When Do Smallholder Farmers Prefer to Be Paid for Their Crop Losses?

Traditional crop insurance policies compensate farmers for losses at some point after the end of an insured agricultural season. Farmers may receive compensation well after their harvest or sales of produce and may not be aware of whether and when to expect payouts. This feature reduces the effectiveness of insurance in two ways. Firstly, farmers may not receive payouts when they most need them to recover from losses, smooth consumption, or plan future expenses. Secondly, the gap between paying premiums and receiving potential payouts might seem too long or uncertain to appeal to impatient farmers—thereby lowering demand for crop insurance. In our research under the WEE-DiFine Initiative, we ask whether smallholder farmers might prefer a crop insurance policy that can pay compensation in smaller installments earlier and on a more certain timeline. We test whether such a policy could be particularly appealing and beneficial to women, who may have different preferences for the use of insurance compensation and may have greater bargaining power over smaller installments of money.

Champion farmers distributing "TimelyPay insurance" in Nakuru county, Eastern Kenya

We work with ACRE Africa, a microinsurance service provider in Kenya, to modify their crop index insurance policy and introduce flexibility in compensation timelines. The standard policy collects premiums ahead of the start of the season and compensates farmers roughly 3-20 weeks after harvest. This policy assesses crop losses in four distinct chronological stages through the season – germination, vegetative, flowering, and maturity – each accounting for a share of the total payout. The exact share and timing of each stage varies from crop to crop, and the losses in each stage are cumulated at the end of the season to determine the final payout. Premiums and payouts are transacted through mobile money (M-Pesa) and USSD and SMS is used to keep farmers updated on their insurance.

Our innovation, which we refer to as “Timely Pay Insurance”, tweaks this policy to allow farmers to choose whether to receive the total compensation in bulk at the end of the season as usual, or receive compensation in parts at the end of assessed stages during the season or after the season on a predetermined schedule. In our pilot study, we collect data on farmers’ preferred payment schedule and their willingness to pay for these innovative features.

To market “Timely Pay Insurance”, we engaged ACRE Africa’s network of champion farmers, who service fellow farmers in their neighbouring villages. We developed a method through which champions could effectively communicate the unique features of “Timely Pay Insurance” and collect data on preferences from smallholders with varying levels of education, experience with insurance, and fluency in common language (Swahili). We came up with a simple tactile method using a table (printed onto a laminated sheet) and game pieces (sometimes substituted on the field with materials available on hand, such as pea pods or coins) to explain the concept of payout installments and to allow farmers to allocate them across different stages. We provided farmers the choice of receiving the payout in up to 4 installments over 6 months covering the Short Rains season in Kenya from October 2023 to March 2024. The table therefore displayed 6 boxes representing each month and farmers were handed 4 game pieces representing the payout installments.

Once farmers were provided an explanation about insurance, farmers were instructed to place the game pieces on the table to indicate when and what share of the payout they wanted to be paid in each of the 6 months. They were reminded of the constraint that they could only receive the share for which losses would already have been assessed, i.e a maximum of 1 (of 4 stages) in the first month, 2 by the second, and 3 by the third onward. The data was entered by champions into a simple Computer-Assisted Personal Interview (CAPI) software which contained checks and balances that ensured that the constraints were met.

This method was met with great success in the field and we observed a wide variation in farmers choices that we are excited to analyse and share. Leah, a champion farmer in Nakuru county shares that “the exercise made it easy for farmers to visualize their choices and think carefully about when they needed the money.”

Our preliminary outcomes show there is significant demand among smallholder farmers, both men and women, for early and precisely timed payouts from crop insurance. We find that the women are more likely to prefer receiving staggered payouts with installments in later months. As we finish analyzing the full results, we are excited to quantify farmers’ preferences and willingness to pay for flexible compensation schedules. Stay tuned for our complete findings and their implications for making crop insurance work better for vulnerable farming communities.

Farmer placing pieces to indicate their preferred payment schedule in Nakuru county, Eastern Kenya

Note: Consent received for use of pictures. Pictures taken by Samyuktha Kannan, Wageningen University