In Sub-Saharan Africa, only 3% of 48 million smallholders are insured. Owning 1 acre of land and earning around 1.40 US dollars per person per day is what makes a smallholder farmer stand out. Smallholders often have a mix of market crops and subsistence or non-commercial agriculture; and they lack the financial and technological resources of large industrial companies. Since extreme weather events are becoming more and more frequent due to climate change, a flood or drought can plunge such farmers into the spiral of poverty without protection from crop insurance.
The following is an update from Ethereum Foundation Fellow Benson Njuguna.
Benson has set itself the task of improving mankind from an economic point of view through innovative, technology-driven ideas. He is a Business Transformation Specialist at ACRE Africa, a microinsurance service provider based in Kenya. For more information on the Ethereum Foundation’s scholarship program, see this blog post.
Barriers to Farmers: Trust and Affordability
Companies like ACRE Africa have helped farmers by providing risk management solutions and agricultural insurance products that address the precarious and insecure livelihoods of farmers. A challenge in this area is that farmers have a negative prejudice against insurance providers because of late or non-payment in the past. Farmers are not used to receiving critical information about their policy – even confirmation that they will receive a payout for losses incurred.
At ACRE Africa, a typical smallholder with half an acre of land pays around $ 5 per season for weather index crop insurance (a type of insurance that pays out based on predetermined weather data such as rainfall). Losses from adverse weather conditions result in a payout of about $ 50, which is just enough to cover agricultural supplies such as seeds and fertilizers.
For insurance companies, such low premiums mean that a profit margin is required, let alone in order to be profitable. Cost savings through digitization and automation are not only crucial for the economic profitability of insurance companies, but also for farmers to be able to afford the insurance premium.
The problem: old crop insurance payout system
The life of every farmer in Kenya and the region is shaped by two seasons: the long rainy season and the short rainy season. The long rainy season starts in April and ends in July, while the short rainy season starts in October and ends in December. For the first cycle of the long rainy season in April, farmers begin to take out insurance. To start with, you have to fill out a lot of forms. After completing the forms and purchasing the insurance product, ACRE Africa monitors risk and climate until the end of the season. In short, if a weather event occurs during the period that a farmer has insurance, these will only be paid out after the start of the following season. Without insurance, however, the farmers would have suffered financial losses and would have difficulty continuing to farm the following season.
The solution: BIMA PIMA. by ACRE
A farmer in Embu County, Kenya activates his insurance policy with a scratch card included in the bag of seeds he bought. (Thanks to Acre Africa for providing this photo)
The product BIMA PIMA, which literally means insurance in small installments, is one of the latest insurance solutions from ACRE Africa. It was implemented in collaboration with Etherisc, whose team developed a decentralized insurance platform on Ethereum.
Farmers looking for BIMA PIMA coverage first buy seeds for the season from a partner agricultural supplier. Each bag of seeds contains a scratch card with a unique registration code. For the pilot we have included the price of basic insurance in the seed price, but farmers can also purchase additional cover via a mobile payment network (M-PESA).
When sowing, the farmer activates the insurance policy via SMS / USSD. During the USSD activation, your location and phone number along with all other relevant details are taken from the registration code (e.g. this process is known as triangulation and results in the automatic creation of a new policy. The farmer immediately receives a text message informing the farmer that the Policy is active.
The alternative system monitors and compares current and historical weather data that trigger the approval of a claim. Here, the payout is not based on human assessment, but on predefined “windows” or phases during the agricultural seasons (e.g. germination, vegetation, flowering, excess rain). As long as the weather and climate data collected meet the criteria agreed in the policy, the claim is approved; The farmers then receive payments during the current season and do not have to wait until the end of the season as before. When the policy is triggered, the farmers receive an SMS and can call up the status of their insurance policy on the go.
Our goal is to gain the trust of every farmer by providing more relevant information, faster payouts, cost reductions for the insurance product, and an audit trail for accountability.
First payout via blockchain
Earlier this year we made our first payout to a farmer, Samuel, who took out insurance for corn seeds!
To date, there have been 511 mid-season payouts totaling KES 75,295 ($ 670) and 4,021 end-of-season payouts totaling KES 309,939 ($ 2,766).
Next hurdles and steps
While this new system addresses existing challenges and improves current systems in Kenya (and soon Tanzania and Zambia), it has not been without its problems. We are still a long way from a completely “decentralized” insurance solution. Payouts, for example, are technically possible, but not yet fully automated. One of the main challenges remains improving processing times for claims approvals. Just like in the old payout system, claims land on someone’s desk awaiting approval. Likewise, the parties outside of our project (e.g. the insurer, the reinsurer who assists us with claims processing and the supervisory authority) also have their own stand-alone system, and there are still aspects that become bottlenecks because a manual one Approval is required process. Looking ahead, we will share all relevant policy information with all stakeholders. With direct access to a system through custom dashboards, we envision each stakeholder accessing a source with a full audit trail.
I hope that our insurance product BIMA PIMA can serve as a model for success to revive the much-needed trust between farmers and insurance providers. I studied computer science to help my community and early on I realized that technology was needed to enable countries like Kenya to be part of the world market. I look forward to being part of it and working towards a future in which millions more family farmers and billions of people in developing countries experience the beginnings of decentralization.
We hope that you will keep in touch with the Fellowship program and would love to hear from you if you wish to contact us by email at [email protected] Finally, connect with Benson on Twitter or contact other Fellows online or learn more about the program.