1. Mobile Phone Micro-Insurance: The Case of Kilimo Salama...

Author: Alvaro Valverde

1. Mobile Phone Micro-Insurance: The Case of Kilimo Salama

a. Vital Statistics

Figure 1. Evolution of the customers of the program Figure 2. Number of customers trained in micro-insurance

Figure 3. Percentage of customers per channel Figure 4. Percentage of revenue per channel

Figure 5. Renewal rates from 2010 to 2011 in 5 regions


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b. Kilimo Salama at Glance

Years of Operation: 2 Number of Customers: 23,615

Service Offering: Weather Index Crop Insurance; Agri Info; Input Suppliers; Pest Management.

Partnership Model: 9 Partners, including: NGOs, IOs, Public and Private.

Delivery Channels: Mobile Phones, Agro Dealers, and Call Centre

Profitable: Currently NO. Expected Break-even Excluding Financial Literacy costs: 2013

“This is the first project to use mobile phones to set up insurance contracts and issue payouts to

poor smallholder farmers in Africa, deploying both our vast data infrastructure and globally

acclaimed M-Pesa service”

(Chief Officer New Products Division at Safaricom, Betty Mwangi: 2010)

Kilimo Salama, which means “Safe Agriculture” in Swahili, is a weather index based

agriculture micro-insurance scheme for Kenyan farmers that embraces mobile phone technology

(UNCTAD: 2010). The program was launched in March 2010 in the Kenyan Rift Valley, and it

soon attracted the attention of development academics and practitioners, as it incorporated new

approaches to the provision of micro-insurance to the rural poor. Kilimo Salama is the first micro-

insurance scheme to incorporate the use of mobile phones to overcome the traditional challenges of

financial product distribution in developing countries (IFC: 2011). It is also the first agricultural

micro-insurance program to use agricultural supply dealers to distribute the insurance policies (WB:

2011a).

Kilimo Salama offers two different types of micro-insurances: Kilimo Salama and Kilimo

Salama Plus. The first product only offers insurance for agricultural inputs which has an associated

cost of 10% of the price of the inputs, but the Syngenta Foundation subsidizes half of the cost so the

farmers only have to pay 5%. The latter insurance offers farmers coverage for all their input costs

and the resulting crops based on the estimated value of the harvest. In this case the farmers have to

pay the full ten per cent of premium themselves.

Kilimo Salama is currently far from being profitable. Financial literacy costs amount for 70 per

cent of the total costs of Kilimo Salama, and taking into consideration that the program has already

trained over 48,000 farmers. Taking out of the equation the financial literacy costs and despite the


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lack of numbers backing up some of the additional costs, the SF expects the program to break even

by the end of 2013. To do so the program needs to reach certain scale, probably around the level of

50,000 customers. Nevertheless, reaching this target might be challenging due to the low renewal

rates discussed in previous sections.

Kilimo Salama still has no conducted a proper impact assessment connecting index based crop

insurance with poverty reduction. The young stage of the initiative and the low renewal rates are

hindering the task of understanding the impact of Kilimo Salama in poverty reduction. Establishing

a clear link between micro-insurance and poverty reduction might be challenging in the case of

Kilimo Salama, as there are other factors like improved seeds and agricultural tips that have an

affect on the productivity of yields and that can positively affect income generation at the household

level. However, there is some preliminary evidence that points to three possible effects of the

program on the lives of poor Kenyan farmers, in the form of reduced vulnerability, improved yields,

and improved access to finance.

c. Operating Context

The implementation and potential success of this program depends, apart from the strategy and

the business model chosen, on the potential for market penetration of financial services and the

socio-economic and political environment of the country (Heyer and Mas: 2011). These

characteristics make of Kenya a unique and favourable environment to try such an innovative

approach for the distribution of agricultural index-based micro-insurance.

Kenya is considered one of the most important economic hubs of East Africa, and the main

Kenyan port, Mombasa, is the most strategic and biggest port of the region. In 2007 the population

of Kenya was estimated at around 37 million people, with more than a third of the population living

in urban areas. Kenya has a strong economy with a GDP per capita substantially higher than the

other countries in the region, and its growth rate in recent years has been around five per cent

annually (Omwansa: 2009). These conditions, together with the telecommunications and financial

sector landscape, have created a favourable environment for the proliferation of affordable and

accessible financial services to the vast majority of the population through the use of mobile

telephony.


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Financial Landscape

Figure 6. Financial inclusion in Kenya

Source Data: FSD Kenya (2012)

As shown in Figure 40 in 2006 less than 19 per cent of Kenyans had access to formal financial

institutions such as banks, while over 41 percent had no access to any form of financial services

(FSD: 2012). However the need for access to financial services was even greater amongst the poor

unbanked households, of which twenty-two per cent depended directly on remittances as their

primary source of income (Heyer and Mas: 2011). The majority of these households opted for

informal methods to remit funds like buses and shared taxis, which have a high risk associated with

the money not reaching its final destination. On the other hand, formal remittances through the

postal service are costly with minimum commissions of 5 per cent of the value (Posta: 2012) and

they are also perceived as slow and prone to shortages alternative. As a result of the latent demand

for domestic remittances and the need of the public for banking services, an innovative mobile

payment and store of value system called M-Pesa (“M” for mobile and “PESA” for money in

Swahili) took off in March 2007 (Mas and Radcliffe: 2010).

