ACADEMY OF ECONOMIC STUDIES, FACULTY OF BUSINESS ADMINISTRATION IN

FOREIGN LANGUAGES

How may be agriculture be

protected by the insurance?
Conf. Univ. dr. Laura Elly Naghi (Novac)
Conea Alexandra
Raluca
Costea Denisa
Group 133

Contents
Introduction.................................................................................................................... 2
Types of risks in agriculture............................................................................................. 2
Overview of the agricultural insurance market......................................................................3
Prevention.................................................................................................................. 3
Agricultural insurance products........................................................................................... 4
Indemnity based agricultural insurance products...................................................................5
Named Peril Agricultural insurance products ( Damage -based products)....................................5
Multiple peril agricultural insurance products ( Yield-based products)........................................5
Index based agricultural insurance products.........................................................................6
Product applications in agricultural insurance..........................................................................7
Crop Insurance............................................................................................................. 7
Livestock insurance....................................................................................................... 9
Bloodstock insurance..................................................................................................... 9
Aquaculture insurance.................................................................................................. 10
Forestry insurance....................................................................................................... 10
Greenhouse insurance.................................................................................................. 11
Conclusion................................................................................................................... 11
Bibliography................................................................................................................ 12

Introduction
Agriculture is highly susceptible to risks and it is necessary to protect the farmers in order to
ensure their credit eligibility for the next season.
Agriculture insurance or crop insurance is purchased by agricultural producers, including
farmers, ranchers, and others to protect themselves against either the loss of their crops due to
natural disasters (hail, drought, and floods) or the loss of revenue due to declines in the prices of
agricultural commodities.
Agricultural production faces a multitude of risks and there are two categories of major risks that
are of concern to the agricultural sectorprice risk caused by potential volatility in prices and
production risk resulting from uncertainty about the levels of production that depend a lot on
weather and other factors. These risks tend to increase in the future: the price risk due to
liberalization of trade and the production risk caused by the effects of climate change.
Not only that the agricultural risks affect farmers, they also affect the whole agribusiness value
chain. Each of the participants along the supply chain, from the suppliers of inputs to the end
consumer, are subject to these risks. As the interconnections between the participants in the value
chain are becoming more close and complex, the possibilities of adverse events have also
increased.

Types of risks in agriculture

Agricultural risks vary in terms of severity and frequency. For the more severe and less frequent
events (for example, intense and widespread flooding, prolonged drought), markets typically fail
to provide adequate insurance services because of limited credible long-term statistical
information, an inability to reinsure on international markets, and the possibility of having to
make large payments in years of catastrophic loss (especially in the early years of the program).
Because of this market failure (undersupplied risk management services for catastrophic events),
the private sector is also likely to fail to provide services for the less severe, more frequent

disruptive events (such as localized drought, pest outbreak) that services would otherwise be
provided for.

Overview of the agricultural insurance market

The direct premiums for the agriculture insurance have grown rapidly in recent years. For
example, in 2005 they were estimated at US$8 billion and they US$18.5 billion in 2008. There
are three main factors that have contributed to the growth in agricultural insurance.
1. The first factor is the increase in the value of agricultural production in recent years which has
impacted directly on the agricultural insurance premium volume.
2. The second factor is represented by the increase in value of agricultural assets. This has
increased the sensitivity of the participants of the agricultural value chain to loss, consequently
raising their demand for insurance.
3. The third factor is the development of new markets for agricultural insurance and the increase
of public sector support in existing markets, which have contributed to an increase in the demand
for agricultural insurance.
From a geographical perspective, most of the premiums are written in the United States and
Canada, with approximately 62% of the market. This is followed by Asia with 18% and Europe
with 16%. The balance comprises 2% in Latin America and 1% in Oceania and Africa
respectively.

Prevention

Agricultural risk management relies on an optimal combination of technical and financial tools.
Agricultural value chain participants can use several tools, whenever they are available, to deal
with these multiple sources of agricultural risk. Agricultural value chain participants may avoid
risk; for instance, by choosing not to select a particular crop or crops which they consider of high
risk for the area in which their farms are located. They may also mitigate risks; they may seek to
lessen the risk through, for example, planting crops only in very favourable conditions or
developing further their infrastructure to improve irrigation or minimize the effects of frost.

