The farmer is the agent best positioned to understand the dimensions, characteristics, and correlations of the risks that affect their farm. They are also best positioned to evaluate the availability of different strategies to deal with these risks.
It is the farmer’s responsibility, as the manager of their farming business, to make appropriate decisions to manage the risks associated with their economic activity farming.
The generic strategies to reduce risk include risk sharing, risk pooling, and diversification. Insurance is one major way of pooling risks together, aiming to reduce the impact of risks when they occur.
Read Also: Photosynthesis, Plant Growth and Partitioning of Assimilate
Meaning and Scope of Insurance
There are numerous definitions of insurance, and a few of them are considered in this section to provide a solid background on the topic of discussion.
A. What is Insurance?
In general, insurance is a form of risk management used to hedge against a contingent loss. The conventional definition is the equitable transfer of a risk of loss from one entity to another in exchange for a premium or a guaranteed and quantifiable small loss to prevent a large and possibly devastating loss.
Insurance is a means of protecting against unexpected loss. It is a financial response to risk that provides a specialized source of liquidity.
Insurance is defined as the elimination of the uncertain risk of loss for the individual through the combination of a large number of similarly exposed individuals who contribute to a common fund, with premium payments sufficient to cover the loss caused by any one individual.
Insurance is also defined as a social device providing financial compensation for the effects of misfortune, with payments being made from the accumulated contributions of all parties participating in the scheme.
Insurance involves the substitution of a small, known cost for the possibility of a large but uncertain loss. It is a provision made for the protection of persons or property against risk and uncertainty.
Agricultural insurance is an agreement in which a farmer pays a premium to an insurance company, and the company agrees to indemnify the farmer against losses, accidents, injuries, and unpredicted environmental factors that are likely to affect crop and livestock output whenever they occur.
Insurance is a contract in which the insured agrees to pay a premium to the insurer, and the insurer agrees to indemnify the insured against loss resulting from certain events or to pay a certain sum of money upon the occurrence of a specified event. As a contract, the insurer promises to indemnify (compensate) the insured against losses that may occur in the future, upon the payment of a premium.
B. Types of Insurance
Broadly speaking, there are two types of insurance: self-insurance and commercial insurance. Everyone has insurance; either they buy insurance from an insurance company, or they insure themselves. When self-insuring, there are no premiums to pay, but in the event of a loss, the individual pays the full amount. In other words, with self-insurance, the policy has a 100% deductible.
1. Self-Insurance
Self-insurance is a type of insurance in which an individual or organization refuses to buy insurance from an insurance company, choosing instead to bear the consequences of risks that may occur in the business enterprise. Self-insurance involves maintaining a reserve of funds to offset a loss.
Merits of Self-Insurance
The merits of self-insurance include:
i. Savings in risk management expenditure.
ii. Savings from the cost of taking an insurance policy.
iii. No payment of premiums on the assets of the organization.
iv. The industry’s claims experience does not increase the organization’s cost of risk transfer.
v. Direct incentive to reduce and control the risk of loss.
vi. No disputes arising, as no contract exists between an insurer and insured in the event of loss.
vii. Funds are available for engaging qualified personnel for the insurance department.
Demerits of Self-Insurance
The demerits of self-insurance include:
i. A catastrophic loss without an insurance policy could lead to the liquidation of an organization.
ii. An aggregate of losses could have the same effect as a catastrophic loss.
iii. It could lead to tying down investable funds for the purpose of risk financing.
iv. Self-insurance leads to incurring extra costs for employing staff for the insurance unit.
v. Lack of access to technical advice from insurance companies on risk management and control.
vi. Contributions to the risk financing funds may not be exempted for tax purposes.
2. Commercial Insurance
Commercial insurance involves buying insurance from an insurance company by an individual or organization in exchange for a premium. Both self-insurance and commercial insurance involve costs for risk protection.
The idea of insurance is to buy protection against a loss. Expenses associated with providing commercial insurance may vary from 10% to 50% or more of the premium.