Telecommunications Landscape

There are several characteristics of a telecommunications sector that determine the uptake of

mobile financial services like mobile money. The first and most necessary requisite is the degree of

mobile phone penetration within the population. As Figure 41 shows, Kenya has witnessed

astonishing growth of mobile subscribers, with subscription levels higher than the average in Sub

Saharan Africa. Moreover, Kenya is considered the most developed mobile market in East Africa

and its levels of penetration are forecasted to reach rates of around sixty-eight per cent in 2012

(Omwansa: 2009). It is estimated that the access to phones in Kenya is twice that of subscriber


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numbers, which means that the vast majority of the population have already access to mobile

phones. Another important factor is the familiarity of mobile phone users with mobile data services

like Short Message Services (SMS). The usage of SMS is directly related to literacy levels and the

pricing of the service, and as the price of an SMS in Kenya is much lower than a minute of call, the

use of SMS has taken off (Heyer and Mas: 2011). On the supply side the chances of mobile

financial services taking root depend on the strength of the mobile operator within the market. With

around eighty per cent of market share, Safaricom (Vodafone’s partner in Kenya) benefits from a

large customer base and a large network of resellers (Mas and Radcliffe: 2010).

Figure 7. Mobile Cellular Subscriptions (per 100 people)

Source Data: World Bank, World Development Indicators (2011b)

M-Pesa

M-Pesa is a mobile financial service solution developed by Vodafone and implemented

partnering with the Kenyan affiliate Safaricom and the Commercial Bank of Africa (Mendes et al.:

2007). Customers registered with M-Pesa are assigned an individual electronic money account

linked to their Safaricom phone number and accessible through a SIM card application on the

mobile phone. Users can deposit or withdraw cash through a local M-Pesa agent, and they can also

transfer funds to other phone users, buy airtime, and pay bills. All transactions are authorized and

recorded using secure SMS and are limited to a maximum of five hundred US$. Customer accounts

are maintained in a server managed by Vodafone, and Safaricom manages the M-Pesa accounts and

deposits the full value of its customer’s balances in commercial banks (Mas and Radcliffe: 2010).

The Kenyan regulatory environment has been favourable to the creation of M-Pesa. Safaricom

and the Central Bank of Kenya have developed good working relationship and the

telecommunications company was given regulatory Space to develop the M-Pesa service to closely


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fit its market (Heyer and Mas: 2010). Safaricom also had the ability to build a good agent network

for the distribution of M-Pesa. It partnered with around a thousand super dealers for airtime

distribution, and one third of them agreed to partner in distributing the M-Pesa service (Camner and

Sjöblom: 2009). As shown in Figure 42, M-Pesa has attracted almost 14 million subscribers since

its launch in March 2007, which is approximately sixty per cent of the adult population of the

country (Heyer and Mas: 2010). There are around seventeen thousand stores at which users can

deposit and withdraw cash. It moves over three hundred million US$ in person-to-person transfers

per month, and over 600 million US$ in cash deposit per month (Mas and Radcliffe: 2010).

Figure 8. M-Pesa revenue and users growth

Source Data: Safaricom (2011)

M-Pesa has demonstrated how mobile technology can be used to extend financial services to a

large proportion of unbanked poor people. A recent study carried out by Plyler et al. argues that M-

Pesa has brought substantial economic benefits to the community level. They describe how the use

of M-Pesa has increased money circulation, fostered business expansion and growth of existing

businesses, increased employment opportunities through the M-Pesa’s shops, and how the use of

M-Pesa for funds transfers has reduced mugging and thefts at the community level, increasing

physical security (2010). The success of M-Pesa and the increasing familiarity of rural households

with financial services and mobile phone technology have permitted the implementation of a more

complex financial service like agricultural micro-insurance.

d. Description of Kilimo Salama

“Extreme Weather, particularly drought, traps many African farmers in poverty because it robs

them of the means to recover”

(Executive Director of the Syngenta Foundation, Marco Ferroni: 2010)

Evolution of the Service

In 2009 the Syngenta Foundation for Sustainable Agriculture (a Swiss agri-business enterprise),


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UAP (a large insurance company based in Kenya), Safaricom (a Kenyan mobile operator), MEA (a

fertilizer company), Seed Co (a seeds company), and the Kenyan Meteorological Department,

partnered together to launch Kilimo Salama. Kilimo Salama was conceived as a service to help

farmers avoid the risks associated with rainfall variability, which directly affects their livelihoods. It

is an index-based micro-insurance that uses low-cost mobile phone payments, data system, and

automated weather stations, to insure agricultural inputs of smallholder farmers. The program was

pilot-tested in the Laikipia district in 2009, where two hundred farmers insured their farm inputs

against drought. In 2010 the program counted with a team of 5 workers and was expanded to other

regions of Kenya, reaching over 12,000 farmers at the end of the year (Observer: 2010).

Figure 9. Kilimo Salama Vs Kilimo Salama Plus

Source: Author’s Own

In 2011 Kilimo Salama increased the size of its team to 10 workers and launched a new product

called Kilimo Salama Plus (Figure 43). It offers farmers coverage for all their input costs, including

two additional seeds (beans and sorghum), and the resulting crops based on the estimated value of

the harvest. In this case the farmer is responsible for estimating the value of his own harvest and

based on these estimations the premium is calculated at UAP (Figure 44). As perceived by

development practitioners, this product has greater potential for poverty reduction than the original

Kilimo Salama, however its early introduction could have hindered the expansion and success of

the whole program, as it is a more expensive service that may requires a higher level of trust from

the potential customer before being bought. As shown in Figure 44, counting both customers of


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Kilimo Salama and Kilimo Salama Plus, the program reaches now over 23,000 of farmers in central

and western Kenya (Kilimo Salama: 2011).

Figure 10. Number of Customers Kilimo Salama

Source Data: Kilimo Salama 2011

Design and Implementation

Kilimo Salama offers weather index-based micro-insurance to eliminate the transaction costs

associated with conventional agricultural micro-insurance, like personal visits by the insurer for the

assessment of damages after a farmer’s claim (IFC: 2011). To further reduce the costs associated

with the provision of the insurance, Kilimo Salama opted for the use of mobile phone technology

for most transactions and the use of M-Pesa as the channel to receive the premiums and send the

payouts (Kilimo Salama: 2010b). Thanks to the implementation of weather index-based micro-

insurance and the use of mobile phones, Kilimo Salama offers an affordable product for poor

Kenyan farmers.

