Heterogeneous demand and supply for an insurance-linked credit product in Kenya: A stated choice experiment approach 2017-2018

Shee, Apurba (2020). Heterogeneous demand and supply for an insurance-linked credit product in Kenya: A stated choice experiment approach 2017-2018. [Data Collection]. Colchester, Essex: UK Data Service. 10.5255/UKDA-SN-853430

Farm households in Africa must cope with bad conditions as to soil quality, weather and infrastructure. The variability of rainfall causes yields to vary strongly from one year to the next. With yields already low (due to poor soil condition) these variations can be life threatening. Meanwhile, inadequate infrastructure makes it difficult to help the households with access to financial services, insurance and inputs that could stabilize their access to resources, and enhance yields.

Solving a single aspect, say bringing inputs to the farm, will not be sufficient as credit is also needed. But credit can only be provided if sufficient likelihood exists that loans will be repaid. Here, insurance can help. If insurance of the loan makes it attractive enough for the lender, a package can be composed of inputs, with credit and insurance, that solves all these problems with one bundle. Yet, the households will remain exposed to some risks as insuring against all is prohibitively expensive. What is the appropriate degree of insurance in such bundles? That is the core question addressed in this research. It aims at supplying inputs to farmers on credit, with insurance, in such a way that a good balance is found between the benefits and risks to the farmers and the profits and risks to the credit provider.

We investigate the possibilities for such a balanced approach in Kenya and Ethiopia in collaboration with a large insurance provider and a farmers organisation. Together with them we collect information on the costs, benefits and risks involved in using the inputs, the alternatives open to them, and the costs and benefits involved in providing credit to finance the purchase of inputs, with and without an insurance against crop failure.

With all this information, we go and talk to the stakeholders concerned to find out how they would respond if more or less insurance would be provided. Will credit suppliers lower their prices, if repayment of loan is more likely because the crop is insured? Will households decide to take higher yielding (but more risky) crops if part of the downside risk is insured? We establish this for the parties concerned in Kenya and Ethiopia, but also in other African countries.

Having established how these stakeholders respond to changes in insurance, we can proceed to derive what the best degree of insurance might be. And this is then finally tested in a field experiment.

With this knowledge we can help other suppliers of insurance and credit, and farm organisations to establish similar packages that are adapted to the local conditions for input supply, and financial services.

Data description (abstract)

We employ a discrete choice experiment to elicit demand and supply side preferences for insurance-linked credit and explore heterogeneity in these preferences using primary data from smallholder farmers and managers of financial institutions combined with household socio-economic survey data in Kenya. Bundling insurance with credit has emerged as a promising market-based tool for both managing agricultural weather risks and providing access to credit to farmers. However, to develop a suitable bundled credit product it is essential to tailor the product to the needs and preferences of both smallholder farmers and insurance and credit providers. We analyse the choice data using multinomial logit and Hierarchical Bayes estimation of mixed logit model. We find that farmers prefer credit for both seasons, credit term to be one year or longer, no or partial collateral for loan, lower risk premium, and loans to be used for any purpose. Supply side results suggest that managers of financial institutions prefer the risk premium to be added with loan amount, loans to be repaid after harvest, credit available for both seasons, credit term to be shorter than one year, loans to be used only for agricultural purpose, and loans to be fully or partially collateralised. We also analyse willingness to purchase and willingness to offer for farmers and suppliers, respectively for risk premium at different attributes and their levels. Identifying the preferred attributes and levels for both farmers and financial institutions can guide optimal packaging of insurance and credit providing market participation and adoption motivation for insurance-bundled credit product.

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