Insurance Association of Pakistan played a major role and prepared an ideal crop insurance scheme with the help of the largest reinsurer, Munich Re of Germany.

Dec 18 - 24, 2006

Experts describe natural hazards as the chronic stagnation in agriculture. However, Pakistan remained as a back-bencher in introducing crop insurance whereas other developing countries like Sri Lanka, India, Bangladesh, Indonesia, Malaysia, Mauritius, Philippines, Mexico, Egypt and Thailand have provided this beneficial scheme for the protection of their agriculture.

The viability of insurance for poor households and businesses, however, remains questionable as far as Pakistan is concerned. One of the most important factors leading to the viability of insurance is the trust of the stakeholders in the system - trust that claims will be paid in a timely manner, that insurers will remain solvent, that the government will assure credible regulation, that there will be sufficient oversight and a reliable legal basis. Many studies show that trust can be enhanced by stakeholder participation in the design and implementation of insurance systems and products. The experts pointed to a recent report of Federal Committee of Agriculture (FCA) which says: "The yields of major crops of wheat, cotton and sugar have remained short of targets in the current year. Wheat's output fell short of target by 1.5 million tons and stood at 20.5 million tons against the target of 22 million tons; in cotton the target was 15 million bales but only 13 million bales were achieved; sugarcane production was estimated at 44.23 million tons against the target of 48 million tons. The rice crop has shown an improvement of 8 percent i.e 5.422 million tons ".

FAC further states that steps would be taken to enhance the under cultivation area in order to increase production of major crops as well as to improve the yield per hectare. In rice increase is envisaged about 2106 kg per hectare, in sugarcane about 50 tons per hectare and in cotton about 773 kg per hectare. FCA had also confirmed that shortfall in wheat had particularly occurred due to rains and hailstorms. The experts say that crop insurance is the only solution that can provide a constant support to poor farmers in the event of a natural catastrophe. Whenever crops are damaged by these disasters, crop insurance will compensate the farmers; and thus save them from the pressure of banks for recovery of loans as well as protect them from the torture of landlords. Poor farmers' worry to procure seeds, fertilizer and other inputs to till their farms once again would be over.

India features a large number of micro-insurance programs, which can partly be explained by that country's favourable regulatory environment. Since 2000 the Indian regulatory authority has made it mandatory for formal insurance providers to service the low-income segment of society. Furthermore, there is a provision that regulated insurers must increase their shares of low-income clients over the time. Insurers wishing to operate in India are fined for noncompliance and appear willing to incur a loss on their low-income insurance business in order to access the broader market. Much like in the United Kingdom, insurers have thus made insurance affordable for the poor communities with cross-subsidies from their other lines of business and wealthier clients. Recently, some Indian insurers have started to view the low-income market as a (potentially) profitable niche. While some of these schemes offer benefits to clients, the main purpose of the insurance contract is to protect the MFI against loan and savings defaults.

Typically, the loan will not have to be repaid (or only partly repaid) in the case of a predefined disaster loss, and the MFI collects this payment from the insurer. Alternatively, the savings account will be increased in the case of a disaster-related death. These schemes cover life and/or property risks. However, the introduction of crop insurance in Pakistan has been under consideration since 1947. The Insurance Association of Pakistan (IAP) of private insurers played a major role and prepared an ideal crop insurance scheme with the help of the largest reinsurer, Munich Re of Germany. This scheme was submitted to the then federal government for implementation, which couldn't see the day of the light. This scheme is still with the IAP. If the federal government were just to instruct the representatives of the insurance industry, they would be able to run this scheme by creating a consortium of private insurers in liaison with the overseas reinsurers. Of course, initial financial support of the government will be required to make crop insurance feasible. The government has to contribute initially a sum of Rs 2 to 3 billion as subsidy. In subsequent years, it would be required to pay less money in view of its smooth running i.e more farm lands, more crops and more risks would be covered and thus it would, in turn, bring more money in its till.

Under the crop insurance scheme, the amount of subsidy can be entrusted to the committee of commercial banks which would lend Rs 130 billion to farmers during the current fiscal year. In this way, the government money will be safe and in the first year, the poor farmers would not have to contribute any amount towards premium. According to that scheme, it will cover production loan (seeds, fertiliser etc plus 20 percent of farm labour expenses); bank loans coverage will be compulsory.

Initially, crops of wheat, rice, cotton, tobacco and sunflower seeds in covered areas in all the four provinces will be included. Risks of damage to crop due to drought, fire, lightning, excessive rains, floods, hailstorm, excessive frost, locusts and diseases caused by excessive rains and floods will be provided. Losses up o 20 percent of the normal yield will not be paid. Losses exceeding 20 percent will be payable proportionately after deducting 20 percent but in case of total loss of crop, the sum assured without deduction of 20 percent, will be payable. Payment of claims will be made to loaning agencies and premium will be paid by lending agencies to insurers. Crop insurance cannot be ignored. It is the need of the hour not only to boost the food grains production but also to combat natural hazards, such as floods, rains, hailstorm, fire, locust invasion, pests etc. It will help solve many socio-economic problems. It will also protect farmers, especially small ones, from financial ruin and help the lending agencies to reduce the writing off of debts.

It will overcome food shortages, generate employment opportunities, reduce poverty and improve foreign trade balance.

Last but not the least, the introduction of crop insurance will help government know the yield of each unit which in the long run will assist the taxation authorities to bring all landlords, who are exempted at present, under the net of tax. Experts say that the existing risk coping mechanisms appear unable to provide complete protection against exogenous shocks. They say that possible explanations for imperfect insurance are that credit constraints limit the effectiveness of precautionary saving, commitment failure limits the enforcement of informal reciprocal arrangements, and information does not flow perfectly among community members, thereby reducing the scope for formal or informal contingent contracts. To the extent that full insurance is not achieved, exposure to risk affects the ex ante production choices. There has been ample empirical work on risk avoidance. However, in particular, it is unclear whether existing insurance institutions, in spite of their imperfections, are sufficient to ensure that the effect of risk on ex ante production choices is negligible and can be ignored.