Crop insurance scenario in Banagladesh

                                                     Definition:

    Crop insurance: Crop insurance is a valuable tool to protect against financial risks stemming from crop damage due to unforeseeable hazards – droughts, floods, pests, and so on. The mechanics are quite simple – a farmer can take out an insurance policy on his expected yield of crops, and pay a fixed premium every month to the insurance company. If bad weather results in under production, or destroys the farmer’s crops, the insurance policy pays out, ensuring that the farmer is protected financially and is not left with very little income for the year.

Livestock insurance:
Livestock insurance mainly refers to the insurance of horses and cattle. This insurance provide cover against death of animals, like bulls, buffaloes, cows and heifers, arising as a result of accident, disease, parturition or pregnant condition, as the case may be.

Present scenario of crop and livestock in Bangladesh:

Given Bangladesh’s reliance on its agricultural sector, and its propensity for natural disasters, crop insurance schemes can play a crucial role in stabilizing and promoting food production while reducing the likelihood of sudden spikes in rural poverty.

Although the concept of crop insurance has been around for decades, its applications in most developing countries fail due to lack of planning and implantation. Crop insurance was implemented in Bangladesh in 1989 as a government program, but was shut down in 1995 after massive losses. Recently, BRAC has been proactive in its efforts to reintroduce insurance for farmers, and the government is also planning to restart the program.

There are many potential missteps to the success of such programs. Insurance works by spreading individual risks across a large pool of buyers. Because of Bangladesh’s numerous rivers and flat geography, it becomes harder to spread these risks – when flooding occurs, a large segment of the cultivated land would likely be affected, triggering payouts that may cripple the insurance providers. Raising the premiums can prevent this problem, but finding a rate that is not cost-prohibitive to farmers is a matter of detailed analysis and research.

         Livestock is a growing sub-sector. Its shared of agricultural GDP represented by livestock in Bangladesh rose from 7.6% in 1974-75 to 12.9% in 1998-99, mainly due to growth of the poultry sub-sector and to a lesser extent the dairy sub-sector, and has been estimated at nearly 16% in 2004 (GOB, 2004). This share is predicted to rise to 19.9% by the year 2020. The growth rate in GDP in 2003 for livestock was the highest of any sub-sector at 4.5%, compared to 3.2% for crops and 2.3% for the fisheries sub-sector. These changes have been promoted by a rapid growth in demand for livestock products due to increases in income, rising population numbers, and urban growth. This phenomenon has been referred to as the Livestock Revolution. The importance of livestock production has increased in Bangladesh as witnessed by the growth of the sub-sector over the last two decades and the contribution to employment in the country. In 2005, the numbers of livestock in Bangladesh are estimated to be 22.6 million cattle, 1.06 million buffalo, 18.4 million goats, 2.38 million sheep, 164.1 million fowls, and 13.5 million ducks (DLS, 2005). Poultry and dairy farming has certain specific advantage over crops, fisheries and forestry. They require less land, least influenced by seasonal change, and the supply of animal origin food is disproportionately low against high demand. The current intake per capita of animal protein in Bangladesh is less than 2g per day, against the FAO recommendation of 28g per day. According to Bangladesh Economic Review (2004), the growth rate in GDP in 2003-2004 for livestock was the highest of any sub-sector at 4.48%, compared to 2.88% for crops and 2.23% for fisheries sub-sector. The high costs of fresh milk production can be attributed to low yield and high feed costs. Average yields are only 2.0 liters per cow per day, although there is some regional variation. Among commercial dairy farmers, average milk production ranges from 3.5 liters per day to a high of 7.2 liters per day.

