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New program tackles risk three ways

Can insurance help make farming more attractive to Indonesians?

Indonesian smallholders face numerous challenges. Some can be mitigated by insurance. But as we’ve learned, risk management requires a broader approach.

In the recent past, farming was part of Indonesia’s national identity. Nowadays, however, many Indonesians view the profession as unappealing. As weather extremes increase, achieving good farm yields is becoming even more of a lottery for smallholders than it has always been. The high risk involved deters most financial institutions from supporting agricultural investments.

In early 2016, SFSA began insurance work in Indonesia. Our initial idea was to only agricultural weather index insurance combined with loans. However, this approach had two disadvantages. On the one hand, the arrangement was not attractive enough since it was hard for the smallholders to realize the importance of insurance in the loan package. The second drawback was that the arrangement did not help increase farm production.    

Together with our partners, we therefore developed a new solution called ‘Dana PANDAN’. The abbreviation stands for ‘Secure and Sustainable Farming Fund’. This model combines weather index insurance, agricultural extension and support from a microfinance institution (MFI). The support comes in the form of a cash loan and good-quality farm inputs.

All these elements help smallholders manage risk. With the farm inputs, Dana PANDAN tackles the threat of pests and disease. The extension advice helps smallholders to farm in the most appropriate way for their local conditions. Insurance shifts the burden of weather risk from farmers’ shoulders. Knowing that clients are covered also increases the MFI’s security and willingness to lend.

Having a good offer is not enough on its own, however. Weather insurance also requires careful explanation, and needs to be welcomed by all stakeholders. In February 2017, for example, we therefore ran a workshop for the Financial Services Authority. Together with our partner ACA Insurance, we used this event to share our experiences of weather insurance development and use.

In October 2017, Dana PANDAN reached a major milestone when the first farmer signed up to the program in West Java. SFSA simultaneously devoted considerable efforts to preparing for scale-up. These included training sessions for our Indonesian insurance team of 18 professionals. Through their work, they now hope to contribute to making farming a more attractive profession again.