Compensation preferences in agricultural insurance among smallholders in rural Kenya

Abstract

Despite the high incidence of adverse weather shocks, the demand for agricultural insurance remains stubbornly low in Kenya, even among risk-averse smallholder farmers with poor access to social safety nets. Two major barriers to adoption concern are: (i) cyclical illiquidity in agriculture households and (ii) the lack of trust in insurance providers. Standard insurance contracts that provide compensation for losses as a lump sum over an uncertain time horizon post-harvest exacerbate these concerns. In this study, recent advancements in digitally-enabled loss estimation and payments infrastructure to modify contracts in a manner than can address these barriers are leveraged. The study examines whether allowing farmers greater choice in structuring compensation transfers from agricultural insurance reveals preferences for earlier and/or smaller transfers and secondly, whether farmers value an insurance product with customised compensation preferences more than a standard contract.