CPBRD POLICY BRIEF

CONGRESSIONAL POLICY AND BUDGET RESEARCH DEPARTMENT

NOVEMBER 2012 NO. 2012-06

REVIEW OF THE PHILIPPINE CROP

INSURANCE: KEY CHALLENGES
*
AND PROSPECTS
The need for agricultural competitiveness in an integrated commodity markets coupled with
climate change adaptation, have allowed the demand for crop insurance as a risk- management
measure to remain strong. However, inherent market/structural weaknesses, have constrained
traditional crop insurance products to deliver their expected benefits.
Under these circumstances, the government has subsidized the bulk of premium costs to
agricultural producers. Even with substantial public support, there has been little evidence to
show that these interventions have resulted to better outcomes in terms of wider penetration
rates among farmers and higher financial returns to the insurers.
The challenge therefore is how to overcome these operational impediments and develop cost-
effective agricultural insurance schemes. Likewise, there is a need to stress that crop insurance
is not an all-out solution for risk management and climate adaptation. It has to be implemented
with other risk management measures or it would likely fail to reduce production risks and to
advance adaptation.

INTRODUCTION

After three decades in existence, the Multiple Peril Crop Insurance (MPCI)1 program being
implemented by Philippine Crop Insurance Corporation (PCIC) 2 has yet to live up to its
expectations. Government subsidies for premiums [and operational expenses] have been
costly and concerns about the financial sustainability of the program have gained ground.
Even with continuing public support, there has been little evidence to show that these
interventions have generated any sizeable social net benefits.

As a formal risk management instrument, the crop insurance has been designed to mitigate
production/yield risks associated with adverse natural events, e.g. typhoons and drought.
Despite potential benefits, its operation has been constrained by market and regulatory
inefficiencies.

* Prepared by Prince Cal T. Mamhot and Director Novel V. Bangsal in consultation with CPBRD OIC Director General
Romulo Emmanuel M. Miral, Jr. The views, opinions, and interpretations in this report do not necessarily reflect the
views of the House of Representatives as an institution or its individual members.
1
Multiple peril crop insurance is an indemnity-based insurance in which an insured yield (for example, tons/hectare) is
established as a percentage of the historical average yield of the insured farmer. Yield-based crop insurance typically
protects against multiple perils because it is difficult to determine the exact cause of the loss.
2
Under P.D. # 1467, as amended by R.A. 8175, PCIC is the sole provider of insurance protection to the country’s
agricultural producers particularly the subsistence farmers, against loss of their crops and/or non-crop agricultural
assets on account of natural calamities.
1
Historically, many government-subsidized MPCI programs, especially in developing countries,
have performed poorly because administration cost is generally too high. The high transaction
cost has been attributed to asymmetric information problems. When one party—in this case
the farmer—knows more about the nature of his risk than the insurer, the cost of obtaining
information and monitoring the client’s behaviour can be prohibitive. The geographical
dispersion of agriculture production makes the operational and administrative costs of
delivering crop insurance higher than other types of insurance.

Nonetheless, the demand for crop insurance has remained strong, driven by the need to
improve agricultural competitiveness in an increasingly integrated commodity markets. In
integrated markets, change in prices may not be correlated with local supply conditions, and
therefore price shocks may affect producers in a more significant way. More so, it is the
effects of climate change that amplifies the risk exposure of farmers to more frequent and
severe adverse natural events.

With these conditions, the challenge therefore is how to overcome the obstacles and deliver
cost-effective and commercially sustainable agricultural insurance products. This has been
made even more urgent with the filing of legislative measures to expand the scope and
coverage of the program. Equally important is the need to stress that traditional crop
insurance3 cannot be an all-out solution for risk management and climate change adaptation.
Unless it is implemented with other risk management and disaster risk reduction measures, it
will likely fail to reduce risk and to advance adaptation.

RISK MANAGEMENT IN AGRICULTURE

Managing risks in agriculture is challenging as many risks are highly correlated4 and are likely
to affect many individuals and households at the same time. It is very likely that these risks
will increase in the future—price risk due to market integration and production risk caused by
climate change.

Without the necessary risk management instruments, these shocks will adversely impact on the
welfare of rural households who depend on agriculture for livelihood. Since consumption
accounts for the bulk of income among low-income families, shocks that reduce rural incomes
can make the poor and near poor households more vulnerable and unable to break free from
the cycle of poverty. Moreover, this will reinforce the risk-averse behavior of farmers and
force them to use low-risk/low-return livelihood strategies, resulting in lower incomes and
growth. Farmers exposed to severe risks are also likely to default on their loans.

