Microinsurance in Kenya

An initiative provides crop insurance to 22,000 Kenyan farmers via cellphone and solar-powered weather stations, making it the largest on the continent. It is financed in part by Syngenta and the IFC. Note, this is mostly a press release disguised as a news article:

Each farmer who buys insurance is linked to the nearest weather station — no one is more than 20 kilometres from a station. If the weather station shows that the rainfall was insufficient early in the growing season, or too much late in the corn season, all the farmers in that area get an automatic payout — farmers do not have to file a claim.

If the rainfall was only slightly off, farmers get a small payment. If the weather was extreme enough to destroy their whole harvest, they get the full amount. No farm visits are necessary. … The shop owner is given a camera phone to record the purchase, which instantly sends a confirmation text message to the buyer. At the end of the growing season, payouts go electronically to the farmer’s cell phone account. It is remarkable that even for small farmers, text messaging and online banking are old friends that provide a comfort level with a new programme. The programme uses the M-Pesa money transfer system. …

The biggest cost is sending the text message welcoming the new client. … [DW - I have to think this is a joke because a little later it says] Forty per cent of the project’s budget goes to pay for trainers who work with farmers, a telephone help line and radio programmes about insurance. Kilimo Salama expects that this expense will drop as the product becomes more familiar. It aims to be commercially viable in three years.

More on the difficulties of providing microinsurance below the fold. Or you can read about ILRI's similar program here or watch a video.

Insurance companies have never been interested in microinsurance because the transaction costs are too high. A farmer who wants to insure two bags of seeds — a $10 investment — may be paying an insurance premium of a dollar. If there’s drought, someone will have to visit the farm to verify the farmer’s loss.

The company has to do the paperwork to be able to give the farmer her payout of $10. The insurer’s expense is the same for a $10 policy as it is for a $10,000 policy — too much for only one dollar in earnings. Writing tiny policies is only feasible if the process of signing people up, verifying claims and making payouts is nearly free.

But there are also obstacles from the farmers’ side. Even that dollar’s worth of insurance may be too expensive for many farmers.

Insurance also has a bad name. If small farmers in Africa have heard of insurance — and many haven’t — it’s usually because they know someone who was cheated when a company went bankrupt, an agent ran off with the money, or a middleman stole a payout before it reached the farmer. …