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Project on Crop Insurance

Project on Crop Insurance

Discuss Project on Crop Insurance within the Upload / Download Banking and Insurance Projects and Notes forums, part of the Banking and Insurance Paradise ( BBI Projects and Research Notes ) category; Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others to protect themselves against either the loss of ...

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Ronak Raichura
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Project on Crop Insurance - April 2nd, 2012

Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others to protect themselves against either the loss of their crops due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural commodities. The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance.

Crop-yield insurance: There are two main classes of crop-yield insurance:
Crop-hail insurance is generally available from private insurers (in countries with private sectors) because hail is a narrow peril that occurs in a limited place and its accumulated losses tend not to overwhelm the capital reserves of private insurers. In early 1820s, crop-hail insurance were available to farmers in France and Germany. That is among the earliest forms of hail insurance from an actuarial perspective. It is possible to implement the hail risk into financial instruments since the risk is isolated.
Multi-peril crop insurance (MPCI): Coverage in this type of insurance is not limited to just one risk. Usually multi-peril crop insurance offers hail, excessive rain and drought in a combined package. Sometimes, additional risks such as insect or bacteria-related diseases are also offered. The problem with the multi-peril crop insurance is the possibility of a large scale event. Such an event can cause significant losses beyond the insurer's financial capacity. To make this class of insurance, the perils are often bundled together in a single policy, called a multi-peril crop insurance (MPCI) policy. MPCI coverage is usually offered by a government insurer and premiums are usually partially subsidized by the government. U.S. Department of Agriculture is known to implement the earliest Multi Peril Crop Insurance program in 1938. Federal Crop Insurance Corporation managed this multi-peril insurance program since then. The Risk Management Agency (RMA) is active in calculating the premiums based on individual risk factors since 1996.
Crop-revenue insurance: Crop-yield times the crop price gives the crop-revenues. Based on farmer's revenues, crop-revenue insurance is based on deviation from the mean revenue. RMA uses the futures prices on harvest-times listed in the commodity exchange markets, to determined the prices. Combining the future price with farmer's average production gives the estimated revenue of the farmer. Accessing the futures market offers enables revenue protection even before the crop planted. There is a single guarantee for a certain number of dollars. The policy pays an indemnity if the combination of the actual yield and the cash settlement price in the futures market is less than the guarantee. In the United States, the program is called Crop Revenue Coverage. Crop-revenue insurance covers the decline in price that occurs during the crop's growing season. It does not cover declines that may occur from one growing season to another.

An innovative crop insurance program that protects small African farmers against extreme weather made its first payouts last week, to growers in northern Ethiopia. The pilot “microinsurance” program gave a total of $17,392 to 1,800 farmers in seven villages, following a drought earlier this year.

The HARITA (Horn of Africa Risk Transfer for Adaptation) pilot was designed as a way for Ethiopia’s poorest farmers to insure their crops against changing weather patterns. Instead of asking farmers to document actual crop losses, the program uses a weather index; when thresholds of abnormal rainfall or temperature presumed damaging to crops are reached, they trigger automatic payouts. This makes the claims process simpler and lowers premiums by easing the administrative burdens of traditional crop insurance. Since starting in 2009 with 200 enrolled households in one village, the project has gone to more than 13,000 households in 43 villages.

The announcement was made by the program’s partners, which include

Oxfam America and the Earth Institute-affiliated International Research Institute for Climate and Society (IRI). They are working with the Relief Society of Tigray, Dedebit Credit and Savings Institution, Nyala Insurance Company, and the Africa Insurance Company. The project is funded by the Rockefeller Foundation and the insurance company Swiss Re.

“If the insurance helps farmers cover fertilizer loans in the worst years, farmers could use these loans to increase yields in the rest of the years. This has the potential to really improve a farmer’s situation,” said Daniel Osgood, an economist at IRI who specializes in index insurance.

One policyholder, Gebre Kiros Teklehaimanot, said, “Last season the rain was bad and we didn’t produce what we had hoped for. So the payment is good for us. We know it won’t cover all our losses, but for me, at least, I can cover the loan I took to buy fertilizers. I am still a big believer in insurance and will go back to my village and encourage others who did not register last year.”

The United Nations World Food Program and Oxfam America, supported by the United States Agency for International Development and Swiss Re have committed to expand HARITA, now known as the “R4 Rural Resilience Initiative.” The R4 organizers say the project will enable poor farmers to strengthen their food and income security by managing risks through a four-part approach: improving natural resource management (community risk reduction), accessing microcredit (“prudent” risk taking), gaining insurance coverage (risk transfer), and increasing savings (risk reserves).

The third international workshop of DelPHE project, "The Application of Crop Insurance to Alleviate Poverty and Promote Sustainable Agricultural Production in the Chinese Autonomous Region of Inner Mongolia and Xinjiang" was convened in Bin Yue hotel, Huhhot,Inner Mongolia from July 23rd to 26th, 2008. This workshop was joint-sponsored by the Department of International Cooperation of Ministry of Agriculture, P. R. China and U.K.Department for International Development (DFID) Beijing Offices, and organized by the Agricultural Information Institute of CAAS and Inner Mongolia Agricultural University. This international workshop is also an important activity under the arrangement of China-UK SDD and DelPHE international cooperation project.
The theme of this workshop was “Agricultural Insurance Products innovation, the pilot experience and institution building of China’s agricultural insurance”. About 50 people attended this workshop, including the officials, professors, researchers and graduate students from the Ministry of Agriculture of China, U.K. Department for International Development (DFID), Agricultural &Animal Husbandry Department of Inner Mongolia, CIRC Inner Mongolia Bureau, Agricultural Information Institute of CAAS, Inner Mongolia Agricultural University, Capital University of Economics and Business, Purdue University of U.S. and University of Manitoba of Canada, the Agricultural Economics Society of Inner Mongolia, Economic Research Institute of Inner Mongolia Academy of Social Science, PICC Inner Mongolia Branch, Anhua Agricultural Insurance company Inner Mongolia Branch, and China United Property Insurance Company Inner Mongolia Branch.
The Opening ceremony of workshop was hosted by Prof. Shiwei Xu, General Director of AII. Prof. Qiao Zhang,the leader coordinator, gave a brief introduction to the China-UK SDD and DelPHE ACIC Project. Then, Ms Guifeng Sui,the director of DIC of Ministry of Agriculture, Mr. Leo Horn, the delegate of DFID China, Mr. Zhongyi Yun, the vice director of Agricultural Husbandry Department of Inner Mongolia, Mr. Pengfei Zhi, General Director of CIRC Inner Mongolia Bureau and Mr. Chenxi Hou, the vice president of IMAU addressed to celebrate the progress of the project. After the opening ceremony, seven Professors and two managers of local insurance company gave their academic presentations.
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