The premium paid by most individuals will far exceed the amount they receive back from the insurance company. A type of commercial insurance, agricultural insurance, is the focus of the next subsection.
Read Also: Plant Disease Album Preparation Guide
Meaning of Agricultural Insurance
Agricultural insurance is a financial tool to transfer risks associated with farming to a third party via the payment of a premium that reflects the true long-term cost to the insurer assuming those risks. Agricultural insurance is a special line of property insurance applied to agricultural firms.
In recognition of the specialized nature of this type of insurance, insurance companies operating in the market either have dedicated agribusiness units or outsource the underwriting to agencies that specialize in it.
Agricultural insurance is defined in the Nigerian Agricultural Insurance Scheme (NAIS) operation guideline (1989) as the stabilization of income, employment, prices, and supplies of agricultural products by means of regular and deliberate savings and accumulation of funds in small installments by many farmers during favorable time periods, to defend some or a few of the participants during bad time periods.
According to Akubuilo, Umeabali, Mgbada, Ugwu, Egwu, and Awoke (2007), agricultural insurance gives farmers minimum protection against the risk of crop or livestock failure in return for the payment of a stipulated premium.
In the event of losses, the insured farmer claims indemnity as a matter of right, and eventually, the losses are wholly or partly shared by the insured farmers themselves. Such contractual rights to assistance further enable farmers to improve their creditworthiness and stabilize their income.
This is a source of confidence for farmers as they venture into the adoption of innovation. It removes the fear of using credit facilities by guaranteeing protection against loan repayment.
The National Insurance Corporation of Nigeria (NICON) and Nigerian Agricultural Insurance Corporation (NAIC) operate an agricultural insurance scheme for the benefit of farmers, as described in subsequent units.
The scheme provides financial relief to insured farmers who suffer losses arising from insured risks and uncertainties. The insurance company is a financial institution involved in the protection of persons and property against risks.
In Nigeria, insurance existed in a rudimentary form prior to the introduction of modern insurance business through associations, clubs, and societies whose members made regular contributions to receive assistance in the event of misfortune or death.
These informal insurance organizations still exist due to some difficulties associated with modern insurance, such as unnecessary delays or outright refusal to compensate the insured, ignorance, and the existence of social life (Aneke, 1998).
Insurance is regarded as a pool of risk because a large number of people who may likely suffer the same loss insure their property by contributing funds to a central pool supervised and administered by the insurance company.
This small annual contribution is usually calculated in such a way that it will be sufficient to indemnify those who actually suffer the insured loss, as well as profit the insurance company.
Not all the insured suffer losses arising from the insured risk at the same time. This ensures that the insured is properly compensated whenever they encounter any risk insured against. By so doing, the fortunate encourage the unfortunate who suffer losses (Esheya, 2011).
However, some risks are insurable, while others are not. Insurable risks occur regularly, and the insurance company calculates, with some degree of accuracy, the likelihood and predicts, based on past statistics, the occurrence of such risks.
Conversely, calculations and predictions cannot be made for non-insurable risks due to a lack of statistical data. Examples of non-insurable risks include risks arising from war, risks incapable of measurement (unforeseen changes in fashion, marketing of new products), risks that are too small and recur too frequently (breakages of crockery or cooking utensils), and very large and infrequent risks (risk of modern nuclear warfare).
Thus, insurance may be seen as a kind of fund into which all those insured pay an assessed contribution (called a premium). In return, those insured have the right to call on the fund for any appropriate payment should the insured event occur. The need for agricultural insurance arises because the sector is exposed to a variety of risks and uncertainties.
There are several features of this type of insurance that validate it being treated as a special line of business. Difficulties in achieving adequate diversification due to the nature of the risk, asymmetries of information in underwriting, the geographical dispersion of agricultural production, and the complexity of the biological processes of production, which require skilled and expert underwriting, justify it being considered a special business line.
