Natural disasters hit hard. They may cause heavy losses to farmers and forest owners. Insurance can assist in managing these losses, and crop insurance is that branch of this financial mechanism that is especially geared to covering losses from adverse weather and similar events beyond the control of growers.
This publication is primarily concerned with risks to arable and horticultural crops, and the applicability of insurance to managing these risks. However, some issues concerning the closely associated field of forest insurance are also discussed. Essentially this book is intended to be a supplement to an earlier FAO publication, Roberts & Dick (1991) Strategies for Crop Insurance Planning FAO, Rome
While some of the example material is taken from developed agriculture and forestry, the basic target group of readers is expected to be those concerned with crop and forest risk management in developing parts of the world. As such, the booklet may be of interest to:
Farmer unions, officials and members;
Producer/commodity groups;
Processors, marketing firms and others contracting with farmer producers;
Officials of Ministries of Agriculture, Planning, Commerce and Health;
Bankers with farming and forestry clients;
Insurers with farming and forestry clients.
First, and basic to the understanding of insurance, is the reality that insurance does not and cannot obliterate risk. It spreads risk. There are two dimensions to this spread. The first dimension is the spread across an industry or an economy, extended in the case of international reinsurance to the international sphere. The second dimension of spread is through time. Most insurance programmes operate on both dimensions. The important fact to note is that insurance does not directly increase a grower’s income. It merely helps manage risks to this income.
Second, insurance is a business. An insurance indemnity only becomes payable in the event of a claim under a policy. The policy must be in force, with premium paid, by the time of the loss event. Most policies incorporate an element of risk sharing, by means of a deductible (also known as an ‘excess’). This amount is the percentage of the loss which is borne entirely by the insured.
Third, premiums must cover several areas of cost in addition to meeting the cost of paying indemnities under policies in force. The components commonly used by insurers to calculate premiums are explained in the Annex at the end of this publication.
A glossary of terms commonly used in crop and forestry insurance is also included in the Annex.
The purpose of this booklet is to provide an introductory overview of crop and forestry insurance. In doing so it opens by defining the boundaries for these types of insurance products. The setting of boundaries is very deliberate. It is intended to assist those interested in exploring and exploiting this financial mechanism to do so in a realistic and satisfactory manner.
Secondly, this booklet sets out how to proceed with planning for crop insurance, within the established boundaries.
There have been many attempts to establish crop insurance programmes in developing countries. A few of these have succeeded in laying the foundation for a sustainable risk management service. But there have also been many failures. Most of those programmes that have not proved durable were set up on the basis of unrealistic expectations.
In any business arrangement, both sides of the transaction must expect to benefit. Crop insurance transactions are no different. This defines the first boundary: crop insurance is sold and bought in a market. The purchasers must perceive that the premiums and expected benefits offer value; the sellers must see opportunity for a positive actuarial outcome, over time, and profit. The implications of this condition will be outlined in some detail later in this publication.
Crop insurance is not the universal solution to the risk and uncertainties which are part and parcel of farming. Rather insurance can address part of the losses resulting from some perils. The second boundary then is, insurance has a limited role in risk management in farming. Again, the implications of this will be explored below.
The third boundary is that any limitations to the scope for effective and economic crop insurance, though real at any given moment, can change over time. Farming enterprises and systems are dynamic. They change over time, and in so doing present different patterns of risk and new ways by which farming technology, and farm management techniques, can cope with production and other risks. The design of insurance solutions is an equally dynamic field of research and development. New techniques of ascertaining that loss-causing perils have occurred, together with more efficient and economical methods for measuring losses, mean that new types of insurance products can be developed. When companies see a business opportunity here, with an evident demand, then these products will be refined, funded and marketed. This dynamism will be reflected later on in this booklet.
Before looking into the future, it is useful to take a bird’s eye view of the business of crop insurance in the world today. Although this booklet is concerned primarily with crop insurance, which accounts for the bulk of farm-related production insurance, some data will include livestock and aquacultural cover. These areas of insurance will be the subject of a companion FAO booklet to the present publication.
The total annual agricultural and forestry insurance premiums, worldwide, in 2001 amounted to some US$6.5 billion. Of this amount 70 percent is accounted for by crop and forestry products. This sum must be compared with the estimated total farm gate value of agricultural production globally, which is US$1 400 billion[2]. In this case the insurance premiums paid represent just 0.4 percent of this total.
Geographically these insurance premiums are concentrated in developed farming and forestry regions, i.e. in North America (55 percent), Western Europe (29 percent), Australia and New Zealand (3 percent). Latin America and Asia account for 4 percent each, Central/Eastern Europe 3 percent and Africa just 2 percent.
