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February 20th, 2018

Unlocking smallholder credit: Does credit-linked agricultural insurance work?

Published by World Bank Group,

This paper (PDF) by the World Bank Group reviews possibilities for, and experience with, credit-linked crop insurance, including different types of insurance and credit arrangements. The paper describes the main methods of linkage that are being tested or proposed, identifies the critical features of each method, and discusses the advantages and limitations for the three parties – farmers, financial service providers (FSPs), and insurers. A number of key lessons have been identified. One of the key lessons is that the main reasons that encourage FSPs to offer crop insurance are to reduce default risks, reduce the use of more costly and less efficient risk management techniques, reduce interest rates, raise profits, attract more clients, reach poorer smallholders, compete better with competitors, and generate fee income. However, if the insurance is administered by the FSP as part of its loan process, these benefits have to be balanced against the cost and management challenges faced in training and monitoring loan officers and others who explain the product to smallholders, and the incentives needed for staff members who take on these additional tasks. The authors finish with one general recommendation: the real need for more evaluations and impact assessments of credit-linked insurance, especially when public funds are to be invested in providing relevant public services and subsidies.

Curated from impactinsurance.org