The branded feed available in Bangladesh is of unknown quality and extremely expensive. Several small animal feed milling plants are operated by the Department of Livestock Services (DLS). Community Livestock and Dairy Development Project (CLDDP) of Grameen Fisheries & Livestock Foundation of Bangladesh, BMPCUL, Non Government Organization (NGOs), and the private sector. Most of these mills have a capacity ranging from 7 to 10 tons per day. Some 4 percent of the milk is processed by the organized sector comprising some 10 dairy processing units. About 15 per cent of the milk produced is consumed by the producer families and 81 per cent goes to the traditional sector. Locally produced liquid milk accounts for 12.8 percent of the formal market. The rest (87.2 percent) consists of imported milk powder. The importance of livestock production has increased in Bangladesh as witnessed by the increase in number of livestock over the last few decades and the contribution to employment in the country .

Government initiative:

The government will hopefully introduce crop insurance and expand credit programme for crop stocks for the welfare of farmers, said Finance Minister AMA Muhith yesterday.

In the upcoming budget, the government will also provide special allocation for agricultural research, he said when Channel i Director Shykh Seraj handed over to him a 39-point recommendations on agriculture titled 'Krishi Budget, Krishoker Budget'.

Seraj presented the recommendations at the conference room of the finance ministry on behalf of the programme titled “Hridoye Mati O Manush' which is telecast on Channel i, says a press release of Impress Telefilm Limited.

Referring to irregularities in various agricultural-related departments, AMA Muhith said once upon a time Bangladesh Agriculture Development Corporation (BADC) provided to farmers a number of services, which may not be possible in that spirit now.

“But there is no doubt that we have to give special attention towards agriculture,” the minister said, agreeing to most of the recommendations.

Seraj highlighted a number of challenges facing agriculture and said climate change, environmental degradation and many other man-made problems are becoming threats to agriculture.

The sector, therefore, deserves very special attention of the authorities concerned, he noted.

A video documentary focusing the field-level experiences was projected before submitting the recommendations.

Finance Secretary Dr Mohammad Tareq and other high officials of the ministry were present on the occasion.

Hridoye Mati O Manush started its pre-budget field level discussion and submission of recommendations to the government since 2005.

March 11: Chairman of the Parliamentary Standing Committee on Agriculture Ministry agriculturist Shawkat Momen Shajahan said `Crops Insurance' would help farmers protect from poverty.

He said the committee recently sent a proposal to finance ministry for taking necessary measures for introducing crops insurance.

He was speaking as the chief guest at a national workshop titled "Farmers Friendly Agriculture Policy." A research organization Incidin Bangladesh organized the workshop at YWCA auditorium in the city.

Shawkat Momen said the government is strongly committed to making the country self-sufficient in food and for this it would formulate a Farmers' Friendly Agriculture Policy through amending the existing one, he said.

The non-government organizations and research institutes which are working with agriculture issues should initiate more programmes in this regard.

Mentioning that the opinion of marginal farmers is much vital in formulating a timely and effective agriculture policy, he said the improvement of condition of marginal farmers would be actual development of the country.

"Land reforms is important for development of agriculture," he said adding: "Preservation of farm land and ownership of land by sharecroppers would greatly contribute to raising production of crops."

Stressing on e-Agriculture for improvement of agriculture management, he said in order to disseminate necessary information of farming to farmers, the utilization of technology should be increased.

Speaking as special guest, Fazle Hossain Badsha MP said it would not be enough to only formulate farmers' friendly agriculture policy, it is also needed to establish a farmers friendly state system.

He said farmers and agriculture should give due share in the development process.

Executive Director of Incidin Bangladesh AKM Masud Ali presented a technical papers at the workshop, highlighting the problems identified by the farmers.

President of the National Agriculture Review Committee Tofazzal Hossain Manju chaired the workshop. A large number of development workers, agri-scientists and leaders of farmers associations attended at the workshop. Source: BSS, Dhaka

 Dhaka, April 01 (bdnews24.com) —The government will initiate insurance schemes to protect farmers from loosing their crops to natural calamities.

Agriculture secretary C Q K Mustaq told this at the meeting of the parliamentary standing committee on agriculture ministry Thursday.

Shawkat Momen Shahjahan, the committee chairman, told bdnews24.com that the agriculture and finance ministries had agreed to start crop insurance as per the committee's recommendations of Jan 31.

