When you think about insurance you think about cars, houses, buildings, people, and other tangible constructions. Things that are likely to go up in flames, crash, fall down because of earthquakes, die because of heart attacks and so on. However, insurance can cover almost anything.
Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. An entity which provides insurance is known as an insurer, an insurance company, an insurance carrier or an underwriter. Since it is a business that deals in risk, anything valuable that could be at risk can theoretically be insured. Footballers, for example, have gotten their feet insured and actors and models have gotten their faces and other body parts insured.
One form of insurance that does not get much attention but should be widespread, particularly in a country like Pakistan, is crop insurance. The reason it does not get much attention is because crop insurance is burning, but that does not make it any less important. And because it is boring, and very far flung from the urban debate on the economy and business, most insurance in Pakistan is life insurance. Now, however, the Punjab government is providing crop insurance, which might be a game changer for farmers of the province.
Crop insurance in Pakistan
The first instance of agricultural insurance in Pakistan did not come for crops but for livestock. When people quote the oft repeated fact that Pakistan is an agrarian society, the image in most people’s mind is wheat fields and farmers hard at work at sunset. However, a large chunk of that majority agrarian economy belongs to livestock farming. That is why in 1983, Adanijcer Insurance Company and the Eastern Federal Union Insurance Company both introduced livestock insurance on a pilot basis.
The experiment produced mixed results, but it was a failure in the long term since livestock insurance didn’t quite catch on. It also took many decades for Pakistan to come to a place where insurance for crops was being offered. Crop insurance was introduced in 2008 under a public private partnership for a national crop loan insurance scheme. Livestock and poultry insurance has been written on a small-scale in the past by various private insurance companies.
Since the Rabi season 2008/09 a group of ten insurance companies in conjunction with 20 commercial banks have been involved in the implementation of the national crop loan insurance scheme. The insurers include New Jubilee, EFU General, East West, National Insurance Company, UBL, Adamjee, United, Silver Star, Atlas and Alfalah. In this regard, Pakistan has seriously lagged behind. In countries where crops are not even that important, crop insurance has been a major security point for a long time. Crop insurance actually began in Sweden in 1950 and came to India in 1979. And while it was discontinued in 1989 and 2006, crop insurance in India is still working.
There is a dire and serious need for this as well. Punjab is the most populous province of Pakistan with a population of over 110 million according to the 2017 census. With a share of 62 percent in the national economy, the province is the most prominent in the agricultural sector. It provides 76 percent of the country’s annual grain production. The cotton, rice and other crops grown here provide a large share of the country’s treasury.
Khaula Walayat, a local insurance expert, says that agricultural insurance is relatively undeveloped in Pakistan despite how central crops are to the country. She also believes that livestock insurance is available on a limited basis and includes both livestock cattle, buffalo, small ruminants and poultry insurance. “Since Rabi 2008/09 individual grower multiple peril crop insurance has been available for field cereal crops and sugar cane. The policy adopts a unique two-trigger indemnity procedure: 1) catastrophe losses as a result of an insured peril that exceeds 50 percent of the normal average regional (e.g. block) area yield must first be declared by a competent authority, and 2) this opens the policy for a loss adjustment at the individual farmer level. For crop insurance, the most important delivery channel is through linkage to agricultural credit for farmers through the banks,” she explains.
Agricultural insurance is compulsory for farmers who have taken seasonal loans from the banks. The scheme carries a maximum agreed indemnity limit of 300 percent loss ratio. There is a stop loss reinsurance cover that is placed with international reinsurers. It is understood that on account of the very severe flooding in 2010 the stop loss reinsurance programme has incurred high losses. No further details of the stop loss treaty are available.
Among credit policies, the CLIS is a unique scheme launched in 2008. It provides credit for five major crops, namely, wheat, rice, sugarcane, cotton and maize. This is accompanied with insurance against natural disasters like flood, drought, hailstorm, pest attack and fire damage. With support of the government, the insurance premium is subsidized for subsistence farmers, defined as those having up to 25 acres of land for cultivation. The crop loan insurance scheme attracts premium subsidy support from the government (SBP, 2010). According to SBP (2010), in 2008/09 the government reimbursed the banks RS 183 million (US$2.2 million) for the cost of premium subsidies to subsistence farmers. This would be equivalent to a premium subsidy level of 58 percent. In the first year of operation, the crop loan insurance scheme generated a premium of US$3.8 million or a 2.1 percent penetration rate for the insured crops, ranging from 1.0 percent penetration rate for maize to 4.0 percent for sugar cane.”
