Having weathered the microcredit boom and the microcredit bust, the development world is waking up to a simple realization: “wait a minute, since when is borrowing the only financial service?” Not a moment too soon, a Microinsurance and Microsavings boomlet is now under way.
Curbing our enthusiasm would probably be wise, if only because flavor-of-the-month interventions have such a long history of riding the unmeetable-expectation-to-bitter-disappointment cycle. But people do learn, and next generation Microfinance mechanisms are better designed, less hype-y and more scalable than what came before.
Crop insurance isn’t just about consumption smoothing: by protecting farmers’ ability to invest, it has a direct impact on incomes, too.
Take Kilimo Salama – the Syngenta Foundation’s ingenious marketing mechanism to sell crop insurance through the established agricultural input market.
Instead of expecting farmers to buy index crop insurance as a separate, stand-alone product – which, experience shows, they won’t – Syngenta Foundation will sell you a seed-and-insurance bundle (or, for a lower cost, a fertilizer-and-insurance bundle). Then, if it doesn’t rain in your area, you’re automatically paid a benefit, directly to your mobile phone via M-PESA.
By piggybacking on the transaction-cost-busting capabilities of mobile payments and linking payments to the weather as measured by automated, unmanned weather stations, Kilimo Salama makes insurance affordable in a way it never had been before. It brings paperwork down to basically zero, and enables farmers to experiment with higher yielding hybrids (which, again, are not genetically modified) at an acceptable level of risk.
Crucially, farmers pay just half of the insurance premium (which is tacked on to the price of the seed); Syngenta Foundation picks up the other half. This is important because some researchers have come to the conclusion that demand for crop insurance by smallholders often falls to zero if they’re expected to bear the full cost of the premium.
But there’s a twist: this cost sharing aspect is not a donor subsidy. Here’s why.
Premium cost-sharing stems from the recognition that a single year’s drought can have a knock-on effect over 2 or 3 years. When the rains fail, farmers are left penniless, and penniless farmers don’t buy hybrid seed. This means that the following year farmers are forced to plant low-yielding saved seed, sometimes from grain harvested two years earlier. This cycle of disinvestment depressess not not just farmer yields and incomes, but seed company sales too.
That’s why cost-sharing isn’t a donor subsidy: Kilimo Salama is insurance for Syngenta’s bottom line, too.
Automating as much of the insurance system as possible is one key to the project’s design. A network of automated weather stations is monitoring rainfall throughout the catchment area. If the rains fail, or if they fall at the wrong time, you’re deemed to have lost your harvest and an insurance payment turns up on your mobile phone via M-Pesa automatically. There are no claims to file, no calls to make, there’s no paperwork at all. Payments are made fast, as soon as the index is triggered, to minimize uncertainty and establish Kilimo Salama’s reputation among farmers.
Just now entering its fourth year, in 2013 Kilimo Salama signed up 150,000 smallholders in two countries. I’d say scalability is pretty well proven by now.
The point is that crop insurance isn’t just about consumption smoothing – by protecting farmers’ ability to invest, it has a direct impact on incomes, too. Shortcircuiting the disinvestment cycles raises farmer incomes directly. And, that’s it’s that direct link with income that’s the distinguishing mark of What Works.