The index used by Kilimo Salama to calculate premiums and payouts is the Water Requirement

Satisfaction Index (WRSI). This index determines the minimum rainfall required to normally grow

a certain crop based on data collected in the specific region for thirty years by the Kenyan

meteorological department (IFC: 2011). Kilimo Salama has over thirty weather stations located at

schools and other secure locations, where the amount of rainfall, wind speed, temperature, and sun

is measured. Each weather station is equipped with a small solar panel and a GPRS device powered

by Safaricom that sends the measurements every fifteen minutes to the data centre of Kilimo

Salama. This data is stored on the central server, which is access by both agronomist from the

Syngenta Foundation and UAP to determine if the insured farmers had the required weather

conditions to normally grow the yield, or if there is a need to give payouts to the farmers (Kilimo

Salama: 2010b). Each of these stations insures those farmers situated in a radius of fifteen to twenty

kilometres. At the time of subscribing the insurance farmers are given the opportunity to select


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which weather station better reflects the weather conditions of their farms. Additionally, based on

the measurements taken at the weather stations and depending on the insured crop, farmers are sent

farming advice through SMS, which helps them improve their farming practices and increase their

productivity (Kilimo Salama: 2010a).

Kilimo Salama offers two different types of micro-insurances: Kilimo Salama and Kilimo

Salama Plus. The first product only offers insurance for agricultural inputs. Under this scheme

farmers buy and insure seeds of maize and wheat, fertilizers, and chemicals. A prerequisite to

insuring the seeds is that they have to be certified, which improves the yield of the farmer at the end

of the season. The fertilizers covered are those offered by MEA (a Kenyan fertilizer company), the

chemicals offered by Syngenta, and the seeds offered by Seed Co Limited. In this way Kilimo

Salama makes sure that farmers are acquiring high quality inputs that will help them improve their

yields (Nsubuga: 2010). In this version the supplier of the input sponsors half of the price of the

premium, leaving the farmer to pay a premium of five per cent of the cost of the inputs (Kilimo

Salama: 2010a). By insuring small amounts of inputs farmers have built confidence on Kilimo

Salama and they have understood the purpose of having insurance. The latest product is called

Kilimo Salama Plus and was launched in February 2011. It offers farmers coverage for all their

input costs, including two additional seeds (beans and sorghum), and the resulting crops based on

the estimated value of the harvest. In this case the farmers have to pay the full ten per cent of

premium themselves (IFC: 2011).

The process for purchasing works as described in Figure 45. Once the farmer agrees to

purchase the insurance, the stockist scans the bar code of the insured product using a mobile

application developed by Kilimo Salama and sends the information through an SMS to the

insurance company (UAP), which replies automatically with the amount of premium that the farmer

has to pay to the stockist. In the case of Kilimo Salama Plus the customer estimates the amount of

harvest that he will expect by the end of the season and this information is sent to UAP, which

calculates the insurance premium and sends this information to the stockist. Then, the farmers

receive on their phone a policy number associated to their M-Pesa account and phone number, and a

confirmation of the items insured. Once the stockist has collected several premiums he transfers the

money through M-Pesa to UAP (IFC: 2011). In case a payout is necessary, the farmer receives an

SMS confirming the amount of the payout, which is deposited into their M-Pesa account (WB:

2011a).


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Figure 11. Kilimo Salama Purchase and Payout Process

Source: Author’s Own

Customer Segment

Kilimo Salama targets small and medium holder Kenyan farmers, starting from those farmers

who plant as little as 0.4 hectares (Australian Landcare: 2010). One of the main motivations of the

Syngenta Foundation (SF) to engage with this customer segment is aligned with one of their

primary focus areas: to reduce farmer’s vulnerability to weather risks and shocks. The vulnerability

of Kenyan farmers to weather shocks combined with the constrained purchasing power of the small-

medium holder farmers and the distance from commercial branches of insurance companies prevent

them from accessing insurance products to manage their weather related risks. As described in the

following sections, the uncertainty associated to weather risks makes smallholder farmers not invest

in agricultural inputs as a risk management strategy. This means that this market segment has

remained for a long time under explored by agricultural input providers. An additional goal of the

Syngenta Foundation is to find new markets, what means that by reducing the vulnerability of

smallholder farmers, the SF is also uncovering a substantial market that can be explored by the

input providers, including the for profit Syngenta.


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The average customer of Kilimo Salama is a smallholder farmer that sees farming as a

business, what means that they sell partially or totally their harvest (Goslinga: 2012). Kilimo

Salama also targets smallholder farmers focused on subsistence agriculture, but this is a more

challenging target market to be convinced of the associated benefits of having a weather index

micro-insurance, and consequently this segment is less represented among Kilimo Salama’ current

client portfolio. Kilimo Salama Plus gives service to a substantially smaller amount of customers

than Kilimo Salama, only 573 farmers. This is due to the newness of the service, which started in

2011 and that targeted from the beginning more advanced farmers at a higher premium that insures

the total value of their harvest (Kilimo Salama: 2011).

Customer Need

Farming represents three quarters of the employment of Kenya and half of all farming in the

country is for subsistence purposes. One of the main problems faced by these farmers is their strong

vulnerability to weather risks and shocks. They face the constant risk of losing their investment in

better inputs if there is a drought, flooding, or disease with disastrous effects on the harvest

(Syngenta: 2010). The most common risk management strategy used by these farmers is to

minimize the amount of money invested in the agricultural inputs needed to grow the yields. This

strategy could be considered efficient in case of a drought or flood, but as extremely inefficient in

case of a balanced amount of rains. As farmers have no way of predicting the weather of the whole

season at the time of planting they opt not to invest much on inputs, and consequently see

themselves condemned to a spiral of low investment and low productivity that prevent them from

escaping out of the poverty trap.