How it works
Meanwhile, a deputy director of the department of Agriculture Punjab informed this scribe that for self-reliance in agriculture, small and medium scale farming, rainfed areas, roads from farm to market, transmission of electricity to tube wells have gained more attention. “The Department of Agriculture aims to establish agriculture on a business basis, making it less costly and more profitable. We believe that special attention should be paid to the welfare and productivity of the farmers and food security should be ensured to provide strong support to the national economy. In the event of crop damage due to natural disasters, diseases and pandemics, government-sponsored protection programs to stabilize farmers’ incomes are essential for a farmer’s economic survival. Crop insurance is crucial for farmers’ financial assistance, post-disaster recovery and compensation. According to international experience, government support for insurance work is of paramount importance in agriculture.”
“This assistance can be provided to farmers by subsidizing the insurance installment. The Punjab government has introduced crop insurance (Takaful) scheme for the farming community in case of natural calamities / disasters. It is an agreement between a farmer and a financial institution (insurance company) in which the farmer pays a small amount to the insurance company, called the insurance premium and if the crop is lost in whole or in part due to natural causes, the farmer files an application or claim with the insurance company to be compensated for the loss,” they said. According to the official, even in Punjab, the insurance company keeps the insurance premium money with it, through which it is able to continue its work and pay the claims of other farmers.
“This practice is not only in Pakistan or Punjab but all over the world. The good thing is that insurance protects a farmer’s capital and keeps his income stable. At the same time, the farmer is freed from the fear of natural disasters and his standard of living improves. Crop insurance not only enhances the reputation and value of the farmer but also encourages modern production methods and technical and professional skills and if, unluckily, crops are destroyed, there is also financial support for farmers and in the event of a loss, it is possible to secure capital for the next crop through insurance,”
Essentially, crop insurance, known locally as Takaful, was started in 2018 Kharif (Jun-Nov). When the government saw the importance of this scheme in Kharif and Rabi (Dec-Mar) 2018, the scope of this program was expanded in 2019 and it was started in 18 districts of Punjab. These 18 districts included Sahiwal, Sheikhupura, Lodhran, Rahim Yar Khan, Multan, Muzaffargarh, Narowal, Faisal Abar, Rajanpur, Bhakkar, DG Khan, Kasur, Khanewal, Layyah, Mandi Bahauddin, Bahawalpur, Bahawalnagar and Okara. Keeping in view the international procedure, the Punjab government had for the first time launched a crop insurance (Takaful) scheme. When the first phase of the scheme was launched in Sheikhupura, Sahiwal, Lodhran and Rahim Yar Khan in Kharif 2018, it was applicable only to cotton and rice farmers.
The initial move made sense since cotton and rice are both crops that are volatile and tend to face harsher natural conditions. Rice is dependent on the right amount of rain, there needs to be enough to flood the fields but not so much that the flood overflows and the entire crop is destroyed. However, according to the Deputy Director, the scheme was launched in phases in Rabi 2018 and was applied to sugarcane, maize, wheat, orchards and vegetables. In the first phase, under this scheme, the Punjab government provided 100 percent subsidy on insurance premium to farmers owning 5 acres of land, similarly, government also provided 50 percent subsidy on insurance premium to farmers of 5 acres to 25 acres and in the case of orchards also provided 50 percent subsidy on insurance premium to farmers.
“In the first phase (Kharif 2018), insurance was applied to agricultural creditors (E-Credit, CLIS) as crop insurance schemes were mandatory for agricultural creditors of E-Credit, therefore, they were registered under the automated system. Moreover, agricultural creditors were asked to approach their respective agricultural banks. In the next phase (Rabi 2018) crop insurance scheme was brought to other farmers besides the agricultural creditors. For registration, the farmers used to register themselves by calling or SMS to the specific toll free numbers of the Punjab government. Or register through the nearest department of agriculture (Extension) or a representative of the designated insurance company. However, the registration service was also available through the online system,” he said.
