SDM Case Study 4: ACRE Africa

Understanding ag fintechs' business models

ACRE Africa service delivery model case study

Published on

June 24, 2020

Among financial services and according to CGAP's latest research, insurance seems to be one of the products whose positive impact in the lives of the underserved is most consistent. In the case of smallholder farmers, agricultural insurance offers protection against climate shocks, helping them to avoid financial losses and to build greater resilience.

In the summer of 2019, the Learning Lab and IDH engaged with ACRE Africa – a risk management solutions designer enabling agricultural insurance to smallholder farmers across sub-Saharan Africa – to conduct a Service Delivery Model Assessment to better understand the extent and the conditions under which the insurance agent could generate positive returns at scale. While ACRE Africa operates in several countries with physical presence in Kenya, Rwanda and Tanzania and provides a range of services (from product development and risk monitoring to training and feasibility studies) across a wide range of both stand-alone and bundled products (e.g., loans, input provision) and partners (e.g., financial institutions, agribusinesses, telcos), this Service Delivery Model Assessment focused on ACRE Africa’s credit-bundled insurance portfolio in Kenya.

This case study shares 4 key findings emerging from this assessment.

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Background

Enabling increased resilience is particularly important for smallholders looking to make investments that can increase their productive capacity. In a series of case studies, the Mastercard Foundation Rural and Agricultural Finance Learning Lab (the Lab)and IDH The Sustainable Trade Initiative (IDH) have found that while access to a comprehensive package of financial and non-financial services can increase farmer incomes by up to 150%, in the absence of agricultural insurance access to capital can actually increase farmers’ vulnerability to price and yield shocks. This increase in risk means that, without access to risk-management options, many farmers are unwilling to make the investments needed to optimize their productivity and increase their income.

Yet despite these known benefits, the majority of smallholder farmers continue to have limited access to agricultural risk management options. This is particularly true in sub-Saharan Africa where according to ISF Advisors less than 3% of smallholder farmers are currently covered by any type of agricultural insurance.

This gap is explained by both low uptake of agricultural insurance solutions but, perhaps more importantly, by the lack of innovative business models that have been able to successfully overcome some of the key challenges involved in providing agricultural insurance to smallholder farmers sustainably and at scale.

Within this context, ACRE Africa – a risk management solutions designer enabling agricultural insurance to smallholder farmers across sub-Saharan Africa – has emerged as one of the few examples that might be able to crack the smallholder insurance business model.  Since inception in 2009, ACRE Africa has worked with over 1.9 million farmers, aiming to reach 500,000 farmers annually across Kenya, Rwanda and Tanzania.

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1. Despite the complexity and costs involved in providing smallholder farmer insurance, ACRE’s credit bundled insurance portfolio in Kenya is expected to breakeven by 2022 and reach market-level returns by 2024.

ACRE Africa is an insurance agent working with aggregators to provide index and hybrid multi-peril crop insurance to smallholder farmers. Index-based insurance pay outs are based on an index, such as rainfall or moisture conditions, measured at local weather stations or by satellite data, independently of the actual consequences of the shocks in farmer yields. Hybrid multi-peril crop insurance combines elements of index-based insurance for some risks, such as rainfall deficits or excesses, and traditional indemnity-based insurance for others, such as hail, frost, fire, windstorm or pest diseases.

As an agent, ACRE acts as an intermediary between local insurer firms and the aggregators working with farmers, providing product design, product education, technology and claims processing services. A leading innovator in the space, ACRE Africa started piloting smallholder insurance over ten years ago. Since then, and faced with low farmer uptake, challenging regulatory environments and low aggregator capacity, ACRE Africa has continued to innovate and improve its insurance solutions; leveraging the latest technologies, such as weather stations, satellite data and mobile phones, to provide affordable and effective insurance to smallholder farmers.

