Insurance now, pay later: Introducing Pula’s pay-at-harvest pilot
Pula is one of the first recipients of the CDC Group’s £200 million (around $267 million) Climate Innovation Facility. CDC Group is the UK government’s development finance institution, whose goal is to support the growth of businesses throughout low-income countries in Africa and South Asia. As part of COP26, the CDC committed over £3 billion (around $4 billion) in climate finance in Africa and Asia for the next five years. Part of this commitment is the Climate Innovation Facility, a programme that will support pioneering climate solutions — in particular for adaptation and resilience.
Agriculture is important to Sub-Saharan Africa. As of 2019, around 60% of the Sub-Saharan African population were smallholder farmers or relied on smallholder farming to supplement their income. As a result, many families’ incomes are dependent on successful harvests. Agricultural insurance can protect smallholder farmers’ livelihoods by reducing risks from yield losses.
Based on research we carried out, agricultural insurance can help smallholder farmers increase investment in their farms by around 16%, improve yields by around 56% and increase household savings by up to 170% (all on average). However, there are barriers that prevent farmers from purchasing insurance products. Farmers often cannot find the right or affordable insurance products for their crops. Most traditional insurers lack the technical capacity to design agri-insurance products, as well as knowledge of local markets. Insurers are also less likely to target customers who are hard to reach and price sensitive.
To fill these gaps, Pula launched a “pay-at-harvest” agricultural insurance product. The product requires partnerships with value chain actors, such as insurers or reinsurers and trade or supply chain actors. The model includes a number of steps:
- Pula works with insurance providers to insure farmers against harvest losses.
- Together with the Pay-at-Harvest Fund, Pula prepays the premium to insurers on behalf of the farmers.
- Impact investors and other financiers pre-finance premiums for the farmers at the beginning of the season (via the Pay-at-Harvest Fund) and absorb any first losses during pilot phases of the programme.
- Trade actors, such as co-operatives and factories, pay farmers in return for harvests.
- A small part of the proceeds from the harvest then goes toward the prepaid premium and is disbursed back to Pula’s pay-at-harvest fund.
This model lowers the barrier for smallholder farmers to buy insurance by allowing them to pay premiums at the end of the season, once they have been paid their harvests.
Current insurance distribution channels are limited to value chains with credit or outgrower contracts, which leaves more than 80% of smallholder farmers uninsured. A recent study by the University of Zurich and Columbia University concluded that the timing of insurance purchase plays a crucial role in the level of farmer uptake. The study found that between 5% and 6% of farmers purchase insurance when asked to pay upfront. When asked to pay at harvest, this figure rises to 72%.
Pula’s is looking to validate these results at scale. In April 2021, with the assistance of the Shell Foundation and Heifer International, Pula launched a pay-at-harvest pilot in Nigeria. Pula is working alongside Olam, a commodity trader, and a consortium of insurers and reinsurers. Around 5,000 farmers that supply produce to Olam were selected to take part in the pilot and receive pre-financed insurance in May 2021. The outcome of this pilot is currently being reviewed and will be published in the near future.
Through this, Pula hopes to show that the pay-at-harvest model can incentivise more smallholder farmers to purchase insurance. The model’s success will help determine which additional countries pay-at-harvest could be launched in too. If the model is successful, it may have a positive knock-on effect of unlocking investment and creating value for the agricultural sector as a whole — across Sub-Saharan Africa and beyond.
To learn more about Pula and our products, visit our website here.
