Insurtech: the solution for smallholder farmers?

Dagmawi Assefa is the Ethiopia country director for Pula Advisors, a global network of agricultural insurance technology providers. Specializing in crop and livestock insurance services, as well as tech-based agricultural financing services, Pula was founded in Nairobi in 2015. It has since expanded to several countries across Africa and Asia.Dagmawi was recently in Addis to attend the launch of BimaLab Ethiopia, an insurtech accelerator program established with the support of FSD Ethiopia. Dagmawi and his colleagues hope to see tech-based agricultural insurance used in the frontlines of the fight against climate change. Although tech-based agriculture insurance has been around in Ethiopia for more than a decade, there has been little progress, exposing small-scale farmers to grave dangers in the face of droughts, flooding, and locust invasions.The Reporter’s Nardos Yoseph caught up with Dagmawi to discuss the future of insurtech in Ethiopia.Reporter: What led you to believe agricultural insurance would be profitable in Ethiopia? Is the premium profitable for Insurance companies?

Dagmawi: What differentiates index insurance from conventional insurance, especially when it comes to farmers, is, for example, let us take 100,000 farmers. I cannot go to each farmer’s house to conduct a yield and loss assessment. That would be costly. Crop insurance is not profitable because the payout comes altogether in one sweeping instance. Car and motor insurance payouts, on the other hand, come sparsely. If one guy has an accident today, there might be another one next week, and then another week after that, but that is not the case for crop insurance. A drought, for instance, could have destroyed the harvest totally, and the resulting payout would bankrupt the insurance companies. Most Ethiopian insurance companies we worked with have an annual profit of 200 million birr max. So, instead of going door to door and making individual assessments, we have decided to use an index.What kinds of indexes are you working with?There are different kinds of indexes. One is called a vegetative index. This observes the state of the farmers’ land through satellites – if it’s green it would mean there is no drought, and if it’s not green it means there is drought, resulting in payout. Its focus is on the field. Our index is rather different. In African countries we work in, farmers have told us that the satellite only sees the greenery of the field, it never sees locust issues, among others. This is true even if a locust invasion results in total crop loss. There would not be an insurance payout, because the satellite does not catch that. These are real cases – things we actually heard from farmers. Our index is called an Area Yield Index. We focus on the yield, not the field. So: we have last year’s production from the insured farmer; how much and what they produced are included, then we calculate the yield production of the current year. If the volume is lower than last year’s harvest, the farmer gets a payout for it. The current season’s yields are compared against a pre-set average production history to determine insurance claims.How do you access satellite information? Do you have your own satellite or lease?There are several satellites that provide these index services. We outsource the services to the private sector or sign sub-contracts with governments that possess these satellites. There are also open sources that perform these services. These open sources provide data that can be accessed by anyone. For instance, the FAO has an infrared satellite that we use. However, the most important thing here is that satellites are not our primary source of information because we believe the problems facing most insurance companies in most African countries reside in their dependency on satellites. The fact that they do not do the footwork or go out into the field means their payouts rely entirely on satellite imagery that can only show whether an area is green or not. Insurers can refuse payouts for crop losses caused by locusts or frosty weather simply by referring back to the green area index. This is why we opt for the Area Yield index. It does not operate solely through satellites; what we use most is the yield assessment data to decide on payout claims or compensation. We use satellites to contrast and determine the accuracy of the data collected from yield assessments.What does the process look like, working with the farmers?Our workers go to each farmer’s field in person. We meet each farmer at least three times. Meeting with the farmers daily, throughout the production and harvest season, encourages them to register for premiums. We call that crop-cut exercise. In the cap-cut exercise first, we go to the fields and weigh crops before they dry out. We weigh them again when it’s dry, and this lets us interact with the farmer at least three different times. This creates a sense of trust and lets the farmer know we are there with them – working.How do you evaluate your activities in Ethiopia? Why do you think vegetation index based insurance failed here?Our company’s first entry into Ethiopia was back in 2017. Back then we came with livestock products, but we failed miserably because we depended on a vegetation index. The index used the same ‘green-or-not’ drought determination mechanisms for payouts to allow pastoralists to buy fodder for their livestock in the case of a drought. Our 100-percent donor funded premium policy will only last for the first year. The second