Insurtech | The Business Models: How is Crop Microinsurance Provided?
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.
Photo courtesy of One Acre Fund.
Insurance has its own language. And very few have it mastered. But there are several fundamentals that, if learned, can unlock a wider understanding of the field and serve as a baseline from which to ask more questions.
The crop microinsurance market is still rapidly evolving, with a variety of models and key elements being combined by innovative startups and established enterprises alike. As investors and donors look to invest in this space, it’s important that they understand the key business model choices insurtechs are making — core parts of this “language” — alongside the implications of these choices. We’ve provided a simple overview here, but there are many layers of depth underneath each and every piece (trust us).
Through our interviews, we saw four key business model elements that crop microinsurance providers and insurtech ventures (i.e., the “Doers” from our ecosystem categories in Article 1) are pursuing, broken down into several subcategories.* We summarize these below, and provide additional detail on each following the summary.
I. Financial: How do you make money?
Margins on microinsurance products are small, so reaching scale is key to becoming profitable in this industry. Most of the interviewees in this series have not yet reached scale — they’re experimenting with creative ways to earn revenue while continuing to test, pilot, and expand their offerings (often with the support of grant funds).
II. Impact: How do you create social and/or environmental impact?
While some enterprises offer protection from shocks, others also use microinsurance as a tool to encourage or incentivize more adaptive and resilient practices. Most enterprises work to achieve a combination of the impact elements.
III. Product design: What are the key components of your insurance product?
We saw many variations in product design, but all were index-based (with some being parametric, i.e., based on the occurrence of an event like rain). The indices were primarily based on weather or yields, and while some products covered projected yield, most focused on inputs. The timing of assessments also varied. Key product design elements include:
A. Primary Index Type: What is the insurance index based upon?
B. Coverage: What piece of the farmer crop lifecycle is covered?
C. Payout: What is provided if there is an approved claim?
D. Timing: When are assessments made?
E. Crop Types: Which crops are covered?
IV. Distribution: How do you distribute your product?
Given the documented challenges of uptake for crop microinsurance, insurtech companies are continuing to test many different approaches to distribution. A few companies are still pursuing a direct-to-customer selling approach, while others have transitioned to a more indirect approach, engaging through other actors who are already serving farmers. Key distribution elements include:
A. Transaction: Are they selling to the customer directly or indirectly? Does the transaction include any other goods and services?
B. Channel: Who interacts with the customer?
C. Premium Payment: Who pays the premium, and how?
In the next article, “Insurtech | The Case Studies: Who is Providing Crop Microinsurance, and How?,” we provide snapshots of the crop microinsurance providers and insurtech companies we interviewed, demonstrating how the different elements (as further described below) come together in their specific models.
I. Financial: How do you make money?
Interviewees pursued different combinations of the approaches below, which are presented alongside their implications:
Commission on insurance sold. Implications: While there are very small margins on microinsurance (and thus on commissions), at scale the revenue can become significant.
Contracts (e.g., with development agencies, multilateral institutions, government, or private sector partners). Implications: Entering into contracts can remove some of the financial risk for Doers by solidifying payment up front. However, providing insurance through contracts often means that the insurtech will not “own” the end customer, and will also be susceptible to the changing priorities of development and government partners.
Revenue from bundled products and services. Implications: The addition of other products and services to a bundle (alongside insurance) can help mutualize distribution costs and also provide some cross-subsidy for a less profitable product. It also offers additional value to the customer. However, the company must have the capacity to manage the addition of products and/or services, especially if they are outside their domain of expertise.
Additional value chain roles (e.g., underwriting). Implications: For Ted Pantone, Co-Founder and CEO of health microinsurance provider Turaco, “The only way to make profits, over time, is to own more of the value chain.” Although a significant investment of time and capital (financial and human), some enterprises are becoming licensed locally and taking on underwriting roles.
Grants. Implications: The majority of our interviewees have received grant funding to test new products or enter new markets — but not for ongoing operations. Those receiving grant funding as for-profit entities must be sure to demonstrate to investors that the funding is not distorting their profitability.