"The secretary informed the meeting that agriculture ministry had already taken measures to start crop insurance in Bangladesh," Shahjahan told bdnews24.com.

"The finance minister has agreed to start crop insurance," he said.

The chairman said that the agriculture ministry, according to the secretary, had tasked the Bangladesh Agriculture Research Council to prepare guidelines for initiating crop insurance.

If introduced, the farmers would pay premiums against their standing crops.

The insurance companies would compensate the farmers in case of crop damages.

"We will discuss the draft guidelines in future meetings," said Shahjahan, an agriculturist in profession.

Agriculture minister Begum Matia Chowdhury and other members of the committee attended the meeting.

bdnews24.com/krc/ta/2345h

Problems:

       There are some problems of implementing crop insurance at field level. The major ones are finding the right client, the provider and the product design. Firstly, without the right group of farmers and approach this might look like a relief to farmers, which will hamper the objective of the programme. Secondly, three different channels of providers can work: full service provision by an NGO/MFI, full service provision by a mainstream insurance company and collaboration between the two within a partner-agent model. Many issues influence the selection of the channel of provision for offering crop micro insurance. These issues include the motivation and goals of the provider, the costs of provision, human resources and information capabilities, access to clients, access to reinsurance and support by subsidies and donors.

Another problem is product design. Developing a viable insurance plan begins with the identification of the risks, deciding upon the method for estimating the loss of crops, setting the premiums etc. Without the right amount of premium the insurance will neither be viable nor sustainable for long.

Many countries, including the US, are doing crop insurance. In India, multi-peril crop insurance, by the name of National Agriculture Insurance Scheme (NAIS), is being implemented. This is implemented by Agriculture Insurance Company of India, an Indian government-owned company. The scheme is compulsory for all the farmers who take agricultural loans from any financial institution. It is voluntary for all other farmers. The premium is subsidised for small and marginal farmers, that is, the farmers who own less than two hectares of the land. This insurance follows the area approach.

Potentials:

Agriculture comprises nearly 15 percent of Bangladesh’s GDP. Considering the importance of this sector in providing for over 145 million people, it is surprising that there is no comprehensive crop insurance system in place for farmers.

Crop insurance is a valuable tool to protect against financial risks stemming from crop damage due to unforeseeable hazards – droughts, floods, pests, and so on. The mechanics are quite simple – a farmer can take out an insurance policy on his expected yield of crops, and pay a fixed premium every month to the insurance company. If bad weather results in under production, or destroys the farmer’s crops, the insurance policy pays out, ensuring that the farmer is protected financially and is not left with very little income for the year.

Many types of sophisticated mechanisms of insurance exist to protect against a variety of risks. For instance, in developed markets, futures contracts are available that lock in prices for future delivery of a certain volume of crops. With these contracts, farmers are protected against losses due to fall in prices of agricultural produce in the event of bumper production.

In theory, crop insurance offers additional benefits besides financial protection. It encourages innovation in production methods by encouraging risk taking. For instance, insurance limits the downside risk to farmers who may be interested in using newer varieties of seeds and fertilizers in their fields, but are unable to do so because of the uncertainty surrounding the production yields of these new varieties.

Insurance also protects financial institutions that lend to farmers. Thus in the event of crop failure and subsequent loan defaults, lenders are protected and are able to continue their operations. The strength and health of these financial institutions is critical for the success of the agriculture sector – without access to lines of credit, poor farmers would be unable to invest in fertilizer or irrigation technology.

Given Bangladesh’s reliance on its agricultural sector, and its propensity for natural disasters, crop insurance schemes can play a crucial role in stabilizing and promoting food production while reducing the likelihood of sudden spikes in rural poverty.

Although the concept of crop insurance has been around for decades, its applications in most developing countries fail due to lack of planning and implantation. Crop insurance was implemented in Bangladesh in 1989 as a government program, but was shut down in 1995 after massive losses. Recently, BRAC has been proactive in its efforts to reintroduce insurance for farmers, and the government is also planning to restart the program.

