Enhancing access to weather index agricultural insurance in Burkina Faso: a new marketing approach

3ie evidence programme: Agricultural Insurance Evidence Programme
Authors: Harounan Kazianga, Zaki Wahhaj
Institutional affiliations: Oklahoma State University, University of Kent, Innovations for Poverty Action, Inclusive Guarantee
Grant-holding institution: Innovations for Poverty Action
Main implementing agency: Innovations for Poverty Action
Sex disaggregation: No
Gender analysis: No
Equity focus: Yes
Study type: Formative evaluation

Context

In recent years, microfinance institutions have experimented with micro-insurance products for rural farmers, and in particular rainfall index insurance, in different parts of the world. But the uptake of these products has generally been very low (Cole et al. 2013). It is evident that there is a mismatch between the type of formal insurance products that microfinance institutions are currently providing and the financial literacy of poor rural farmers. Academic researchers have proposed a number of possible explanations for this phenomenon including high opportunity cost of insurance premiums for poor farmers and their reliance on informal risk-sharing networks (e.g. Binswanger-Mkhize 2013, Mobarak and Rosenzweig 2012).  There are approximately 700 million working poor and vulnerable non-poor in Africa, who can potentially benefit from formal insurance. However, less than 3 per cent of this population currently uses micro-insurance products. (Matul et al. 2010).

The evaluation was carried out with small-holder farmers in rural Burkina Faso and migrants from these households currently living in urban areas. The majority of farmers are engaged in rainfed subsistence agriculture. The rainfall occurs during a single wet season lasting three to five months (May to September) and is highly variable. Consequently, the majority of rural households are exposed to weather-related risks. According to data from the Burkinabe Ministry of Agriculture survey of 2015, nearly 78 per cent of households cope with adverse shocks through consumption of own stocks. By contrast, less than 2 per cent rely on formal insurance. 

Intervention design

The intervention marketed an existing rainfall index insurance product to urban migrants in Ouagadougou who originate from villages and have relatives engaged in farming. Urban migrants were given the opportunity to purchase insurance for agricultural plots farmed by their rural relatives, with the contract specifying indemnity payments to be paid either to the subscriber or directly to their rural relative. The intervention sought to address two problems: 

• Gaps in financial literacy. By marketing the insurance product in urban areas, financial illiteracy regarding insurance may be a lesser concern since urban dwellers are more likely to be familiar with other forms of insurance already. 
• High transaction costs of insurance marketing. The new marketing strategy will drastically reduce transaction costs by offering insurance to urban dwellers instead of farmers as commonly practised. 

Evaluation design and methodology

The research design is a mixed methods study. The samples were constructed by randomly selecting 20 villages in 2 regions (10 villages per region) of Burkina Faso. 10 villages were randomly selected in each region from a restricted set of villages meeting the following criteria:

• located less than 50 kilometres from Ouagadougou;
• having no more than 75 households;
• within 15 kilometres of other villages within the restricted set.

A household census was conducted in each village, gathering information on whether a household had migrant relatives living in the capital city, Ouagadougou. Based on the census, a stratified random sample (¾ with relatives in Ouagadougou) of 20 households were chosen from each village for the rural household survey. The rural survey respondents were asked to list all household members who have left the village, and all migrants based in the capital city Ouagadougou were traced for inclusion in the urban survey.

Two focus groups discussions (FGDs) were conducted to obtain insights on how the insurance product should be designed and implemented. The first one was an FGD with representatives of migrant network associations (MNAs) in Ouagadougou, with an overall aim of understanding whether and how migrant network associations can play a role in marketing rainfall index insurance to urban migrants.  The second FGD was conducted with a random sample of urban migrants who were traced as part of the urban survey. This FGD was focused on understanding whether and how effectively they were able to provide assistance to their rural relatives following adverse weather shocks, prior experience with formal financial products, interest in a potential rainfall index insurance product, and how such a product could be tailored to their needs and specific circumstances.

Primary evaluation questions

The key evaluation questions were as follows:

• What proportion of rural farmers have (extended) family ties in urban areas? To what extent do urban migrants assist rural relatives in times of need?
• How does the understanding of the concept of insurance and willingness-to-pay for insurance of urban migrants compare with that of rural farmers (where the two share an extended family link)?
• What is the take-up rate of the insurance product among urban migrants (with an extended family link in rural areas)?
• How cost-effective is marketing insurance to urban migrants versus rural farmers (uptake/cost of marketing)?
• Should indemnity payments be made to subscribers (urban migrants) or directly to farmers (rural relatives) whose farm plots are being insured?

Primary findings

• 56 per cent of rural households have a relative residing in Ouagadougou; about 39 per cent of rural households receive transfers from an Ouagadougou-based relative. 
• Understanding of rainfall index insurance and responses to willingness-to-pay questions are very similar between rural farmers and urban migrants, with differences being statistically insignificant.
• A pilot of the rainfall index insurance product marketed to urban migrants with relatives in rural areas had an uptake rate of 27 out of 124, i.e. 21.7 per cent. The take-up rate is higher for migrants who have recently arrived in Ouagadougou and for migrants who reported that their rural relative had experienced an adverse shock during the previous 5 years (Tables 5, 6A and 6B).
• Based on the insurance partner’s administrative data, the cost per subscription among urban migrants ranged from 10,000 to 25,000 CFA. This include the cost of marketing, phone calls, home visits, etc. In comparison, the initial cost per subscription among rural farmers range from 20,000 to 40,000 CFA.
• The take-up rate was higher (estimates ranging from 17 to 22 per cent) when the migrant was offered an insurance contract which specified that indemnity payments to be paid directly to the rural relative (Table 5 and 6B).

Implications

The study yielded some unexpected findings that have important implications on the design and marketing of future insurance products designed for urban migrants. The uptake rate of the marketed insurance policy was higher when the migrants reported that their rural relatives had experienced at least one adverse shock – covered by the insurance policy – in the preceding 5 years; but the uptake rate did not respond to the incidence of such shocks as reported by the relatives themselves. A similar pattern emerges in the analysis of ‘total number of shocks’ in lieu of ‘at least one coverable shock’. These findings mean that there are important differences between the urban migrants and rural farmers’ views about the shocks suffered by the latter.