Insurtech | Scaling Crop Microinsurance: Key Takeaways & Questions for the Future
This series is produced by Mercy Corps Ventures in partnership with CASE at Duke University. Each article explores the challenges the microinsurance industry faces to scale to support more than 600 million smallholder farmers around the world in becoming financially included and more climate resilient.
Find out more about the project here, and stay tuned for the full series of six articles here.
Smallholder farmer, Uganda. Photo courtesy of Mercy Corps.
Too busy to read the articles and need a takeaway to summarize the series? We’ve collated six of our top takeaways, covering everything from the critical role of subsidies to climate adaptation and resilience to the reality of the psychology around insurance. We’ve also highlighted the key questions they pose for the future of crop microinsurance.
Did you have other key takeaways from the series, or key points we didn’t cover? Join the conversation, and comment below.
Our Key Takeaways:
Crop microinsurance is not a one-size-fits-all solution.
Subsidization is critical. Without it, other innovation is “tinkering around the edges.”
Technology is the simple part. It’s the underlying process, operations, and rollout that require the most attention.
Insurance providers can’t go it alone: Government and corporate partners must play a role in achieving scale.
More climate events = more risk = higher premiums, but microinsurance can help spur adaptation.
Let’s be realistic about the psychology of insurance. (Nobody really likes it.)
1. Crop microinsurance is not a one-size-fits-all solution.
Smallholder farmers face many complex challenges that threaten their livelihoods, but each farmer is unique in what challenges they face and what tools they have at their disposal to mitigate those challenges. While one microinsurance product might provide protection to one smallholder, it could be less helpful to another. For the ecosystem players in microinsurance, it is important to identify which specific problem you’re trying to solve and align your offering with the impact and financial objectives that you’re trying to achieve.
For example, do you want to offer more protection to female smallholder farmers? Then bundling microinsurance with a financing product can be a good option, as most female smallholders are excluded from traditional financing options.
Or say you want to support smallholder farmers to be able to invest in higher quality inputs. Then a product that covers input expenses would be ideal.
Whatever your impact goal, it is important to recognize that one microinsurance product cannot solve all of a smallholder farmer’s problems, nor can it be applicable to every single one. See more information on the implications of different crop insurance business model elements in the “Business Models” article.
Questions for the future:
What problem are we trying to solve with crop microinsurance, and do the available products contribute to that solution?
What business models are best aligned with different impact goals, targeted to different smallholder populations? Which are more likely to have a profitable model, and which may require additional subsidy to achieve the mission?
2. Subsidization is critical. Without it, other innovation is “tinkering around the edges.”
The overwhelming majority of interviewees and other experts cited in our research tend to agree that crop microinsurance is not scalable without the availability of subsidies. As One Acre Fund’s Christensen asserts, “You can tinker around the edges and give technical support and actuarial support and incorporate things like remote sensing, but you’re not fundamentally going to change anything unless you push more money into the system, and dramatically increase payout amounts via products that are affordable for farmers.”*
In “The Basics: What is Microinsurance?” we defined four key challenges to scale for crop microinsurance: meeting farmer needs, gaining trust, reaching farmers, and managing costs.
While data and technology innovations can address many of the obstacles related to the first three challenges, as well as the administrative cost element of managing costs, they do little to address the costs related to risk and thus remain a major roadblock to achieving impact at scale. We discussed subsidies further in the “Who Pays?” article, and highlight two stakeholders (governments and corporate partners) with important subsidization roles in the takeaway below.
Question for the future:
How can investors continue to both support technology innovation and advocate for sustainable subsidization programs to enable scale?
3. Technology is the simple part; it’s the underlying process, operations, and rollout that require the most attention.
Investors are often very interested in the power of new technology, but our interviewees emphasized how important it is to get the product and process right first — that tech is just a wrap-around. As Acceso COO Rob Johnson notes, “technology is the simple part.” It’s the operations, process, and rollout that require significant attention and investment. Most interviewees also warned that the availability of digital platforms and interfaces in a farmer’s hand will not significantly reduce the need for human touch for the foreseeable future — a reality that they hope investors will understand. You can read more about the potential of three key technological advances — remote sensing and drones, mobile phone penetration, and blockchain — to enable scale of crop microinsurance in the “Data and Tech” article.
