Crop Insurance: Is it Workable in Sri Lanka?

Farmers have been severely affected by various natural calamities – floods, droughts and excessive rainfalls during the recent years. At macro level, the decrease in paddy production due to unfavourable weather conditions including droughts was 27% in 2014, when compared to production statistics of the previous year. Whilst important, weather-related risks are merely one component when it comes to overall risks and uncertainties faced by farmers – which include price risks, market risks, etc.  Recent unexpected changes in climate patterns have worsened the situation.

 

When affected by a natural calamity, farmers face numerous additional issues in farming as well as in their household economy.  A farmer from Nachchaduwa who was severely affected by floods in 2014 said: “Everything was washed away,   Not only rice, our maize cultivations were also destroyed”.  Floods and droughts are widespread disasters, which have area-wide implications.   “We did not have any other income.  We, farmers tend to work as agricultural labourers in others fields when we face difficulties.  But when everyone’s cultivations are destroyed, where can we go?” he added, highlighting their struggle in coping with such events.

 

To this end, promoting effective risk management among farmers is important. In facing the impacts of a natural disaster, there are several ways of ‘risk management’, namely: avoiding risks, reducing risks and sharing risks.  Risk sharing has been gaining a lot of consideration – which comes in the form of insurance.

 

Insurance

 

Crop insurance was introduced to Sri Lanka several decades ago.  It was first introduced as a pilot project; later, the Crop Insurance Act (No 13 of 1961) was passed in 1961 to provide the required legal framework for the operation of regular crop insurance.  The Agricultural Insurance Law No. 27 of 1973 came into operation in 1974 to make provisions for a more comprehensive scheme.  The Agriculture and Agrarian Insurance Board (AAIB) was established in 1999, which is the responsible government agency for undertaking the government crop insurance programme now.   A private insurance company entered the crop insurance business in 1993, and it is primarily being conducted as a welfare programme along with its other financial services.  Both insurance programmes are voluntary and indemnity-based where insurance payout is based on the crop damage.

 

According to the Central Bank Annual Report 2015, when just these two voluntary insurance programmes are taken together, only less than 4% of the paddy-cultivated area (on average) is insured during 2003-2015. In most of the cases, crop insurance is obtained as a requirement in getting agricultural loans.

 

A survey of 750 farmers, conducted as a part of a research study by the Institute of Policy Studies of Sri Lanka (IPS) last year, in selected sites in the Anuradhapura district revealed that the demand for existing insurance schemes is considerably low.  Over 31% of the farmers interviewed during the survey mentioned that they are not aware of how crop insurance work.  Another 23% of farmers have doubts regarding the process of crop insurance.  Most farmers during the discussions highlighted that they do not understand the real benefits that crop insurance bring in for small-scale farmers like them.

 

Farmer unawareness seems to be a major barrier for taking up insurance in the rural areas.  There has been a compulsory crop insurance programme introduced in 2013 by the government, which was bundled with the existing fertilizer subsidy programme.  A mark-up was added to cover the insurance premium when obtaining fertilizer at a subsidized price.  Due to the compulsory nature of the programme, the area percentage insured recorded 72 and 90 during 2014/15 Maha and 2015 Yala, respectively.  However, lack of awareness of its intended benefits is also an issue with regard to this scheme.

 

Innovations in Crop Insurance

 

Index-based crop or weather insurance has been receiving much popularity particularly in developing countries (such as in India, Kenya Ethiopia), as a way out for certain inefficiencies of indemnity-based crop insurance.  In index-based weather insurance, the payout is based on a certain weather index, for instance, rainfall.  The weather index is correlated with the crop yield.  Index insurance is characterized by low transaction costs, as it does not require crop damage assessments in the field.  In addition, it lacks moral hazard and adverse selection problems, which are associated with traditional indemnity-based insurance products.

 

Sri Lanka has a very short history in this regard. It is vital to implement an effective awareness creation programme to educate farmers on the benefits of index-based crop insurance.  However, the discussions with key stakeholders reveal that there are several technical challenges in implementing index-based insurance in Sri Lanka.  The absence of required rainfall and yield data are significant in this regard.  Lack of weather stations and delays in getting data on a frequent basis are attributed to the unavailability of rainfall data in most cases.

 

What Works for Sri Lanka?

