Learnings from Global Best Practices in Agriculture Insurance

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1 Learnings from Global Best Practices in Agriculture Insurance Presented at IFPRI-IIDS Workshop on Best Practices in Agriculture Insurance in South Asia, at Kathmandu, Nepal Presented by: VIJAY SARDANA MBA (IIM-A), M.Sc. (Food Tech.)(CFTRI), B.Sc. (Dairy Tech.) PG Diploma in International Trade Law and ADR (ILI), Justice (Harvard) Bio-economy, Agribusiness & Value Chain Expert Vice President & Head Food Security & Agribusinesses, UPL Limited ;

2 Disclaimer: Information used in this presentation is based on primary and secondary sources. I must acknowledge the following organizations: IFPRI - IIDS European Union World Bank International Association of Insurances USDA FAO AIC and many others 2

3 Agriculture Insurance - A unique inbuilt Challenge - Agriculture & Livestock Insurance means: Insuring Developing Biological Objects Risk profile Insured object itself doesn t exist at the time of insurance Risk Factors : The object insured can differ significantly from the one that was accepted for insurance. Example: The animal s weight or crops weight usually increases; but at the same time the purpose or usage of the crop or animal can change. Example: Oilseeds, maize, sugarcane, poultry, etc. 3

4 Risks in Agriculture Insurance Agriculture Insurance: It deal with plants that should form the yield are insured and this yield should be obtained in a definite form and in a definite state by the end of the insurance contract. Livestock Insurance : It deals with the transformation of biological organisms as by the end of the insurance contract. Important: It means peculiarities of the agricultural insurance needs a special approach to the risk underwriting. 4

5 Types of Agriculture Insurance The peculiarity of the agricultural insurance is the possibility of catastrophic events occurrence (the systematic risks such as a drought, freezing in the wintering period, etc.) when nearly all clients insured can lose crops or livestock (Viral attack like Bird flu). This is one reason that globally there are no uniform approach for Agriculture Insurance because Risk profile varies from region to region. This will have its own cost implication. 5

6 Types of Agriculture Insurance (1) 6 Single-risk insurance: Single-risk insurance covers against one peril or risk. Combined (peril) insurance: Combined insurance means a combination of several risks covered (two or more risks, mostly with hail as basic cover). In some countries this type of insurance is also referred to as multi-risk insurance. Yield insurance: Yield insurance includes yield guarantee, based on regional average yield or on individual historic yield, where the main risks affecting yield (e.g. drought) are comprised. In some countries this type is also called combined or multi-peril insurance. Revenue insurance: Revenue insurance combines yield and price risks coverage in a single insurance product. It can be product-specific or whole-farm.

7 Types of Agriculture Insurance (2) Income insurance: Income insurance covers income, so it covers yield and price risks, but the costs of production are also considered. Usually this type of insurance is not product-specific, but whole-farm income. Whole-farm insurance: This type consists on a combination of guarantees for the different agricultural productions in a farm. Depending on the coverage of the guarantees, it can be whole-farm yield insurance, or whole-farm revenue insurance or whole farm income insurance. Area yield index insurance: Indemnities are computed from the decrease of the average yield in an area. 7

8 Types of Agriculture Insurance (3) Area revenue index insurance: Indemnities are computed from the decrease on the product of the average yields and prices in an area. Indirect index insurance: Indirect index insurance reports to those indices of yields or vegetation computed from weather based indices, satellite images and others. Stabilization accounts Stabilization accounts are a form of self-insurance. They consist on individual accounts where farmers put an amount of money every year, which they can withdraw in a year of big losses. Stabilization accounts can be based on yield, revenue or other indices. 8

9 Single & Combined Insurance Scheme 9

10 Income & Yield Insurance Scheme 10

11 Calamity Fund & Stabilization Accounts 11

12 Index based Insurance Scheme 12

13 Agriculture Insurance still evolving Reasons are: Absence of industry standards, Lack of skills to understand complications of agriculture Insurance companies carry out the insurance procedures in different ways, Complicated settlement procedure Premium rates not making sense to users Introduction of the too many limiting clauses to the insurance contracts, Complicated texts of the contracts 13

14 Implications Poorly designed Insurance Products Poor Quality Excessive premium Poor coverage Conflicts at the time of settlements Lack of trust in Insurance products Loss of reputation of the organization 14

15 Caution for Agriculture Insurance Planners Ensure provision of quality services to the insurers, beneficiaries and plaintiffs The insurance industry, as well as the other components of the financial system, changes under the influence of the social, technological and global economic factors. Consider these while developing agriculture insurance policies. The systems of the insurance supervision and insurance practice should be constantly improved 15

16 Challenges relate to Agricultural Insurance Defining needs & type of agricultural insurance Single or multi-peril insurance Range of risks covered Gaps in the legislation Rules for insurance supervision 16

17 What Should be done to create effective insurance products? Develop guidelines on establishing crop yield for insurance purposes Develop principles of sum insured calculation Develop mechanism to apply the prices for agricultural products that are calculated in a special way for insurance purposes. Account the amount of the production costs Calculation of premium rates according to the risk zones for certain crops (groups of crops), animal species and different types of insurance products Develop general supervision within the overall legal system 17

18 Open for Discussion Copy of this Presentation can also be found on my Thank you very much for giving me this opportunity. 18

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