There are many potential missteps to the success of such programs. Insurance works by spreading individual risks across a large pool of buyers. Because of Bangladesh’s numerous rivers and flat geography, it becomes harder to spread these risks – when flooding occurs, a large segment of the cultivated land would likely be affected, triggering payouts that may cripple the insurance providers. Raising the premiums can prevent this problem, but finding a rate that is not cost-prohibitive to farmers is a matter of detailed analysis and research.

Setting the comprehensiveness of insurance policies is another matter. What types of risks should crop insurance cover? Studies in India have shown that providing a wide range of coverage can be inefficient. Leaving private sector players to decide which types of risks to cover will inevitably lead to a market with the most profitable schemes; on the other hand, governments are notoriously inefficient in deciding what types of coverage to provide, and may also be influenced by political factors. Striking a balance is difficult, yet critical.

Finally, the schemes must be implemented so as to reduce the common problems of insurance – moral hazard (when a farmer deliberately neglects his crops and then collects on payments) and adverse selection (when only the people who need insurance the most tend to buy it, thus the insurance provider is left with a pool of the riskiest buyers).

The initiatives of BRAC and the government are welcome, but the design, implementation and efficacy of their programs remains to be seen. I welcome the thoughts of Dharona’s readers.

Comparative analysis among different countries:

 Developed country experience

In the USA, the present crop insurance system is the product of nearly a century of experimentations, studies, and trials. The first "multi risk" crop insurance was offered by a private insurance company in Minneapolis in 1899. The first attempt was however a failure. It nevertheless set the stage for entry of the public and private sectors towards mitigating crop production risks.

Providing a national crop insurance programme became a major political issue between the Democratic presidential candidate Franklin Roosevelt and his Republican challenger Alfred Landers. While Roosevelt supported a federal programme, Landers pleaded for a private one. On being elected, Roosevelt took this issue seriously and commissioned several studies to probe into its feasibility. Subsequently, Federal Crop Insurance Act of 1938 was passed under which Federal Crop Insurance Corporation was set up in 1939. Besides, several other epoch making initiatives were taken up by him to rehabilitate the agricultural economy severely shattered by the Great Depressions and the Dust Bowls.

The crop insurance programme was started as an experimental one and was limited to a few major crops. Due to its poor performance, its operation was suspended after one year, 1943-44, while the Congress studied it carefully. It was restarted after one year with an expanded list of insurable risks and inclusion of an array of new crops. Besides, several innovations like 3-year contracts, country or area premium rates were also introduced. During the seventies, premium calculation was established on the basis of individual farm yields rather than on country yields. Even with these innovations, farmers' participation rate was rather low averaging at less than 10 per cent of eligible crop acreage.

The Crop Insurance Act of 1980 brought several fundamental changes, among which the most important ones were -- a) provision of subsidy to premium and b) induction of private insurance agencies for delivery of multi-peril crop policies and c) providing them with reinsurance support and reimbursement of their operational expenses. These new measures proved to be highly effective in expanding farmer participation with crop coverage reaching the level of 70 per cent.

One major impediment to the programme was the liberal and free availability of the federal disaster payments to the farmers suffering from severe crop damages. Despite repeated recommendations, it was not until 1994 that the basic legislation authorising crop disaster assistance to farmers was cancelled in favour of an expanded multi-peril crop insurance. Under this reform, participation to crop insurance was made mandatory for the farmers receiving payments under the federal assistance programme. And for this, a new catastrophic policy, "CAT", was introduced to take charge of the old disaster payments. Premium of CAT policy was fully subsidised. Risk Management Agency (RMA) was also established during that period to administer the FCIC and other non-insurance risk management and educational programmes.

Further innovations were effected under the Agricultural Risk Protection Act (ARPA) of 2000 under which RMA was authorised to regularly enter into contracts with the private entities, particularly the universities for research and development of innovative insurance products. Liberal amounts are now being spent annually for such R&D activities and for mounting aggressive educational and promotional drives. A variety of insurance products have been developed combining the major characteristics of individual and area approaches with varying levels of guarantee and price elections.

