Like many Zambian farmers, Stephen Chomba suffered greatly from a prolonged drought that began shortly after last year's planting season in October. The corn seeds he had used on his small 12-hectare farm in Chilanga, outside the capital, Lusaka, did not germinate. He risked losing his entire crop. Then, to his surprise, he got a call from the seed company. He was told that he had the right to harvest spare seeds at no cost. It turned out he was safe.
His story shows how technology and new ideas can bring insurance to poor people around the world – but also how difficult this task is. Movements to expand “financial inclusion” are being extended to bring the poor insured as well as mobile money accounts and access to credit.
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The poorest are the most in need of insurance, and as climate change makes extreme weather more common, it is likely that poor farmers are increasingly vulnerable. Chomba has seven children to support, five of them still in school. For these families, a loss like the one he faced is much more than a temporary setback. It can put them in crippling debt or extreme misery. But most poor people around the world assume that insurance is not for them. In fact, if they think about it, many wonder why they would pay money now, a premium for something they hope they never need, a claim for some unforeseen loss.
Since 2011, the World Bank, funded by the Bill and Melinda Gates Foundation, has produced a financial inclusion index, or "Findex," an attempt to measure access to financial services. Included in the latest Findex, covering 2017, was a survey of farmers in several poorer countries. About half had spent at least one very bad year in the last five. The vast majority had assumed the full financial risk of the loss, receiving nothing from insurance payment or government assistance (see chart).
In India, for example, many poor farmers are uninsured, says Shree Kant Kumar of VimoSEWA, the insurance arm of SEWA, a women's union and microfinance provider. "Most insurance is subsidized or forced," he says. Based in Ahmedabad, Gujarat state, Kant says that in the 1980s SEWA noted that some of the women to whom it had lent money were unable to pay because a calamity had struck them. Then, in 1992, it began offering life insurance, adding health insurance in 2000.
The government also offers a subsidized agricultural insurance scheme. But this is only available to farmers who borrow through cooperatives and tend to be relatively wealthy. Kant says Indian smallholder farmers cover their risks as their ancestors – piling up produce and having more children to take care of them, they hope, when they are old.
A lose-lose policy
Among a group of rice farmers in the village of Jalalpur, some have been interested in insurance, thanks to the government-subsidized scheme. Some complain that it was not worth it despite the terrible harvests in 2015-16. Others have had no complaints and resent paying premiums and getting nothing back. In fact, SEWA began paying non-claim bonuses to people who have not filed a claim for several years.
In Zambia, Chomba recalled that when he bought his seeds, the seller mentioned the insurance. But he assumed it was only part of his speech. In fact, by giving his mobile number, he registered for insurance. It covered only non-germination and paid only in seeds. The prolonged drought left him with a crop about one fifth of the normal year. But that was much better than nothing.
Mobile phone adoption has exceeded financial inclusion and insurance coverage. According to GSMA, a mobile operators organization, 5.1 billion people – two thirds of the world – owned cell phones by 2018. It expects the number to increase to 5.8 billion, or 71% by 2025. According to At Findex, 78% of the world's cashless adults who receive cash salaries had a cell phone. Even Zambia, a poor country, has a mobile penetration rate of over 80%.
Seeds of distrust
This facilitates access to non-bankers, both to market insurance services to them, and to manage and even pay claims. It is still, however, a difficult sale. An agricultural fair in Zambia's Mumbwa district is a three-hour drive from Lusaka, largely through drought-dried maize fields. One farmer at the fair says the year was so bad that "it will send all but the strongest to the wall." But he and others there find it difficult to understand the idea of agricultural insurance. Trying to explain, there are representatives of Pula, the “insurtech” company that designed the cover, and Bayer's Zambian subsidiary, an agribusiness giant, that sells it with its corn seeds. The idea is unfamiliar. And sometimes farmers who buy seeds do not go through the minimum registration procedure required for insurance – the seed shop may not explain it to them, or they are in a hurry.
