Agriculture plays a key role in Bangladesh's development. Over the years, it has been leveraged well to reduce poverty. Growth in farm income has been a key driver of the country's success in poverty reduction. The farm sector is dominated by small and marginal farmers who comprise about 80 per cent of all farmers. Still, these farmers have the least access to credit, extension and other essential services. More importantly, these farm households are vulnerable to weather-related events that threaten their farm activities. Typically such incidences are quite regular; and they have few resources at their disposal when these events occur. In many cases, the result is a loss of income for these households, and they have no channel or mechanism for recouping the losses. They cope with unexpected events by selling assets and turning to family members or friends; otherwise, they have nothing to recoup the losses.
The life of small farmers is thus marred by difficulties, and they face many constraints that limit their economic potentials. Besides uncertain weather conditions affecting harvests, these challenges include insecure land ownership limiting farmers' propensity to invest, restricted access to capital and farm inputs such as fertilisers or seeds, unfavourable terms of trade, and price fluctuations.
Agricultural insurance has the potential to address some of these constraints by facilitating access to means of production and changing behaviour by reducing uncertainty. One must, however, realise that agricultural insurance is not a complete solution. Rather, it is one component of a risk management strategy where constraints such as lack of access to finance, improved seed and markets can also be addressed. For example, where drought is a severe problem, irrigation schemes maybe a more cost-effective approach.
Crop insurance programmes are structured to support different types of losses. Damage-based indemnity insurance is calculated by measuring the percentage of damage in the field soon after the damage occurs. Yield-based crop insurance allows the farmer to insure a percentage of their average yield; if the actual yield is less than the insured yield, a pay-out is awarded. Crop revenue insurance guarantees the farmer a certain level of revenue from the insured crop. This insurance protects the farmers from shortfalls in the yield and also from market price fluctuations.
Index-based insurance is calculated based on measures provided by meteorological stations, satellite data, or regional-level yield data. The general characteristics of index-based livestock insurance programmes are similar to those for weather and area yield. For example, the index-based livestock insurance (IBLI) project of the Consultative Group for International Agricultural Research (CGIAR) in Africa uses forage measurements taken from satellites to identify seasonal forage availability. If forage falls below a certain level, pastoralists can use the pay-outs to buy extra feed, medicine for their livestock, or take other livelihood protection measures.
Coverage can enable farmers to invest in riskier but potentially more lucrative farm activities. Timely insurance pay-outs after crop losses can help small farmers in softening consumption and prevent the sale of assets. Insurance can also be a catalyst, as lenders are more likely to extend credit to farmers covered by insurance, allowing them to make productivity-enhancing investments.
Pilot tests show how successful agricultural micro-insurance can become a sustainable risk management solution. In reality, the demand is still low as many farmers underestimate the severity and frequency of risks. The level of insurance education is also limited. There exists a lack of trust in insurance providers, and there is an over-reliance on traditional coping mechanisms like selling assets or borrowing from relatives or friends after a disaster or loss.
This low demand makes the provision of sustainable agricultural micro-insurance challenging, particularly when offering insurance as a stand-alone service. The success of most micro-insurance lies in combining insurance with other services, such as loans, in-kind seed payouts, and government programmes that improve soil conditions and infrastructure.
Because of the variety of constraints the small farmers face, micro-insurance would be more efficient when embedded in a comprehensive disaster risk management strategy. Some weather-based index products use weather parameters like rainfall to trigger payments even before an event, so that farmers can take preventive measures to protect their crops.
Crop insurance ultimately appeals most when offered alongside other services like weather forecasts through text messages, extension services like price and other market information. These, coupled with basic agricultural advice such as on optimal planting dates for crops, are considered highly valuable to small farmers. For example, some programmes emphasise all aspects of risk management from prevention to creating financial reserves for offsetting future risks. Similarly, if unable to pay the insurance premium in cash, farmers are allowed instead to engage in risk reducing labour, such as construction of small water retention basins and forestation.
The potential of agricultural insurance lies in contributing to the prevention and management of risks and modifying the behaviour of small farmers towards increased and more lucrative investments while facilitating their use of additional financial services.