Scope of Agricultural Insurance
Agricultural insurance is designed to provide coverage for financial losses incurred due to a reduction in expected outputs from agricultural products. The major products are crops and livestock. Others include fisheries and forestry. Crop insurance and livestock insurance provide the two broad categories for which commercial insurance covers are designed.
Due to the complexities brought to agricultural ventures by mechanization, a broad range of traditional policies namely personal accident, fire, vehicles, machinery, and public liability covers are made essential parts of comprehensive agricultural insurance package.
Agricultural investments, unfortunately, are among the most risky economic ventures one can embark upon. The absolute dependence on unpredictable weather conditions, such as hailstorms, floods, droughts, and other natural hazards, makes income from crop production very unstable.
Other agricultural products, such as livestock, poultry, and dairy, are exposed to risks that occur in catastrophic proportions. The recent cases of bird flu and swine flu in Nigeria come readily to mind.
Agricultural insurance policies protect farmers against these unforeseen circumstances by way of indemnification. They also serve as securities for banks for financial losses suffered by farmers from damages to their products and provide funds for servicing loans.
The capacity of the agricultural sector to hedge itself from the vagaries and aberrations of nature is considered critical to its development and growth. Many factors, including disasters, can slow the development process by reducing domestic food supplies and raw materials in the short term.
Natural disasters, such as droughts, floods, and cyclones, are a major source of risk in agriculture. A large expanse of cropped land is vulnerable to drought to varying degrees.
Globally, on average, crops on millions of hectares of land are damaged annually by natural calamities and adverse seasonal conditions, grossly impacting the level of agricultural productivity and production.
The need for agricultural insurance cannot be overemphasized, as it is a highly risky economic activity due to its critical dependence on weather conditions.
Most farmers use various forms of insurance to protect against specific types of losses. Fire insurance provides liquidity to replace losses due to fire. Most farmers find that commercial fire insurance is more cost-effective than self-insurance (maintaining a reserve of funds to offset a loss).
Risks that have a low probability of occurrence and very adverse consequences are the most logical risks to insure against. Liability, major medical, disability, and fire/extended coverage on buildings, equipment, and livestock are examples of insurance that many farmers carry.
Self-insurance, included in the normal cost of doing business, is generally more cost-effective for risks that occur frequently and cause only minor problems. Insurance to protect against hog deaths in finishing could probably be obtained, but farmers typically average out these losses as part of normal production costs.
Many other types of insurance with different levels of coverage are available. One’s financial position is important in determining whether to self-insure or buy commercial insurance.
A farmer in a strong financial position who uses the car only to drive to church might logically decide not to carry collision insurance, even with a very high deductible. In contrast, another farmer in a weaker financial position whose spouse drives to work every day may logically carry collision insurance with the minimum deductible.
The nature of agricultural production and agricultural products has made the design and implementation of an appropriate insurance program for agriculture a very complex and challenging task.
Benefits of Agricultural Insurance
The overall benefits of agricultural insurance are outlined below:
i. Cushions the shock of disastrous crop and livestock losses by assuring farmers a minimum level of protection.
ii. Crop and livestock insurance spreads losses over space and time. As agricultural income is an important factor in national income, crop insurance also affects the prosperity of the country.
iii. It gives farmers greater confidence in making greater investments in agriculture.
iv. It improves the position of farmers in relation to agricultural credit.
v. The government is relieved of the present uncertain financial burden of providing relief.
vi. It can help normalize the availability of supplies and stabilize prices.
vii. It helps maintain the dignity of farmers.
viii. It enables the maintenance of systematic records of crop and livestock production.
Do you have any questions, suggestions, or contributions? If so, please feel free to use the comment box below to share your thoughts. We also encourage you to kindly share this information with others who might benefit from it. Since we can’t reach everyone at once, we truly appreciate your help in spreading the word. Thank you so much for your support and for sharing!
Read Also: Best Organic Fertilizer for Vegetable