Lastly, they may transfer all or part of the risks to a third party through an insurance contract. Of
course, they may mitigate the financial effects of these risks by creating emergency reserves
from profits in good yearsa form of self-insurance This primer is concerned exclusively with
the use of agricultural insurance by firms in the agribusiness value chain to manage their risks.
The primer defines what is meant by agricultural insurance, gives an overview of the market and
explains the challenges of this type of insurance. Further, it discusses the range of agricultural
insurance products and their practical application in the sector. It concludes with a description of
the reinsurance market for agricultural insurance and an overview of public sector participation.
What is agricultural insurance? In general, insurance is a form of risk management used to hedge
against a contingent loss. The conventional definition is the equitable Agricultural Insurance 3
transfer of a risk of loss from one entity to another in exchange for a premium or a guaranteed
and quantifiable small loss to prevent a large and possibly devastating loss. Agricultural
insurance is a special line of property insurance applied to agricultural firms. In recognition of
the specialized nature of this type of insurance, insurance companies operating in the market
either have dedicated agribusiness units or outsource the underwriting to agencies that specialize
in it. Agricultural insurance is not limited to crop insurance, it also applies to livestock,
bloodstock, forestry, aquaculture, and greenhouses.

Agricultural insurance products

Agricultural insurance products are classified into three groups based on the method of
determining how claims are calculated. These are summarizes in the next table.
Classification of Agricultural Insurance Products
Type of Agricultural Insurance Product

Payouts

Availability

a). Indemnity Based Agricultural Insurance (Insurance payouts based on the actual loss at the
insured unit level)
1. Named Peril

Percentage of Damage

2. Multiple Peril

Yield Loss

Widespread
Widespread

b). Index based Agricultural Insurance( insurance payouts on an index measurement)

3. Area-Yield Index

Area-Yield Loss

USA, India and Brazil

4. Crop Weather Index Insurance

Weather Index Payout Scale India, Mexico, USA,

5. NDVI-Index Insurance

NDVI Index payout scale

6. Livestock Morality Index insurance

Livestock m.index payout scale

7. Forestry Fire Index Insurance

Mexico, Spain, Canada

Mongolia

ignition focus/burnt area payout scale

Canada, USA

c). Crop revenue Insurance ( Insurance payouts based on yield measurement and crop prices)
8. Crop revenue insurance

Yield and Price Loss

Limited to USA

Indemnity based agricultural insurance products

This determine claim payment based on the actual loss when is happening by the policy. If is
happening an insured event , an assessment of the loss and a determination of the indemnity are
made at the level of the insured part. This Classification is also often divided in two subclasses:
named peril and multiple peril agricultural insurance.

Named Peril Agricultural insurance products ( Damage -based products)

Named peril provides indemnity for the events that are explicitly on the insurance. This subclass
has some features like: indemnity is calculated as the product of the percentage of the damage
and the sum insured, the sum insured at the beginning of the contract and is based on the
production cost or on the expected crop revenue. Named peril insurance contracts are used to
protect against hail damage and are used in horticulture and floriculture.

Multiple peril agricultural insurance products ( Yield-based products)

Multiple peril provides insurance against all perils that affect production unless specific perils
that are out of the insurance contract. In this type of insurance the sum is defined in the terms of
the contract and yield to the producer. The range is from 50 to 70 percent on the expected yield.
This subclass of insurance offers comprehensive cover to the producers but comes with a higher
cost compared with named peril insurance. Rates for this insurance contract the individual
producers range between 5 to 20 percent at the sum insured, depending on the crop , the region
where the crop is located and the level of coverage.

Index based agricultural insurance products

Index based agricultural insurance products pay out based on the value of an index , not on
losses measured on the field . The index is highly correlated with losses and that cannot be
influenced by the insured. Indexes can include rainfall, temperature, regional yield, river levels
etc. The precondition for successful implementation is that both parties to the contract have
confidence in the objectivity and transparency in the index. To have this two , to achieve them ,
there must be sufficient data , correlation between the index and the losses at the producer level
and freedom from influence by either the insurer or the insured party. These subclass has her
own advantages : avoids the issues of moral hazard and adverse selection found in other classes
as individual producers are only one of a large number of producers whose output determines the
index or the data used to construct the index, physical phenomena such as rainfall are observable
and cannot be affected by either party. priate indexes. Once the indexes have been created,
further operational costs are low and this translates into lower premiums for insured parties. The
lower premiums are very gradually attracting smaller producers who otherwise would not be
inclined to take out insurance. The flexibility in design of these products allows insurers to create
insurance products that to date have not been possible.