BANGLADESH SITUATION: The micro-insurance sector is relatively new in Bangladesh. There are many obstacles that need to be overcome for effectively reaching remote communities. These include small size of the market, lack of client familiarity with financial products, lack of necessary infrastructure, and limited demand. Basis risk - where indices measured do not perfectly mirror the experienced loss - remains a key issue. From the consumer perspective, efforts need to be sustained to promote financial literacy in order to address low demand; and insurance providers must continue to focus on creating products that are both valuable, sustainable and tailored to the context-specific needs of clients.
Crop insurance has become more of a necessity for the small farmers today, as exemplified by the total crop failure in the haor areas during 2017. In such circumstances, crop insurance can serve as a life saver by providing financial assistance when it is required most.
To be successful, the crop insurance process should be made easy and understandable, and the insurance package should be attractive to the small farmers. A crop insurance policy alone might not be enough; a multi-level approach that makes the system more robust may be more useful. This would provide crop insurance in the form of a package rather than just one policy. For example, there may be a linkage between crop insurance and bank credit. At the same time, non-governmental organisations (NGOs) practising microfinance can offer micro-insurance as well, which may be a more sustainable approach.
Crop insurance may envisage a voluntary, mandatory or compulsory approach. In the case of a voluntary approach, participation is optional for a farmer who is eligible to be insured. In compulsory approach, all farmers, who grow the insurable crops over more than a minimum prescribed area, may be included. In Bangladesh, crop insurance may be compulsory for farmers who borrow from banks and other financial institutions and also receive subsidies from the government.
The compulsory approach has many advantages. The problem of adverse selection is reduced significantly, and there is reduction in the cost of insurance. There may, however, be dissatisfaction among the low-risk farmers who would have to cross-subsidise the high-risk farmers. To run crop insurance schemes smoothly, grassroots level monitoring and networking is essential. Different stakeholders like local level organizations may be engaged for the purpose. With insurance, the farmers will be able to raise investments in farm production in order to produce better quality products.
Micro-insurance is a positive development, but there are many hurdles. The infrastructure like weather stations as well as the software has to be put in place alongside consistent collection of data in a transparent manner. At the same time, there has to be cost-effective ways for obtaining micro-insurance. Furthermore, micro-insurance needs a wide base of customers for becoming effective. A certain volume of business is necessary for it to be viable. This would require educating the farmers about the value of insurance. The government should develop an appropriate policy framework to ensure that the industry is regulated properly and those selling financial products are not misleading the customers.
Micro-insurance is a means to an end. It is only one component of a broader and well-balanced disaster risk management strategy. In many situations, prevention and adaptation is more cost effective than insuring in unsustainable conditions. A holistic approach to sustainable risk management solutions is thus required to address the small farmers' multiple woes that hold them back from investing.
In reality, index insurance is still a field of constant innovation; it is evolving to provide reliability and value to the small farmers. Although the technical aspects of index insurance require just solutions, one equally important aspect is the constraint and opportunity landscape within which the small farmers operate. As such, the weather index insurance framework should not focus exclusively on product design issues at the expense of broader market development challenges. Tailored interventions are necessary within a well-understood domain of key constraints and associated opportunities.
In Bangladesh's small farmer-dominated agriculture, adoption of index insurance by individual farmers as a stand-alone solution is not likely to be sustained. Small farming is a complex operation and insurance is only one component of risk management for this extremely vulnerable group. Besides, limited empirical evidence that is available suggests that parametric insurance solutions for the small farmers work best when they are integrated into a broader programme for development and disaster risk management.
Index insurance can develop its full short-term potential when small farmers can receive credit effectively, and quality farm inputs and farming know-how are available to them. Ideally, formal savings opportunities should also be made available, which would allow small farmers to gradually build up assets as well as financial buffer. A longer term development strategy should also address issues related to land property rights, trade policies, provision of quality healthcare, and improved infrastructure. This would allow small farmers, for example, to store their harvests and bring the produce to markets at times when prices are high.
For achieving 'quick wins', strengthening the small farmers' organisations could be a good option along with mechanisms to extend the benefits of micro-insurance to the population in need. Organising small farmers in efficient groups or cooperatives or associations has many advantages beyond involving them in micro-insurance. The groups can facilitate receiving extension services, marketing products, purchasing inputs collectively, and improving other aspects of small farmer scenario.
Dr. Mustafa K. Mujeri is Executive Director of the Institute for Inclusive Finance and Development (InM). [email protected]
