Interview: Why should crop insurance lag behind in market entry?

It would not be wrong to think that a product that shifts risk from farmers to insurers would be an easier sell, given that the former are less able to handle risk than the latter. Likewise, it should be an easy sell for a product that stabilizes fathers’ incomes, incentivizes them to be more productive, and removes the burden on governments that might be called upon to subsidize them.

But crop insurance has yet to make a significant impact. Penetration is low, with many of the world’s 500 million smallholder farmers finding the product often unavailable or unaffordable. The market is also limited by its poor performance, with crop insurance premiums totaling only about $35 billion — the equivalent of just one to 1.5 percent of non-life premiums.

Recently, Reinsurance news sat down with Arsira Tumaprudtti, Head of Business Development at Agritask, to discuss the issues at hand.

Asked about the current state of crop insurance and where it stands in the industry and wider global economies, Tumaprudtti says it has yet to make significant inroads in more than a few nations. But Tumaprudtti calls the potential growth “enormous,” saying the market is expected to reach $53 billion by 2027, with a growth rate of 6.5 percent annually.

“Only a few countries,” she says, “enjoy the benefits of substantial and long-established government subsidy programs and already established insurance distribution infrastructures. While many such as the US, China and India tend to have high crop insurance penetration as a result, products tend to be highly regulated with less flexible pricing or product design. In other words, ‘one size fits all’ for most farmers.”

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There are also huge differences around the world. In Latin America, for example, there is a vibrant private sector without the need for subsidies. Meanwhile, in sub-Saharan Africa, only 3% of smallholders have agricultural insurance.

“Most of the solutions in Latin America,” says Tumaprudti, “still work in the traditional way, which is by obtaining data from a physical inspection of damage in a field or farm. The result is significant administrative and operational costs that generate prohibitive premiums, thereby preventing many farmers from purchasing crop insurance in the first place.

But in sub-Saharan Africa, says Tumaprudti, most farmers rely on small government subsidies, which has resulted in inadequate risk coverage and limited population coverage.

Thumaprudti added: “Furthermore, the insurance solutions available tend to be ‘parametric’ – with payouts dependent on external parameters such as the level of rainfall in a region, rather than actual conditions on the ground.” Although it is the only practical choice in many places, there is no doubt that the parametric. Most insurance premiums are too high for most farmers to afford, and private insurers are hardly motivated to set up the necessary distribution infrastructure or even to send workers to collect the field data needed to create suitable products.

Industry should, says Thumaprudti, push in this area, especially given the benefits this product has for stakeholders.

She says farmers won’t have to bear the brunt of climate volatility with this product, given that it shifts the risks from them to insurers. Crop insurance, she adds, is also adept at helping meet global demand for more efficient food production by helping farmers stabilize their incomes.

She continues: “In turn, this incentivizes farmers to acquire high-quality seeds and farm equipment, easily obtain credit from financial institutions to make improvements to farming practices, and positively impact the wider community by contributing to local incomes providers.”

She concludes: “Climate change is not going anywhere. As this becomes a major global issue affecting agriculture everywhere, the need to shift risks away from the poorest farmers and into more resource-rich sectors through crop insurance becomes increasingly urgent.”

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