Insurance can be seen as a wiseman arrangement of transferring a future loss to someone…
Agricultural producers have series of risks affecting the income and welfare of their households. These are mainly production risks in relation to: weather conditions, pests and diseases and market conditions. Consequently, the income stability of agricultural stakeholders can be affected. The economic stability of an entire rural area can be jeopardized by crises caused by different types of natural disasters, from climatic occurrence to livestock or plant diseases. Weather is an important production factor in agricultural, which unfortunately, can hardly be controlled. In fact, unfavourable weather conditions constitute a major risk in farming operations. Drought or excess rainfalls are responsible for bad harvests all over the world. Besides, it seems that the volatility of temperature, precipitation and the occurrence of extreme weather in the last decade are likely to continue due to global climate changes. This has lead to unstable farm incomes in countries with strong yield variability. Perhaps, the most obvious impact of weather risk is on crop yields, but its relevance is not limited to crop production. The performance of livestock farms, the turnover of processors, the use of chemicals and fertilizers and the demand for many food products also depend on the weather.
MEANING OF AGRICULTURAL INSURANCE
Agricultural insurance is the insurance policy which provides compensation to farmers for losses suffered. For example, 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.
Insurance is one of the tools that farmers and other stakeholders can use to manage risks that are too large for them to manage on their own. Part of the risk is transferred to another party, who takes it in return for a fee (or premium).
Agriculture has always been a risky business. Unlike the Industrial sector, it is subject to the vagaries of the weather. The variations in productivity induced by nature cannot be fully accommodated by farmers. It is true that from time immemorial farmers have devised measures to limit these risks: crop rotation and diversification, inter-cropping, use of low yield but hard varieties, tillage systems and share tenancy. Despite these practices, risks are not totally taken away.
IMPORTANCE OF AGRICULTURAL INSURANCE
- Agricultural insurance plays an important role in stimulating investment in agriculture and in stabilizing farmers’ income.
- Insurance can assist farmers in accessing new opportunities by improving their ability to borrow either in cash or in kind as credit facilities. In doing so, farmers may potentially experience safer and possibly higher returns.
- Another area where insurance is of relevance is in improving agricultural technology. New technology usually requires additional borrowing and investment and the farmer may be reluctant to enter into additional commitments since he is not sure of the production results. He therefore tends to take sub-optimal decisions. With the security of insurance, the farmer might be more willing to take a chance with efficient technology as his risks are now being shared.
VARIOUS AGRICULTURAL RISKS
Risk in agriculture can be discuss under the following headings:
- Human or personal risk: The farm operator can get health problems or even die.
- Asset risks: Like theft, fire and other damage or loss. Losses are generally covered by insurance or in case of calamity the public disaster aid may help to reduce the losses outcome.
- Production or yield risk: Most of the time the weather is responsible, but it also includes risks like plant and animal diseases. Yield risk is measured by yield variability. In turn, yield variability for a given crop differs from region to region, while it is determined by the soil type, the climate and the production method. Regarding livestock the risk is less considerably, because weather has a minimal influence.
- Price risk: This is the risk that result from the fall or rise in prices after a production modification has been done.
- Institutional risk: This is associated with policy changes which interfere with agricultural issues and that can have a negative impact on farm revenue.
- Financial risk: This refers to the possible increase of interest of a mortgage, insufficient liquidity and loss of equity. The above mentioned risks are often interrelated, so one event can create several impacts on other realities. All the categories of risks have an effect on the income of the stakeholder.
TYPES OF INSURANCE POLICIES FOR AGRICULTURAL PRODUCTION
1) Crop Insurance: Crop insurance is purchased by agricultural operators, including farmers, ranchers and other stakeholders to protect themselves against the loss of their crops either due to natural disasters, such as hail, drought, and floods or the loss of revenue due to declines in the prices of agricultural commodities.
Since the production of crops is the most important segment of Agriculture, crop insurance is the major component of agricultural insurance.
Scope of Crop Insurance: The most common perils to which crops are exposed to are:
- Fire (including lightning).
- Frost (including snow).
- Windstorm or atmospheric disturbance (including hurricane, tornado, cyclone or typhoon).
- Rainstorm (including excessive or unseasonal rain).
- Malicious damage (including vandalism).
- Convulsions of nature (such as: earthquakes, landslides, avalanches or volcanic eruptions) and pests, insects and diseases.
When the damage occurs at an identifiable time, and is of short and sudden duration, such as fire, hail, and convulsions of nature, the perils are manageable. Frost, windstorm, rainstorm and flood are the intermediary categories of risks where the cause of the loss, or the proximate cause, is still determinable but the farmer has an influence on the extent of the loss.