Farmers rely on a variety of strategies and coping mechanisms to manage risk in agriculture.
While some of the on-farm, risk mitigation practices are recommended such as crop
diversification and integrated pest management, other practices such as economizing on
purchased inputs, and the use of low-yielding but drought resistant varieties, represent

3
Traditional crop insurance products fall under the categories of single- and named-peril insurance and multiple or all-
risk insurance.
4
Highly correlated risks, mostly natural disasters including extreme weather events, are likely to affect many
individuals or households at the same time.
2
production efficiency losses. These inefficient risk mitigating techniques contribute to chronic
poverty and increased vulnerability.

On other hand, relying on formal risk management strategies such as crop insurance offers a
number of advantages. First, formal risk management arrangements can provide protection
against high-severity, low-frequency correlated risks such as typhoons, floods, and droughts.
And second, with increasing trade liberalization and market integration, insurance programs
can serve as a substitute for transferring payments to farmers and maintaining farm income
levels in a post-Uruguay Round of Trade Negotiations policy regime wherein all signatories to
the agreement are supposed to reduce and phase out direct support payments to farmers
(Wenner and Arias 2003).

OVERVIEW OF CROP INSURANCE

Crop insurance is a financial instrument used to manage risks associated with agricultural
production. It is restricted in a sense in that it mostly addresses only production and yield
losses due to adverse weather and natural phenomenon such as pest infestation.

This instrument involves the collection of individual premiums5 and the assessment and
payment of indemnity claims6 for all or part of financial losses. Similar to all other insurances,
it is a risk-pooling instrument which reimburses the amount of financial loss caused by a
determined risk or an unpredictable event.

The general characteristics of crop insurance programs are described as follows: 1) it is heavily
subsidized by the government, 2) most of the publicly-provided programs are MPCI
programs, and are compulsory in nature, and 3) there is capacity constraint in agricultural
reinsurance to underwrite systemic risk.

Publicly-provided crop insurances are generally MPCI programs. Kang (2007) noted
that “every multi-peril insurance program that has progressed beyond infancy has been
underwritten by a government”. In the 1970s and 1980s, many governments in Latin America
and Asia introduced crop insurance schemes to provide MPCI for their small-scale farmers.
In the case of the Philippines, PCIC started underwriting crop MPCI in 1981.

The government subsidizes the bulk of premium cost to farmers. Premium subsidies
are usually more than 50% of the original gross premium (Table 1). Some countries offer
variable premium subsidies such as the Philippines at 48% to 63%. These subsidies take
different forms, namely: 1) subsidies on premiums, 2) operational subsidies to private insurers
for administrative (and product development cost, and 3) subsidized reinsurance (World Bank
2005; Kang 2007). Regardless of the form, government subsidies are generally designed to
increase insurance purchasing and penetration rates by lowering the premiums charged to
agricultural insurance purchasers.

5
It is the monetary sum payable by the insured to the insurers for the period of insurance granted by the policy; the
premium rate x the amount of the insurance; the cost of an option contract paid by the buyer to the seller.
6
Payments for indemnities are based on the difference between actual yield and a pre-specified target yield, not on
actual crop damage or input costs lost.
3
 TABLE 1
GOVERNMENT SUPPORT TO CROP INSURANCE, BY DEVELOPMENT STATUS AND REGION
(in %, except otherwise indicated)
Number of Admin & Public
Premium
Development Status/region Countries with Operational Sector
Subsidies
Crop Insurance Subsidies Reinsurance
By Development Status
High-Income 21 67 24 52
Upper-Middle- Income 18 56 6 22
Lower-Middle-Income 19 74 21 21
Low-Income 5 40 0 0

By Region
Africa 8 63 0 13
Asia 10 70 40 70
Europe 21 67 10 38
Latin America/Caribbean 20 60 0 5
North America 2 100 100 100
Oceania 2 0 0 0
Source: World Bank Survey 2008 in Mahul and Stutley (2010)

Publicly-provided programs are mostly compulsory in nature. Premium subsidies are not
enough to induce farmers to buy insurance. Hence, governments make the insurance
compulsory for farmers who avail of state-sponsored credit programs. There are two possible
sources of loans, the bank and the informal lender.

In the Philippines, the Land Bank of the Philippines (LBP) serves as the main credit arm for
small farmers, a large proportion of which belongs to the rice sector. Loans from the LBP
require collateral but vast majority of farmers are either unable or unwilling to put up
collateral. Thus, crop insurance is applied as a collateral substitute by the bank.

MODERNIZING THE AGRICULTURE

Under ideal conditions, crop insurance can be an important tool to spur agricultural
development because it helps transfer excessive agricultural risks to a third party. This may be
an important motivating factor for providing insurance to agricultural stakeholders.

