The Importance of Crop Insurance and how MIS will help to develop their future packages in particular to the small scale farmers of Uganda. By: Newton.

The Importance of Crop Insurance and how MIS will help to develop their future packages in particular to the small scale farmers of Uganda.

By: Newton Jazire

Outline

• Definition of Crop Insurance • How Crop Insurance works• The importance of Crop Insurance • Types of Crop Insurance • MIS & Crop Insurance

Definition of Crop Insurance • A contract of indemnity by which, for a

specified premium, one party(insurer) promises to reimburse another(farmer) for the financial loss acquired by the destruction of agricultural products from the forces of nature, such as rain, hail, frost, drought or insect infestation.

Crop Insurance• All these vagaries of the weather may cost the farmer a season’s crop(harvest),

hence the reason why farming is a business that is very risky.• Other than the weather , there are multitude of other things that can destroy a

farming season e.g. falling crop prices, rising costs of both equipment and supplies and transport expenses.

• The purpose of crop insurance is to mitigate the financial risk of farming so that farmers focus on harvesting their crops rather than worrying about every possible situation that could spell financial ruin.

• As with all insurance premiums the cost of the premium should be weighed against potential financial damage that would occur without having the insurance policy.

• For example if a cotton farmer receives constant rainfall during harvest time he/she may lose 43% of the expected harvest and there is no insurance cover in place, he will have to absorb this loss in his working capital.

• Therefore crop insurance protect billions of agriculture production and with the financial uncertainties and economic volalities facing today’s farmers crop insurance is more important now than ever before.

The Importance of Crop Insurance• Producers receive individualized risk management solutions- it allows farmers to

customize and their plans and coverage to suit their unique yields or risk tobacco- hail and cotton- rain.

• Farmer can use Crop Insurance as collateral for loans. It is essential for preserving production capacity and provides producers with the financial freedom to build capacity and innovation.

• Producers are forced to improve on farming standards or practices for them to be eligible for payments on incurring losses

• Producers receive insurance indemnities in the timeliest way ; before harvest in case of prevented planting or replanting payments or shortly after harvest in case of yield or revenue shortfall.

• Farmer can afford sleep as crop insurance is the only true source of bottom line protection

• Serves a spearhead for development in the rural areas and reduce emigration to urban centers to seek better life.

• Mitigates the burden on the national budget with respect to natural hazards

Insurance Policies

Perils covered by Insurance

1. Crops: Loss in Yield Due To- Hail- Windstorm- Excessive Rainfall- Drought- Excessive Heat- Uncontrollable Pests and Diseases- Fire, Lightning

1. Crops:- Farm Management Practices- Geographical Location- Historical Yield and Loss Data- Climatic (Weather) Conditions- Types of Crops- Markets- Value of Crops

Information Requirements

Classic Crop Insurance Products• 1.Damage based or Named Peril Insurance policy This covers a particular peril like hail, frost or fire and damages are normally

localized, sum insured agreed when purchasing policy, loss adjustment based on actual damage after the incidence of loss event and this type is not suitable for perils that cover wide areas like drought, pest and disease.

2. Yield based- Multi-peril Crop Insurance (MPCI)Insurance geared to a level of expected yield, rather than the damage that is

measured after a defined loss event. Suitable to perils whose contribution to a crop loss are difficult to measure and more suitable to perils that impact over a period of time.

Establishing a farmer’s yield history provides the basis for determining the % of shortfall after a loss event.

The yield is measured at harvest at may be in the range of 50 to 70% of historic average yield. Yield shortfall may be determined on an area or individual farmer basis.

1. CropsLong Term Average Yield x Total Area Planted x

Crop Value (or Input Cost per Hectare)

2. Basis of IndemnityExpected Yield – Achieved Yield (less Excess)

Basis of Sum Insured

Indemnity - Wheat example

30 X 70% = 21 bushel guarantee30 bu. APH

70% level$5.20/bu.

100% share.I harvested only 10 &$@*#bushels off of this place!

21 - 10 = 11 bushel11 x $5.20 = $57.20 acre

Indemnity Payment

New Crop Insurance Product• 3.The Index-Based Insurance Policy• In 1 & 2 evidence of the damage to the actual crop on the farm or in the area of the

farm, is needed before an indemnity is paid, and process of verification is very expensive and accurate measurement of the losses is costly.

• An Index Policy operates with a meteorological measurement that triggers the indemnity payments. These could be : a certain minimum temperature for a minimum period of time, a certain amount of rainfall in a certain time period- this can be used for excess rain or also lack of rain(drought) cover and attainment of certain wind speed for hurricane insurance .

• A coupon is issued with the index policy that merely states the monetary sum to be paid once certification that the named weather event , of specified severity, has occurred for the area or it can be graduated so that a proportional amount of the severity is paid.

This type of policy operates over an area and encompasses many farms. Hail is localized and this policy is not suitable.

Basis risk and pay outs not related to farming operation.

Causes of Loss

Causes of Loss• Fire (act of God)• Insects (if control measures have been carried out)• Plant diseases • Wildlife • Earthquake • Volcanic eruption • Failure of Irrigation (if do to an insurable cause of loss)• Revenue loss due to price• Prevented Planting (from insurable cause of loss)

How Marketing Information Service can help develop Crop Insurance packages

• Develop close links with the representatives of farmers and promote speedy response to new needs for insurance.

• Also similar linkages with banks, farm product buyers and others with business connections with insured growers

• MIS can ensure attention to appropriate publicity• Assist farmers with loss assessment and claims handling for speedy payment of

claims through dissemination of information of disasters experienced around the country.

• MIS can also assist by lobbying the government to come up with pro small scale farmer policies.

• Assist with educated decisions by farmers through provision of timely market commodity prices information and crop insurance information, which will assist farmers take less risks and also preserve their equity.

• Advocate for technical back up in terms of research, extension and technology transfer.

Questions ?