These figures present a snapshot view of agricultural and crop insurance. A dynamic rather than static view indicates a changing situation. Agricultural insurance is a growth business area. This growth is driven not only by the increasing commercialism of agriculture and the availability of new types of insurance products, but also by international trade policy developments. These points are covered in greater detail in Section 2, Growth in Demand for Crop Insurance Products.
The previous section makes it clear that crop insurance is primarily a business which involves developed country farmers. However, some 13 percent of global premiums are paid in the developing world. Where do these business arrangements take place, and what are the characteristics of the farmers who are insured?
It is not the purpose of this publication to provide detailed country by country information. This is given, albeit in summary form, in the 1991 FAO publication Compendium of Crop Insurance Programmes. Rather the aim of this brief section is to illustrate the types of situations where insurance is used, or is being considered as a risk management mechanism, across a number of countries, and involving a variety of both farming systems and agricultural enterprises.
This country has many of the features of developed agriculture, so it is not surprising that some 25 percent of the total crop area is insured - mostly just against hail damage, though a start has been made to introduce multi-peril policies. The crops concerned include soybean, wheat, sunflower and maize (corn). Insurance on grapevines and other fruits is also important.
The agricultural insurance business is competitive. Some 25 companies and mutual entities operate in this area. Some of them have invested significantly in technical expertise. For example, one company, with about 12 percent of the market, employs eight fulltime agriculturalists in order to have an in-house team, both to design policies and to manage the insurance products being sold.
This major agricultural producing country has had a crop insurance programme subsidized by the government. This has gone through some serious problems, originating from its desire to cover too much risk too quickly. The result was that the insurer bearing the risk had insufficient understanding of that risk - a major error for any branch of insurance.
More recent developments have progressed in a slower and better informed manner, and have been largely led by the private sector. New style apple cover started in 1998, wine and table grape covers in 1999, and broad acre crops such as soybean, wheat and maize in 2000. Despite these developments, crop insurance business is very small in relation to the size of the agricultural sector in the country. Some recent developments include moves to introduce crop-revenue products, under area-based determination of loss (see under New Insurance Products, below).
The Agricultural Insurance Organization of Cyprus (OGA) was established under an Act in 1977, following earlier attempts to structure relief payments for farmers affected by adverse climatic events. After investigation, the format of a parastatal insurance corporation was adopted. A wide variety of crops are covered, against a range of perils. Some examples:
|
Cereals: |
drought, rust, hail |
|
Deciduous fruits: |
hail |
|
Grapes and citrus: |
frost, hail |
There is continuous demand from growers to extend the range of risks covered, especially windstorm, excessive rain and excessive heat. The OGA employs professional agriculturalists, both for product development and for supervision of loss assessment.
The crop insurance scene in India is two-pronged. One of these prongs, a government programme that has a strong social objective, loses vast sums each year[4]. Officials are believed to be attempting to re-design this programme, in order to make it more efficient and sustainable. The task is immense. In 2000 the programme insured 10.5 million farmers, with a total sum insured of US$1.8 billion on 15.7 million ha of crop land.
On the other hand, a few insurance companies are active in offering commercially sound insurance products, especially geared to producers of high quality fruits, and much developmental work is being done in India on new products and approaches, following actuarially sound underwriting practices. The General Insurance Corporation (GIC) of India has formed a specialist subsidiary, Agricultural Insurance Corporation (AIC) in order to provide a company/institutional focus for this class of business.
An interesting example of a new product is “Failed Well Insurance”, the demand for which is not surprising in a country which has in excess of 10 million pump sets, most of which pump from boreholes and wells, and which are therefore vulnerable to significant falls in the water table.
A recent development is that private sector banking/insurance interests, with some advisory assistance from the World Bank, now offer index insurance, an insurance product covering non-irrigated farmers against the risk of insufficient rainfall during key parts of the cropping season. The policies are offered by a commercial firm, ICICI Lombard General Insurance and are marketed to growers through micro-finance banks which are linked to an apex micro - finance entity known as BASIX (Bhartiya Samruddhi Finance Ltd.). Further details of this Indian initiative are given below in Section 2.5.2.
Malaysia’s agricultural sector combines large-scale, plantation enterprises with large numbers of small-scale producers. Both types have access to crop insurance, but the larger scale farms are more likely to buy insurance. Cover is available for oil palm, cocoa, rubber, for several species of timber trees, as well as for tropical fruits such as durian, mango and mangosteen.
