Insurance bundled with loans: Maximising smallholder farmer uptake of insured loans
By Maryam Anike Yusuf — Associate, Busara Center for Behavioral Economics
There is a need for agricultural insurance among smallholder farmers, especially in Sub-Saharan Africa, which has the largest number of uninsured smallholder farmers (97%). Bundling insurance with loans has become an increasingly popular way of making insurance more accessible.
Pula has distributed insurance to 1.7 million smallholder farmers in Nigeria alone. The company’s success in reaching so many farmers is partly due to its collaboration with the Central Bank of Nigeria in offering insured input loans. Pula — in partnership with the Busara Center — recently conducted research to understand the attitudes of Northern Nigerian smallholder farmers toward insurance bundled with input loans. Nearly 1,700 farmers were surveyed with scripts that describe insured loans indifferent ways. The research aimed to answer the following questions:
- Does bundling insurance with a loan programme make it more appealing to farmers?
- Does it matter what type of organisation the insurance is associated with? (Farmers were asked to choose between government, insurance companies, banks, local farming associations, or national farming associations.)
- Do social cues impact farmer perceptions toward insured loans?
- Does altering the framing of what insurance is protecting change perceptions toward insured loans?
- What style of explanations of insurance encourages the most uptake of insured loans?
The findings of the tests were summarised under three main themes: desirability, trust, and perceived risk.
What did we learn about desirability for insured loan programmes?
Pula and Busara used farmers’ willingness to register and recommend insured loans as a measure of desirability. Their research showed attractiveness for insured loans was very high mostly because of the need for loans. However some scripts improved desirability more than others. Desirability for insured loans was greatly influenced by the style of explanations and the type of organisation offering an insured loan. Willingness to register was 5% higher when insurance was explained in a story-like manner. This was estimated to increase by at least 6% when national farming bodies were described as “taking care” of insurance compared to other organisations.
What did we learn about trust toward insured loan programmes?
Trust is the main driver of insurance uptake, especially for individuals who have little experience with financial service products. The research findings showed that insured loan programmes had higher credibility than uninsured loans. Trust in benefitting from insurance bundled with loans was 7% higher among farmers that were offered insured loans through a national farming association.
In addition, the choice of words used to describe what insurance protects, also known as framing, plays an important part in building trust. Average trust levels in benefitting from insurance rose by at least 12% when insurance was framed as protecting livelihoods instead of crops or individuals. Similarly, the level of satisfaction in the protection insurance offered during a bad harvest was estimated to rise by 8% among farmers that received the livelihood framing compared to the crop or self protection framing.
What did we learn about perceived risk toward insured loan programmes?
Farmers provided a risk rating for the insured loan programmes presented across the different scripts. The use of social norms significantly reduced average risk ratings. Social norms refer to behaviour and beliefs that are generally acceptable in society. 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 few farmers that felt the programme was risky, the fear of being cheated, distrust of people involved with the programme and doubt in input quality were some of the most common reasons.
Key takeaways for optimising insurance bundled loan programmes for better uptake
- Messenger effects (who provides the insurance) play a significant role in how farmers evaluate insured loan programmes. Partnership and communication through trusted farming organisations can increase desirability and trust.
- The style of communication matters: explanations that emphasise the process of how insurance works or story based examples of insurance can improve the perceived value of insured loan programmes and may reduce perceived risk.
On Tuesday 14th December, Pula and the Busara Center will run a webinar to explain the results of this research with smallholder farmers. Register here to participate in our webinar and hear from insurance and development finance experts from the Central Bank of Nigeria and Veritas Kapital.
