Innovative Agricultural Insurance Products and Schemes

This paper identifies recently developed innovative products and schemes of agricultural insurance, followed by some alternatives to insurance. It is an introductory guide for policy-makers, farmers and insurance planners. The paper states that the following points about agricultural insurance:

• It is a financial tool that helps manage the various risks that arise in agricultural production;
• It is able to reduce risk costs by spreading risks in three ways: among farmers, to other sectors of the economy and over time;
• Factors that have recently renewed interest in this insurance are:
  • Increasing incidence of crop-damaging weather events of extreme severity;
  • Commercialization of farming;
  • World Trade Organization (WTO) regulations;
  • Expanded food safety concerns and increasing environmental protection requirements;
  • Liberalization of agricultural trade.

The paper examines:

• The evolution of traditional agricultural insurance products and their inherent problems;
• Innovative insurance products and schemes as well as alternatives developed in the past decade.

The paper concludes that:

• Crop-insurance reduces risk exposure by promoting public and private risk management;
• State involvement is necessary to maintain multi-peril schemes that allow the inclusion of traditionally uninsurable risks;
• However, government support is costly and sometimes, economically inefficient;
• Index-based and market-based approaches offer positive advantages in the context of developing countries.

The paper recommends that governments provide the requisite technical and institutional assistance to facilitate the adaptation of insurance and risk reduction, possibly with the support of international agencies and specialized financial institutions.