year, donors will cover 75 percent of the premiums, and by year three, farmers will be paying the insurance premiums on their own. We are supporting the government in swiftly creating an Agricultural Insurance Framework. The creation of sandboxes in Ethiopia might help boost the productivity of the agricultural sector. If provided with a regulatory framework, we can make assessments on the most profitable ways of encompassing large commercial farmers – for instance with the use of drones. But, the current procedures to import and operate drones is complicated, making it nearly impossible. If we have regulations permitting insurtech companies to have these sandboxes, it would help us achieve an insurance penetration ratio that is only a dream now.How much presence do you have in Ethiopia?We set our pilot program over the past year in six woredas and 120 kebelles in the Amhara Regional State. We have provided 70 million birr worth of premium coverage for 122,000 farmers. The premium is provided with money raised from donors costing nothing to the farmers, just paving the way for insurance coverage introduction, which we believe is building interest in acquiring coverage with their own money, once they see the benefit.How much presence does Pula have in Ethiopian Insurance companies?Insurance and Insurtechs are two different things. We are an insurtech business. The insurtech company often reaches out to the traditional insurance company showing them how to efficiently underwrite risks, and providing them with capable systems. It used to take them at least a week to develop one policy, with the Pula Insurance Engine (PIE) system; they develop policies in five minutes. We also facilitate their need to get more involved in agriculture insurance.We handle yield data collection and farmer sensitization, building the insurance companies’ confidence in us. But most importantly, we are here to ease their burden. There are re-insurers. For instance, the insurance policies we sell only carry a five percent risk for traditional insurers, transferring the remaining to foreign reinsurers so as not to burden local firms with the payment all by themselves. These reinsurers are not too eager to get involved in the direct sales of Ethiopian insurance companies because of the lack of production and productivity data in the sector, but we work globally and they know us.How did you get the access to engage the Ethiopian farmers into buying premiums?We convinced the Ethiopian Agricultural Transformation Institute (ATI) into working with us to let us provide the premiums in bundle packages. In our experience, insurance is not a standalone thing. For instance, when you buy an airline ticket, though most people don’t know it at the time; you are also buying an insurance cover for that specific travel. So, if something happens the compensation emanates from that. The same principle applies here. When farmers buy fertilizers, at the same time, they are also buying the premiums. It’s a bundled product. We have convinced the government into letting us sell it like that. We are getting the necessary finance from donors. We’re also sensitizing the farmers, training them on several essential skills like how to handle their money and providing them vital yield and insurance information via SMS and IVR pre-recorded calls. The farmers get early notice short messages like warning them to collect their harvest if data suggests heavy rain is coming. The IVR pre-recorder calls to inform them about yield insurance, what it covers them with and not. It lets them know if our workers will be visiting their fields, or if we’re having a Cap Cut Exercise. If a farmer ends the call before the necessary information is delivered, the system will call again and again until the circle is complete.What is the main thing that is holding back the development of agriculture insurance in Ethiopia?There were five issues of concerns that needed to be addressed in order to allow the conditions for our systems to work. The agriculture insurance problems were focused on high premiums, had high donor partnership dependency, issues pertaining coverage, standalone policy sale experiences and preferences of smaller target components. These were the biggest issues.How did you deal with them?Our product in Ethiopia is designed with these specified agriculture insurance problems in mind. Our premiums are 40 percent cheaper than those previously in the market. The farmer only pays 300 birr to get the premium. We are able to do this because it is area yield index insurance and we leverage our systems – as simple as that. We do not utilize our systems solely for our purposes, nor do we rely only on satellite data. We have field presence, allowing us to handle the logistics and operational costs. In each kebelle, woreda and zone we have designated workers. They collect data digitally. The entries in the system use GPS, the geo-tag lets us prove that they were on the field in person. When the workers go to the farmers, first they have the consent signature, then they measure the field and yield production, they take pictures, after that they submit the data on the field not more than two meters away from the field. Because of these factors, we are able to lower our premiums.The other prevailing problem in earlier works in the insurance industry is that the insurance policy offers were not bundled. They were trying to work in standalone situations. Here, we can ask, in current conditions, how many citizens will get health coverage by themselves? The answer is that