Agricultural insurance is an insurance policy taken by a farmer, who enters an insurance contract by paying a premium to a company, which assumes the transferred risk. Based on the conditions stipulated in the contract ‘policy’. Such a company undertakes to indemnify the farmer in case of a loss.
Several people and farmers face prospects of tragic livestock mortality and crop failure, due to extreme events like floods and drought becoming more frequent, a shift in rainfall patterns and climate change. Agricultural insurance is important in assisting governments, farmers, and herders to reduce the negative financial effect of these adverse natural events. Agricultural insurance does not only entail crop insurance; it also applies to bloodstock, aquaculture, forestry, livestock, and greenhouses.
Farmers understand the risks they face and based on this, design techniques for reducing the effect of weather-related hazards. Through their choices of crops, management practices, and marketing channels, farmers use the knowledge they have and experience to plan and implement methods for maximizing income and minimizing risks. Therefore, Agricultural insurance entails managing tools and strategies to improve certainty in agricultural activities that are exposed to different external sources of risk that create a gap between expectations and results.
In case a farmer incurs a loss, then it is the duty of the insurance company to verify the loss and begin the process of payouts. The insured farmer receives the indemnity for damages incurred as per the terms of the policy
Reasons for Agricultural Insurance
Agriculture is exposed to several risks that can affect production results. This is because:
- Farming is an open-air activity that is vulnerable to natural phenomena that may be disastrous in some cases.
- Farming is subject to the risks underlying in the macroeconomic, social and political environment, such as changes in government intervention (export and import permits, regulations, and exchange rates), political administration, and social conflicts.
- Similar to other economic activities, agriculture is subject to market fluctuations (changes in prices of inputs and products) and in commercial systems.
Importance of Agricultural insurance
Agricultural insurance guarantees protection against loss (damage) in exchange for premiums (a series of fixed payments). Agricultural insurance is designed to protect farmer’s agricultural properties by compensating them for insured loses. It is mostly important to lower the uncertainty level regarding the possibility of adverse events disrupting their plans. Agricultural Insurance serves the purpose of lowering the level of uncertainty because it is based on actuarial and statistical methods.
Agricultural insurance market
In the recent years, direct premiums for agricultural insurance have rapidly grown from US $8billion in 2005 to approximately US $18.5 billion in 2008 and continues to grow. Three reasons have majorly contributed to the growth in agricultural insurance. The first reason is the inherent value of agricultural production in recent years, which has directly affected agricultural insurance premium volume. The second is the development of new markets for agricultural insurance and rise in public sector support in existing markets, which has led to a rise in the demand for agricultural insurance. Third is the increase in value of agricultural assets, which has increased the sensitivity of agricultural value chain participants to loss, therefore, increasing their demand for insurance.
