Earlier, it was established that 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 this article, more details about agricultural risks and insurance will be explored.
Insurability of Risks
Not all risks are insurable. To be insurable, a risk must satisfy the following main criteria:
- The probability of a loss in the future should lend itself to estimation. This is possible only if reliable data of losses is available for a sufficiently long period in the past.
- The loss must be capable of being estimated in financial terms.
- The probability of occurrence needs to be in a medium range: if it is too high, the premium will not be affordable; if it is too low, it will not be possible to use the record of occurrences to estimate the likely distribution as accurately as possible.
- The occurrence of an event, or the damage it causes, should not be affected by the insured’s behavior (moral hazard).
- To the extent possible, the risk should be an independent risk.
- The risk must be of a fortuitous character.
- It should be measurable in large numbers.
- The cost of insurance or premium should be within the means of the average farmer.
In line with the conditions for the insurability of risk, the probability of occurrence of death, fire losses, and accidents is measurable and hence insurable only because the number of observations is sufficiently large and independently randomly distributed.
Furthermore, risks and uncertainties resulting from natural hazards lead to losses not only in the field but also during storage, packaging, and marketing of agricultural commodities.
Pests, diseases, and parasitic attacks are also hazards that occur most frequently on farms annually and cause a very high percentage of both field and post-harvest losses of agricultural products.
Pilferage is a social risk that farmers have to contend with at different stages of crop and livestock production. If the pilferage is substantial and the losses can be estimated in financial terms, then it is an insurable risk.
Read Also: 12 Medicinal Health Benefits of Emilia Sonchifolia (lilac tasselflower)
Types of Agricultural Insurance
There are different types of agricultural insurance in countries where agricultural insurance has developed. The three types of insurance that all farmers should undertake are:
- Property and casualty insurance.
- Health, life, and disability insurance.
- Liability insurance.
Crop insurance is a very important type of property insurance that can be used effectively in conjunction with marketing plans to reduce marketing risk. Crop insurance can guarantee a level of production, thus removing the risk associated with forward pricing or selling crops that are yet to be produced.
Crop insurance provides the tons of the product to deliver on a contract should the insured producer suffer a loss prior to harvest.
Medical expenses due to a serious illness or injury can wreak economic havoc on a family. Farmers are more likely to be disabled than killed in accidents, and a good disability policy is as important as life insurance and is a good risk management tool.
A liability policy protects a farmer against claims or lawsuits brought by persons whose property or person has allegedly been injured by the farmer’s negligence.
Crop Insurance as a Risk Management Tool
Crop insurance is a mechanism to protect farmers against the uncertainties of crop production due to natural factors beyond the farmer’s control. It is also a financial mechanism that minimizes the uncertainty of loss in crop production by pooling most uncertainties that impact crop yields, so that the burden of loss can be distributed.
Crop production involves numerous risks natural, social, economic, and personal. However, the principal characteristic that distinguishes crop production from any other activity is its great dependence on nature.
Unlike almost any other activity, crop production has to be carried on in the face of continual uncertainties arising from diverse natural and social elements.
Normally, the greatest impact of all these elements falls on crops, which remain under the open skies for weeks and months. Uncertainty of crop yield is thus one of the basic risks that every farmer has to face, more or less, in all countries, whether developed or developing.
These risks are particularly high in developing countries, especially in the tropics, as in most of these countries, the overwhelming majority of farmers are poor, with extremely limited means and resources. They cannot bear the risks of crop failure of a disastrous nature.
It is true that much of the present uncertainty of crop production in developing countries like Nigeria could be removed by technical measures and by improvements in the social and institutional setup.
The need for a complete set of initiatives in this regard cannot be overemphasized. Still, a good deal of uncertainty will always remain, as no imaginable measure could make crop production completely independent of natural factors. Also, the physical measures envisioned need to be justified by their cost-benefit ratio.
There may be many places, for example, where floods are preventable, but the cost of prevention measures would be far out of proportion to their benefit. In such cases, it would be bad economics to spend more capital on preventing a risk than would be lost by the risk itself (especially where capital is so scarce).
Secondly, with a growing population constantly pressing against land, no part of it could be given up for cultivation simply because it is subject to periodic risks of failure. It is as much in the country’s interest as in that of the individual owners that such lands should be kept under plough, even if there are occasional risks of failure.
Therefore, the risks of crop production have to be faced. However, a serious crop failure has a cascading effect, leading to serious repercussions for the entire community. Calamity relief by the government is a privilege and not a right; hence, farmers cannot always expect it.
Besides, the Nigerian government’s response to risks on the farm often comes only when the calamity affects a very large number of farmers. An important measure that is largely free from the above difficulties is crop insurance against all natural and unavoidable hazards.
Read Also: Factors Affecting Mineralization and Nitrification Dendrobium Nobile Medicinal Plant
Livestock Insurance as a Risk Management Tool
Livestock insurance is defined as a contract by which the insurer agrees to indemnify the insured against loss sustained by reason of injury or the death of livestock due to the happening of specified perils or a contract to pay a certain sum of money on the death of an animal from disease or accident.
The livestock industry is subject to outbreaks of pests and diseases, which often result in great losses to farmers. A recent experience of poultry farmers in Nigeria with the outbreak of avian flu led to the loss of a large number of birds and significant financial losses. Disaster relief was granted to the poultry farmers to the tune of 631 million naira.
Sometimes, risks may be farm- or local-specific and not a national issue; such risks might not attract disaster relief. To combat such risks, farmers need livestock insurance to be protected.
Livestock insurance helps farmers who lose their animals to severe drought conditions and outbreaks of pests and diseases, as they often do, to receive monetary compensation to either allow them to restock faster, invest in other productive activities, or even purchase food and other items of necessity.
Livestock insurance protects pastoralists against the full impact of drought-related losses. Insurance programs encourage productivity and returns from livestock-based livelihoods.
In this article, the basis for which agricultural risks can be insured, the types of agricultural insurance, and how each is used as a tool in risk management have been discussed.
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!