Product applications in agricultural insurance

In agriculture we can name several types of insurances according to the main fields in which
risks may arise, crop insurance, Livestock insurance, Bloodstock insurance, Aquaculture
insurance, Forestry insurance, Greenhouse insurance.

Crop Insurance

The most developed form of agriculture insurance is represented by crop insurance. Insurers
writing crop business offer all several types of cover.
Named peril crop insurance
The named peril crop insurance is a product insurance represented by hail insurance. Insurance
companies offer hail insurances for crops as well as for fruits, horticulture and floriculture
production. Hail insurance can be offered on a standalone basis or in combination with other
perils like fire, freeze, and/or wind as additional risks. The main characteristic of this type of
crop insurance is that the insurance claim is calculated by measuring the percentage of damage in
the field soon after the damage occurs. Under this type of insurance, the amount insured is
defined on an agreed basis, based on the production costs or on the expected crop revenue. The
quantity of the deductibles and franchises depends on how vulnerable the crop is to hail damage
and the prevalence of hail within the growing area. Many farmers purchase Crop-Hail coverage
because hail has the unique ability to totally destroy a significant part of a planted field while
leaving the rest undamaged. In areas of the country where hail is a frequent event, farmers often
purchase a Crop-Hail policy to protect high-yielding crops. Unlike MPCI, a Crop-Hail policy can
be purchased at any time during the growing season.
Multiple peril crop insurance (MPCI)
Insurance that covers crop loss, MPCI policies must be purchased prior to planting and cover
loss of crop yields from all types of natural causes weather conditions, insects, flood, including

drought, excessive moisture, freeze, and disease. Coverage under MPCI is expressed in terms of
a guaranteed yield which is between 50% and 70% of expected yield having regard to the nature
of the crop and the region in which it is being grown. Payout under the policy is initiated where
the yield of the producer falls short of the guaranteed yield in the policy. If the producer has an
insurable interest, the payout will be the shortfall in yield at a value that is agreed in the policy.
Premium for this type of insurance ranges between 5% and 20% of the sum insured (depending
on the type of the crop), the region in which it will be grown and the level of coverage being
sought.
Crop revenue insurance
If a policyholder wants to protect the level of revenue, the insurer will cover the risk of declines
in yield and also adverse movements in crop prices. The guaranteed yield is determined as a
percentage of the producers past production, and the guaranteed price can be either the future
market price for the month of harvest or the strike price of a base price option. If the actual yield
received by the producer, which is given by the product harvested and the spot market price at
the time of harvest, is less than the guaranteed amount, the insurer will pay the difference.
Area yield index insurance
The insurance contract mentions a specific area referred to as the insured unit. The insurer
develops an index based on a guaranteed yield for the insured unit, normally in the range of 50%
to 90% of the expected yield. The insurer pays out if the actual yield of the insured cropp in the
insured unit falls below the guaranteed yield. The payout is determined by the shortage in
production in the insured unit and the sum insured. Payment is normally made six months after
the crop is harvested.
Weather index insurance products
The payout is determined according to a certain index that is highly correlated with loss
experiences. The most common index in agriculture is rainfall. In most of the cases, an insurer
will offer a contract that will clearly specify the index ,for example, rainfall, over what period
and where it will be measured, the threshold, the sum insured and any indemnity limits. If the
rainfall is less than the index at the specified measurement point and over the period specified in

the contract, the insurer will payout under the contract irrespective of the actual losses of the
policyholder. The quantity of the payout is determined according to the provisions of the
contract. A simple payout may be the total sum insured under the contract. More commonly,
contracts are written so that the proportion of the sum insured that is paid out is determined by
how far the actual production observed in the insured unit deviates from the index.

Livestock insurance

Livestock insurance provides insurance products to cover horses, mares, colts, fillies and foals;
bulls, cows and heifers; swine; sheep, goats and dogs and occasionally wild animals. It is a
relatively small segment of the market.
The protection offered under livestock insurance includes losses arising from death, injury and
loss of function as a result of accidents, natural causes, fire, lightning, acts of God and acts of
individuals other than the owner. Additional coverage can generally be purchased for veterinary
expenses, transport and non-epidemic diseases. The sum insured is based on the market value of
the animal and can be reduced based on the animals age. Premium rates range from 1.5 percent
to 10 percent of the sum insured based on the type of animal, its age, location and the functions it
performs.
Livestock mortality index insurance is a relatively new form of livestock insurance that was
introduced into Mongolia. It has potential in countries where livestock production is exposed to
catastrophic losses.