Questions for the future:
What factors will be most important in increasing smallholders’ use of digital platforms, and thus decreasing (or changing) the need for human touch?
How can investors best support not only technology innovation, but also process and operational innovation? How can insurtech ventures communicate the importance of first perfecting these underlying elements to investors?
4. Insurance providers can’t go it alone: Government and corporate partners must play a role in achieving scale.
Agriculture is largely a public good — and public goods often require government involvement and support to sustain them. As the Microinsurance Network’s 2020 Landscape Report notes, “Crop and livestock insurance have grown dramatically in some countries where there is government support and subsidies. However, schemes without government support have largely not achieved scale.”
National crop insurance schemes have many upsides, but they can often be inflexible and slow, and provide limited coverage (e.g., just inputs). Many of the insurtech companies that have entered the market are working to address those challenges, making sign-ups more seamless, payments more timely, and offering additional coverage. However, other stakeholders can help to offset the costs of supplementing the government coverage to meet the needs of smallholders. Specifically, the corporate entities who rely heavily on smallholder farmers for their business, such as those selling inputs or purchasing crops, have the opportunity — perhaps even the mandate — to help ensure the resilience of their farmers. Other businesses, such as banks and mobile network organizations, are also finding a role to play in the crop microinsurance value chain. Governments offering national crop insurance programs, then, need to ensure sufficient flexibility so that these complementary programs are possible. Read more about the role of government in scaling crop microinsurance in “Who Pays?,” and about the role of various corporate partners in the “Who Pays?” annex.
Questions for the future:
How do national insurance programs need to evolve as the technology, uptake, and role of ecosystem players evolves? Who can partner with the government to help identify and make these changes?
What are the opportunities for buyers and input suppliers, specifically, to ensure the availability and easy uptake of crop microinsurance? What is their mandate to do so?
5. More climate events = more risk = higher premiums, but microinsurance can help spur adaptation.
One Acre Fund’s Global Policy Director, Colin Christensen, articulates the challenges that climate change poses to the crop microinsurance market: “The need for risk mitigation — whether it’s just the input costs coverage or the actual social safety net side of insurance — is only going to increase as climate change makes weather patterns more unpredictable. Due to the costs of covering more weather disasters, reinsurers are either going to have to pull out of markets or raise prices, making products even less affordable. We are already seeing signs of this, and it’s not unique to Africa… This could push the already precarious livelihoods of smallholders over the precipice of viability.”
Interviewees spoke to a few ways to address some of this increased risk associated with climate change:
Guarantees or subsidies for reinsurance companies
Given their increasing risk in providing coverage, reinsurers may require subsidies or public guarantees to be willing to continue backing crop microinsurance products.Premium subsidies
Even if governments or other donors provide a subsidy or guarantee for reinsurers, the increasing costs for this high-risk product is likely to be too high for the average smallholder, meaning that premium subsidies will be critical for coverage. Read more about premium subsidies in the “Who Pays?” article.Adaptation efforts
Arguably the most important approach to this risk is to see how insurance offerings can encourage or spur adaptation to changing climate conditions.
“…One of the main priorities for the insurance industry to develop solutions for climate risks should be to understand CSA [Climate Smart Agriculture] and link its products to adaptation and resilience practices.”
— Microinsurance solutions to address climate change, State of Microinsurance, 2017
When insurance is attached to inputs, those inputs are often selected for being higher quality and/or more adaptive to an environment (such as drought-resistant seeds), and thus increasing the resilience of farmers for that planting season. When insurance includes wrap-around advisory services or mobile alerts, it can help farmers improve practices or prepare for impending weather events. But the most compelling example we saw of an insurtech making adaptation and resilience a key part of their offering was WRMS in India, which has taken on more crop lifecycle roles to manage the risks. (Read more about WRMS in our “Case Studies” article.)
