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Offering the Food-provider a Secure Life with Crop insurance

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In several developing countries, rural communities survive mainly on agriculture. Smallholder farms are the livelihoods of over 2 billion people; hence, to reduce poverty on a global level, it is necessary to improve smallholders’ conditions.

Such rural smallholder farmers lead a life full of difficulties and several constraints are present to limit their financial potential. Difficulties mainly include unsure climatic conditions impacting harvests, limited access to capital as well as farm supplies like seeds or fertilisers, insecure ownership of land that restricts the propensity to invest, price fluctuations and unfavourable trade policies.

Most of these constraints are out of the farmers’ control as they are dependent on climatic conditions, market players or policies. For instance, a female farmer in a traditional rural community is quite unlikely to own the land on which she works. Thus, she won’t have any collateral and since market prices and demand are volatile and her work is highly exposed to natural disasters, lenders could find her business too unsafe to invest in. Even banks are unlikely to lend money to farmers in calamity-prone areas if the calamity might lead to widespread loan payment defaults.

Crop insurance has the ability to solve some of these difficulties faced by farmers by allowing access to the means of production as well as changing behaviour by minimising uncertainty. Coverage offered by crop insurance allows farmers to invest in more challenging but possibly more lucrative farm works. Prompt payouts of insurance after losses of crops can help smallholder farmers smooth consumption as well as avoid the sale of assets. Insurance can also act as a catalyser, since there are more chances that lenders will extend credit to farmers that are covered by insurance, enabling them to make investments that will enhance productivity.

Pilot studies have evidence that suggests that the farmers’ behaviour can be highly impacted by insurance. For example, in India, farmers that bought rainfall insurance changed their investment towards cash crops, which are more sensitive to rainfall shortage but can give higher returns. Farmers in Ghana increased their cash investments, labour inputs and cultivation area with rainfall insurance. However, the ultimate influence of insurance on the total worth of farm outputs remains less apparent.

The main challenge now is to take such programs to scale in order to be sustainable. Several of the earlier schemes have not extended beyond pilot studies and the next few years will actually reveal what amount of success the agriculture micro-insurance will get as a workable risk management solution.

However, demand for crop insurance is still not very high since several smallholder farmers cannot rightly judge the frequency and severity of risk, extent of consumer awareness is still not very wide, insurance providers have not been able to gain trust and an overdependence exists on the traditional coping mechanism like borrowing from relatives or selling assets to cover the losses after a calamity.

This low demand makes the supply of workable agriculture micro-insurance difficult especially when providing insurance as a stand-alone. Most insurance projects become successful when they are combined with other services, like in-kind seed payouts, loans and government programs with enhanced infrastructure and soil conditions.

Due to the diversity of constraints faced by smallholders, crop insurance can be more efficient if included in a comprehensive disaster risk management strategy. For example, certain climate-based index products in Peru make use of climate parameters like rainfall to stimulate payments even before an event so that farmers can take preventative actions for the protection of their crops.

Farm insurance eventually appeals most when provided along with other services like weather predictions through text messages as well as extension services like costs and other market information, which together with standard agricultural advice like optimal planting time for crops are supposed to be greatly valuable for smallholders. For instance, a program in Ethiopia stresses all factors of risk management from prevention to generating financial reserves to rely on in the situation of future risks. If incapable of paying the insurance premium in cash, there is a facility for the farmers to engage in risk minimising labour, like building of small water retention basins as well as afforestation.

The potential of crop insurance lies in adding to the prevention as well as management of risks and enhancing the behaviour or smallholders towards higher and more lucrative investments while allowing them to use more financial services. However, the micro-insurance sector is comparatively new and so, there are hurdles to be overcome to reach out to remote communities effectively, including small size of markets, lack of required infrastructure, lack of demand and lack of client understanding with financial products. Basis risk, in which indices calculated don’t accurately mirror the experienced loss, remains an important issue. From the viewpoint of consumers, there should be continuous efforts to increase financial literacy so as to take care of low demand and insurance providers should keep focusing on generating products which are sustainable, valuable as well as customised to the context-specific requirements of clients.

Though the above conditions apply to developing countries, one of the most developed countries like Australia has farmers that work in one of world’s riskiest farming environments. However, unlike their counterparts in Europe and North America, they don’t have an easy access to income protection insurance.

Although Australian homeowners are needed to buy mortgage insurance on their home loans, farmers are not offered similar protection as other Australians on the banks excluding their properties, which are actually Iivelihoods.

If farmers are allowed to buy affordably priced income protection insurance like crop insurance, it would offer them a similar protection if they are not able to maintain their mortgage repayments because of farm conditions or something out of their control such as low export market prices, poor climatic conditions or adverse exchange rates.

Some of the major issues with insurance had been the rates of premiums, a tendency for insurance programs to lure farmers with high risk levels and farmers’ ability to affect loss levels through management decisions.

Considering all these factors, it’s obvious that there should be affordable crop insurance for farmers so that the food-providers will have a secure life.

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