Crop insurance can facilitate access to credit. The limited access to credit makes
agricultural households vulnerable to income or production shocks. Access to credit is
restricted in the sector because of the variability of production and its exposure to a wide array
of risks. This increases the probability of default risk of borrowers and exposes financial
institutions to greater risks. Collateral requirements to credit further hamper access to formal
financial services.

Crop insurance can facilitate access to credit by increasing credit-worthiness of farmers. It can
serve as a substitute for physical collateral and give banks more security and incentive to lend
to the sector. Government-sponsored insurance programs are usually linked to production
credits.

Crop insurance can facilitate the adoption of higher-yielding activities. With insurance
cover, farmers will invest in high-return but sometimes riskier activities. Poor farmers tend to
4
be conservative, scaling their production on a survival strategy that lessens the probability of
their income falling below a certain level. In this case, crop insurance can help farmers invest
in more profitable activities because insurance contributes to the transfer of risk to a third
party.

In the context of climate change, insurance can also facilitate adaptation activities. In India
for example, farmers were encouraged to shift from rain-fed crops to livestock as a way to
better mitigate the impact of recurrent droughts on their livelihood, and a livestock insurance
policy was especially designed for those farmers (Mahul and Stutley 2010).

Crop insurance can improve agricultural competitiveness amid increasing market and
environmental pressures. Two factors, i.e. climate change and market integration, will have
far-reaching impact on agricultural productivity. More frequent and severe weather events will
reinforce the systemic risk, faced by agricultural producers. Insurance can provide farmers
with incentives to adapt to climate change. Moreover, government’s attitude towards
agricultural insurance is being influenced by the World Trade Organization (WTO)’s Uruguay
Round of multilateral trade negotiations in 1994. The WTO policy specifically exempted
agricultural insurance premium subsidies from the list of state aid and subsidies directly related
to agricultural production that have to be reduced or eliminated.

INEFFICIENCIES OF CROP INSURANCE

Despite the potential benefits of crop insurance, it is still largely underdeveloped in developing
countries.7 The fundamental reason is that the ideal conditions for the insurance to be
effective are not often met in reality. Many of the crop insurance programs that appeared in
the 1970s and 1980s failed because the market and regulatory failures were not addressed.
Below are key impediments to a more stable and complete crop insurance market.

Crop yield risks are highly correlated. As cited earlier, most sources of yield risks are
neither independent nor spatially uncorrelated which make insurance markets in agriculture
difficult to sustain. Many of the yield risks of farmers are induced by weather conditions that
affect large number of farmers at the same time. Because such risks are realized over a large
geographic area, systemic risks can generate major losses in the portfolio of insurers.

This can overburden the financial capacity of insurers and may make them fail. Risk-pooling
will not work well because of the systemic risk, especially if all of affected farmers will claim
indemnities simultaneously. This is the reason why hardly any agricultural insurance can cover
its costs of indemnity with premiums. Most have to be subsidized and most governments are
compelled because of the strategic role the agricultural sector has to the entire economy.

Insurers do not have sufficient information for risk assessment. Viable insurance
programs require that the insurer has enough information about the nature of risks being
insured. However, this becomes very difficult for farm-level yield insurance—where farmers

7
Limited penetration despite high premium subsidies, poor financial performance, underdeveloped private sector
provision of crop insurance are some indicators of the level of development of the insurance business in developing
countries such as the Philippines.
5
know more about their potential crop yields than any insurer. As a result, insurers cannot
correctly classify their clients by risk type and calculate premium rates that can accurately
reflect the likelihood of losses for farmers or monitor them effectively (Wenner 2005). Under
these circumstances, problems of asymmetric information arise. The two critical
informational problems that any insurance program faces are adverse selection and moral
hazard.

In the case of adverse selection, insurers find very expensive to distinguish between high-risk
and low-risk farmers and thus fail to set premiums commensurate with the risks. To
overcome adverse selection problem, the insurer will have to invest heavily in obtaining more
information, especially farm level yield data for long periods, so as to get better risk
classification.

The other related information problem is one of moral hazard, wherein the insured changes
behavior and may become less diligent in minimizing production risks knowing that potential
losses are covered. Since monitoring the behavior of the insured is costly and imperfect, this
could lead to potential losses for the insurer.

Administrative cost is prohibitive. Marketing of individual crop insurance policies to

dispersed and small farmers entails huge administrative and transaction costs. This is
compounded by the agency’s individual underwriting and claim approach to the program.
High operating cost is also due in part to the loss adjustment for yield-based programs and the
risk classification and monitoring systems which the PCIC must put in place to mitigate
asymmetric information problems.

