agricultural insurance

Food and Agriculture OrganizationOf the United Nations

Agricultural insurance

Training of Trainers Workshop to Enhance Pro-poor Policy Formulation and Implementation at Country Level

21 – 25 September 2015Bangkok, Thailand

Outline• What is insurance: a parable• What is required for insurance to work?• Types of risks in agriculture• The special nature of agricultural risks• Types of agricultural insurance• Is agricultural insurance a panacea?• What can we reasonably expect

agricultural insurance to do?

2

Parable to explain insurance• Holy man:

“ Your next child will be a boy or money back”• Two families send Rs 100 each• Logical possibilities:

3

Family 1 Family 2 Holy man’s earnings

Boy Boy 200Boy Girl 100Girl Boy 100Girl Girl 0

Parable continued• 3 families: logical possibilities

4

Family 1 Family 2 Family 3 EarningsBoy Boy Boy 300Boy Boy Girl 200Boy Girl Boy 200Boy Girl Girl 100Girl Boy Boy 200Girl Boy Girl 100Girl Girl Boy 100Girl Girl Girl 0

Parable continued• When 2 families send money, chance that

holy man has to return all the money? 1 / 22 = 1 / 4• When 3 families send money? 1 / 23 = 1 / 8• When 20 families send money? 1 / 220 = 1 / 1 000 000 (!!)

5

What does this have to do with insurance?

• Take case of 3 families, • Insurance company says:

– Send us money every month (premium), we give you powerful charm to protect car (!!)

– If your car is stolen, we return your premium and give you enough money to buy new car

– This has the same structure as the boy-girl problem• Change girl to “car stolen” and boy to “not stolen”.

6

What is insurance and how does it work?

• A way of sharing or pooling risk– Risk: “undesirable fluctuations in consumption

that are not perfectly predictable”

• But does not eliminate risk

• Spreads risk across an industry or economy and through time

7

Income risks facing poor rural households

Crop failure (partial or complete)Death of livestock

Price shocks Illness or death of household members

Loss of employment or self-employment Natural calamities (drought, flood, fire etc.)War and other forms of violence, e.g. crime

1. RISK-MANAGEMENT STRATEGIES I.E. STRATEGIES

TO STABILIZE INCOME

A. Crop and field diversificationB. Diversification of income sourcesC. Contractual arrangements such as sharecropping, bonded labour D. Adoption of hardier crop and livestock varieties

2. RISK-COPING STRATEGIES I.E. STRATEGIES TO STABILIZE CONSUMPTIONA. SavingB. Access to credit from formal and informal sourcesC. Marriage outside the village and other means of building alliancesD. Reducing consumptionE. Risk sharing arrangements , i.e. insurance 8

Benefits of insurance• Helps households and governments

manage natural hazards• More efficient than credit and savings if the

financial market is not well developed• Reduces credit default risk• Facilitates adoption of production

innovations• Enhances agricultural production and

possibly competitiveness9

What is required for insurance to work?“Work” means that insurance company should

not lose money and should be able to pay back insured people when loss occurs

1. Large no. of people take out insurance

2. Risks are independent

3. “Making whole”: 1. Company should know how much it costs to restore

insured to original position 10

Crop insurance: special issues

• Risks are not independent (“covariate risks”)

• How to “make whole” is difficult to decide– E.g. hailstorm before crops harvested. How

does insurance company know what the value of the final crop would have been?

• Loss to individual farmer is hard to assess11

Crop insurance: solutions

• Link crop insurance to credit and savings schemes– Provide insurance for input loans– Work with micro lenders to allow farm

households to build up their savings

• Crop insurance and livestock insurance

12

Traditional insurance products

• Single (Named) Peril

• Multiple Peril

Actual physical loss or damage is measured in-field, and the claim is specific to that field/farmer

13

Innovative insurance products• Crop area yield index insurance

• Crop weather index insurance

• Livestock mortality index insurance

The claim is calculated based on an external index designed to reflect as accurately as possible the loss incurred by the farmer

14

Public Subsidies

• Argument for subsidies for premiums and operational expenses:– Farmers prefer multiple peril and revenue

insurance rather than index insurances. – Such types of insurance are costly and

subsidies are required to keep premium levels at an affordable level• Premium depends on chance of loss x extent of loss• Build in safety factor to allow for fact that e.g.

