Agricultural production nowadays is exposed to more risks than it was in the past. In addition to the weather condition, trade liberalization also adds pressure to the agricultural sector by increasing the volatility of food prices. Questions have emerged on how agricultural stakeholders can cope with this issue. The Jakarta Post’s Linda Yulisman recently interviewed Roman Hohl, the head of agriculture for Asia Pacific of world’s leading re-insurer Swiss Re, about the role of the agriculture insurance to help agricultural stakeholders, especially farmers, to minimize the myriad risks. Below are the excerpts of the interview.
Question: How can agriculture insurance contribute to Indonesia’s national food security?
Answer: Indonesia is one of the countries in Asia where population growth of 1.5 percent per year outpaces production increases in rice, despite an effort to raise yields and production areas, and is often among the countries importing the largest amount of rice, which is its staple food, and corn per year in
the world.
The Indonesian government recently made it a strategic target to increase rice output beyond the 68 million tons expected for 2011 in order to overcome its dependence on large imports of the commodity and to become rice self-sufficient in 2014.
The country is exposed to natural hazards, including floods, droughts, volcanic eruptions and to some extent also tsunamis. In 2008, 3.9 percent of its agriculture production was lost to droughts, floods, volcanic eruptions and tsunamis.
According to the UN organization overseeing the development of disaster reduction policy (UNISDR), agriculture production losses can cost the country 1 percent of GDP, including high government spending for ad-hoc disaster relief, increased rice imports and (possibly) high default rates for farming loans.
Establishing a national agriculture insurance scheme for key agricultural commodities like rice, sugar cane and corn guarantees future farm incomes, is a safety net for farmers during seasons with low yields due to natural calamities, increases investments in the sector, which should increase agriculture production in the mid-term.
Agriculture insurance also acts as collateral for bank loans, as the farmer will have income in years with severely impacted harvests, and can better pay back interest and loan amounts. Insurance, therefore, also contributes in this way to increase the much-needed lending to the sector.
In spite of the fact that Indonesia is an agricultural country, agriculture insurance has yet to develop well here. Why?
As in other Asian countries dominated by small-holder agriculture, a successful implementation of agriculture insurance must address the following challenges: first, efficient distribution channels to access many small scale farmers. This is usually done via an agriculture bank, cooperatives or an existing government agency. Second, introducing an insurance product that covers key perils (such as drought, flood and typhoon) and is easy to understand for farmers, with minimal resources used to adjust losses on many small-scale farms. This is usually addressed by using a yield index product where farmers receive a payout once yields in a district are below normal levels or attaching a crop insurance product on an existing government calamity scheme for farmers, where officials measure losses following declared disasters. Third, calculating risk-adequate and affordable premium rates. This is usually done by modeling yield volatility and the government subsidizing premium rates, to some extent.
A successful approach will need to be based on a private-public partnership involving various government agencies, Indonesian insurers and (depending on the level of risk and capitalization of the insurers) international re-insurers.
In Indonesia, several approaches to use weather index insurance, which is linked to data from weather stations — for example temperature or rainfall amounts — have been undertaken but have not been successful, and some insurers offer conventional insurance for plantation risks (mainly palm oil and timber) sporadically.
Is there any example how the insurance has benefited farmers in any Asia-Pacific or Southeast Asian countries?
In Thailand, farmers who enrolled in the new rice insurance scheme that started in July 2011 will benefit from a payout for the current severe flood event if their rice fields are in a flood disaster zone declared by the government and have incurred a total loss.
In contrast, farmers in other Southeast Asian countries impacted by the recent floods, for example Cambodia, Laos and Myanmar, where no national insurance scheme exists yet have to rely on government ad-hoc disaster payments or simply have to cope by themselves.
Swiss Re recently worked with Agribank, Vietnam’s largest agriculture bank that lends to farming households, to establish rice yield index insurance to address various risks. As the key agriculture bank in Vietnam, the Agribank had an interest in managing non-performing loans to rice farmers, who may be unable to repay their loans or make interest payments, due to low rice yields from natural disasters.
The Agribank decided to pro-actively manage the non-performing loan ratios with an index insurance cover, which is attached to the loans, and will payout in the event of lower than expected rice yields from natural perils, thus enabling its farming clients to repay the bank.
With this solution, the Agribank could comfortably increase loan amounts in the future where necessary, even in times with potentially higher frequencies and severities of typhoons, floods and droughts.
A similar solution is possible for any large agriculture banks, including the ones that operate in Indonesia.
