1. Food and Agriculture Organization
Of the United Nations
Agricultural insurance
Training of Trainers Workshop to
Enhance Pro-poor Policy Formulation
and Implementation at Country Level
21 – 25 September 2015
Bangkok, Thailand

2. 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

3. 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 200
Boy Girl 100
Girl Boy 100
Girl Girl 0

4. Parable continued
• 3 families: logical possibilities
4
Family 1 Family 2 Family 3 Earnings
Boy Boy Boy 300
Boy Boy Girl 200
Boy Girl Boy 200
Boy Girl Girl 100
Girl Boy Boy 200
Girl Boy Girl 100
Girl Girl Boy 100
Girl Girl Girl 0

5. 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

6. 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

7. 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

8. 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 diversification
B. Diversification of income
sources
C. Contractual arrangements such
as sharecropping, bonded labour
D. Adoption of hardier crop and
livestock varieties
2. RISK-COPING STRATEGIES I.E.
STRATEGIES TO STABILIZE
CONSUMPTION
A. Saving
B. Access to credit from formal and
informal sources
C. Marriage outside the village and
other means of building alliances
D. Reducing consumption
E. Risk sharing arrangements , i.e.
insurance 8

9. 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 competitiveness
9

10. 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

11. 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 assess
11

12. 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

13. 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

14. 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

15. 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

16. Public subsidies
• Should be oriented to providing public
goods
– Market development
– Legal and regulatory reform
– Reinsurance
– Well managed disaster relief funds
16

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. Agricultural insurance:
Case study of India
• 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

24. Agricultural insurance:
Case study of India
• 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

25. Agricultural insurance:
Case study of India
• 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

26. Agricultural insurance:
Case study of India
• 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

27. Agricultural insurance:
Case study of India
• 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

28. 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

29. THANK YOU
29

30. 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