Agricultural Insurance – SS3 Agricultural Science Lesson Note (Second Term)

What is agricultural insurance?

Agricultural insurance is a policy that pays compensation to farmers for losses they suffer.

• Crop losses: compensation for crops lost to hail, drought or floods.
• Revenue losses: compensation when the prices of agricultural commodities fall.
• Premium: the fee the farmer pays to the insurer for the cover.
• Risk transfer: the insurer takes over part of the risk that is too large for the farmer to manage alone.
• Nigerian example: the Nigerian Agricultural Insurance Corporation (NAIC) provides agricultural insurance in Nigeria.

Behavioural objectives

By the end of the lesson, students should be able to:

1. define agricultural insurance;
2. state the importance of agricultural insurance;
3. explain the various agricultural risks;
4. describe the types of insurance policies for agricultural production;
5. differentiate between premium and indemnity;
6. state the problems of agricultural insurance.

How does agricultural insurance work?

Agricultural insurance works by the farmer paying a premium and the insurer paying compensation when a covered loss happens.

1. The farmer chooses a policy that covers the farm enterprise, machinery or life.
2. The farmer pays the agreed premium to the insurer.
3. A covered loss happens, for example a flood destroys the crops.
4. The farmer reports the loss to the insurer.
5. The insurer checks the claim and pays compensation (indemnity) as agreed.

Why is agricultural insurance important?

Agricultural insurance is important because it shares the farmer’s risk and makes farming a safer business.

1. Investment: it stimulates investment in agriculture.
2. Stable income: it helps to stabilise farmers’ income.
3. Access to credit: it improves the farmer’s ability to borrow, in cash or in kind, so farmers may enjoy safer and possibly higher returns.
4. New technology: it helps to improve the development of new technology in agriculture.
5. Willingness to take chances: with insurance, farmers are more willing to try efficient technology because the risk is shared.

What are the various agricultural risks?

There are six agricultural risks: human, asset, production, price, institutional and financial.

1. Human or personal risk: the farm operator can get health problems or even die.
2. Asset risk: theft, fire and other damage or loss of farm property.
3. Production or yield risk: loss of output, mostly from weather, and also from plant and animal diseases.
4. Price risk: a fall in the price of produce after the farmer has already produced.
5. Institutional risk: policy changes that harm production and farm revenue.
6. Financial risk: a rise in the interest on a loan or mortgage, shortage of cash (liquidity) and loss of equity.

What are the types of insurance policies for agricultural production?

There are three types of agricultural insurance policy: specific enterprise insurance, farmer’s vehicle insurance and life assurance.

Specific enterprise insurance

Specific enterprise insurance is a policy that covers a particular farming enterprise against loss from disasters or calamity.

• Crop insurance: bought by crop farmers to protect against loss of crops to flood, drought, earthquakes, volcanic eruptions, pests, disease or malicious damage.
• Cover for crops: the policy may protect against one peril, a group of perils or all perils.
• Livestock insurance: protects animal farmers and their allies against foreseeable and unforeseen disasters.
• Rural reach: livestock insurance also allows the insurance industry to make a meaningful entry into rural areas.

Farmer’s vehicle insurance

Farmer’s vehicle insurance is a policy that covers machinery used on the farm.

• Examples of items covered: tractors, harvesters, pumps and windmills.
• Premium rates: in some countries they are set by motor insurance tariffs.

Life assurance

Life assurance is a policy that insures human life against death, accidents, retirement or disability.

• Payment: financial compensation is paid to the policyholder or to the dependents, as the case may be.
• Link to risk: it covers the human or personal risk of the farmer.

What is the difference between premium and indemnity?

Premium is what the farmer pays to the insurer, and indemnity is what the insurer pays back to the farmer after a loss.

• Insurance premium: the fee, paid at regular intervals by the insured (farmer), in return for the insurer’s (insurance company) promise to compensate the insured in the agreed manner when a specified occurrence happens.
• Indemnity: the mode of compensation the insurer uses to honour the agreement and put the insured back in the position he was in before the loss.

What are the problems of agricultural insurance?

The problems of agricultural insurance are shortage of skilled staff, low awareness, uncertain weather, limited insurer capacity and farmers’ illiteracy.

1. Lack of skilled personnel: trained staff are scarce at both managerial and operational levels.
2. Lack of awareness: many farmers do not know the benefits of insurance.
3. Uncertain weather: unpredictable weather makes losses hard to forecast and price.
4. Limited capacity: insurance businesses can assume only a limited amount of risk.
5. Illiteracy and conservatism: many rural farmers cannot read policies and resist new practices.

Evaluation

1. Define agricultural insurance.
2. State three reasons why agricultural insurance is important.
3. Explain briefly five agricultural risks.
4. Differentiate between premium and indemnity.
5. State the three types of agricultural insurance policy and the two divisions of specific enterprise insurance.

Assignment

Read Essential Agricultural Science by O. Aiwena, pages 459-463, then give four reasons why agricultural insurance is important (WASSCE 2017, question 6b).