II. Impact: How do you create social and/or environmental impact?
Interviewees worked to achieve different combinations of the impacts below, which are presented alongside their implications:
Prevent one season from sending farmers deeper into poverty. Implications: Insurance covering loans or inputs can help keep a farmer from falling further into debt, but it does not provide coverage on lost potential yield.
Provide more stable income year-round. Implications: Providing claims and payout opportunities several times throughout the season allows for more stable year-round income for smallholder farmers, although the processing costs for the insurance provider can be higher. Some enterprises offer a claims opportunity shortly after planting so farmers can have an opportunity to replant that same season if there hasn’t been enough rain.
Incentivize improved farming practices to enhance farm productivity and income. Implications: The practice of incentivizing improved farming practices requires significant data and monitoring (alongside advisory services), but can help make farmers more resilient and successful — especially important as farmers face the increasing risks of climate change. It may also result in fewer claims.
Access to credit/loans. Implications: Insurance can help open the door to microcredit for smallholder farmers, who are typically seen as risky customers; the credit could then be used to invest in better inputs for a more robust potential harvest.
Value-add, bundled services or products. Implications: The additional services provided by some enterprises, like advisory services or market access, can help to create more touchpoints with clients, and may or may not have an associated fee.
Colin Christensen, Global Policy Director of One Acre Fund, on the value that crop microinsurance could provide: “The primary value of the way we provide insurance, which just covers the input costs, is to encourage farmers to purchase enough fertilizer and seed. While covering this need is critical to de-risking the decision of farmers to invest in their fields, we’d love to be able to do more. Ultimately, what insurance should provide — if higher coverage were affordable — is a cash transfer for when extreme weather hits and crops fail, covering a portion of the anticipated yield revenues that are lost. That would then become a really transformative social safety net; and an efficient one, only paying out when the need arises.”
III. Product Design: What are the key components to your insurance product?
A. Primary Index Type: What is the insurance index based upon?
Area yield index. Implications: Conducting area yield assessments usually requires time-intensive crop cutting for samples, although remote sensing may eventually provide measurements that can complement (or potentially replace) the process. (We speak more to the potential of remote sensing in the article, “Insurtech | Scaling Crop Microinsurance: How Will Data & Tech Impact Scale?”) Depending on the area covered by the index, area yield may also include less basis risk. According to one interviewee, farmers have more trust in the tangible process of crop cutting for an area yield index than in a complicated weather index algorithm. Yield index insurance can also take into account other non-weather risks to crop yields, such as disease, pests, or natural disasters.
Weather index. Implications: Weather index insurance requires complicated algorithms, and often incurs more basis risk than a crop cutting methodology. (On developing algorithms for weather indices, Pula’s Rose Goslinga commented, “You could put 60 PhDs on it and still get it wrong.”) However, if weather data exists, it can be less expensive than collecting data for a yield index. As Acceso’s Rob Johnson noted, “Good historic and current weather data are ‘fundamental starters’ for weather index-linked microinsurance. Limited rural farming weather data — both historic and current — exist throughout much of the developing world, making weather index linked microinsurance risky for insurers and therefore often quite expensive for farmers, programs and social enterprises.” Weather index insurance cannot account for non-weather related risks to crop yields, such as pests, disease, or natural disasters.
Area yield and weather index insurance, explained
The Index Insurance Forum provides helpful definitions of these two types of index insurance:
Area Yield Index: With this type of insurance, the indemnity is based on the realized (harvested) average yield of an area, such as a county or district. The insured yield is established as a percentage of the average yield for the area (typically 50–90% of the area average yield). An indemnity is paid if the realized average yield for the area is less than the insured yield, regardless of the actual yield on a policyholder’s farm. This type of index insurance requires historical area yield data on which the normal average yield and insured yield can be established.
Weather Index: With this type of insurance, the indemnity is based on realizations of a specific weather parameter measured over a pre-specified period of time at a particular weather station or for a given satellite grid. The insurance can be structured to protect against index deviations that are expected to cause crop losses. An indemnity is paid whenever the realized value of the index exceeds or falls short of a pre-specified threshold. The indemnity is calculated based on a pre-agreed sum insured per unit of the index (for example, dollars/millimeter of rainfall).
