30x in 1 year: Insurance pilot with 4k Nigerian farmers leads to a scale-up across 3 countries
Agricultural insurance serves as a powerful risk mitigation tool against climate risks and other hazards smallholder farmers face. However, any agricultural financing solution needs to tailor to farmers’ cash flows to sustainably solve these challenges. At the start of any planting season, smallholder farmers have cash for preparing their land, buying seeds and other critical inputs, and thus purchasing insurance is an additional financial burden and a matter of low priority for farmers.
A study carried out by Columbia University and the University of Zurich concluded that insurance uptake increased from 5% to 72% between farmers paying for premiums upfront and at harvest. Even a 30% discount on premiums couldn’t further convince farmers to pay for insurance upfront. Clearly, a funding innovation was needed to solve this liquidity constraint! Pula partnered with Shell Foundation and UK Government’s FCDO to deliver an innovative product that eases the cashflow burden on farmers at the start of their crop production cycle.
The pay-at-harvest (PAH) model of insurance explicitly addresses this liquidity constraint. It is structured to allow farmers to receive insurance coverage at the start of a season but pay the premium after they have harvested and sold their produce. In 2021, Pula carried out a PAH insurance pilot funded by the Shell Foundation and Heifer International in Nigeria’s Benue and Nasarawa states, with Olam aggregating produce from these farmers.
Out of the 4,358 farmers insured, 71% received payouts. At the payout ceremony, more than 75% of the farmers expressed their satisfaction with the insurance product and the PAH model, especially the timing of the premium payments which allowed them to manage their cash flows better. Subsequently, Olam has witnessed a 125% increase in enrollment to 9,900+ farmers this year under this innovative model in the same states.
Here are 3 things that the sector stakeholders can learn from this experience to enhance the penetration of index insurance using pay at harvest model:
● Sensitize farmers early and at the grassroots: Outreach to farmers, especially at the village level, should be done well before product roll-out to ensure alignment and increase buy-in from farmers. Provide clarity on premiums that will be deducted at harvest.
● Get farmers to contribute: PAH would be sustainable if farmers had ‘skin in the game, either through a partial down payment or an existing small loan taken from the aggregator.
● Find value chains where organized buyers exist: Ideal to work in value chains with organized buyers who are integrating backward and wherein farmers are disincentivized from side selling, e.g., organic cotton, certified cocoa, malt barley.
Pula along with its development partners has leveraged this pilot to align repayable grants to work with off-takers in Uganda, Ghana, and Malawi for rice, maize, coffee, and cocoa farmers. This has allowed 115k farmers to be insured under the PAH model in this ongoing season — a ~30x growth in 1 year! Our learnings on repayments will be shared as we keep collecting more data.
Based on further research and analysis, we anticipate the greatest opportunities to successfully implement PAH insurance through tight value chains such as organic cotton in India and certified cocoa in Cote d’Ivoire among others, where side selling is highly disincentivized for farmers.
We also recommend that aggregators who purchase directly from farmers should be targeted first. Digital farmer registration should be encouraged to promote efficient and accurate data recording while digital payment channels should be pursued to ensure quick and timely transactions. Lastly, research in Kenya, and Ethiopia among other countries, highlight that the financial flexibility of the PAH model is likely to allow the most liquidity-constrained farmers to increase their demand for insurance thanks to delayed premium payments.
