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Innovative agricultural insurance products and schemes

Topic :

There has been a considerable revival of interest in agricultural insurance recently. Reasons for this include:

  1. An increasing incidence of crop-damaging weather events of extreme severity, exacerbated by global warming and increased specialization and market integration.
  2. Increasing commercialisation of farming, with greater levels of financial investment. As a part of this commercialization trend, greater use is now being made of contract farming arrangements, where insurance is one of many services provided to growers, along with inputs.
  3. The WTO regulations which exempt governments from subsidy reduction commitments as far as assistance to agricultural insurance is concerned.
  4. The availability of new insurance products. To reflect the dynamism of the farming sector and its environment, some new insurance products have been introduced in the last decade, such as crop revenue products and index or derivative products.
  5. Accidental introduction of exotic pests/diseases. This affects all countries where agriculture is an important part of the economy. Insurance can help to address risk of a breakdown of protection measures.
  6. Expanded quality and food safety concerns for farm products and increasing environmental protection requirements, such as stricter rules for use of fertilizers, herbicides and medicines for animals. These trends increase production risk.
  7. Liberalization of agricultural trade. This can be expected to lead to price volatility and to greater exposure of farmers to competitive market forces and income instability.

In light of this renewed interest in and demand for agricultural insurance, this paper first reviews how agricultural insurance products have evolved and then examines innovative products which have recently been developed and how they have been applied in practice. Chapter II reviews the evolution of traditional products of agricultural insurance, mainly insurance against yield risk and their inherent problems. Chapters III then examines a range of insurance products and schemes that have been developed in the past decade and gives examples of their application. Chapter IV provides details of a number of alternatives to insurance which farmers may use and Chapter V includes a summary and policy recommendations.

One major conclusion is that encouraging insurance mechanisms is preferable to ad hoc disaster aid. Disaster aid has counterproductive effects since it encourages farmers to neglect their responsibility for managing their own business risk. It tends to encourage production in marginal situations by indiscriminately covering crop losses, e.g. in fragile, arid countryside or flood-prone wetlands. In contrast, crop insurance actively reduces risk exposure by promoting public and private risk management.

  • Resource type
  • Author Myong Goo KANG
  • Organisation
  • Year of Publication2007
  • Region
  • LanguageEnglish
  • Number of pages64 pp.
  • EditionAGSF Occasional Papers

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