droughts run in cycles of several years.15

Public subsidies

• Should be oriented to providing public goods– Market development– Legal and regulatory reform– Reinsurance– Well managed disaster relief funds

16

Reinsurance

• Useful for protecting against natural disasters affecting large numbers of people– Quite common in agriculture

• Reinsurance is provided for losses exceeding a mutually agreed upon rate

• International reinsurers can spread their risks across many countries / agro-ecological zones

17

Agricultural insurance:Key considerations

• What perils should be protected against?• Target commodities / target audience?• Requirements of different agricultural

sectors (crops, livestock, fisheries, forestry)

• What are the legal & regulatory requirements?

• What is the real demand for the insurance product?

18

Agricultural insurance in the region• FAO survey of agricultural insurance in the

region 2010– Agric insurance available in 20 countries of

the region– Agricultural premiums grew from USD 1.6 bn

in 2005 to USD 4 bn in 2009– Major markets for agric insurance are (2009):

• China (50%)• Japan (31%)• India (11%)• Australia (4%)• Korea (3%) 19

Agricultural insurance in the region (cont’d)

• Total agricultural insurance premiums:– 60% crop insurance– 40% livestock insurance

• Public sector subsidised multiple peril crop insurance schemes have generally performed poorly and been replaced by Public-Private partnerships

• Weather index insurance introduced in India in 2003, extended gradually to other countries

20

Agricultural insurance in the region (cont’d)

• Govt support to agric insurance – Premium subsidies: USD 2 bilion in 2009– Subsidies to A&O expenses

• Modalities:– Public sector (high penetration / social over

tech criteria / high fiscal cost)– Public-private partnership (high penetration /

tech over comm criteria / moderate fiscal cost)– Pure market based (low to moderate

penetration / comm over tech criteria / no fiscal cost) 21

Agricultural insurance:Case study of India

• NAIS area-yield index multiple peril crop insurance scheme

• Has 3 objectives: – Provide financial support to farmers if crop

failure– Restore credit eligibility of farmers after crop

failure for next season– Support and stimulate prod of cereals, pulses

and oilseeds

22


• NIAS Sold 20 million policies in 2007– 15% of farmers – 14% of gross cropped area

• Livestock insurance– 3% of cattle are covered

• Weather index insurance– Introduced in 2003– By 2008 had reached 0.6 million farmers– By 2013 had reached 3 million farmers

23


• Market structure:– Agriculture Insurance Company of India (AIC)

• Public sector specialist crop insurance company • Responsible for implementing NAIS

– ICICI Lombard and IFFCO-Tokyo• Crop weather index insurance for poor farmers

– Public sector insurance companies providing livestock insurance

24


• Agricultural insurance products:– MPCI: covers food crops, oilseeds,

horticultural and commercial crops– MPCI: Yield loss resulting from

• Natural fires and lightning• Storms, hailstorms, hurricanes, cyclones etc• Floods, landslides etc.• Droughts, dry spells • Pests/diseases etc.

25


• Agricultural reinsurance– NAIS is reinsured by government under 50:50

excess of loss agreement by the central government and participating state govts• If made more market oriented, could face serious

constraints in obtaining reinsurance bec large size– AIC’s weather index program reinsured partly

by GIC (General Insurance Co.) and partly by international reinsurers

– Livestock epidemic disease reinsurance is not available 26


• Public subsidies to agricultural insurance– Premium subsidies (USD 7 mn)

• Caps on premiums for food crops and oilseeds below actuarially fair rates (available to everyone)

• Subsidies to small and marginal farmers– Premium subsidies on crop weather index

insurance (USD 25 mn)– Subsidies on AIC’s A&O (Administrative and

Organizational) expenses (USD 3.3 mn)– Excess of loss reinsurance (USD 228 mn)

27

Conclusions• Agricultural insurance has some special

issues which must be confronted– Covariate risk– How to make whole

• Farmers must perceive that the expected benefits are greater than the premiums

• Agricultural insurance is likely to require subsidies and/or reinsurance to be financially viable 28

THANK YOU

29

Indonesia rice sector insurance scheme, 2009

• Micro analysis of risks in rice production (at regency level) shows that rats and stem borers in both locations are the main factors causing loss of rice production

30

agricultural insurance

Education