Ensuring financial coverage for farming community

Area-yield index insurance was first developed in Sweden in the early 1950s and has been enforced in India since 1979 and in the United States since 1993. There have been numerous attempts to establish crop insurance programmes in developing countries. Some of them have succeeded in laying the foundation for a sustainable risk management service. But there have also been failures. Most of such programs that did not prove durable were set up on the base of unrealistic prospects. Risk management is of pivotal importance in the investment and financing decisions of growers in developing countries and in transition economies.

Agrarian insurance, although one of the most frequently used tools for risk management, can only play a limited role in managing the pitfalls involved in farming. The application of insurance in any given situation is grounded on consideration whether it is a cost-effective means of addressing a given risk. In practice, agricultural insurance is almost invariably peripheral to a whole set of risk management measures, of which adequate farm management practices constitute an important element.

Agriculture is very much vulnerable to the unpredictability of nature. The impact of natural disasters and other agricultural risks, therefore, cannot be taken lightly as agricultural production represent the only livelihood for numerous resource-constrained Pakistani growers. In case of natural calamities, the growers not only have to bear the loss of their yield/crop but also have to face defaults for the bank credit. The need to protect the interests and investments of growers is, therefore, of paramount significance.

Crop insurance is a risk management mechanism designed to smooth out agrarian risks and even out the consequences of natural disasters to make losses, especially to the marginalized growers, more bearable. In countries having multiple-risk insurance schemes, government’s intervention or its heavy support to agricultural insurance operations has been regarded justifiable and inevitable due to the market failures. Such support has been provided in the form of subsidies on premium to growers, operational subsidies to private insurers to cover some of the high administrative costs associated with agricultural insurance contract underwriting and subsidized reinsurance.

The system of government intervention also varies from country to country. For example, in Canada, Japan and Philippines, the insurance schemes are operating under a central government or local government body, while in United States, Spain and Mexico they are operated as cooperation between government and private insurance companies with the former assuming the role of reinsurer of the latter. In India, government allows 50% subsidy in premium to small & marginal growers. WTO’s regulations also support subsidization of crop insurance premiums by the governments. However, the government support programs are often fiscally burdensome.

Experts are of the view that crop insurance would serve as an important instrument in promoting and adopting modern ways in agriculture especially by small growers. However, despite doing exhaustive exercises spanning nearly three decades, our economic and agricultural experts are still looking for a model Crop Insurance Scheme for Pakistan, while India and Sri Lanka had actually been insuring the crops of their growers for decades.

Recently, Habib Bank Limited (HBL), the Bank of Punjab (BoP) and TPL Insurance Limited have entered into a strategic partnership for pilot testing of the Area Yield Index Insurance (AYII) product proposed by the Pakistan Agriculture Coalition. The product will enable growers to avail crop production loans from HBL and BoP in pilot districts with the provision of yield insurance coverage bundled with their loan product.

The incremental premium cost for the value-added services for additional cover under AYII will be jointly shared by HBL, BoP and TPL. The product will ensure climate adaptability and fiscal stability through insuring the crop production risks against climatic abnormalities, including windstorm, frost, excessive rainfall, heat-wave, hail, flood, drought, pest and diseases. The project will initially focus on wheat and rice crops in Pakpattan, Gujranwala, Hafizabad and Sheikhupura districts of Punjab.

AYII has the potential to transform the agricultural landscape of Pakistan by facilitating the farming community through financial coverage of their agricultural produce. This will encourage growers to take broader steps by adopting latest farming techniques on the back of flexible and enhanced risk coverage, thereby ensuring financial inclusion and sustainability.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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