Crop insurance policy can be broadly grouped into two categories
- Single or named peril.
- Multi-peril or comprehensive or all risk.
A policy is regarded as single or named peril when one or a few identifiable and specific perils are insured. And as multi-peril or all risk when compensation is provided if the yield falls below a specified point. Conceptually, multi-peril insurance is not the same as all risk. However, in practice, each of the perils influences the other in a multiplier manner, and when a large number of perils are insured it almost becomes an all-risk cover, hence, the two are treated in the same category.
2) Livestock Insurance: Livestock insurance has been defined as animals kept or raised for use or pleasure. Livestock products, namely meat and dairy products are an important source of nutrition. Livestock insurance is one of the simplest of the various forms of agricultural insurance. This is evident from the fact that it has been practiced in different forms for a long time and is the genesis of agricultural insurance. Apart from its developmental role, it provides an opportunity to the insurance industry to make a meaningful entry into the rural areas. The significance of livestock insurance is accentuated by the fact that, in most of the developing countries, efforts are being made to improve the genetic quality of indigenous animals by importing animals of high yielding breeds, particularly breeders. The imported animal is a high risk since it may not readily adapt to the new environment and climate, but the offspring generally do so. Insurance of the imported animals will facilitate the transition to improved breeds and thus the attainment of higher productivity.
It should be noted, however, that insurance of imported animals only is anti-selection against the insurance company and could lead to the collapse of the livestock insurance scheme. Insurance of imported animals should therefore be provided together with that of domestic animal. It is significant to note that, unlike crop insurance, livestock insurance does not create a serious financial burden for the insurance company.
3) Farm Vehicle Insurance: This includes tractors, trailers, power tillers, harvesters, threshers, pumps, pedal cycles, windmills, solar cookers and heaters and biogas units. These and similar mechanical devices are gradually entering the agricultural sector of developing countries. The level is admittedly still low. However, the rate of increase is higher in the developing countries than the developed countries of the world. Premium rates and terms and conditions of insurance for tractors, trailers and power tillers are determined in some countries under the motor insurance tariff. If this is not the case, either the appropriate authority or the insurance company may finalize the terms and conditions.
4) Life assurance (Farmers, Farm workers and Farmer’s household): Life assurance deals with insurance of human life either in death, retirement and disability. It has to do with situation that will definitely happen but when and how it will happen is not known. The policy holders are assured while they are alive and their dependants they left behind after their demise will be provided with financial compensation. It is long time insurance contract because it runs for not less than five years and above. The insurance cover that fall within the group of life assurance are:
- Term Assurance.
- Endowment Assurance.
- Whole Life Assurance.
- Personal Accident Assurance.
Premium is the consideration given by the insured in return for the insurer’s undertaking to compensate or indemnify the insured in the manner agreed on the happening of a specified occurrence.
In agricultural insurance policy, the determination of the premium is of utmost importance. This is so, because sufficient revenue has to be generated to meet the payment of claims, but on the other hand, the premium should be perceived as reasonable and affordable.
The losses vary from year to year and an annual average based on historical data of a few years has to be first established. This may have to be modified to take care of the trend of losses, whether increasing or decreasing, to determine the quantum of losses expected to be paid in the coming years. In other words, in estimating the annual expected losses likely to be faced in the coming years, the past pattern of losses may have to be modified, taken into account the changes in farming technology and climatic changes.
MEASUREMENT OF INDEMNITY
Indemnity is the mechanism by which insurers provide financial compensation to the insured in an attempt to place the insured back to the position he was before the loss. The indemnity payable in respect of livestock and farm produce is the local market price and where the farm produce is for sale it is usually based on the market price less processing, handling or transportation cost which are saved from its destruction. Any cost property which is for consumption at the farm such as dairy cow, straw, feedstuffs, the indemnity is the cost of replacement which must take into account any additional cost that will ensure replacement of such farm stock at the farm.
PROBLEMS OF AGRICULTURAL INSURANCE
- It is evident that insurance is not a panacea for the problems of the rural sector. Insurance in itself cannot increase productivity or be a source of financing, although it can play a role in enhancing both. Other basic issues such as an effective network of extension services, supply of inputs, storage and marketing facilities are important. Insurance can not be a substitute for deficiencies in these areas.
- There are understandable limitations that prevent rapid growth of insurance business. A large number of insurers in developing countries are undercapitalized. Consequently, their capacity to assume risks is limited.
- Reinsurance for agricultural risks is not easily available.
- Skilled personnel, at both the managerial and operational levels, are scarce.
- Lack of adequate information. Farmers need to be convinced of the benefits of insurance before they accept it.
- Uncertainty of weather conditions.
- Some losses occurred due to natural disaster which is know as an act.