The opportunity for formal means of risk management strategies to address the needs farmers at

the BoP seems to be evident. However, access to these strategies has usually been unaffordable for

small farmers in Kenya due to the high costs of insurance in general and agricultural insurance in

particular (FinAccess: 2007, as mentioned in Kilimo Salama: 2010b). Additionally, poor farmers

lack of trust on insurance services and companies, what makes financial literacy training a key step

to create the need for these kinds of services among the BoP. Once the customers learn about the

functioning of the micro-insurance and build confidence on the fact that in case of a drought or

flood they will receive a payout, the need is created and the farmers are willing to buy a micro-

insurance.


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Distribution Channel

One of the main challenges to delivering any financial product to smallholder farmers is the

distribution channel used. To overcome this barrier there are two main ways in which Kilimo

Salama distributes the insurances: through direct sales to the farmers and through sales to

aggregators and groups. The former channel started as the main way to reach the smallholder

farmers, but Kilimo Salama soon realised that the potential to sell these kinds of services was

greater through groups and aggregators. Selling through groups and aggregators is currently the

fastest growing channel, which increased sales from 8,000 farmers in 2010 to 19,000 farmers in

2011.

There are two main ways of selling the insurances through groups or aggregators: through

financial institutions and through agribusinesses. The main motivation for financial institutions to

provide Kilimo Salama is to link their agricultural loans to a micro-insurance, which helps to insure

the repayment of the loan. However, one of the main challenges of providing a micro-insurance

together with a micro-credit is that it may increase the propensity of farmers to not repaying the

loan, as they believe the insurance company will cover their costs. Consequently the micro finance

institutions try to keep farmers unaware of the insurance policy associated to their credit, and just

publicise that in case of a drought affecting all farmers in a district not full repayment would be

required. The second main channel is through agribusinesses, which offer Kilimo Salama’ insurance

as an additional input to farmers together with their existing input packages. These kinds of

agribusinesses usually serve medium and large-scale farmers, which tend to have a deep

understanding of their crops and climatic risks and are more willing to buy an insurance policy

(Kilimo Salama: 2011).

Figure 12. Number of agro dealers trained and recruited by Kilimo Salama



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Currently there is only one channel used to sell the insurance policies directly to the farmers:

through the input providers or agro dealers. Over eight thousand agricultural stockists in Kenya

were identified as a good distribution channel. Through CNFA/AGMARK (a local NGO that

provides training and helps in the selection of stockists) the SF was able to identify those agro

dealers that could fit better in the program (WB: 2011c). The agro-dealers also had a motivation to

participate in Kilimo Salama, as they were conscious of the latent need of their customers for

micro-insurance services. As shown in Figure 46, 100 agro-dealers currently sell the products

offered by Kilimo Salama together with agricultural inputs. If the farmers choose to buy the

insurance, they pay an extra percentage of the total value of the seeds, fertilizers, chemicals needed

to grow their yields, or of the total expected value of their harvest.

Figure 13. Number of calls answered by Kilima Salama's helpline


Kilimo Salama is currently exploring two new ways of delivering the insurance products to

individual farmers: through the call centre and through ground agents. The call centre registered in

2011 over 21,000 calls from farmers (Figure 47) asking both about the insurance policies and

agricultural advice, representing the insurance related questions around 60% of the calls (Figure

48). Kilimo Salama believes that by offering the farmers to buy the insurance directly through their

phones after talking with the call centre will help increase the number of customers and cut down

the costs associated to selling the insurance. The role of ground agents would be more related to

selling the insurances during or right after providing the financial literacy trainings to the farmers.

Both new channels would focus on boosting the sales of Kilimo Salama Plus.


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Figure 14. Call centre information requests


Customer Relationship

Kilimo Salama maintains a close relationship with its customers. The initial lack of trust of

smallholder farmers in micro-insurance makes of having a close customer relationship a key factor

for the success of the program. Kilimo Salama puts particular emphasis on creating, maintaining

and increasing the level of trust of the customers in the service. This objective is mainly achieved

by extensive financial training carried out by specialists from both UAP and the SF. In 2011 27,000

farmers were trained through trainers and partners on the ground and over 21,000 were trained

through Kilimo Salama’ helpline (Figure 49). In addition to the financial literacy training, free

additional services like the agronomic information have been identified as one of the main sources

of customer satisfaction, what leads to customer loyalty (Brugger: 2012). Moreover, Kilimo Salama

dedicates time and resources to explain the purpose and expected outcomes of any additional

research or impact assessment study to its customers, building in this way an image of transparency

that is well perceived and valued by the customers.


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Figure 15. Farmers trained on index insurance


Value Added of the Service

Kilimo Salama is radically different from other formal or informal services that try to address

the needs of the same target market. The main informal alternative way for managing these kinds of

weather related risks is to not invest in agricultural inputs. By reducing the inputs, the risk is also

reduced, as well as the opportunities of escaping out of poverty. Other informal risk management

strategies may involve saving assets to cope with the shock in case of loosing the harvest, this

implies that there is no additional investment in agricultural inputs at the beginning of the season

preventing as well the farmer from having greater revenues. The main value added of Kilimo

Salama compared to the informal risk management strategies is the certainty of farmers that in case

of drought or flood they will receive back their initial investment or that they will receive the value

of the harvest in case of Kilimo Salama Plus. The reduction of the uncertainty is translated into an

increased investment in better agricultural inputs, what in case of favourable meteorological

conditions would lead to substantial economic increases.

