Definition
Price insurance is an insurance product that can be purchased by farmers to cover (a portion of) their losses in case of a drop in commodity prices below a certain level. While this typically comes at a premium, it means that farmers are guaranteed a certain minimal income from their produce. Price insurance is in some occassions embedded into off-take contracts (see "Cost-plus pricing).
Lead Actors
Financial Service Provider; Off-taker
Target Demographics
Agri-SMEs; Farmer Organisations; Farmers
Objectives addressed
Farmer related
Improve yields:
Price insurance can increase yield by improving the willingness of farmers to invest in their farms. By investing more in their farms, farmers can expect higher yields.
Strengthen income stability:
Price insurance strengthens income stability by insuring against downside risks to a farmers income, albeit not against other risks.
Increase farmer income:
Price insurance can increase incomes by insuring against downside risks and incentivising farmers to invest. By investing more in their farms, farmers can expect higher yields.
Boost access to finance:
Price insurance can improve access to finance by reducing the risk of repayment faced by loan providers. This can then improve the willingness of loan providers to extend credit.
Business related
Lower credit losses:
Price insurance can reduce the risk of non-repayment by limiting the vulnerability of a farmer to market price fluctuations.
Reduce side-selling:
Price insurance (especially when embedded in contracts) can reduce side-selling by guaranteeing farmers a return on their investment.
Contexts Best Suited to
Cash crops and crops that are priced internationally: results in their being available indices for the insurance policy.
Higher value crops: more willingness to pay for insurance.
Markets with volatile prices: more incentive to pay for insurance.
Higher value crops: more willingness to pay for insurance.
Markets with volatile prices: more incentive to pay for insurance.
Key Risks
Market Risk: If the provider of price risk is unable to hedge/insure the risk they have incurred through the process of insurance, they will be exposed to swings in price that can no longer be passed through.
Limited Coverage: There are a limited number of options for price risk insurance for smallholder farmers available (apart from when embedded into off-take contracts).
Limited Coverage: There are a limited number of options for price risk insurance for smallholder farmers available (apart from when embedded into off-take contracts).
Environmental Impact
Limited:
Link with environment relatively limited.
Ambition level
Low
Time
Involves time to motivate farmers to adopt.
Time can be saved because price insurance can be built into contracts rather than needing separate policy.
Time can be saved because price insurance can be built into contracts rather than needing separate policy.
Investment Need
Involves startup costs in outreach.
Operational and claims processing costs relatively limited.
Costs can be incurred based on price swings.
Operational and claims processing costs relatively limited.
Costs can be incurred based on price swings.
