When and How Should Agricultural Insurance Be Subsidized? Issues and Good Practices

Agricultural insurance is subsidized in many countries, at a global cost to governments of well over USD 20 billion each year. Very little is really known about the effectiveness of insurance subsidies in achieving their intended purposes, or whether the impacts they generate justify their costs, and there is a real need for more evaluations and impact assessments of subsidized agricultural insurance programs. Much more is known about the challenges that can all too easily undermine the benefits from agricultural insurance subsidies. These include well known challenges with the design and operation of agricultural insurance programs themselves, poorly designed subsidies added to those programs, plus political dynamics that make it hard to terminate or contain the amount of the subsidy. Poorly designed subsidies can also inadvertently create disincentive problems that lead to significant economic costs and inefficiencies, and in some circumstances, to environmental degradation.

To avoid these problems, any insurance subsidy needs to be carefully designed to be “smart”, in the sense that it is cost effective in achieving its underlying purpose, minimizes disincentive problems, and does not become a growing financial burden on the government. This paper discusses these issues in detail and draws upon available literature and case study experiences to propose some good practice guidelines for the design and implementation of subsidized agricultural insurance.