One if its most successful products in the market today, is credit-bundled insurance. Tied primarily to smallholder input and working capital loans, ACRE Africa uses a mix of USSD location services, indices from weather stations satellite data and field inspection to monitor and validate compensation claims (see figure 1). The policies also include a funeral cover to provide for the costs of a funeral in the event of the borrower’s death.

By the end of 2019, ACRE Africa’s credit-bundled insurance portfolio rose to 70,346 active insurance policies, for an annual average sum insured of USD 10.89 million. By 2024, this portfolio is expected to grow to over 150,000 active polices per year, the equivalent to an annual USD 24 million in value insured.   Strong growth rates in both partner accounts and number of farmers per account means ACRE is expected to breakeven by 2022 – and reach market level returns by 2024 – becoming one of the first smallholder micro-insurance business models to prove commercial viability.

Figure 1: Process flow for ACRE Africa's credit-bundled insurance

Figure 1: Process flow for ACRE Africa credit-bundled insurance

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2. Cost sharing partnerships with financial institutions and value chain actors are critical to drive the scale and operational efficiencies needed to reach commercial viability

The last ten years have seen important innovations in weather stations and satellite imagery, helping to reduce the cost of claim assessments. Yet despite these advancements, the small amounts of value insured – due to small land sizes and relatively low yields – and the high cost to serve of most micro-insurance solutions mean that, for most providers, offering agriculture insurance to smallholder farmers remains financially unsustainable.

Partnering with large aggregators – such as a financial institution, telco or value chain actor – to reach customers at scale and to share key customer acquisition and serving costs can offer a workaround to these challenges.

Today ACRE Africa offers credit insurance bundles through over 20 Kenyan aggregator partners. But not all partnerships are equally valuable. The contribution margin per policy can be up to 10x higher for those policies issued through large scale partners that help absorb customer acquisition costs, source insurance applicant data and support field visits for claim validation and assessment. This holds true even with 45% lower revenue per policy.

Most of this value comes from eliminating marketing and sales-related costs for customer acquisition and from the cost efficiencies derived from higher policy volumes. Having one partner, as opposed to multiple partners to reach the same number of farmers, can decrease the cost of setting up and managing partners by up to 85% and overheads by over 45%.  In addition, access to granular farmer data from the aggregator can be used to complement data coming from weather stations and satellite imagery to enhance product design, optimize pricing and refine claim assessment.

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3. Scale and value insured are the biggest revenue drivers but optimizing for growth and value per acre relies on securing large – and often complex partnerships – and risks leaving the most vulnerable farmers behind

With low margins per transaction – primarily due to small plot sizes and relatively low yields and high cost to serve - providing smallholder insurance is unsurprisingly a scale game. Scale allows for operational efficiencies and lowers the burden of overheads per policy. It also often enables risk diversification allowing providers to better manage claim costs and keep premiums affordable.

If ACRE was to double the number of policies issued through its largest partner, cumulative net income for 2019-2024 could increase over 5x, moving ACRE’s breakeven point forward by two years to 2020. However, this is easier said than done. With bundled insurance products, driving scale is highly dependent on either the growth of existing partners – which ACRE has little control of – or on securing new partners which might result in a rise in business development and operating costs.

Alternatively, ACRE could consider increasing the margin per policy by shifting the portfolio to higher value customers and therefore increasing the average value insured. Should ACRE shift its Kenyan credit-bundled insurance portfolio from predominately sunflower and soy, to a mix of sunflower, soy, tomatoes and passion fruit, cumulative net income from 2019-2024 could increase by 6-10x, depending on the value per acre – which in turn depends on expected yields and crop prices – and the percentage of value insured.

However, and as an intermediary, targeting higher value crops requires getting buy-in from existing market access partners or finding new partners involved in higher value chains or engaging with larger and more commercialized farmers.  In addition, large fluctuations in crop prices can significantly affect the value insured and therefore the potential income gains.