Through its SecuFarm insurance product, WRMS focuses on a subset of crops and geographical regions where it has sufficient data to manage risks. SecuFarm offers complete yield protection for farmers, and participants must follow a package of farming practices suggested by WRMS. Alongside the yield assurance, WRMS also offers farmers access to markets for commodities where the company is able to create market linkages. Co-Founder and CEO Anuj Kumbhat explains further:
“Let’s say when we do the soil testing we find a basic issue with the pH of the soil, which is causing the yields outcome to be low — how do we address the pH issue? Or if there is a micronutrient issue, how do we address that issue? Or the sowing window chosen by the farmer, or the variety chosen by the farmer doesn’t suit that area? For each of these areas where we are working, we have completely mapped these things, identified the risk which can be managed using these practices, and the risk that cannot be managed and has to be completely taken by us or transferred to the insurance market.”
WRMS has taken an increasing number of roles with smallholder farmers in order to create a stronger and more impactful insurance product. Is this what we might see with other insurance companies, or could this be accomplished through strong public-private partnerships? Is it enough anymore to just assume that your insurance product incentivizes adaptation and resilience? Inspiration can come from other sectors where prevention and risk mitigation have benefited both insurers and clients, such as health insurance companies like Kaiser Permanente in the U.S. and Discovery in South Africa.
Questions for the future:
Will increasing risk force insurers and reinsurers out of the crop insurance market, and/or drive up premiums so high as to be (even more) unaffordable?
Where could climate funding be used to successfully support the climate adaptation of smallholder farmers and availability of insurance? How does this fit within the mandates of different funders?
6. Let’s be realistic about the psychology of insurance. (Nobody really likes it.)
Insurance is an expensive and complex product. Realistically, will smallholders purchase crop insurance if it’s not compulsory or fully subsidized? In other markets, and for other products, the uptake of insurance can be limited when it’s not compulsory or fully covered. As Pula Co-Founder and Co-CEO, Rose Goslinga, shared in a SOCAP21 session on insurtech, “I’ve been selling insurance for the last ten plus years, and I myself do not like buying insurance. I still consider it as a cost, and I’d rather not have it. And that’s coming from one of the biggest advocates for insurance. If that’s my perspective, then we have to be honest with ourselves.” (Read more about Pula’s model, which works with partners to embed insurance with other products, in the “Case Studies” article.)
This perspective has led some of our interviewees to focus on the provision of insurance that is embedded and compulsory (e.g., insurance included in an input bundle or a loan). However, others are still working to offer voluntary products, often partially subsidized, alongside education about insurance and sometimes other wrap-around services. (See the “Business Models” article for more detail and implications for these and other models.)
To address tensions that accompany discussions of insurance in its direct to customer model, WRMS has begun speaking first with farmers about active risk reduction and yield improvements, for which it provides advisory support — and only after that do they speak about the insurance side of risk management. GramCover is offering crop insurance in addition to other types of insurance targeted to the rural customer. (In the cases of both WRMS and GramCover, the India national insurance program provides premium subsidies. See the “Case Studies” article for more information on these two models and several others.) Others outside of India are also trying to prove the model of direct to customer sales of crop microinsurance — both in countries with and without national insurance subsidy programs. They are also employing various techniques to try to overcome the psychology around insurance and empower farmers to make informed decisions about insurance.
Questions for the future:
Will smallholders purchase crop insurance if it’s not compulsory and/or fully subsidized? What have we learned from other markets and products about the willingness to purchase insurance and customer retention?
Are some smallholders better targeted with compulsory products, and others better targeted with voluntary products? What are the implications for other elements of these business models?
As insurtech investors, donors, governments, and other agriculture value chain players look to bolster the resilience of smallholder farmers, what will be the role of crop microinsurance — and who will take responsibility to ensure it can achieve impact at scale? We believe that strong public-private partnerships will be critical to this effort, and are encouraged by the innovation and market-building efforts of the insurtech industry in making crop microinsurance a reality.
This article was written by Kimberly Langsam, CASE at Duke, and Jane Choi, CASE consultant, and released in November 2021.
*Unless otherwise noted, all quotations in the articles are from interviews conducted by Kimberly Langsam and Jane Choi between May and August 2021.
