my family.”
Pilot Participant (female, 42)
Forty percent of surveyed farmers reported that ACRE’s smart contract insurance product improved their quality of life, citing reduced stress, increased ability to purchase agricultural inputs, and greater knowledge of improved farming practices. This is an important outcome given that studies from around the world have documented significantly higher rates of depression, anxiety, and suicide among farmers than the general population. The 34% of farmers who specifically reported reduced stress because of crop insurance demonstrates the role of insurance in boosting resilience to climate shocks. As participants stated;
“Being able to relax and worry less about the weather affecting my production is an improvement to me. I used to plant then start worrying whether there will be enough rains in that season.” Pilot Participant (male, 23)
“I am no longer worried about how the weather will affect my production because my farm is covered in case things do not go as expected.” Pilot Participant (male, 46)
Scaling Results
With these promising outcomes, we launched a second phase of the pilot with ACRE Africa for the short rains 2021/2022 season in Kenya, with a goal to achieve full contract automation to further reduce payout times from an average of five days to just 24 hours. During this second pilot phase, in which ACRE Africa integrated this solution into their Bima Pima product, they were able to reach 100% of claims processed within 24 hours. This is a transformative reduction in payout time, compared to an average of 14 days in ACRE Africa’s pre-pilot season, and an industry standard of 30–45 days.
Based on the success of these two pilot phases, ACRE Africa has made a groundbreaking commitment to put all parametric insurance products on blockchain, including their rainfall insurance product (applied in the pilots) and their new soil moisture product. They are also planning to replicate the same blockchain integration in Tanzania to include other value chains beyond the maize, sorghum, and green grams covered for smallholder farmers in Kenya.
Stay tuned for updates, evidence, and insights on our other Mercy Corps Ventures pilots, responsibly testing DeFi solutions for unbanked and underbanked populations in emerging markets.