“Now if you look at the performance of the Punjab government, under the insurance program for Kharif 2021-22, the process of insurance program registration has been started for cotton and paddy farmers in 27 districts of Punjab to compensate for climate change, natural disasters and locust damage. Similarly, South Punjab includes Multan, Lodhran, Khanewal, Vehari, DG Khan, Muzaffargarh, Rajanpur, Layyah, Bahawalpur, Bahawalnagar and Rahim Yar Khan Districts. The program will provide 100 percent subsidy on premium for farmers owning up to 5 acres of land and 50 percent subsidy on insurance premium for farmers owning 5 to 25 acres of land. Policy certificates will be issued to farmers who insure cotton and paddy crops in Kharif 2021-22. In case of loss / loss of production at tehsil level, announcement will be made in December 2021 and the concerned insurance company will contact all the insured farmers in January 2022 and will be bound to compensate the loss,” he added.
Why it is important
Walayat believed that along with the threat and disasters caused by climate change, farmers are facing issues of salinity, water scarcity and decreasing groundwater levels which slash their income from crop harvests. “Such issues have made it more difficult for them to repay their debt. With the growing challenges, the demand for agriculture credit from the farmers has gone up in an attempt to improve their harvests. Provision of credit to the agriculture sector reached Rs704.5 billion in fiscal year 2016-17, up 17.8 percent compared to the previous year,” she said.
“However, some loopholes have been found in the credit policy, especially in the Crop Loan Insurance Scheme (CLIS). In my opinion and according to research inefficiencies in the scheme were highlighted by the farmers during a survey conducted in the flood-prone tehsils of Sargodha. Majority of the farmers have avoided taking formal credit because of their own savings and easy access to loans from informal sources. Some farmers are interested in insurance policy alone, but CLIS offers crop insurance to only those that borrow from banks. Finally, some of them do not consider insurance policies to be in line with Islamic principles.”
This hesitance means that farmers instead end up borrowing from informal sources like individual lenders in their areas since they find this easier, quicker, and more efficient. There are also major loopholes in the policy, including the declaration of calamity by the government as a major issue. When this happens the bank or insurance company concerned sends their representative or an independent consultant to assess the loss. This causes a delay of around six months. Owing to the delay, the assessment of field losses is not accurate. The assessors, most of the time, rely on prediction rather than actual data. After the assessment, slow disbursement of insurance claims takes at least another month. These drawbacks force the farmers to borrow from informal sources for planting their next crop.
“The money paid in insurance claims is also meagre that neither covers the loss nor the input cost. Moreover, political influence is another hidden factor found during consultation with the farmers as such influences play a role in whether or not a village should be declared calamity-stricken. Apart from these, absence of political support leads to negligence of villages that are severely affected by disasters but are never declared calamity-hit. Farmers also complain about lower resilience against natural disasters and climate change, which is the outcome of a lack of proper guidance by agriculture extension officers and ineffective early warning system. The process documents itself is a big problem due to hidden conditions and lack of understanding by poor farmers that made them impossible to claim. Insurance companies all over the world hide behind faulty law procedures and the long pending cases for claims disappoint farmers mostly,” explains Walayat.
How the banks are organizing
It is pertinent to mention here that a month ago, HBL, The Bank of Punjab (BoP) and TPL Insurance Ltd. have entered into a strategic partnership for the pilot testing of the Area Yield Index Insurance (AYII) product, proposed by Pakistan Agriculture Coalition (PAC) with PULA Advisors as implementation partner & SCOR as global reinsurer. Under the product, farmers availing crop production loans from HBL and BoP in pilot districts will be provided yield insurance coverage bundled with their loan product. The incremental premium cost for the value-added services for additional cover under AYII will be jointly shared by HBL, BoP and TPL.
The product will ensure climate resilience and financial stability through insuring the crop production risks against climatic abnormalities including windstorm, frost, excessive rainfall, heatwave, hail, flood, drought, pest and diseases. It will facilitate the insuring farmers without any payout limitations or waiting for calamity declaration from Government agencies. The pilot project will initially focus on wheat and rice crops in four districts i.e. Pakpattan, Gujranwala, Hafizabad and Sheikhupura of the Punjab Province.
The crop yield will be insured against a pre-set average benchmark yield on the basis of historical data and the insurance claim will trigger if average farm yield is below 70 percent of the threshold. The crop yield will be measured through crop cutting experiments carried out by international partners i.e. PULA.
In a joint statement, Muhammad Aurangzeb, President & CEO – HBL, Zafar Masud, President & CEO – BOP and Ali Jameel, Group CEO – TPL Corp shared, “We are excited to partner on this landmark initiative that has the potential to transform the agricultural landscape of Pakistan by facilitating the farming community through financial coverage of their agricultural produce. This will encourage the farmers to take broader steps by adopting latest farming techniques on the back of flexible and enhanced risk coverage, thereby ensuring financial inclusion and sustainability”.
