Agriculture is the single largest sector of Pakistan’s economy and it contributes around 24 per cent to the country’s GDP, besides engaging about half of the total employed labour force and supporting directly or indirectly 70 per cent of the population for sustenance.

It is also the largest source of foreign exchange earnings and meets raw material needs of the country’s major industries like textile and sugar. Not surprisingly, the state of Pakistan’s economy largely depends on the performance of its agriculture.

Within the agriculture sector, crop farming is the major sub-sector accounting for more than two-third of its GDP. Performance of this sector thus sets the tone of the overall performance of the agriculture sector and consequently of the economy.

Crop farming is an open-roof industry. More than any other activity, crop farming is exposed to vagaries of nature such as floods, excessive rain, drought, hailstorms, windstorm etc, which yet remain largely beyond control. Uncertainty of crop yield is thus one of the basic risks which every farmer has to face. A serious crop failure means not only the loss of farmers’ expected income but he may not even recover his investment in the crop. If crop farming is his only or major source of income, it means a financial catastrophe for him.

For humanitarian and socio-political considerations, governments have to undertake relief measures for farmers. In case of borrowing, farmers’ huge debts may have to be rescheduled or written-off by the lending agencies, as has been done recently by the government in case of small and medium farmers.

Insurance of crops against losses due to natural factors is an alternate and effective device for providing financial protection against the uncertainties of crop yield. For relatively small payments (premium) farmers can buy the security of financial protection against large crop losses. In contrast to payments received under government relief programme, farmers not only get compensated as a matter of right but these losses are borne wholly or partly by the farming community itself.

For these and other reasons, the need of a crop insurance (CI) programme for farmers has been felt in both the developed and the developing countries. To date there is a wide variety of CI programmes already operating in North America, Europe, Asia, etc. In Asia alone, CI programmes exist in nine or more countries including three in the Saarc countries namely Bangladesh, India and Sri Lanka. The CI programme in Sri Lanka has been in operation for almost four decades and after Japan is the oldest in Asia.

In Pakistan, the interest in CI was generated when Sri Lanka initiated a pilot project for paddy in the late 1950’s. In 1959, an FAO consultant was hired to advise the government about the feasibility of introducing a CI programme in the country. He made a qualified recommendation for introducing CI on a pilot scale. Since then the issue has been discussed and deliberated upon off and on by various government agencies. There has also been repeated exchange of proposals between the government and the private insurance industry in this regard. However, except for the Agriculture Development Bank pilot cotton CI scheme of 1986 which was tried for a brief period on a very limited scale, for one or the other reason, farmers of this country have not had the benefit of a CI programme so far.

In the long history of crop insurance proposals in Pakistan, basically two types of programme have been under consideration;

1) comprehensive crop insurance scheme (CCIS) and

2) crop catastrophe scheme (CCS). The CCIS is characterized by (a) wide range of perils or risks covered and (b) wide range of losses covered - low franchise. The comprehensive scheme is not only technically complex, difficult to administer, but also very expensive. The proposed premium rates for this type of scheme are generally very high. For example,the National Insurance Corporation in its CI proposal of September 1996 had quoted a flat premium rate of 9 per cent. Obviously, such a programme would be too costly for an overwhelming majority of our farmers, unless heavily subsidized. However, in view of the severe financial constraints that the government is in, a subsidy seems unlikely to be forthcoming.

Crop catastrophe schemes are characterized by (a) high franchise of 50-70 per cent and (b) losses indemnified only in a calamity situation, when the magnitude of losses are large and widespread such as in case of floods.

The CCS is based on the assumption that smaller losses can be managed by the farmers themselves through their traditional means. Since the cost of covering the small losses is disproportionately high, it makes the programme unaffordable for the small/marginal farmers. Experience in both the developed and the developing countries and studies by the FAO support these conclusions. Therefore, by covering only those losses which are beyond the capacity of the farmers to sustain, we can bring down the cost of Insurance programme to a level (less than 3 per cent) which he can afford perhaps even without government subsidy. Thus proposals were developed for the CCI the private insurance companies’s and submitted to the government through the ADBP and the Sate Bank of Pakistan. The crop catastrophe scheme (CCS) was one such proposal submitted to the ADBP in 1989 for consideration. This proposal was based on a study of the production cost of major crops by the East West Insurance Company Ltd and their reinsurers (Munich Re) in consultation with the Agricultural University, Faisalabad. From this study it was concluded that although all crop losses meant financial hardship to the farmer, those in excess of 50 per cent were beyond his capacity to sustain. When the extent of his crop loss was 70 per cent or more, it spelled financial catastrophe for farmers. Some of the advantages of the scheme providing only basic cover such as above are as follows:

(a) it is economical for farmers; (b) low or almost no subsidy required and (c) it is simple and easy to operate and administer.

A scheme on the above lines can be a good beginning programme for development of a comprehensive scheme on sound basis in the future, which should be our goal. This would also allow the insurance industry to gain operational experience, collect reliable data, develop required infrastructure and get procedural requirements sorted out. This is important as crop insurance is a highly technical and complex undertaking, as compared with other types of insurance business. Therefore, it would be desirable for us to tread these ‘unknown waters’ with caution.

The writer is Chief Agronomist at the East West Insurance Co Ltd.