The federal crop insurance programme is a government-private sector collaborative effort with RMA administering and overseeing implementation of the programme and FCIC providing insurance and reinsurance expertise. The sale and servicing of crop insurance is being carried out by the private insurance companies, who are selected and re-insured by FCIC. Presently, 19 such companies are in operation; they market the policies; collect premiums and settle claims payments. Under re-insurance contracts, they receive a variety of payments as per agreements.

The distinguishing features of the US crop insurance experiences are: a) strong political commitments from the Presidents and the Congress, b) crop insurance accepted as a state function, c) provision of liberal subsidy, d) collaboration of the private sector insurance in servicing crop insurance losses and e) priority to R&D efforts with liberal fund allocations.

Developing country experience

India gained substantial experiences in crop insurance through its following evolutionary stages of growth and development:

Experimental Project (1973-76): General Insurance Corporation (GIC), a public sector insurance agency under the Ministry of Finance, implemented one experimental crop insurance scheme during 1973-76. It was based on "individual approach" and provided coverage to some cash crops like cotton and groundnut. Its performances were quite poor with loss ratios exceeding ten folds and was thus discontinued in 1976.

The General Insurance Corporation was incorporated in 1985. It has offered a crop insurance program that has been revised thrice. The scheme only covers food crops, not cash crops. The INR 10,000 coverage is assured regardless of the value of the crop. If the yield goes 80% beyond the threshold then the claim can be as much as 150% of the total loan. Claims not on tapering basis. Once the insurance claim is settled, then clients receive their money adjusted to the loan amount and their savings account

Pilot Scheme (1979-1985): The Pilot Scheme on Crop Insurance (PSCI) was introduced in 1979. This was based on "area approach" providing coverage to crop loanees only as recommended by Prof. Dandekar. Other major features of the scheme were a) its voluntary nature, b) 50 per cent premium subsidy to the small and marginal farmers shared by the central and state governments with the latter as co-insurers with GIC, c) premium based on 10 years average area yield collected through crop cuts and d) Master Policies issued in the names of loaning banks.

Comprehensive Scheme on Crop Insurance (1985-1999): Another new scheme: Comprehensive Crop Insurance Scheme (CCIS) was launched in 1985 after a thorough review of PSCI. Some of the major innovations effected were a) subsidy to the small and marginal farmers was increased from 50 per cent to 66 per cent, b) premium rates reduced from 5 per cent to 2 per cent for cereals and 1 per cent for pulses and oilseeds and c) crop strata classified into low, medium and high risk categories with corresponding variations in limits to payable indemnities. Crop insurance was made obligatory for all institutional crop loanees in the scheme areas. Two funds were also established, one at the central and the other at the state level, for facilitating settlements of claims and to provide for basic infrastructure and administrative set ups.

Experimental Crop Insurance Scheme (1997-98): Besides CCIS, which continued to be modified from time to time, another Experimental Crop Insurance Scheme (ECIS) was introduced in 1997 specifically to cater to the non-loanee small and marginal farmers. 100 per cent subsidy to premium for such farmers was borne by the central and state governments in the ratio of 4:1. The scheme was operated through the commercial and regional rural and co-operative banks to whom 5 per cent service charge was paid. This scheme was however discontinued after one year.

National Agricultural Insurance Scheme (1999-to date): Both modified CCIS and ECIS were merged together into National Agricultural Insurance Scheme (NAIS) during 1999. Under this scheme, share croppers and tenants were included with retention of compulsory coverage for crop loanees. Several improvements were brought in with regard to premium fixation. Flat rates were fixed for food and oilseed crops separately for rabi and kharif seasons with the provision to switch over to actuarial rates within a period of five years. In respect of horticultural and commercial crops, premium was to be charged on actuarial basis. Subsidy was to be phased out within five years. In case of food and oilseed crops, GIC would bear losses up to 150 per cent in the first five years and 200 per cent thereafter. All claims beyond these limits will be paid by the government through corpus fund. Payment of administrative and operating expenses will be phased out completely on subset basis gradually within five years.