In selling insurance to the poor, three things seem most important: trust, price, and ease. The most important way to establish trust is the demonstration effect. One of Mumbwa's seed traders regrets that there is no more noise about payments like what Chomba received. Kamlaben Dayabhai Parmar, midwife and SEWA insurance agent in Gujarat, agrees. In their village, 35 families are insured through SEWA; she receives a small cut of the awards. Their main sales tactic is to make payments public – big complaints, for example, are paid at village meetings.
Similarly, when claims are not paid or fully met, insurance may soon be given a bad name, usually unjustifiably. Parmar is interrupted while announcing the benefits of insurance by an assertive woman in a pink saree, who complains of having made a health claim and received 2,000 rupees when her total costs were 10,000 rupees. She closed her policy when premiums went up.
Similar problems pursued some "insurance index" schemes. Several East African companies offer farmers agricultural insurance that will be automatically paid into a mobile phone bill, without the need to claim if, for example, a rainfall falls below a certain threshold. This is ingenious. Following an index is cheaper than assessing farmers' lost crops or counting how many of their cows have survived a drought. And because the index is out of the farmer's control, the "moral hazard" is reduced – he can do nothing to make the payment more likely. But the enthusiasm for index insurance has dwindled a little. You have to make some general assumptions. Some policyholders may lose their crops but receive no payment, discouraging others.
The other important elements in increasing insurance adherence – price and ease – are often linked. MicroEnsure, a UK-based “insurtech”, has hired millions of customers by offering life insurance policies with mobile phone top-ups as an incentive for loyal customers. It offers coverage to 8.6 million people in Africa and Asia. But their boss, Richard Leftley, says asking customers to answer up to three simple questions (name, age, and close relatives) may be enough to stop them from accepting a free offer.
Or insurance can be provided with a product, making the price invisible and buying as direct as possible. People, says Bayer Ndavi Muia, will not pay for insurance unless it is a legal requirement, such as auto insurance. Therefore, Pula's premium is paid by the seed company, which absorbs the cost and bundles insurance with its product to increase sales. You can afford this because the payment is made in seeds and the risk period is relatively short.
The idea of buying fault insurance for a product you are buying seems obvious to many people in developed markets, but not to many poor people. Lumkani, a Johannesburg-based company, sells fire detection equipment (Lumkani means "caution" in Xhosa). The municipalities of South Africa suffer many fires. Lumkani devices are networked so an alarm triggers people nearby, and users receive an SMS alert of a fire in their district or in their own home. They also come with fire insurance, with coverage for total losses of up to 40,000 rand ($ 2,600). For minor losses, says David Gluckman, head of Lumkani, policyholders often need to be required to claim.
An Indian insurer called Toffee (as in "as easy as …") offers a range of products, such as bicycle theft and damage coverage, "commuting" insurance (for accidents passengers may have); and insurance against mosquito-borne diseases such as dengue (which it expects pharmacies to promote for those who buy insect repellent). It prides itself on taking less than 200 seconds to purchase a policy on your app or site and less than three days to pay claims.
These insurance companies can win business by serving the poor by venturing into parts of the market long neglected by insurers and through digital processes, exploiting the chronic inefficiency of well-established competitors. But it's hard for them to make big margins. They are intermediaries between clients and insurance companies that actually underwrite the policies. Many also find it difficult to achieve the turnover that would bring economies of scale.
Insurance as a service
Many who work for insurance for the poor believe that to make a real difference, insurers need to do two things. The first is to think of your role quite differently: “go beyond just providing compensation for losses,” in the words of Hugh Terry, founder of Digital Seguradora, an online trade magazine. Instead, they should help customers reduce and manage risk by using new technologies to advise them and encourage them to best practice: farmers planting the right seeds at the right time; health policy holders to manage medical conditions online and so on.
Second, in poor countries, they …