Cracking the trust problem for crop insurance uptake

While agriculture is the backbone of many economies in sub-Saharan Africa, accounting for significant proportion of employment, they have not cracked how to adequately finance it to meet the region’s needs.

Since independence, injecting capital into agricultural value chains has remained a challenge to a majority of countries in the continent. Agriculture is considered risky by financiers due to factors that are generally unknown to them.

Consequently, financing the agricultural sector is deemed between four and five percent less profitable, compared to other sectors due to, for example, natural hazards, more expensive loan appraisal processes, higher defaults, and market risks such as price volatility and export bans. Thus, it requires de-risking mechanisms to make funding of the agricultural sector attractive to financiers

One way of de-risking it is to provide farmers with inputs and market access instead of cash credit. This is because one of the risks associated with financing inputs is that farmers may divert cash to their other needs. Enhancing access to quality inputs and machinery reduces this risk significantly. Providing insurance to farmers is another necessary risk mitigation tool.

Agriculture insurance offers a way to protect farmers from yield and income loss due to natural hazards. Insurance strengthens farmers’ resilience by de-risking their investment in improved inputs, mechanisation and land lease.

With compounding shocks, utilising innovative insurance solutions is more important than ever in the agriculture sector— which provides livelihoods to millions of people in Africa, food security to all, and stability to entire economies.

However, not many insurers consider agriculture as a good business because of its risks, complex distribution, and the negative perception many farmers have of insurance. This leads to a lack of scale, which in turn leads to high premiums.

Decision-makers and other industry players need to encourage low-cost insurance and incentives for African farmers to get insurance cover.

Around the world, only one in five smallholder farmers have taken up insurance against risks such as extreme weather, pests, or diseases. These farmers cannot access traditional, indemnity-based insurance due to lack of awareness and the high cost of premiums. Even where farmers are aware, few are willing and able to pay.

On the other hand, insurance providers continue to overlook smallholder farmers due to the costs related to their acquisition as customers, sensitising them, some in remote locations, and packaging suitable covers for them, which makes it less profitable than other segments.

One model of insurance that can reduce the monitoring costs is index-based insurance where payouts to farmers are determined, by indices which can be rainfall, soil moisture or a combination.

Under this model, insurance companies do not need to visit farms to assess the damage because these indices can be obtained by combining data sets coming from a weather station, satellites and on the ground sampling.

Operational costs are reduced, cost of premiums lowered, and settling claims becomes easy and automatic. Challenges in index-based insurance have had some providers opt to also include picture-based insurance and crop cuttings to determine payouts.

The main issue in agricultural insurance, however, is gaining farmers’ trust and understanding of insurance. Field presence can help to explain how insurance works and to confirm that actual damage is seen and measured (farmers do not trust satellite monitoring of weather events as the sole source for the indices).

Indices that are calculated might not correspond to real events. So, preference for crop cuttings and pictures is coming up to gain trust from farmers and because weather indices might be unreliable due to microclimatic events.

This can lead to ‘basis risk’, where compensation is paid to farmers without losses while those with losses are not compensated. This is a disaster when trying to gain trust, hence the move to picture-based insurance or actual registration of yield losses through crop cutting.

AGRA (the Alliance for a Green Revolution in Africa) to partner with various organisations, including private sector companies, to enhance awareness and uptake of crop insurance and to develop innovative, partially digital, distribution channels.

The organisations are provided with technical and financial assistance to enable them better understand smallholder farmers and to adapt and roll out various crop insurance products.

To create more trust by farmers, in Embu County, for example, AGRA-trained village-based advisers serve as agents of insurers, offering crop insurance to farmers. Being from the same community and trusted by fellow community members, this has seen more farmers taking up crop insurance.