Crop insurance experiences: Lessons for Bangladesh

The major benefits that flow from an effective crop insurance system are stability and security to farm investment and income and assurance of fresh fund for re-investment in the event of large scale production damages. In the developing countries, losses in production of small and marginal farmers lead to their increasing indebtedness and pauperisation.

There are evidences of increasing frequency and magnitude of damages to agricultural production due to deteriorating global warming situations. As per Munich Re, a leading re-insurer, the average annual loss to weather-related events increased ten folds during 1950-1999. Such challenges to agricultural production are pushing up demands for crop insurance.

Besides, as economy develops, urbanisation expands, agro-processing and exports of agricultural commodities pick up momentum, agricultural producers start making larger investment of capital per land unit to meet the growing demands. These burgeoning investments need insurance protection to provide economic security to the producers as well as to bring stability in the production system. Such a stability is also essential for the growth of international trade in agricultural commodities. It is precisely why subsidy to crop insurance premium has been permitted by World Trade Organization (WTO) under WTO Agreement on Agriculture, 1995.

Crop insurance practices have been evolving gradually in various forms and directions in the light of the compelling requirements of the practicing countries. Crop insurance was initially a domain of the developed world. During the last few decades, developing countries are increasingly stepping into this important field. New insurance products are also being developed to meet emerging challenges.

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.

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 progamme 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.

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.

Nurul Haque Miah is retired Chief, Planning, Ministry of Agriculture, and a consultant in agricultural economic issues.