As with many other countries, the Malaysian experience with crop insurance has been mixed, but companies are taking a professional attitude to understanding the risks, and to the design of policies accordingly. A new initiative is a possible pool of commercial insurers to develop insurance for paddy rice[5].
A parastatal agency, the Mauritius Sugar Insurance Fund (MSIF) was established some 50 years ago in order to provide protection to the island’s sugar farmers against losses from cyclones. As experience has been gained, and staff trained, this programme has gradually taken on the coverage of other risks. For example, fire and excessive rain were added in 1974, and losses from yellow spot disease (only in conditions of excessive rain) in 1984.
The programme has also developed a sophisticated method for rewarding growers whose claims experience has been good for the insurer. All growers are placed, for each insurance/growing season, somewhere on a 100 point scale. Their position on this scale determines the level of premium to be paid, and the indemnity level they will receive in the event of a claim for that insurance period. The scale is dynamic, with movements up and down being dictated by claims experience.
Some 22 cyclones, on average, strike the Philippines each year, and of these four cause significant damage. The northern and central parts of the county are more affected than is the south, where the main perils for farmers are drought and pests. The present crop insurance programme grew out of an agricultural guarantee fund, which was operated by the Land Bank of the Philippines, the principal government bank servicing the agricultural sector. The insurance is operated by a parastatal entity, the Philippines Crop Insurance Corporation (PCIC), which began business in 1981, after a three year preparatory period.
Designed initially to provide risk management to borrowing farmers and their lenders, the PCIC also offers policies to self-financed farmers. Participation in insurance is compulsory for farmers in the higher-potential agricultural areas, for two crops, maize and rice. This element of compulsion has not resulted in a negative reaction by growers - probably because the premiums paid to PCIC, at approximately 8 percent for rice and 7 percent for maize, are heavily subsidized, by the government and by institutional lenders, so farmers pay only a proportion of these amounts[7].
The Syrian government has investigated introducing crop insurance, and is still (in 2004) understood to be undecided as to whether to direct the state-owned insurance company, a monopoly insurer, to develop and market crop policies.
A major constraint to the introduction of crop insurance is that the most important peril by far is drought. As is well known, drought is perhaps the most difficult peril to include in any insurance cover, especially in the early years of a programme, when procedures are still being developed, and when staff are gaining experience.
The Syrian position illustrates a classic dilemma that has fairly general applicability in arid and semi-arid countries. Officials understand that drought will be difficult to include at the start of any crop insurance programme, yet are well aware that unless insurance products cover this peril, then there will be a very negative reaction from farmers. This may justify investigating the applicability of one of the new developments in crop insurance, namely index (coupon) insurance products. For further details see section 2.5, New Insurance Products, below.
The major agricultural export crop of the Windward Is. is banana. The industry is made up of some 5 800 growers, the vast majority of whom are smallholders, cultivating between 0.5 and 5 ha. The number of active holdings is around 8 200 - some growers have more than one holding.
The main peril faced is windstorm. After some earlier attempts to establish insurance, the Caribbean Development Bank funded a feasibility study in 1983, which eventually led to the formation of WINCROP (Windward Is. Crop Insurance (1988) Ltd.). The ownership of WINCROP is vested in the industry itself, through Banana Growers’ Associations in the three participating islands. The company structure means that it has underwriting freedom and responsibility. WINCROP enjoys a good international reputation, and is able to negotiate re-insurance (to cover the risk of major hurricanes) on the international market.
|
[1] For certain information
provided in this chapter the author is indebted to William Dick and his
colleagues in PartnerRe Agricultural Services. [2] Economist, March 2000 [3] For further details see Roberts & Dick (1991) pp 61-78. [4] The social dimension is illustrated by a quote from a government official, describing the aims of the programme as being to “provide significant benefits not merely to the insured farmers but to the entire community, directly and indirectly through spillover and multiplier effects in terms of maintaining levels of production and employment, generation of taxes etc., and net accretions to economic growth”. [5] For information on this and other recent developments in a number of countries, the author is indebted to William Dick and his colleagues in PartnerRe Agricultural Services. [6] For further details see Roberts & Dick (1991) pp. 117-127. [7] These are the actuarially determined premiums required to meet expected indemnity payments. They are ‘pure premium’ figures, i.e. they do not include an administrative overhead. The costs of administration are met from income produced by the investment of funds of the PCIC, both from premiums paid, and, especially, from the fund initially provided by the government to establish the PCIC. The latter acts as an endowment fund for the Corporation. |
