Risk Management Around the World
Nov 24, 2017
Farmers everywhere are uniquely vulnerable to external forces and factors that are well beyond their capacity to control. Chief among them is the unpredictability of weather, which due to the emergence of climate change in recent decades has become even more variable, resulting in more frequent and severe extreme weather, such as massive flooding and drought.
One of the public policy responses that has been developed over the last several decades is the availability of crop insurance or similar risk management policies to provide farmers a cushion against the financial impact of crop losses resulting from bad weather, to avoid having to draw down or sell off the capital assets associated with their operation. Insurance programs have been adopted more widely in the last few decades around the world, in part because under such an approach they have to share in the risk by paying some amount of premiums for the coverage they obtain, although frequently those premiums are subsidized.
The crop insurance program in the United States is the oldest, largest, and most comprehensive such system in the world. It was first established in 1938 as part of the Agricultural Adjustment Act, but it was operated for several decades as a low-participation program that covered only a handful of major crops in key producing areas. It was not until the passage of the Federal Crop Insurance Act of 1980 that the key principles of the current program were truly established. Those include striving to provide universal coverage, across both crops and regions, with premiums to be established on an actuarially sound basis. This bill also marked the first time that the U.S. government offered subsidies to encourage farmers’ participation in the program. Subsequent major pieces of crop insurance legislation in 1994 and 2000 mainly sought to reinforce those principles, as well as increase the federal subsidy share of insurance premiums. In 2017, U.S. farmers have insured 311 million acres of farmland, with that coverage generating total premiums of more than $10 billion. Of that premium amount, the federal government share was $6.3 billion, or 63 percent.
From the very beginning, the U.S. crop insurance program provided insurance to farmers at the individual farm level, requiring a massive infrastructure to manage that amount of data and validate farmers’ claims of crop losses. Since the mid-1980’s, that infrastructure has been assembled and maintained by private crop insurance companies, which retain a portion of the premiums paid to cover their operating expenses and are also entitled earn underwriting gains based on how they handle the reinsurance of the insurance policies they sell and service.
The government of Canada and its provinces have also jointly provided crop insurance to Canadian farmers for a long time, with the initial authority for such programs established in 1959. The basic principles of the Canadian system are quite similar to those in the United States, although for the most part, state governments play no formal role in the U.S. program other than regulatory oversight of the insurance companies broadly. In part because the Canadian agricultural sector is smaller than its U.S. counterpart, total crop insurance premiums are also lower--about $1.5 billion for Canada in 2011, as opposed to $11.7 billion for the United States.
According to a 2015 article in Actuary magazine, the crop insurance programs in the United States and Canada accounted for more than half of the agricultural insurance premia (58 percent) paid worldwide in 2011. Programs in Asia accounted for 20 percent, in Europe for another 17 percent, and Latin America and Africa combined for less than 5 percent.
The ability to offer coverage at the individual farm or even field level, as characterizes the U.S. and Canadian programs, is premised on the availability of reliable farm level production data, not just current production but also past production, so as to determine what constitutes normal yields. In addition, it requires the willingness to expend resources to develop the capacity to send people to individual farms to verify that crop losses have actually occurred. Where resources are not available to offer indemnity-based coverage, the most feasible approach is to offer index insurance, which provides payments based on weather events in a broader geographic area, not on individual farms’ yield performances.
Both China and India have adopted broad-based crop insurance programs in the last few decades. In 2016, China spent $2.3 billion on subsidies for its program, and unlike most developing countries, has sought to provide indemnity-based insurance. Those companies trying to deliver crop insurance at the local level in China have found it expensive to do so because of the costs of reaching remote villages. On the other hand, India’s program offers area-based insurance coverage, with the region being covered at the village level for most crops. Those with outstanding loans are required to purchase the heavily-subsidized coverage, while those who do not can go without, or buy less expensive weather-index plans.
In Africa, index-based insurance has been offered on a pilot basis in several countries in recent years, often supported by external development entities or foundations at either the national or international level, such as the U.S. Agency for International Development (USAID), the Syngenta Foundation, and the World Bank. As of 2014, only half of one percent of all African farmers were covered by indemnity-based policies, primarily in Algeria, Nigeria and Kenya. A recent book entitled Renewing Local Planning to Face Climate Change in the Tropics, the authors summarized index-based insurance pilots in 11 African countries, and found that demand for such insurance was relatively low and that designers of the pilots had not yet determined how to replicate successful efforts on a larger scale. Appropriate data remains a constraint, but work continues.