There are no real formal alternatives to Kilimo Salama for small-.holder farmers in Kenya.

Medium sized and large farmers can access agricultural insurances from the main insurance

companies like UAP. However, under these schemes the premiums and requirements are

substantially higher than in the case of Kilimo Salama. Kilimo Salama offers an affordable

insurance scheme for small-holder farmers that would otherwise fall apart from conventional

insurance services. Another main difference is that through Kilimo Salama insurance becomes

accessible even in remote rural areas, compared to regular insurances that can only be purchased in

big cities, where the insurance companies have their commercial branches.

Key Activities

There are some activities that are key for Kilimo Salama to execute their value proposition:


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• Investment and construction of AWS. These are used to get the weather measurements that

will help determine if there is a need for a payout or not.

• Investment and implementation of financial trainings to the mass target market. Through

these trainings Kilimo Salama creates a demand for micro-insurance services and identifies

new potential clients.

• Training and identification of potential agro-dealers for the program. The agrodealers are

currently the only sales point of the program and are one of the main sources used by

farmers to ask insurance related questions.

• Having a flexible and effective call centre. The call centre works 18 hours a day and it

attends over 30,000 calls a year, most of them insurance related questions and the rest

agronomic related questions. The good functioning of the call centre will become more

crucial in future years, as Kilimo Salama intends to use it as a platform to sell the

insurances.

• Providing agricultural advice through SMS to the customers. This is a key factor in

promoting customer satisfaction and even customer loyalty.

• Fostering a close relationship between UAP and Kilimo Salama. The relationship between

these two main partners allows a high level of communication between them and helps

strengthen the link between the micro-insurance an the effect that this has on the lives of the

customers.

Key Resources

In terms of the key human resources, Kilimo Salama counts with a group of 6 people from

UAP and 4 from the SF apart from the support of well-trained agronomists in Safaricom. The

workers from the SF and UAP are required to provide the basic services, as agronomist are needed

both to calculate the insurance premiums and payouts, and also to analyse the weather measurement

to provide agronomic advice to the customers of the program. However, by giving specific training

to between 10 and 15 workers of Safaricom Kilimo Salama makes sure that there is no shortage of

agronomists in the call centre during the sales peak time. At the same time it is a step forward in

pursuing the self-sustainability of the initiative, as the SF will step out from Kilimo Salama in a not

really far future.


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Figure 16. Staff trained on index insurance from UAP


In terms of physical resources, the Automated Weather Station are probably the most important

resource of Kilimo Salama. The infrastructure and service of M-Pesa is the other key physical

resource that makes possible the value proposition of Kilimo Salama. The central server and the

software for the analysis of the weather measurements are the last physical resource that helps

achieve the value proposition.

An additional key resource that makes possible the existence of Kilimo Salama in Kenya and

that would challenge its replication in a different country is the existence of accurate weather

measurements in the country for over thirty years. The knowledge of the weather trends over a long

period makes possible the estimation of both the cost and price of the weather index crop insurance.

e. Partnerships Model

Kilimo Salama is an innovative service provider in terms of the partnership model supporting

the program. This program is jointly led by a for-profit insurance company (UAP) and a non-for

profit agricultural foundation (SF). These two partners manage the main activities of Kilimo Salama

and coordinate with the other partners. The remaining partners include three different input

providers (MEA, Syngenta, and Seed Co.), a mobile phone operator (Safaricom), an NGO

(CNFA/AGMARK), a public organization (KMD), and a multilateral finance organization (IFC).

The Syngenta Foundation took the leading role during the first stages of design of the program,

as it aligns with its three core objectives. The main goal of the SF is to promote a behavioural

change in the farmers, so they buy the insurance services to protect against risks in a regular basis


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rather than only buying the insurance when they believe that the harvest season will not be

productive. The current role of the SF is to coordinate Kilimo Salama together with UAP, and make

sure that the overall program has an effect on the lives of the customers. With the pass of the time

the SF would probably step back out of Kilimo Salama, and leave the leading role to UAP.

UAP is the insurance company and has a key role in the whole development and success of the

program and the services. As any other insurance company is private seeking, what contrasts with

the objectives of the Syngenta Foundation. A part from coordinating the majority of activities of

Kilimo Salama, UAP is responsible for the provision of the insurances to the small farmers. The

main benefit that UAP obtains from partnering in Kilimo Salama is to access the BoP, a market that

was previously underexplored. However, in terms of current economic benefits UAP seems to be

loosing money due to the reduced amount of the premiums collected and due to the need of

reaching certain scale to break even. It is estimated that the program will reach over fifty thousand

farmers in the next two years and it will then become profitable for UAP (IFC: 2011).

The inclusion of Safaricom and particularly a mobile payment system like M-Pesa is the key

innovative component of the partnership of Kilimo Salama. Other weather index crop insurances

can be currently found around the globe, but Kilimo Salama is the only one to register the insurance

policies, receive the payments and make the payouts through mobile phones. The benefits for M-

Pesa are directly related to the fees charged for each single transaction. By partnering in Kilimo

Salama, the perception of Safaricom among smallholder farmers is also improved.

MEA is a Kenyan private fertilizer company that aims to improve crop production and

agricultural development in Kenya (MEA: 2012). Under Kilimo Salama’s scheme only MEA’s

fertilizers can be insured, what guarantees that the farmers will access certified and high quality

fertilizers. Half per cent of the cost of the insurance associated to the fertilizers sold under Kilimo

Salama is covered by MEA. Even if this might not seem to be highly profitable in the short term it

has an associated benefit in the long-run, as it creates customer loyalty and increases the customer

base.

