Need for crop insurance

Published Jan 27, 2013 09:22pm

FARMING is vulnerable to unpredictability of nature, and the impact of natural disasters and other risks to farmers cannot be taken lightly. In case of natural calamities, farmers bear the loss of their produce/crop and face debt defaults.

Hence, the interests and investments of farmers need to be safeguarded by crop insurance. In countries having multiple risk insurance schemes, government`s intervention or its support to agricultural insurance operations has been regarded justifiable and inevitable due to market failures.

Such support has been provided in the form of subsidies on premium to farmers, operational subsidies to private insurers to cover some of the high administrative costs associated with agricultural insurance contract, underwriting and subsidised reinsurance.

The method of intervention also varies from country to country. For example, in Canada, Japan and Philippines the insurance schemes are operating under a central government or local government body, while in the United States, Spain and Mexico, they are operated under a partnership between government and private insurance companies with the state assuming the role of re-insurer.

In India, the governments allows 50 per cent subsidy on premium to small and marginal farmers. Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others, to protect themselves against either the loss of their crops due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural commodities. In spite of such challenges, agricultural insurance is becoming ever more important in developing countries.

Agricultural production and farm incomes in Pakistan are frequently affected by natural disasters such as droughts, floods, cyclones, storms, landslides and earthquakes. Susceptibility of agriculture to these disasters is compounded by the outbreak of epidemics and man-made disasters such as fire, sale of spurious seeds, fertilisers and pesticides, price crashes etc.

All these events severely affect farmers through loss in production and farm income, and they are beyond the control of the farmers. With the growing commercialisation of agriculture, the magnitude of loss due to unfavorable eventualities is increasing. The question is how to protect farmers by minimising such losses.

Despite technological and economic advancements, the condition of farmers continues to be unstable due to natural calamities and price fluctuations. In some extreme cases, these unfavorable events become one of the factors leading to farmer’s suicides which are now assuming serious proportions.

Agricultural insurance is one method by which farmers can stabilise farm income and investment and guard against disastrous effect of losses due to natural hazards or low market prices. Crop insurance not only stabilises the farm income but also helps the farmers to initiate production activity after a bad agricultural year. It cushions the shock of crop losses by providing farmers with a minimum amount of protection. It spreads the crop losses over space and time and helps farmers make more investments in agriculture.

It forms an important component of safety net programmes as is being experienced in many developed countries like the US and Canada as well as in the European Union. However, one needs to keep in mind that crop insurance should be part of overall risk management strategy. Insurance comes towards the end of risk management process. Insurance is redistribution of cost of losses of few among many, and cannot prevent economic loss.

In Pakistan crop insurance scheme has been launched through the Bank of Punjab and two national insurance companies but it is hoped that with the passage of time, other banks and insurance companies will also join it. Under the scheme, if natural calamities like flood, drought, etc., hit a district, it would be declared a ‘disaster area’ and 50-70 per cent payment along with relief in agricultural credit and exemption from the provincial taxes would be provided to the farmers.

Different companies are providing insurance policies for specific crops in particular areas. Many companies are offering insurance for seasonal crops which only covers for certain season and crops. Preferably it is best to get a crop insurance policy on annual basis which will provide insurance cover for all the crops during a year.

Crop insurance is an important way to protect small farmers from harm. However, the business model is complex. Insurance schemes are only likely to work where there are fully operational meteorological services. At the national level, agricultural extension services are also likely to make a difference. In short, developing countries need comprehensive risk reduction packages.


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