 

As of now, crop insurance is not a popular tool for climate risk management, although both public and private crop insurance schemes have been in place in Sri Lanka for several decades.  Given the recent variations in climate patterns, it is important to identify gaps with regard to crop insurance take-up as a risk management strategy.  In particular, the aspects of crop insurance demanded by farmers have to be researched in the case of Sri Lanka.

 

IPS is currently conducting a comprehensive research to study risk management strategies of farmers and demand for climate insurance amidst a changing weather pattern.  The study aims to bring in suitable policy recommendations to help farmers better manage climate risks and improve adaptation.

 

This article is based on an IPS research study titled Risk Management Strategies and Demand for Climate Insurance by Dry Zone Farmers in Sri Lanka, funded by the Global Development Network (GDN).  The research proposal submitted by Kanchana Wickramasinghe won First Prize for the Japanese Award for Outstanding Research on Development in the Global Development Awards and Medals Competition of the GDN in 2014. 

 

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  • Hemal de Silva

    It is obvious from the statistics given and the views expressed that Crop Insurance in Sri Lanka has failed. In Anuradhapura District the majority interviewed are either unaware of the benefits or have no idea how
    it can be beneficial at all. According to the CB report, less than 4% of the paddy-cultivated area (on average) has been insured during 2003-2015. This is the end result 10 – 20 years later after attempting to introduce and implement the schemes to assist farmers.

    Innovations to improve the situation are being formulated. Index-based crop or weather insurance instead of the traditional indemnity-based insurance products is being seriously considered. How long will
    the research and policy recommendations and their implementation take, if they are accepted at all? To be certain of whether the situation will improve or not will take many more years.

    The views of the farmer from Nachchaduwa explain the plight faced by not all farmers but, those who concentrate on growing short term crops only with the limited resources available in order to earn an income within a short period of time. It must be noted that farmers face not only natural calamities but price and market risks as well. Further, there is no mention of the damage from wildlife, poor living conditions, health and possibly other unidentified risks.

    While all farmers are not living in poverty, many face the expected and unexpected difficulties. Is Crop Insurance the Sole Solution for Risk Management among farmers in Sri Lanka?

    What appear to be essential are innovations in growing suitable crops and giving the farmer or groups of farmers the ability to add value rather than sell it soon after the harvest. Otherwise a fool proof GPS
    should be established. A successful example is the payment for Tea green leaf. Even when the industry is not viable, small holder growers continue to extend their acreage under the crop.

    If such a scheme is not practical, diversification of highland and lowland where possible is another solution. This is not an unknown innovation. What are the reasons for some farmers to be successful while others
    are living in poverty? Where possible all farmers must be encouraged to grow perennial crops giving harvests of crops that need not be sold immediately, if the prevailing prices are not attractive. Perennial trees and creepers that yield produce that can be value added on a small scale or in demand from food
    processes should be encouraged. In the dry zone highland perennial trees that will yield vegetable oils and fats can be successfully established at convenient distances enabling the farmer to grow short and annual crops as well. These crops have not even been considered or tried out. A perennial tree will always be more beneficial to the environment much more than short term or annual crops.

    In several African countries, India and Indonesia vegetable fats are produced mainly by women collecting the raw material (seeds) for extracting the oil / fat by themselves, individually or collectively. Shea,
    illipe, Sal and Kokum are extracted from seed collected from forests and are called “Exotic fats”. Mango seed kernel is another butter produced in India. These are all substitutes for cocoa butter and approved in cocoa butter equivalents for high quality chocolates. They are in demand from global cosmetic, food and confectionery industries.

    The unfortunate experience of the farmer from Nachchaduwa indicates that financial assistance after a serious crisis will definitely help but the real solution is to show him how not to be in the same situation once again.

    Hemal de Silva

    hsdes59@yahoo.com

    • Kanchana Wickramasinghe

      Thanks for the comment. Insurance is not the only solution or tool for risk management, as you have correctly pointed out. There are many aspects which need to be considered in improving the ability of farmers to face various kinds of risks they face in effective manner. Accordingly, there are several approaches of
      risk management namely risk reduction, risk avoidance, risk retention etc. Crop selection, crop diversification etc are
      important elements in this regard as you have mentioned. This article focuses on the role of a risk transfer tool – crop insurance. The basic idea is to see if existing crop insurance programmes actually play a role in facing climate-related risks and the relevant issues. However, it does not mean to say that crop insurance is the only the solution.