Pilot Scheme on Seed Crops Insurance (1999-continuing): In addition to NAIS, another Pilot Scheme on Seed Crops Insurance (PSSCI) was launched in 1999. Foundation as well as certified seeds were covered under this scheme. This was an important initiative to provide financial security to the burgeoning seed industries.

Bangladesh experience

Bangladesh was among the first few countries in this region to enter the world of crop insurance and was least successful in reaping benefits out of it due to a variety of reasons including her failure to accord appropriate thrust and resources to it. Sadharan Bima Corporation (SBC), a public sector insurance agency under the Ministry of Commerce, was entrusted with the implementation of a pilot project on crop insurance since 1979 with its own resources. Govt did not come forward to provide any premium subsidy or reinsurance support, which were vitally needed for its sustenance and growth, particularly during its formative period.

Individual approach of reaching out to farmers with service delivery and claims settlements was followed with field supervision by its Head Office staff. This was time consuming and vexing. Research element, which was absolutely indispensable for evolving suitable low cost models, was missing. Little or no innovations in operational methodologies, specially in switching over to "area approach" and linking to institutional credit, were effected despite repeated expert level recommendations for the same due basically to bureaucratic bottlenecks. The Commerce Ministry gave precious little attention to it.

Besides, a minimal critical mass of trained and dedicated manpower is essential for running and sustaining any programme efficiently and successfully. There were no serious efforts to develop and provide such a critical mass of manpower through the institutions of higher education and training in the public and private sectors. There were no sustained initiatives to educate the farmers of the importance of suitable crop insurance as an important tool for managing risks in agriculture and to provide them the much needed economic security. There is no strong farm lobby to plead for it. Meanwhile, the financial liabilities for running this weak programme was getting increasingly costlier to SBC with claims exceeding premium incomes by more than five times. The programme was therefore suspended in 1995 as per recommendation of a high level government committee pending implementation of a reformed, research-oriented government supported project involving private sector insurance agencies. Several committees were subsequently formed and reports submitted for restarting a renewed and research-oriented pilot project with private sector participation. The proposed programme is yet to take any shape due to government's indecision and fumbling over this issue. Livestock insurance schemes usually can call Participatory Compensation Fund (PCF). Micro-credit borrowers who are rearing poultry or Cattle, they are losses their livestock asset due to flood, cold wave after due care, vaccination & treatment. Due to compensate the losses, PROSHIKA (large NGO) formulate Participatory Compensation Fund (PCF) for its Micro-credit borrowers. The Micro-credit borrowers get credit, training and technical support from PROSHIKA. Beside of this supports, they get compensate for the losses of livestock asset. Micro-credit borrowers give premium 10% of purchasing value for Poultry and 3-5% of purchasing value for animal to this Fund( for generate the fund ) during the getting credit . After losses the livestock asset, they get back full money of purchasing for the animal/poultry. Specific procedures and formats are used for borrower selection, purchasing livestock asset, giving premium, accounts maintain and return compensate.

Livestock insurance could reduce vulnerability of poor smallholder livestock producers  

Conclusion: There is nothing to despair from the initial failings in the first attempt in crop insurance. This exercise has unfolded various useful and hard lessons on which to build the next programme successfully. Crop insurance cannot thrive in a vacuum. It is an organic process. It needs congenial atmosphere to grow and develop. People for whom it is meant must understand it; government must provide necessary resources to run and sustain it; business approaches must be there to manage it efficiently to contain losses at sustainable level. The ongoing poverty reduction strategies must encompass some basic guidelines and funding for initiating any next programme on agricultural insurance. Our future success in modernising agriculture and stabilising farm income will greatly hinge on how well we succeed in handling our agricultural insurance needs.