B. Coverage: What piece of the farmer crop lifecycle is covered?
Credit or loan.
Tangible inputs (e.g., seeds, fertilizer).
Productive Inputs (e.g., tangible inputs, plus other planting costs such as labor).
Yield.
Revenue.
Implications for different coverage options: The most common types of coverage offer protection for loans or credits (usually to purchase inputs), or for the inputs themselves. In the case of loans (or credit), the bank, MFI, or other intermediary (such as an agriculture social enterprise) will hold the coverage so that they are able to partially forgive the loans if the insurance is activated. Coverage for inputs can include just the tangible inputs (e.g., seed and fertilizer), but it could also include other planting costs such as labor (called “productive inputs”). While covering inputs provides some level of protection and incentive to invest in adequate inputs, it does not protect the farmer from the loss of yield and revenue during a bad season. Insurance covering yield or revenue can provide more of a safety net for a bad season, but the premiums (i.e., percentage of covered value) are significantly more expensive than those for inputs.
C. Payout: What is provided if there is an approved claim?
Loan forgiveness or credit.
Inputs.
Cash.
Implications for different payout types. Farmers generally feel more comfortable taking a loan or products on credit if they can be forgiven (or passed on to the next season) in the case of a bad harvest. Intermediaries (e.g., development programs or agriculture social enterprises) selling inputs bundled with insurance to farmers (often through loan or credit) can also ensure that they are offering high quality seed and fertilizer — usually at better prices than the farmer may have access to on their own. Claims payouts for many of these programs will be inputs (or credit for inputs) for next season, or possibly replacement seed during the current season if there is a replanting guarantee. Insurance products offering cash payouts provide more flexibility to the farmer for how they use the funds, but must also align with available platforms for money distribution (e.g., mobile money accounts, if accessible).
D. Timing: When are assessments made?
End of harvest.
Key points throughout the season.
Implications for timing of assessments. While it might be easier to conduct an assessment only once during the season, doing so does not allow for replanting and also contributes to uneven income throughout the year. Conducting assessments at multiple points throughout the growing season allows farmers to replant and have more stable income, but it does involve more administrative effort. Using “smart contracts” (i.e., automated contracts leveraging blockchain technology), however, could make multiple assessments less of an administrative burden. This technology is still being developed and tested for crop insurance; see the article, “How Will Data & Tech Impact Scale?” for more.
E. Crop Types: Which crops are covered?
Staple crops, part of unstructured value chains.
Cash crops, part of more structured value chains.
Implications for types of crops covered. The poorest farmers are usually those growing staple crops, which lack formal or organized markets to sell surplus. Insurers report difficulty covering their risks and targeting them in an efficient way. If these farmers are part of a larger group of farmers (e.g., a Farmer Producer Organization (FPO) or cooperative), insurers are better able to reach them and manage their risk.
IV. Distribution: How do you distribute your product?
A. Transaction: Are they selling to the customer directly or indirectly? Does the transaction include any other goods and services?
Direct to customer (B2C), and voluntary
Indirect to customer (B2B2C), and not voluntary
Indirect to customer (B2B2C), and voluntary
+ Product Bundle [relevant to all above]
Implications of different transaction models. There are three key elements involved in the transaction models we saw: 1) whether the insurance was sold directly to the farmer (B2C) or indirectly through intermediaries (B2B2C), 2) whether the insurance product was voluntary or mandatory, and 3) the bundle with which it was delivered. With B2C models, selling insurance directly to the customer requires significant customer acquisition investment, but usually means the customer will have a better understanding of the product (than they would if it were embedded and not voluntary). The entity providing the insurance also has the opportunity to “own” the client and reach him or her with additional services. Since this model has fewer intermediaries, it can also lead to higher margins. For B2B2C models, if insurance is embedded into another product, such as a package of inputs, loan, or contract with a buyer, the farmer may not understand the nature of the insurance (or even know they have it). Embedding insurance into existing transactions can be significantly easier to scale, but the margins may be smaller and the insurance provider is unlikely to “own” the customer. As explained in the Microinsurance Network’s 2020 Landscape report, “Significant awareness efforts will be necessary if these bundled products are to offer value to consumers and build trust in insurance and interest in further insurance purchases.” Some intermediaries (e.g., buyers) have begun to offer microinsurance products as part of their agreements with smallholders, but the smallholder still has the opportunity to opt out. While including the insurance within an existing transaction decreases the friction to sign up, if it’s voluntary the farmer will still need enough information to make a decision to opt in or out.
