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Bundling value into the agricultural value chain

Emerging Insight #:

  132
 

Date of Release:

  July 11, 2017
 

Subtopics:

  Health, Agriculture
 

Source:

  Our paper on "Bundling to make agriculture insurance work"
 
 

Why contract farming firms should look at insurance to increase farmer loyalty

Bundling agriculture insurance with other services that form part of the agricultural value chain, like credit and farming inputs, is emerging as a solution to help make insurance more tangible, achieve better social outcomes and enable schemes to scale faster. A bundled solution requires the involvement of various entities in the agricultural value chain such credit providers, input sellers or output buyers. Bundling can be successful if it makes business sense for the parties involved. For example, it may be beneficial for an agribusiness to offer insurance as a value-added service to differentiate itself from competitors.

In Zambia, NWK Services, a contract farming buyer, offered weather index insurance and free life insurance to 80,000 cotton farmers to attract more farmers and address problems of farmer loyalty and side-selling. The weather insurance component is offered as a voluntary product along with inputs given on credit. It protects farmers against a severe dry spell or excess rain.



A typical agricultural value chain

In addition, NWK offers free life insurance to those farmers who delivered their cotton early in the previous season and achieved 100 per cent loan repayment. In 2013, 25,000 farmers got access to life insurance (most were first-time insurance customers) and approximately 7,000 farmers in 10 locations bought the weather-index insurance. After realising the benefits of life insurance, farmers bought additional cover for their families, resulting in about 52,000 people having an insurance cover.
 
NWK noticed a positive impact on its business with increased deliveries and reduced side-selling. In order to avail free life insurance cover, farmers increased the amount of land allocated to cotton production to supply at least 350 kg cotton per hectare to NWK. In addition, NWK recovered a much greater proportion of the in-kind credit given to insured farmers compared to non-insured farmers. Due to droughts, pay-outs were made in some locations in both 2013 and 2014, and the timely benefits contributed to this higher loan recovery rate from insured farmers.
 
Contract farming buyers are one type of player in the agricultural value-chain who can link insurance with their services. Credit providers and input sellers are others whose core business may benefit from bundled insurance solutions. For other examples, see the recently published paper: Bundling to make agricultural insurance work.