Agricultural insurance, in the form of either crop insurance or livestock insurance, is an area of obvious interest in the microinsurance field. Agriculture provides all or some of the income for an estimated 70% of the world’s poor, and it also represents a substantial portion of the third-world population’s household wealth. In rural Kenya, a few cows can be a large part of a farmer’s wealth and, therefore, managing the risk in cattle raising is highly desirable. In a great many locations, food and fodder crops occupy a similar position in farmers’ lives. If we think of insurance as a mechanism for income and wealth security, it is clear why there is a rising interest in crop and livestock insurance services in the third world.
Together with my Milliman colleague Richard Lord, I assisted in evaluating data for a research project in the Eastern Region of Ghana conducted by Innovations for Poverty Action (IPA), a nongovernmental organization (NGO) dedicated to helping the world’s poor find ways of improving their lives. IPA’s goal in the project was to discover what factors inhibited farmers from investing in technologies such as hybrid seeds, fertilizer, or irrigation—factors that could improve the yields of their crops, in particular maize (corn) and eggplants. Milliman’s part in the study was minimal, but it gave us some generalizable insights into the viability of crop microinsurance.
IPA hoped for results that might encourage a private Ghanaian insurance company to offer crop insurance on the micro level. Agricultural insurance is a challenge for private insurers, however. Microinsurance policy values are by definition very small, and distribution and claims adjustment costs can be high relative to the value insured, which can make the price of a policy unattractive to consumers. And when the situation involves potentially catastrophic exposures—insurance against floods in Bangladesh, for example—purely private microinsurance may simply not be viable.
However, there may be intelligent ways for governments to subsidize microinsurance so that private insurers could step into the agricultural area. Governments do provide disaster relief; if they could channel some of that expense into insurance and appropriate risk management in advance of disasters, the outcome might be a win for farmers and insurers alike. Priced efficiently, insurance would be costly in areas prone to floods, hurricanes, severe drought, etc., and more affordable in safer locations. Farmers concerned about the risk of disaster might have less incentive to locate in disaster-prone areas.
Milliman’s role is not to make policy. Our role, if requested, is to provide technical services to assist insurers, reinsurers, NGOs, and others on how to design microinsurance products. We are experts on pricing and risk adjustment—skills that are in short supply in most third-world countries—and we can help evaluate the viability of crop and livestock microinsurance. We can add value by creating a realistic set of expectations to all concerned; our guidance can inform microinsurers about what is practical and doable.