Regardless of the B2B/B2B2C model or if it was voluntary or not, most models bundled the insurance with other value-add products and services such as a loan, inputs, advisory services, or other insurance products (e.g., health). Bundling was seen as an effective way to increase distribution while also meeting more of customers’ needs, increasing their yield potential or resilience, and creating additional touchpoints with customers to demonstrate the value of the bundle being offered.
Dr. Annette Detken, Head of Management for InsuResilience Solutions Fund, on the benefit of bundling: “For scale-up you need a more holistic approach, where you bundle the insurance product with other services. That is especially important for the retention rate, because if you don’t have a payout and don’t see any other benefits for the insurance, you think twice if you want to pay the premium next year. We are seeing more and more proposals that include either a direct bundling or a bundle with extension services. With direct bundling, the insurance may be sold as one package with input providers, and if the input providers can see a benefit for themselves they can help use their distribution channels and thus lower the cost of the insurance. With insurance bundled with other extension services, like agricultural advice or early warning systems, we see there is benefit for the insurer and the farmer, and the farmer sees there is regular contact — there’s a reminder ‘oh yes, I have insurance and that is very, very helpful.’”
B. Channel: Who interacts with the customer?
Insurtech company’s own sales force.
Intermediaries. Includes: Microfinance institutions, AgriBanks, Banks; Buyers (e.g., Pepsico); NGOs, INGOs, and Multilateral Institutions (e.g., World Food Programme); Retailer; Mobile Network Operator (MNO).
Implications for different customer interaction channels. Our insurtech interviewees who operated B2C models used their own sales forces to reach customers — either through the farmers’ own communities or through farmer organizations or other platforms used by groups of farmers. While the customer acquisition costs for this approach are high, the companies have the opportunity to educate farmers about the offering and to reach their customers with other products in the future. The interviewees who operated B2B2C models used intermediaries to reach customers, so the point of interaction for the farmer may have been an MFI or bank, buyer, or NGO. While initial iterations of microinsurance leveraged retailers and MNOs as intermediaries, most insurtechs have moved away from those strategies with crop insurance because of small margins and low uptake.
C. Premium Payment: Who pays the premium, and how?
Subsidized premium (full or partial).
Farmer pays the full premium.
Freemium model.
Implications for different premium payment models. The majority of our interviewees agree that some kind of premium subsidy will be required to make crop microinsurance sustainable and scalable (although there are many opinions about the timing of the payments and who’s responsible for them). Yet investors and donors express concerns about market distortion and sustainability when it comes to subsidies; you can read more about the subsidy discussion in the upcoming article, “Scaling Crop Microinsurance: How Does “Who Pays” Impact Scale?” Most interviewees incorporate premium payments into other transactions the farmer makes, such as repaying a loan or selling crops to a buyer. Many smallholder farmers do not have sufficient cash, access to a transaction platform, or a willingness to pay for insurance up front (including when it is an extra cost on a common purchase, such as seeds), although smallholders in more structured value chains with higher-value cash crops may have the funds to pay premiums in full. The freemium model, while tested in earlier iterations of microinsurance, has not proven to be a successful on-ramp to paying customers (as discussed in the Microinsurance Network’s 2018 Landscape Report).
In the next article, “The Case Studies: Who is Providing Crop Microinsurance, and How?,” we will provide insights into the approaches and lessons learned from our Doer and Catalyst interviewees.
This article was written by Kimberly Langsam, CASE at Duke, and Jane Choi, CASE consultant, and released in October 2021.
*Unless otherwise noted, all quotations in the articles are from interviews conducted by Kimberly Langsam and Jane Choi between May and August 2021.
