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.
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It sounds great, though I wonder how the “network of automated weather stations” gets installed and paid for. They would have to be pretty carefully planned for annd installed to insure that microinsurance takes microclimateinto account.
Won’t be long before somebody sets up an umbrella over the rain gauge, right?! 🙂
I don’t know the details. But Syngenta is a huge, resource-rich company. Plus it’s Syngenta that acts as underwriter, so if somebody tampers with the gauges, they’re the ones who have to pay. I’d say they have rich incentives to keep people from messing with the equipment.
I’ve heard of this initiative, and I just wish I had more faith in weather-station-based rainfall index insurance… I *love* the concept of bundling seed and insurance, but I think that aside from the possibility of tampering, there is the issue of imputing weather *between* stations – notoriously high basis risk (discrepancy between farmer yields and the index).
The other day, what felt like a giant rain + thunder + hail storm passed by. At my friend’s office, 1.5 km away, basically no precipitation at all. Micro-climates are the enemy of weather-indexes.
Thanks for tweeting that Elabed and Carter paper – http://elabedghada.weebly.com/uploads/2/3/8/8/23882320/elabed_jmp.pdf – I was looking for it and couldn’t find it!
My faith has to do with the way Kilimo Salama aligns farmer and seed company interests. Syngenta *needs* this to work, if East Africa is going to work for them as a growth market for seed. If that means more, cheaper, better-located weather stations, then that’s what they’re going to do.
In any event, if microweather variability and the problems Elabed and Carter identify turn out to mean this is not a workable intervention, we’ll find out when Syngenta realizes farmers just aren’t willing to buy inputs-with-a-surcharge. Maybe they’ll start buying seed from another seed company that’s figured out a smarter way to insure their crops. Any way you slice it, increasing competitiveness in seed markets can *only* help.
Also – and note, I’m not a real economist, I just play one on the web – but if I’m understanding this correctly, Syngenta Foundation’s willingness to pay half the premium mitigates the problems Elabed and Carter suggest.
As I read it, aversion to compound risk means farmers are willing to pay roughly half (a little more than half, actually) what a utility-maximizer would pay for an insurance contract. But half the value of the contract is all that Syngenta F. is asking them to pay!
Again, whether their pricing is right is going to be revealed by how popular the product is. With 150,000 farm households taking it up already, it doesn’t seem to me their pricing is wildly out of whack.
I agree that lower prices will compensate for some of the issues with high basis risk. It is possible that the success will be short-lived, though, if the insurance product actually behaves more like a risky gamble (i.e. farmers get payouts in good years, and don’t get them in bad years)…
But I think you are right in that Syngenta has an incentive to get it right. And I’m totally with you: these types of products are the (boring) way forward!
Elabed also has a paper in the works that shows her sample farmers’ response to having insurance — and these are ex ante behavioral responses to *having insurance*: the farmers invest and plant more, if I remember correctly. And that’s exactly what Syngenta is banking on – that farmers will spend more on shiny new hybrids 🙂
Boring is the new fun!
Hi,
I came across the Kilimo Salama index insurance program, which sounds very promising, addressing several issues often linked to micro-index-insurance (scalability, alignment of incentives etc). Basic risk may still be a problem as it doesnt say about the spatial coverage of these automated weather stations – very much agree with Emilia here.
My concern, however, is another: When seeds and insurance are linked, farmers are basically incentivized towards buying Syngenta seeds, no matter if they are better alternatives in terms of seed quality/robustness/price etc. I am not an agricultural expert but I am wondering whether such schemes are not creating artificial dependencies of hybrid seed varieties.
Thanks to anyone who could fill me in 🙂
Syngenta are not going to insure other companies products. The other companies should set up their own equivalent insurance product. Or a general broker could insure all companies products. What you need to do also is compare products by field testing. I was in Kenya recently and bought four types of seeds planted each type and after six weeks asked people what did they think was the best. Syngenta was not one of them. Well, all said, Kenyaseed was the worst. All said Pioneer was the best. Some said Paanar was second and Seedco third. Some said Seedco was second and Paanar third. Next month when I go back they should be cobbing. Syngenta are a good company too but their seed was not available where I was.
On the dependency on hybrids I assume you mean as opposed to OPV. Some traditional seeds are good for really poor people who have no means of purchase of hybrid and who can buy traditional seed as food then plant some for growing. But OPV by companies just don’t cut the mustard compared to hybrids.
Another thing is what do commercial farmers grow. I was at a funeral sometime back and bumped into the foreman of a commercial farmer. I asked him what seed they planted because the farm is beside a road I drive along quite frequently. He told me and said that they had field tested all options and the ones they plant they found to be the best. Commercial farmers used to grow traditional and opv before the invention of hybrids but on the invention of hybrids they moved to hybrids. It was a commercial decision.
Sorry for going on so much but I hope the above helps.