Speaking about the AYII the DD agriculture department speaking to Profit informed that the special feature of this scheme was that the loss or loss of production would be estimated on a scientific basis instead of the traditional method, for which ‘AYII’ was to be introduced. The purpose of crop insurance (AYII) was also to overcome the shortcomings of traditional crop insurance and to suit the needs of small scale farmers.
“The most important point is that it does not cover crop damage at the level of an individual farmer or field. Rather, under this method, production loss or a specific geographical area (such as a district, tehsil, union council or village) is considered, however, the geographical area is usually called the Unit Area of Insurance or UAI. Under this method, in case of less than average production in UAI by area (index), area, production, index product pays compensation. Damage is compensated in case of sudden causes like flood, rain, drought, disease / pest attack, hailstorm etc. Moreover, the loss is estimated on the average yield of a given area (tehsil) rather than the individual farmer’s land. AYII is based on scientific principles and in this index, crop harvesting experiments are carried out scientifically in different places at the level of a specific area (tehsil) in Punjab,” he explains.
“These experiments are performed by the Crop Reporting Services Department of the Department of Agriculture for almost all crops each year. The production survey is divided into five phases which include preparation list, selection of fields, identification of plots, harvesting, and masonry, cleaning and drying. Since the Crop Reporting Service has been computerized in the Department of Agriculture, all the work of Gardawari has now been computerized, thanks to which the preparation of field indexing and selection of experimental fields is done by computer.”
As he explains, the special feature of this scheme is that if there is a crop deficit compared to the average production of a particular area (tehsil), it will be compensated. This scheme will make it possible to repair the damage caused by sudden disasters. If the production of the area falls below the set average production this year, then the difference between the set average production and this year’s production will be borne by the insurance companies. Unexpected situation refers to damage to crops due to floods, pest or disease infestation, drought, flash floods, rains or any other cause. Estimates of production will be made by the Crop Reporting Service Department of Agriculture. In order to offset the loss, the current year’s production should not be less than the prescribed regional production.
“The farmer should have a crop insurance policy and the insurance premium has been paid in full. The crop that is being claimed must be insured and the government will calculate the claim through its online crop insurance portal. Insured farmers will be notified via SMS and will be able to check on the internet with their valid computerized identity card. The claim amount will be transferred to his bank account through branchless banking. The Punjab Crop Insurance will apply only to the production data obtained at the tehsil level which will be issued by the Crop Reporting Service Department of Agriculture. Farmers should register for free at local agriculture offices (Crop Reporting Service / Agriculture Extension) or on the website,” he said.
“It is a seasonal cover for crop yield shortfall below the historical average yield in a unit area of insurance [UAI]. Your insurance yield is based on your actual production history (APH), which is the average yield obtained on the insured unit for four to ten consecutive crop years in which that crop was produced,” says Walayat. “There are two decisions that determine the amount of protection obtained from YP: level of yield coverage. But as the average yield cannot be standardized and other problems of agriculture cannot be determined accurately so it is not very effective in countries like Pakistan which has an unstructured and informal agricultural market. Contrast this index to a very successful one where corporate farming is applied. In my opinion crop insurance can certainly be the major participant in a country’s growth. If we fix the loopholes and red tapism in bureaucracy being an agrarian economy we can not only address our domestic demand but can export. We need to implement corporate farming as this goes hand in hand with policy making to improve agriculture.”
“A few quick fixes in crop insurance are badly needed. The benefits of CLIS cannot be denied, there is always room for improvement. Suggestions given by the farmers can provide useful input for the policymakers and economists and help the growers to cope with multiple challenges. In order to bring improvement, the farmers recommend effective assessment of individual loss, quick settlement of insurance claims, increase in the amount of claims and giving cover to horticulture as well, especially orange orchards and vegetable crops. While Sargodha produces 90 percent of oranges in the country and generates millions of dollars from exports, the government should also consider including excessive or erratic rains, hailstorms and pest attacks along with floods in CLIS.”
One of the key suggestions is to provide crop insurance without linking it with formal credit at least in major growing areas. The current CLIS mechanism depends on damage-based insurance, but it can be improved by developing a weather or yield-based index. Such agriculture credit policies are successfully functioning in neighboring countries such as India. They will help speed up the process of effective and individual loss assessment to clear the way for releasing claims before the start of plantations in the next season. Such changes will boost farmers and help them achieve sustainable agriculture growth.