As smallholder finance service providers and members of the Propagate coalition, we are often asked how to manage the risks of working with farmers. Our answer is: “We are still figuring it out… but what we need the most is insurance!” While the availability of credit for smallholders has become widespread over the past 30+ years, the same cannot be said of insurance. Yet we believe that insurance is a vital part of holistic financial services delivery, especially important for smallholder farmers, to help them become resilient against the shocks they face.

So why is insurance not yet widespread? And what can we do about it? During its last meeting, Propagate brought together a number of leading microinsurance providers and stakeholders for a discussion to exchange views on these very questions. 

What are the main challenges for insuring smallholder farmers?

In our discussion, we came to the conclusion that there are three major challenges to insuring smallholder farmers: distribution, the multitude of risks that farmers face, and uptake. Let’s look at each one of those in turn.

Distribution: One of the major challenges of distribution is simply cost. Global Parametrics told us that the “delivery of adequate products can be expensive and operationally unviable,” so finding the right price point and hitting sufficient scale is critical. Additionally, the usual distribution channels for insurance are often not suitable for smallholders, as most “farmers find it difficult to access traditional financial institutions like banks,” Pula observed.

Multiple risks: Farmers face a multitude of risks that are not just about farming. Four major risks were discussed:

1. Natural risks. Syngenta mentioned that “smallholder farmers are vulnerable to weather risks, especially with the drastic effects of climate change globally,” as well as “to agronomic risks such as livestock and pest diseases.”
2. Credit risk. “Farmers face barriers in terms of providing traditional collateral and guarantees needed to access things like credit and insurance in the conventional processes,” Pula shared.
3. Market risk. “The lack of a consistent buyer relationship contributes to price risk, which … could affect [a] farmer’s ability to repay their loan,'' explained Syngenta. 
4. Health risks. Rural areas lack access to quality health services. According to BIMA, “the scarcity of traditional healthcare resources poses a structural barrier to access quality healthcare services.”

Uptake: The final challenge to insuring smallholder farmers is a lack of interest on the part of farmers. Insurance is a harder sell than credit. With credit, the immediate benefits of borrowing money are obvious even to those with no experience with financial services. Insurance is more complex, with an uncertain pay-off and no immediate benefits. MicroEnsure explained, “With insurance penetration at levels below five percent in most of the emerging markets, the communities at the lower end of the economic pyramid don’t have easy access to insurance, don’t understand it and don’t trust it.” Low uptake may be partly due to low levels of financial literacy for smallholder farmers, but insurance providers also need to better understand their clients’ needs in order to design products that are truly relevant to their clients’ lives and communicate the benefits more clearly.

What solutions should we focus on going forward?

After agreeing on the challenges we all face, discussion turned to solutions. We believe that the three most important developments needed to increase the scale and impact of insurance are: partnerships and bundled products, improved technology, and increased data availability.

Partnerships and bundled services: Developing partnerships and bundled services can help solve distribution challenges, as well as some uptake issues. “Insurance as a stand-alone product is in most cases not scalable,” explained Syngenta, so bundling insurance with other products that smallholders are already familiar with could help facilitate distribution, and therefore enable scale. Partnerships with other smallholder stakeholders can also help demonstrate the benefits of insurance and convince farmers to use it. Pula argued that we need to “develop catalytic partnerships that repackage insurance in a way that encourages uptake. Scaling such partnerships will be key to spreading the benefits of insurance to those who need it most.” For example, very basic introductory insurance can be bundled with other services, as has been done with health insurance via mobile phone accounts.

Technology: Better use of technology can reduce distribution costs. For example, MicroEnsure now manages enrollment via mobile phones, documentation via digital apps with premiums paid, and claims settled via airtime or digital wallets, thus reducing staff time, transport cost and fraud risk for these processes. MicroEnsure explained, “as technology becomes more pervasive, the distribution of insurance can scale further, providing easy access to financial products for rural communities and smallholder farmers.” Syngenta added that “investment in technology by insurance companies will benefit the entire industry since it will lead to cost-cutting and increased penetration.”

Data: Increasing the data available for effective product and risk pricing will help to mitigate the multiple risks faced by smallholder farmers. Global Parametrics gave the example of “using climate change models to understand climatic information in areas where there are no weather stations.” Syngenta also mentioned the need for high-quality long time series data, arguing that that governments should provide both “timely yield data” and “the required meteorological data.” Such a data pool will help to better identify specific risks and can also provide real-time information to farmers, such as the best time to plant. Data will also improve understanding and targeting of smallholders as insurance clients.

What do you think?

Do you agree that these are the main challenges and solutions that the sector should focus on? We invite the insurer community, as well as any other contributors, to share their thoughts and experiences with us. Join the debate by contributing to the comments section below.