Seed Co Limited is a public listed company that is considered to be the leading producing and

marketer of certified crop seeds in Southern Africa (Seed Co: 2012). As in the case of MEA, only

Seed Co’s seeds can be insured under Kilimo Salama’ scheme. As well half of the price of the

insurance is subsidised by Seed Co, which benefits from greater customer loyalty and increased

customer base.

Syngenta, the for-profit brother of the SF, is a large global Swiss agribusiness company that


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mainly commercialises seeds and pesticides. As in the case of MEA and Seed Co, under Kilimo

Salama’ scheme only those chemicals provided by Syngenta can be insured. Alike the others,

Syngenta subsidizes half of the cost of the insurance associated to their products. In exchange,

Syngenta benefits from a greater customer loyalty and customer base.

CNFA/AGMARK is a non-for profit international organization which mission is to increase

rural incomes by assisting farmers and rural entrepreneurs. The role of CNFA was key at the

beginning of Kilimo Salama, as it helped identify those agro dealers that had been better trained and

that were more likely to understand and better perform the role of distributors of Kilimo Salama.

There is no commercial benefit associated to the collaboration of CNFA in Kilimo Salama.

The International Finance Corporation (IFC) is a member of the World Bank that promotes

sustainable private sector investment in developing countries. The IFC granted $ 2.4 million to

Syngenta in 2010 as support of the development and expansion of Kilimo Salama.

The Kenyan Meteorological Department (KMD) has a secondary but important role in Kilimo

Salama. During the initial stages of implementation access to weather measurements of the previous

thirty years was needed to do the actuarial calculations that determined the percentage of premium

required by this type of insurance. Currently, the role of the KMD is to certify and approve the

Automated Weather Stations (AWS) that are used by the program.

f. Performance of Kilimo Salama

Cost Structure

For the analysis of the cost structure of Kilimo Salama it is necessary to make a differentiation

between the two main groups of costs faced by the program (Figure 51):

Figure 17. Kilimo Salama's share of costs


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Source Data: Fritz Brugger 2012

The costs associated with the financial literacy training represent between 70% and 80% of the

total costs of Kilimo Salama (Brugger: 2012). This could be considered customer acquisition or

market creation costs and includes 1,600 farmer meetings with an average of 30 farmers per

meeting, which means that approximately 48,000 have already been trained with this purpose.

Based on internal estimations, the financial literacy costs of Kilimo Salama could surpass levels of

150,000 US$. Additionally, a weekly radio program is broadcasted during sales seasons to increase

customer awareness. Recovering this cost would be extremely challenging for Kilimo Salama and

for that reason this investment is seen from the SF as an investment or cost lost dedicated to the

improvement of social welfare of the target communities.

The remaining 20% to 30% of the costs is divided between initial investments and the

operational costs. There are currently over 30 weather stations, each of them is financed entirely by

the Syngenta Foundation and require an initial investment of 4,000 US$. This means that over

150,000$ were needed for the initial investment in weather stations. Additional initial investment

costs are the creation of a help line, investment in a server platform, and development of a scanning

software and adapted cameras for the mobile phones used by the agro dealers. Operational costs

include the functioning of the helpline, the maintenance of the Automated Weather Station, the

maintenance of the server, and the cost of the input providers of subsidizing 50% of the costs of the

insurance premiums.

Revenue Structure

Kilimo Salama makes the totality of its revenue out of direct sales to customers. As explained

in previous sections, the number of insured farmers grew in 2011 from 12,000 to over 23,000,

including products sold through aggregators and groups, agro dealers, and the sales of Kilimo

Salama Plus. In 2011 Kilimo Salama insured 200,000,000 Kenyan Shillings (2,400,000 US$) worth

of inputs and agricultural production. In this same period Kilimo Salama collected over 18,000,000

Kenyan Shillings (216,351 US$) in premiums.


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Figure 18. Proportion of customers by channel


As shown in Figure 52, over 19,000 clients are reached through aggregators and groups,

representing 81 per cent of the total number of customers. The second biggest group of customers

are those buying Kilimo Salama through agro dealers, accounting for almost 4,000 customers (17

percent of the total customers). The last group of customers is the one that buys Kilimo Salama Plus

through the agro dealers, which due to the newness of the service it still accounts for only 570

customers (2 per cent of the total customers of the program).

Figure 19. Proportion of revenue by channel


As it can be seen in Figure 53, the proportion of revenue generated by these three groups in

2011 is slightly different from the amount of customers they have. Insurance policies sold through

aggregators and groups account for almost 17,000,000 Kenyan Shillings (204.000 US$), what

represents 94 per cent of the revenue of the program. The proportion of revenue generated by


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insurance policies on inputs sold through the agro dealers accounted for only 640,000 Kenyan

Shillings (7,700 US$), what represents a little over 3.5 per cent of the total revenue. Finally, the

estimated revenue generated through Kilimo Salama Plus accounted for over 370,000 Kenyan

Shillings (4,475 US$) in the same period, which represents 2 per cent of the total revenue. This

financial data points to the importance of sales through groups and aggregators for revenue

generation and to retail sales of Kilimo Salama as a weaker engine of revenue generation.

Safaricom does not benefit from the volume of premiums charged to the customers, but by the

amount of transactions done through M-Pesa. Safaricom charges for the money transfers done in the

program the normal M-Pesa tariff for any economic transaction.

The most important innovation in the revenue streams used by Kilimo Salama is not the

number of different revenue streams used, but the innovation in the ones used. One of the main

challenges of selling micro-insurance, apart from explaining the functioning and purpose to the

target market, is the difficulty to bill customers. This is caused by two main reasons: farmers are

reluctant to pay for something they have never had before if they still don’t fully trust in the service

provider, and paying in advance for a service you are not sure you will receive becomes even more

challenging when located at the BoP. For those insurances sold through the agro dealers, by

charging the price of the premium together with the cost of the inputs the whole process of paying

for the insurance becomes less transparent and less clear to the farmers. Moreover, as farmers

usually don’t buy first quality inputs as a risk management strategy, the first time they do it and it

has an insurance policy adhered they find it difficult to understand the proportion of the price paid

for the improved input and the proportion paid for the insurance. Additionally for those insurances

sold through groups and aggregators, the insurance is embedded in the loan or credit received by the

customers. The insurance premium is deducted from the service fee of the loan, in this way

customers do not know the existence of the insurance and are less reluctant to pay for it.