Most importantly, and beyond the operational challenges, the greatest risk of shifting the portfolio to higher value customers is deprioritizing customer segments – such as women and subsistence farmers - who need agricultural insurance the most. These segments are often in a desperate need to invest in their farms to increase productivity – primarily to achieve food security and feed their families – but tend to be more exposed to climate shocks and market fluctuations and have weaker resiliency buffers to adapt to these occasional, although highly disruptive, agricultural events.

Targeting these segments will often involve partnering with aggregators that provide a comprehensive package of services – finance, insurance, inputs, advisory service and market access – to optimize yields and value per acre. The bundles should also be tailored to overcome uptake challenges – particularly product awareness and understanding. Because these practices often make the unit economics more challenging, targeting larger farmers or higher value crops is unsurprisingly tempting, particularly for private actors trying to provide the commercial returns investors expect.

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4. Expanding weather index-based insurance and shifting the cost burden of added features such as funeral cover could increase cumulative net income by 5x, but risks eroding a value proposition that is already hard to sell among smallholder farmers

Parametric products such as weather index-based insurance offer attractive advantages for providers serving smallholder farmers. They are relatively easy to design and can lower settlement-related costs since payouts are determined automatically by the occurrence of specific weather events.

Shifting ACRE´s portfolio from multi-peril crop insurance and hybrid insurance to fully weather index-based insurance could eliminate field-related costs and reduce claim administration costs by over 50%, resulting in a net income uplift of 2x.  However, weather index-based insurance can increase basis risk for farmers – the risk of not having a payout even if the farmer has faced losses – and does not cover non-weather risks. This makes the product harder for farmers to understand, can reduce trust and ultimately demand. Weather index-based insurance also heavily relies on weather stations and associated technology which can be costly to develop.

Similarly, shifting 50% of the cost burden of the funeral cover to either the aggregator or the farmer could increase net income by and additional 3x. Providing funeral insurance to cover for a death in the family is expensive – funeral cover-related costs can account up to a third of policy revenue – yet for many farmers it’s an essential part of ACRE’s value proposition and neither aggregators or their farmers may be willing to share the costs. An alternative option would be to secure a lower cost cover, something that ACRE might be able to achieve as they continue to gain scale.

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Conclusion

Since its inception in 2009 ACRE Africa has come a long way, consolidating as a leading innovator in the micro-insurance space and demonstrating the power of technology and business model flexibility to attain commercial viability.

But the journey is far from done. Over the next 5 years ACRE aims to increase the number of partner aggregators – particularly agricultural partners offering bundled insurance – to over 50 in Kenya, while developing new soil moisture index and picture-based insurance products, which will reduce the basis risk associated with weather index-based insurance, and enhancing training to smallholder farmers on agronomical practices and record keeping to drive insurance uptake.

About the Author(s)

Original Content

The Learning Lab works to identify and share knowledge relevant to our learning agenda and our users, but also to create new knowledge through research and facilitated learning. Original content from the Learning Lab includes news about the Lab, analyses we've conducted, knowledge products we've created, and posts we've written about other relevant initiatives.

Learning Lab Contributor

IDH drives sustainability from niche to norm; by convening companies, civil society organizations, governments and others in public-private partnerships. Together with our partners, we design, co-fund and prototype new economically viable approaches to realize green & inclusive growth at scale. Our approaches are designed to drive sustainability in commodity sectors and sourcing areas, while delivering impact on the Sustainable Development Goals. IDH is supported by multiple European governments, and works together with over 500 companies, 35 civil society organizations and 40 governments, in 11 sectors and 11 landscapes, worldwide.

 

ACRE Africa
Learning Lab Partner

ACRE Africa links farmers to insurance products so that they can confidently invest in their farms. The ACRE Africa team undertakes risk assessment, product development and risk monitoring to facilitate access to crop and livestock insurance products for smallholders. The team has developed insurance products to cover a variety of crops against weather risks like drought, storms, flood and erratic rains, as well as other production risks.

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