Bloodstock insurance

Bloodstock insurance provides cover for high value animals, mainly equines. Animals are either
insured on an individual basis or collectively such as where a stable of horses is insured. The
insured events include mortality, disability, infertility, medical treatment and surgery. The sum
insured is based on the market value of the animal. The market value is determined by the prizes
that the animal has won or the present value of the future prizes that it potentially will win. Any
matter that adversely affects the animals capacity to win prizes will affect its market value and
can result in over insurance. To deal with the potential moral hazard, it is common practice

amongst bloodstock insurers to insure high-value animals for only a portion of their market
value.

Aquaculture insurance

Aquaculture insurance provides cover for producers involved in breeding and raising aquatic
fauna and growing aquatic flora. In addition to fishes, aquaculture encompasses molluscs,
crustaceans and commercial seaweed cultivation. Although it is a small segment of the market
with 1 percent of written premiums for the worldwide agricultural insurance market in 2008, it is
expected to develop rapidly as aquaculture becomes more important in the face of dwindling
natural fish supplies. Cover is offered on a named peril or all risks basis. Cover is for loss of
stock. Covered perils include meteorological events, acts of God, diseases, pollution, predator
attacks, collision, oxygen depletion, changes in pH and salinity, theft and escape. Both offshore
cage systems and inshore pond cultures are covered. The sum insured is defined by the value of
the stocks insured and it is customary to set a maximum aggregate limit per site. Premium rates
depend on the species, location and the conditions in which the stocks are kept. Aquaculture
insurance is a very specialized field with complex insurance contracts reflecting the complexities
of the production processes.

Forestry insurance

Forestry insurance protects standing timber stocks against fire, lightning, explosion and aircraft
impact. Coverage can be extended to damage caused by wind, windstorms, volcanic eruption,
flood, hail, freezing and the weight of ice and snow. Fire fighting expenses and debris removal
are also covered and are capped at an annual aggregate limit. The sum insured is determined on a
level basis with young plantations valued at establishment cost, medium aged plantations at the
lower of establishment cost or commercial value and mature plantations at commercial value.
Losses are frequently capped at an annual aggregate limit to avoid large exposures in high risk
areas. Premium depend on the species, location and measures in place to prevent or suppress
fires. The terms and conditions of forestry insurance contracts are comprehensive and complex.
This reflects the nature of the risk being underwritten and the possible risk of moral hazard.

Greenhouse insurance

Greenhouse production is a capital-intensive activity and relies heavily on the the infrastructure
that the producer has put in place. When insuring the infrastructure, the insurer typically provides
comprehensive cover for material damage to structures, glass, equipment, stock and other
contents. Infrastructure is insured against damage from storm (including hailstorm), water, fire,
smoke, lightning, explosion, malicious acts, aircraft impact and earthquake. Cover may also be
extended to business interruption, machinery breakdown, and electronic equipment. The sum
insured is determined on either an agreed value or production cost basis. Payouts are calculated
as a percentage of damage to both the structures and the contents. Premiums for greenhouse
insurance vary depending on the construction of the greenhouse.

Conclusion

In conclusion may be helped by the insurance in different ways, this is one of the most
predictable to risk business and it needs a lot of insurances, because nothing is sure. Agriculture
insurance is made by agricultural producers , ranchers , farmers but also by the companies of
insurance and companies who are producing seeds, fertilizer and insecticides.
For the protection of the business and cultures, the insurance can be made for the weather,
natural disasters (frost,hail, drought and floods) for the seasons of work (spring and autumn).

Bibliography
Itturioz, R. (2009). Agricultural. Washington, DC: The World Bank.
http://www.cropinsuranceinamerica.org/about-crop-insurance/how-itworks/#.WICJB9KLTIV
https://www.astrasig.ro/en/insurances/corporate/agricultural-insurance
http://www.microinsurancenetwork.org/microinsurance/key-concepts/agriculturalinsurance