As shown in Figure 54, low renewable rates are one of the key challenges of Kilimo Salama to

keep generating revenue that supports the growth and sustainability of the initiative. There are

several factors responsible for the low renewal rates: the quality of farmer education and the overall

understanding of the product and benefits associated with it; the motivation of agro dealers in

reminding farmers to renew the insurance policies bought in previous seasons; and the frequency of

payouts. In those regions that received a payout due to not favourable conditions of weather in

previous seasons, and where farmers have been well trained the renewal rates are slightly higher,

peaking at levels of 30 per cent. These low renewal rates translate into a direct negative effect on

the revenue growth of Kilimo Salama.


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Figure 20. Renewal rates 2010-2011


Kilimo Salama has recently planned a retention strategy for 2012 to increase its renewal rates.

This strategy consists of many different activities:

• Meetings with current customers

• Premium discount for insurance renewals.

• Farm and financial literacy packs for current customers.

• Focused trainings

• Premium payment available in instalments.

• Continuous feedback from farmers that allow a trouble shooting tool.

Profitability

Kilimo Salama is currently far from being profitable. As argued in the revenue section, the

program generated a revenue of 216,351 US$ in 2011. Financial literacy costs amount for 70 per

cent of the total costs of Kilimo Salama, and taking into consideration that the program has already

trained over 48,000 farmers, based on estimations these costs can be expected to be over 150,000

US$. Investment in the construction of Automated Weather Station is the main initial cost and

amounts for around 150,000 US$. Additional initial investment includes the creation of a help line,

investment in a server platform, and development of a scanning software and adapted cameras for

the mobile phones. Lastly, operational costs must be brought into the equation. Taking out of the

equation the financial literacy costs and despite the lack of numbers backing up some of the

additional costs, it is easy to get a grasp of the remaining gap between revenues and costs. However,

considering the financial literacy training as cost lost, the SF expects the program to break even by

the end of 2013. To do so the program needs to reach certain scale, probably around the level of


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50,000 customers. Nevertheless, reaching this target might be challenging due to the low renewal

rates discussed in previous sections.

Competitive Advantage

Kilimo Salama has several resources and capabilities that conform their competitive advantage.

Kilimo Salama has the know-how of the main challenges and opportunities of providing micro-

insurance through mobile phones to small farmers. Additionally it is building a customer base

among those farmers that have received a payout or those medium/large-size farmers that

understand better the value added of having an insurance. Kilimo Salama is also building a strong

reputation among the farmers.

There are also a few risks that might challenge the current competitive advantage of Kilimo

Salama. Given the high investment cost in financial literacy training, other initiatives could decide

to target the same target market that has already been trained and do not have to incur in financial

training costs, and cut down in this way the majority of costs faced by Kilimo Salama. Kilimo

Salama is facing some difficulties to establish a customer base.

Impact

The young stage of Kilimo Salama and the lack of academic studies on the topic impede the

task of reaching any conclusive answers about the impact of the program on poverty reduction.

However, there is some preliminary evidence that points to three possible effects of the program on

the lives of poor Kenyan farmers, in the form of reduced vulnerability, improved yields, and

improved access to finance.

In 2009, the two weather stations of the product pilot registered one of the worst droughts in the

recent history of Kenya. As a consequence, all of the two hundred farmers received payouts

amounting for thirty or eighty per cent of the maize seeds insured. This proportion was different for

each of the two weather stations (IFC: 2011). One year after the pilot, the average amount of seeds

insured by the same farmers doubled and they also insured the fertilizer (Haskins: 2010). During the

short rain season of 2011 1205 farmers received payouts in the regions of Embu and Nanyuki, the

reason for the payout was drought what led to compensations between 4 and 48 percent of the

insured input or harvest depending on the particular recordings at each weather station. The long

rain season of 2011 also recorded severe droughts and led to higher compensations ranging from 16

to 90 per cent in the regions of Nanyuki, Embu, and South Nyanza (Kilimo Salama: 2011). These

payouts reduce the vulnerability of poor farmers to risks by compensating part of the losses and

giving them the opportunity to plant again the amount of yield lost and recover it during the next


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season, and to recover the lost expected value of the harvest for Kilimo Salama Plus customers.

Kilimo Salama Plus has a greater potential for poverty and vulnerability reduction, as it offers the

farmer the ability to recover the potential earnings at the same time the damage happens.

As described in the previous section, those farmers insured by Kilimo Salama plant certified

and improved seeds, as buying these kinds of seeds is a prerequisite of the program. As well,

insured farmers use recommended chemicals from registered and certified suppliers like MEA and

Syngenta. In the past, farmers were buying low-quality seeds, resulting in low-productivity yields.

Actually, with the use of improved inputs the overall production and quality of the yields at the end

of the season has been enhanced (Nsubuga: 2010). Farmers buying for the second time the

insurance tend to insure greater quantities of inputs. Evidence from the pilot showed that farmers

insuring 2Kgs of seeds the first time insured 4Kgs the second time and additionally purchased

fertilizers (Nsubuga: 2010). Furthermore, by receiving SMS with farming advice based on the

measurements taken at the weather stations, farmers improve their farming practices and increase

the productivity of their yields (Kilimo Salama: 2010a).

