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    Making the ‘safety net’ work

    August 29, 2019

    Agriculture is a risky venture as it is usually subjected to the vagaries of nature such as flood, drought and wind, as well as pests and diseases. All these events that are beyond the control of the farmers severely affect farmers through loss in production and farm income.

    Hence, there is a need to adapt and find ways to alleviate the damage caused by climatic changes and other uncertainty in production in order to sustain agricultural productivity and achieve food security. In general, the farming community in Sri Lanka is poor and their mainstay is farming which offers them only a meagre income, and in case of paddy, it is limited to only two seasons per year. Therefore, any crop loss or damage adversely affects the socio-economic condition in rural areas.

    Agricultural insurance is one of the strategies that can tackle the problem of risks in farming with the aim of mitigating the financial losses suffered by farmers due to the destruction of their crops as a result of various risks. In 1956, the government recognised agricultural insurance as a mechanism to minimise the risk and to relieve and protect the socially and economically beleaguered segment of the population.

    The first experimental crop insurance scheme in Sri Lanka was introduced in 1958 for rice cultivation and Sri Lanka was the first developing country in Asia to have launched an ‘all-risk’ insurance for the paddy crop on a limited experimental scale with the assistance of the Food and Agriculture Organization (FAO). At the preliminary stage, the Agrarian Services Commissioner carried out the administration of the crop insurance scheme with the assistance and co-operation of other relevant paddy cultivation departments.

    Crop Insurance Act No. 13 of 1961 provided the necessary legislative authority for the operation of a crop insurance scheme which could be considered as the second phase of development. The Agricultural Insurance Law No. 27 of 1973 came into operation in 1974 with various experimental changes in administration. An autonomous body called the Agrarian Insurance Board (AIB) was established under this law to administer and operate the agricultural insurance system in Sri Lanka. This was brought within a broader framework by the Agricultural and Agrarian Insurance Board Act No. 20 of 1999 with a view to establishing the scheme on a self-finance basis.

    With the implementation of the new Act, the activities hitherto handled by the AIB were transferred to the newly established Agricultural and Agrarian Insurance Board (AAIB). Since the monopoly of the AIB in respect of the agricultural insurance was eliminated by the new Act, other insurance companies involved in the sector received the opportunity to pursue agricultural insurance.

    After the enactment of the new Act, the AAIB expanded their insurance coverage towards several crops including paddy and several sectors such as fisheries and livestock. The AAIB provided an indemnity-based insurance scheme since its inception with various revisions made from time to time. In 1993, a private insurance company moved to the indemnity-based crop insurance business together with its other financial services. It also provided insurance coverage mainly for paddy and other subsidiary crops, seasonal crops, perennial crops, plantation crops and livestock.

    Though the indemnity-based crop insurance scheme has been in operation for over five decades in Sri Lanka, lukewarm responses have been observed from the farming community in this regard. In terms of the extent of paddy land insured, out of the total cultivated paddy lands, the land extent insured has been at a low level over the years. Both government and private insurance providers insured only five percent of the total cultivated paddy lands in the Maha season 2016/17 and only two percent in the Yala season 2017.

    The benefits of crop insurance such as increased investment, stabilised farm income, increased production and reduced government expenditure have been well accepted in theory. But there appears to be a discrepancy between the theory and the practical application supported by the low-level participation. The evaluation study of the crop insurance scheme in Sri Lanka in 2007 conducted by the HARTI found that farmers had lost confidence in this regard. The inadequacy of indemnities, delay in indemnity payments, lack of transparency in the process of loss assessment and indemnity payments, and poor awareness of farmers were the main causes of this situation.

    It was observed that a conventional indemnity-based insurance scheme was not a demand-driven product and the lack of suitability of existing crop insurance schemes for crop losses is the prime problem as most of the crop losses are caused due to bad climatic conditions.

    The index-based crop insurance scheme has been utilised in many developing countries in an attempt to address conventional problems. As Sri Lankan farmers had to face climate-induced disasters frequently during the last few decades, the importance of a new method to tackle this problem emerged. A private insurance company introduced the Weather Index Insurance (WII) (rainfall) scheme for paddy farmers in 2010 as a pilot project. The AAIB also implemented the WII scheme from 2017/18 Maha season. Our institute has carried out research regarding the performance of the WII scheme as a new method to tackle the existing conventional problems in the agricultural crop insurance sector.

    The study found that compared to the conventional insurance scheme, there are some advantages in the WII scheme such as no delays, easily operated product, transparency, less moral hazards and adverse selection, and less administrative costs. Though the WII scheme has more positive characteristics than a traditional indemnity-based insurance scheme, there are some major hurdles in the WII from a supply-side basis risk perspective such as basis risk due to microclimatic variations, large start-up cost, low-density of weather stations, limited perils, the lack of quality and updated weather data, and no proper institutional integrations. The WII scheme is not popular so far among the paddy farmers in Sri Lanka and it was proved that the farmer participation ratio with regard to the WII scheme is below 0.5 percent out of the paddy farmers in the country.

    The study recommends that proper awareness programmes and training is needed to be provided to farmers on how indexes are structured, what they cover, and how payouts are measured. A strong awareness campaign through mass media, posters and leaflets is essential to promote the WII. It is very important to see the possibilities to use mobile phone technology as well. It will help to increase the trustworthiness of farmers regarding the WII scheme.

    To minimise the basis risks, measures should be taken to update the network of collecting rainfall data by automated equipment for receiving real-time rainfall data, while product design should also be improved. Further, to obtain improved, nationally reliable and internationally comparable agriculture and weather data, weather stations should be well managed, that is, we should implement community-based, automated weather stations.

    The weather station density should be increased to reduce the radius square kilometre. It will minimise the basis risks and increase accuracy. It is important to integrate weather information available from various sources into a national centralised data centre as it will help both government and private insurance providers to deliver better insurance schemes to farmers.

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