unless it is provided by an employer, they probably won’t. So, in order for it to work in Ethiopia, you have to bundle it with something.The third major issue is that Insurtech development is dependent on development partner donors’ finance. When the donations stop, it automatically halts any progress made. Pula and the government have established an Insurance Technical Committee, working on how we could make insurance mandatory in just three years’ time.The small target component was the next thing that had to be handled. Up until now, the largest agricultural premium coverage was 20,000 people. In our first year alone we have managed to cover 122,000 farmers. We are now working on data to decide how many we could cover in the rainy season, which we expect to be close to 400,000 insurers. We plan to insure seven million farmers within three years. The final issue was the product itself. Almost everybody was trying to push a vegetative index, which is something that does not consider many of the potential causes for production loss.What is your opinion on the Insurance industry’s progress when it comes to agricultural insurance coverage?Nonsense! When I say nonsense, I mean to say it did not grow at all. An enabling environment where stakeholders, including the government, understand the situation must be created. In a country where 80 percent of your population is in agriculture, at a time when climate change has become no joke, the industry must seriously come up with solutions on how to provide payouts and how to compensate for the loss of farmers. It’s not like farmers have side businesses. Their fields are their one and only means of their way of life, and their livelihood is getting affected on so many fronts. In Africa, only over the past two years, crop loss excluding livestock has topped USD four billion per year. This is a result of climate change. I believe the best and easiest way for climate change adaptation is insurance.How do Ethiopian Insurance Companies engagee with Insurtechs and how is their willingness to utilize them? It’s still very early but I would say they are getting more comfortable with it. For instance, companies that provide crop insurance coverage are only four: Ethiopian Insurance Corporation, Nyala Insurance, Oromia Insurance and Africa Insurance. Among these we have worked together with Oromia and Nyala and the others are showing interest. They are getting more comfortable now because we have reduced their costs by more than half, and we are getting them more premium businesses. For instance, with Oromia Insurance, we have registered almost fourfold the number of agricultural clients they already had. So I’d say it’s getting better.There are often criticisms that the regulations behind agricultural insurance are holding the business back. What is your take on the National Bank of Ethiopia’s insurance regulations?The National Bank is a regulatory body; it’s within its mandate to regulate matters for fair market presence. By default, this is any central bank’s role in any country. For instance, there are significant problems that fintechs have overcome in the banking industry by adding digital payment platforms to bank services. Insurtech firms have the opportunity to do the same for insurance companies. We have not faced any problems when we reach out to the central bank for permits.Given the market and regulatory challenges, how can the insurance industry get itself out of the 1% coverage reality and make insurance a normalcy for every Ethiopian citizen?The underwhelming figure is not limited to Ethiopia. In Africa in general, the insurance subtake is less than 3 percent of the population. This is mainly because of affordability issues, and also most do not see its benefits. In developed countries, people are willing to pay taxes because they see the benefits immediately in things like infrastructure and universal health coverage. I believe the same goes for insurance. Unless the farmers see the benefits, the interest in buying out premiums will stay low.What are your expectations for insurtech development within the country?The sandbox should come first. In a sandbox, there is no regulatory body slapping the companies’ wrist with routine policy and regulation issues that get thrown around when you ask for a permit to introduce something new. The sandbox could be provided for selected insurtech companies, to test out their new products and ideas in a limited environment where the outcomes can be controlled. From there, the regulatory body can analyze the results and go on to perform its duty. We have done this in Kenya and Uganda. As the biggest Insurtech company in Africa, that’s what we take from our experiences.What are the issues that you expect could make it difficult to hit that seven million farmer figure after three years?Three things: premium subsidies on the behalf of the farmer, updates, and regulations. Over the past year we provided 122,000 farmers with coverage at a cost of USD 1.2 million. These premiums were donor funded at no cost to the farmer. We need the finance to grow to USD 40 million in the next three or four years. This will be something for us to really strive for, but we have done it in other countries with even greater financial needs so we expect to get it. Secondly, some regions need more updates on the benefits of insurance. But most of all, we need NBE to understand that we are sprinting towards deepening our reach. This can only be possible if there are proper regulations set. Insurtech needs its own regulatory framework.