Kilimo Salama has helped reduce vulnerability and agricultural risk of poor farmers by

reducing the amount of losses incurred by farmers through payouts. This has resulted in an

improved financial inclusion in the covered regions, with a number of banks and MFIs willing to

give loans to the insured farmers (Nsubuga: 2010). In early 2011 a MFI approached Kilimo Salama

to develop an agriculture loan portfolio that included a loan, a quality inputs package, training, and

insurance (Kilimo Salama: 2011). Moreover, some MFIs are now requesting the enrolment in

Kilimo Salama as a prerequisite to receive a credit. Kilimo Salama offers the MFIs additional

indirect coverage by protecting their debtor. Insured farmers have more certainty that at the end of

the season they will have positive results, which increases their willingness to take loans.

Furthermore, in a focus group in Moiben several farmers mentioned that they were buying the

insurance because they wanted to take a loan to expand the acreage of their farms (IFC: 2011).

However, Kilimo Salama still has no conducted a proper impact assessment connecting index

based crop insurance with poverty reduction. The young stage of the initiative and the low renewal

rates are hindering the task of understanding the impact of Kilimo Salama in poverty reduction.

Nevertheless, establishing a clear link between micro-insurance and poverty reduction might be

challenging in the case of Kilimo Salama, as there are other factors like improved seeds and

agricultural tips that have an affect on the productivity of yields and that can positively affect

income generation at the household level. Apart from reducing poverty, Kilimo Salama emphasizes

the promotion of behavioural change as one of its main goals, which explains the large amounts of


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investment in financial literacy trainings. This assessment in underway but it is still challenging due

to the low renewal rates.


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SWOT Analysis

Strengths: • First mobile weather index crop micro-insurance for

smallholder farmers. • Strong partnership model (NGO-Public-Private). • Close governance of Kilimo Salama by UAP and the SF. • Weather index insurance does not require field visit

what decreases costs compared to other agricultural insurance schemes.

• The use of agro dealers avoids the high costs associated with sending salesmen to rural areas to sell insurances.

• The use of M-Pesa reduces the transaction costs, associated risks, and time of sending payments and payouts.

• The premium of Kilimo Salama is only 5% and the SF subsidizes the remaining 5%. This reduced premium makes the service affordable to poor customers.

• Reduced transparency of the billing process facilitates sales of insurances.

• Provision of free services like Agro info promotes customer loyalty.

• Partnerships with micro-credit or MIS providers, increases the number of group customers.

• Kilimo Salama addresses with one service several issues: poverty reduction, food security, climate change, and access to financial services.

Weaknesses: • Investment of over 150,000 US$ (based on estimations)

needed for financial literacy training considered as lost cost.

• Expensive initial investment in the construction of Automated Weather Station (4,000 US$ each), required to increase the outreach.

• Need to reach 50,000 customers to start generating benefits for UAP.

• Basis Risk associated to any weather index insurance (claims not matching weather measurements) can be a reason for customer dissatisfaction.

• An affordable premium for poor farmers of 5% of the value of the inputs implies a limited coverage against shocks.

• Difficult to be replicated in other countries or contexts with less accurate historical weather data or without the support of a widely extended M-Payment system like M-Pesa.

• Stockists do not always have the time and willingness to explain the benefits of micro-insurance to the farmers.

Opportunities: • Great potential for poverty reduction and improved

yields associated to the insurance, high quality inputs, and agricultural tips.

• The use of micro-insurance can reduce uncertainty among small-holder farmers and foster greater investment in agricultural inputs.

• Kilimo Salama can become the proof of concept of these kinds of services for small-holder farmers.

• A proper impact assessment on poverty reduction would facilitate the access to additional funds from international donors.

• Financial literacy can transform farmer’s perception of insurance services.

• The financial literacy training can potentially create a demand for other financial services.

• The know-how acquired in Kenya can facilitate Kilimo Salama’ expansion to other countries

• By exploring other delivery channels like selling insurances through the helpline, the distribution costs can be reduced.

• The use of new technologies like Satellite information can reduce the Basis Risk.

• Registering farmers at the end of the training can increase customer uptake.

• By focusing on the provision of micro-insurance embedded with micro-credits and not making explicit the existence of the micro-insurance can reduce the need for financial literacy training.

Threats: • Lack of trust of small-holder farmers on insurance is a

high entry barrier, and without a payout it can hinder renewal rates.

• Low renewal rates peaking at 30% in some regions can make difficult to reach the minimum scale to generate benefits.

• Low renewal rates affect the possibility to assess impact. • Differences in the goals of the SF and UAP can create

confrontation between the two main partners over key issues, challenging the expansion and sustainability of Kilimo Salama.

• The weather data is property of the KMD what can limit new business opportunities.

• The provision of micro-insurance bundled with micro-credits through aggregators can increase moral hazard of customers not repaying loans.

• Other insurance companies could target the same market that has already received financial literacy training and elude the high entry costs.


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g. Future Steps

The Syngenta Foundation aims to help farmers improve the productiveness of their harvest by

assessing them through the whole farming process. Kilimo Salama is planning to provide farming

packages that will include the adequate inputs for the specific crop, specific training adapted to the

crop, and agricultural advice adapted to the seasonality and that will be delivered through SMS. The

program also wants to start providing weather forecasts as current customers constantly request this

information. Additionally, weather measurements will be used to send personalised information on

possible diseases that might affect the insured crops. The goal of Kilimo Salama is to extend the

program to all key farming areas of the country by 2012.

“When it comes to drought, most farmers have no choice but to simply pray for rain. And if the

rains don’t come, the crops don’t grow. At a time of global change we are trying to give farmers

more options so they can meet these challenges and prosper”

(UAP Insurance Managing Director, James Wambugu: 2010)

1. Mobile Phone Micro-Insurance: The Case of Kilimo Salama...

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