The GoP wishes to promote crop insurance with an
objective to hedge the risk associated with lending to agriculture
sector by the commercial banks. There is general lack of awareness about
insurance and insurance companies, after burning their fingers in the
past, are reluctant. Under the new arrangement Securities and Exchange
Commission of Pakistan (SECP) is required to oversee the insurance
companies, which has not been able to quantify the business. It is yet
not clear that what sort of covers will be available. It may be true
that hedging the risk of farmers is necessary to minimize the government
liability particularly in case of natural calamity, but hedging of
lending seems to be the GoP's priority.
One may ask why hedging of credit risk is more
important than protecting the interest of farmers? The reason is that
specialized financial institutions as well as nationalized commercial
banks (NCBs) have been extending large credit to the agriculture sector.
It comprises of two key areas< 1)
loans for the purchase of agricultural implements and 2)
credit for the procurement of various inputs, i.e. seed, fertilizer and
pesticides. In case of any natural calamity the GoP has to bear double
the amount. The GoP is obliged to write off agricultural loans, either
partly or completely and provide financial support to the farmers.
Therefore, the analysts believe that the GoP has realized the need for
crop insurance — though very late. Under the proposed arrangements,
when fully implemented, insurance companies will pay the claim to
farmers, who in turn will settle their liabilities towards the financial
institutions. The added advantage to the GoP will be the saving of
millions of rupees paid almost every year.
Insurance sector experts believe that since the GoP
wishes to minimize its risk it must also take the initiative. National
Insurance Corporation (NIC) enjoys the exclusive right to underwrite
insurance business originating from the public sector. Therefore, NIC
should provide risk cover for credit, related to agriculture sector,
mainly lent by the financial institutions operating in the public
sector. As the system and mechanism develop private sector insurance
companies will be more than willing to underwrite crop insurance
An important factor to be kept in mind is that the
quantum of crop insurance business has not been estimated as yet. To
start with one may use two basic indicators to estimate the size of crop
insurance business. These are:
1) worth of four major crops, namely wheat, rice, cotton and
sugarcane and 2)
grand total of funds extended under agriculture loans by all the
financial institutions for seed, fertilizer and pesticides.
If crop insurance remains voluntary, no farmer will
be keen. Therefore, the only way to implement this scheme is to make
crop insurance mandatory. Bulk of the general insurance business is
realized due to mandatory requirement of financial institutions which
demand insurance of goods in transit, plant and machinery, stocks and
vehicles. A similar approach should also be followed at the time of
credit disbursement to agriculture sector.
The critics may say that most of the farmers are poor
and cannot afford payment of insurance premium. This is an over
exaggeration of the fact. It is on record that 98 per cent of cultivable
land is controlled by less than two per cent of the total farmers.
Therefore, it will be the land owners who will be required to pay the
premium. However, agri sector experts also say that most of the land
owners fall in the category of 'absentee' land owners and
farmers/workers are forced to pay all types of taxes.
According to sector experts some common denominator
has to be used. In Pakistan this common denominator is PIU (produce
index unit). Since land revenue and loans are approved on the basis of
PIUs, the same may also be used for payment of crop insurance premium.
As the basic purpose of crop insurance is to hedge the risk of medium to
small farmers, the size of applicable PIU can be worked out with the
help of Agriculture Development Bank of Pakistan (ADBP), which has the
longest history of credit extension to farmers.
Analysts say that various models are also available
round the globe, including our neighbouring country India. Based on
their experience and expertise detailed strategy can be developed. It
may also be mentioned that initially part of the premium may be realized
from other stakeholders. In agriculture there are three main
the government, 2)
financial institutions and 3)
One may raise the question, why should the government
and financial institutions share the premium? In case of any natural
calamity the government and financial institutions get the biggest hit.
With the shortfall in the produce, the government has to spent millions
of dollars for the import of these commodities. The shortage also
The SECP has recently appointed Etrat Rizvi as
Commissioner Securities (Insurance). He has very aptly managed various
financial institutions. Implementation of crop insurance is a test case
for him. The insurance companies must help him in making this dream come