How governments can drive demand for crop insurance while protecting their own and their farmers’ investments- Evidence from Zambia and Kenya
Agriculture is an inherently risky activity, with farmers facing natural risks (for example, pests and diseases), climatic shocks and as we have seen with the crisis in Ukraine they are also exposed to non-agricultural shocks that increase fertiliser prices. That said, demand for agricultural insurance has so far been low if offered to farmers on a stand-alone basis. In this blog we explore how offering bundled agricultural insurance with inputs has the potential to unlock agricultural insurance demand by farmers and have an impact on farmers production.
Bundling insurance with agricultural inputs aims to protect farmers from the risks associated with rain-fed agriculture. For governments and farmers, bundling an input subsidy programme with an insurance product can offer several advantages, and if embedded well, has benefits for both governments and farmers alike.
Case Studies of Embedded Insurance: Kenya & Zambia
In Kenya and Zambia, Pula has successfully partnered with insurers to deliver insurance products bundled with inputs offered through an e-voucher system. While the programs are different they also have some similarities, as illustrated below.
Figure 1: Key features of the e-voucher programmes in Kenya and Zambia
Bundling insurance with inputs subsided is showing promising impacts on farmers’ demand for insurance while promoting productive investments. Key hypothesis according to CGAP why this might be, include:
- The use of a trusted distributor who will ensure payouts are made when due- the government
- The affordability of the product- where the product is embedded in existing planned expenses- the voucher
- Channels exist for increasing farmers’ understanding of the product- Farmer understanding of basic features of the product for product usage exist through the government and its extension officers who can train farmers, answer FAQs, while farmer lists exist that enable for digitised content distribution.
- Product features and risk features are appropriately designed- since they are designed in partnership with the government.
These hypotheses are increasingly proving right in Kenya and Zambia, based on our experience and data collected so far:
Payouts drive trust and demand- in the first year led to farmer satisfaction and retention (Figure 2). In the Kilifi and Taita Taveta regions, there was an increase in the numbers of farmers covered and the total sum insured (TSI) per farmer between 2020 and 2021 following insurance payouts. The TSI equals the total amount of money that is to be covered in the event of a covered loss. Our hypothesis here is that farmer satisfaction and trust in the product led to informal product promotion between farmers’ social networks.
Figure 2: Farmer growth statistics for select KCEP regions, 2020–2021
Note that KCEP is a sliding-scale subsidy programme where farmers’ contribution rises from 10 percent in the first season, to 40 percent in the second, and 70 percent in the third — they would usually experience declined uptake as the own contribution rises but despite the decrease of the government subsidies in year two, there was a modest increase in the number of farmers covered for the long rain season in 2021, while the total sum insured rose significantly. This means that farmers that had decided to renew the input product had increased their input purchase and hence their investment.
This compares positively with the experience of a non government program in Ethiopia where insurance demand dropped quickly when subsidies reduced.
In Zambia, similar to KCEP, the product design fit and payouts plays an important role in driving farmers’ interest in purchasing an inputs-insurance bundle as we can see at Sinazongwe and Choma regions (Figure 3), where there was an increase in the numbers of farmers covered and the total sum insured (TSI) between 2020 and 2021.
Figure 3: Farmer growth statistics for select FISP regions, 2019–2020
Beyond insurance payout Pula has found that non-financial value added services are meaningful for increasing farmers demand: In Kenya Pula sent out agronomy tips via SMS on good agricultural practices. In 2021, Pula sent out SMS for the short rain season, both before and after registration. This was done to encourage farmers to renew their policies, keep them updated about how the product works and inform them of when payments were due (both from and to them) A 2020 study in Kenya among farmers suggests that “ learning about the benefits of (subsidized) insurance outweighs any anchoring effects on the zero price”.
Area yield insurance and weather index insurance are still new to many markets. As a result, further analysis to assess in-depth the various impacts of bundling such products with input subsidies is necessary. But its clear that leveraging on government systems instils trust and can have beneficial impacts on investments made by governments and farmers alike. Similarly product design here can guide investments to be productive. In both cases of Zambia and Kenya, Government required that payouts be channelled to the e-wallet for purchasing inputs in future seasons, insuring future food security.
There are currently an estimated 26 input voucher programs in Africa, on average their budget is 20–50million dollars per year. Only 2 of them embed insurance, meaning that hundreds of millions of dollars are being invested without any risk strategy in place. At Pula we work with ministries of agriculture to support policies that enable farmers to adapt to climate change and ministries of finance to secure their investments.
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