Badly Needed, Hard to Deliver: The Challenges of Selling Drought Insurance to African Farmers
After 10 years working for wealthy investors, Chris Sheehan decided in 2014 to chart a new career path where he could use his quantitative analysis skills for positive social impact in the developing world. He first considered microfinance; then a conversation with Yale development economist Christopher Udry steered him toward risk transfer for poor African farmers.
“Professor Udry pointed out that even with all these innovative microfinance programs, millions of poor farmers in Africa still couldn’t borrow the money they needed to move beyond the barest subsistence levels because their risks were unacceptably high,” Sheehan recalled.
This wasn’t a new idea. Governments, donors and NGOs had been supporting risk transfer programs since the mid-2000s to help poor farmers build their resilience to drought and climate change—especially in Africa where only large commercial farmers typically purchased crop insurance. “Tailored agricultural insurance products are essential to build household assets and improve [poor farmers’] resilience to climate shocks,” wrote the authors of a 2017 report by the Global Alliance for Climate-Smart Agriculture. In a drought or other weather disaster, insurance payouts can make it possible for poor farmers to remain on their land, retain their livestock and continue investing and even borrowing to fund the next season’s planting.
To keep premium costs low, most of these risk transfer programs have used weather indices instead of indemnity coverage, which would require cost-prohibitive assessment of actual losses. With weather index coverage, payouts are made to farmers when seasonal rainfall in a given region falls below a certain trigger point. And thanks to rapidly growing mobile phone networks and phone payment systems, farmers without banking accounts have been participating in these programs. (To read more about risk transfer to support climate change resilience in Africa, see Nephila Climate’s June 2019 report.)
Sheehan and his team drew on these approaches and added innovations in data science and marketing to create WorldCover. Unlike virtually every other African microinsurance provider, they launched with the explicit goal of becoming profitable. “Profitability is important to us and our investors, but it’s also needed to prove to others in the risk transfer value chain that there are viable markets among the world’s poorest and most vulnerable farmers,” Sheehan said.
WorldCover began with pilot programs in several African countries. Four years on, it has sold drought insurance to about 30,000 customers. Its largest customer base is in Ghana, and it recently expanded into Kenya. But the firm has also encountered some of the same market barriers that have hampered other African microinsurance programs.
The Challenges of Selling Insurance in Africa
Despite robust financial subsidies, many programs have found that selling insurance to poor African farmers is extremely challenging. This remains the case even when risk products are bundled with other services, such as community savings programs and training in how to improve crop yields.
For instance, a 10-year-old government farm insurance program in Ghana has fallen far short of expectations, according to multiple observers—including the same Christopher Udry who inspired Sheehan to create WorldCover. Udry and colleagues reported in a March 2019 paper that the government insurance program had had little meaningful impact.
In Kenya and Ethiopia, risk transfer programs aimed at pastoralists have had disappointing results, according to an extensively researched June 2019 article in Devex, which was underwritten by the Technical Centre for Agricultural and Rural Cooperation.
Experts point to two main types of obstacles. First, there are enormous marketing and logistical challenges inherent in trying to sell small insurance policies to very poor farmers who’ve never heard of the concept, live in remote areas and may only speak indigenous languages. Second, it’s difficult to build customer loyalty for an abstract product that often doesn’t provide what farmers expect. The Devex story describes how some pastoralists thought they were putting money into a savings account. When they didn’t get their premiums back, “they start[ed] thinking that this product has failed them,” a coordinator said.
Finding the Right Approach to ‘Basis Risk’
Additionally, many insurance providers face another common challenge: Basis risk—the gap between the financial losses that an insured party suffers and what they get paid for those losses—has damaged the reputation of risk transfer in many African countries.
There’s basis risk in most risk transfer contracts. For example, a U.S. homeowner whose home is destroyed by fire will only receive the replacement value specified on their insurance policy, regardless of their actual costs to rebuild. But basis risk can be especially high in weather-index systems, which determine payouts based on weather data measured at specific sites or interpolated from satellite observations—regardless of how many crops or livestock the insured farmers lose.
Program managers are trying various strategies to align payouts more closely with farmers’ actual losses, from measuring actual crop yields at reference plots to verifying satellite readings with unmanned aerial vehicles. But few if any are considering shifting to an indemnity model. “Individual claim verification would not be manageable and affordable,” states a 2019 report prepared by the Munich Climate Insurance Initiative for German aid agencies.
WorldCover’s Head of Research Melanie Bacou reports that she and her colleagues don’t see basis risk as a major impediment to their sales efforts. “In our field experience, we’re having success clarifying to farmers that we’re not insuring their yields, we’re only insuring against a lack of rainfall,” she said. Instead, WorldCover’s primary challenge is selling their risk transfer products cost effectively. After building up a 40-person sales force of farmer-representatives and motorcycle-riding salespeople, the firm found this approach too costly. It has scaled back its African sales staff to about 10, and is developing partnerships with organizations that already have relationships with farmers – such as ag extension providers, microfinance institutions and farm input suppliers.
This is a common strategy for African microinsurance providers. But the approach is not easy to develop and can have limitations, as seen in the experience of the R4 Rural Resilience Initiative.
Using Partnerships to Deliver Climate-Related Insurance
R4 was launched in 2011 in Ethiopia by Oxfam America with the Relief Society of Tigray, “to enable vulnerable rural families to increase their food and income security by managing climate-related risks.” R4 has since worked with other NGOs or government agencies to expand into Senegal, Malawi, Zambia, Kenya and most recently Zimbabwe. According to its most recent quarterly reports, the initiative provided insurance to 93,000 farm families in 2018; it has the goal of insuring 500,000 farm families by 2022. (Along with risk transfer, R4 provides risk reduction through projects like building water retention ponds; enabling risk reserves, i.e., savings; and discouraging risk-taking, i.e., supporting prudent borrowing.)
Independent evaluations have shown broad positive impacts of the program: After poor harvest seasons, R4-insured farmers maintained higher levels of food security than their uninsured counterparts – and female-headed households especially benefited.
But R4 is still working on measuring its renewal rates, key indicators of customer satisfaction. “We can measure growth in the portfolio within one village, but we can’t yet tell if the customers are new customers or existing customers who are renewing,” said Mathieu Dubreuil, insurance advisor for the World Food Programme, which co-sponsors R4 and will soon take over full management.
Looking Toward the Future in Africa’s Drought Insurance Market
According to Sheehan, WorldCover has experienced renewal rates as high or higher than those for traditional insurance products. As it shifts to working with partners that have more direct contact with farmers, the firm intends to stay close to its customers via mobile telecom technology and call centers. “Customers will still know that they are purchasing WorldCover insurance,” he said. “By building our brand directly with customers, we can more quickly iterate on improving the customer experience, and build products they really want.”
Despite the challenges it has faced, one of WorldCover’s early financial backers remains enthusiastic about the firm’s prospects. “Weather risk transfer is an important part of the financial tool kit for climate change resilience in both emerging and developed markets,” said Barney Schauble, managing partner of Nephila Climate (the climate change division of Nephila Capital, a reinsurance investment management firm that provides risk capital to WorldCover and other risk transfer programs in the developing world.) “We believe strongly that businesses like WorldCover are playing a critical role in expanding risk markets.”
Jim Hight is an independent journalist and consultant. His research for this article was supported by Nephila Climate.
Photos provided by author.