INNOVATIONS TO CROP INSURANCE

Problems of correlated risks and information asymmetry are likely to make risk pooling—an
essential element of insurance—ineffective. Hence, recent innovative insurance instruments
focus on tackling the traditional problems with agriculture insurance such as moral hazard,
adverse selection and high transaction costs, have been developed and pilot-tested world-wide.

Most notable are index-based insurance products designed to address the traditional insurance
scheme’s operational weaknesses (FAO 2005).

With index-based insurance schemes, estimates of financial losses are based on index or proxy,
instead of using the assessment of an adjuster. The index is based on variables such as
regional rainfall, wind speed, temperature and area yields. When the index passes a
predetermined critical threshold, the insurance provider starts compensating policyholders for
losses.8 Among these product innovations are:

 Weather-based index insurance. Weather based insurance contracts are linked to a

weather index such as volume of rainfall, rather than a possible consequence of

8
If the coverage is indexed on a volume of rainfall, for example, the insurance assessment is designed around rainfall
data. If the amount of rainfall is below (drought) or above (heavy rains) the threshold stipulated in the contract, the
insurance provider pays out.
6
 weather, such as crop failure. Unlike traditional crop insurance, the insurance provider
does not need to visit the coverage area to determine premiums or to assess damages.
Instead, the insurance assessment is designed around rainfall data. If the amount of
rainfall is below (drought) or above (heavy rains) the threshold stipulated in the
contract, the insurance provider pays out.

 Area yield-based insurance. Under the area yield-based insurance, a specific area is
properly identified, for which the historical yield is first determined. The insurance
provider would then agree to a pre-determined trigger (i.e. a 10% yield decline in the
coverage area). If the trigger is met, farmers-enrollees would be paid regardless of the
cause.

 Crop-revenue products. This insurance scheme is designed to meet any shortfall in

revenue from crop sales. It aims to protect insured parties from the consequences of
low yields, low prices or a combination of both. The essence of this insurance product
is to take into consideration both production and price risk as determinants in the
gross revenue of a given crop insured because under normal supply/demand
conditions, a production shortfall might result in a rise in price.

These products offer new opportunities for agricultural insurance, although their long-term
sustainability has yet to be proven and have some drawbacks. One problem is that of
reducing and communicating “basis risk”. Basis risk happens when the amount of rainfall
measured at a weather station differs from the rainfall at an insured farmer's plot.9 In some
indexed-based products, price fluctuations, unmanageable pests or availability of inputs are
also difficult to manage by index-based insurance scheme. Despite these drawbacks, initial
results have proven the feasibility and affordability of such products (World Bank 2007).

Other than these new insurance products, crop re-insurance is another instrument that allows
insurers to access additional risk capital for protection against systemic loss. Without
reinsurance, insurers may not be able to meet the demand for agricultural insurance or may be
exposed to default risk.

However, the market for agricultural reinsurance is small due to the high cost of reinsurance
premiums and reluctance of reinsurers to develop people with the necessary specialized
knowledge and information systems to properly monitor and evaluate agricultural risks. Since
crop yields are highly correlated, private insurance companies cannot effectively pool risk at
the regional or even at a country level, especially if it is a small country. This is particularly
evident for MPCI business given the aversion of many international reinsurers to underwrite
individual grower MPCI because of its exposure to systemic risks, which can result in
catastrophic losses.

9
Basis risk is defined simply as all the risks that the insurance contract does not cover.
7
THE PHILIPPINE CROP INSURANCE PROGRAM

Legal Mandate. The Philippine Crop insurance Corporation (PCIC) implements and
manages the government program on agricultural insurance. Its operation has been
decentralized up to the regional level, bringing services closer to its farmer-clienteles.

Created under Presidential Decree (PD) 1467 in 1978 and amended under PD 1733 (1980)
and Republic Act 8175 (1995), the PCIC operates as a business corporation and does not
receive budget from the government for its administrative operations. Prior to 2009, PCIC is
the sole public-sector crop insurance company.10 With regards to livestock, PCIC has tied-up
with a pool of private insurers—the Philippine Livestock Management Services Corporation
(PLMSC). The PLMSC has 14 participating insurers including the Government Service
Insurance System.

Insurance products available. The crop insurance program was operated nationwide on
May 7, 1981 with rice as the only covered crop. Corn was added to the program starting July
1, 1982. Other crop and non-crop insurance packages followed in the succeeding years11
(Table 2).
TABLE 2
PCIC INSURANCE PACKAGES
Name of Implementation
Coverage
Package Date
traditional rice 1981
Crop corn 1982
insurance tobacco 1991
high value commercial crop 1993
Non-crop buildings, machineries, equipments, transport facilities,
1996
agri. assets other related infrastructures
Livestock implemented as part of the PCIC-Philippine Livestock
1988
insurance Management Services Corporation (PLMSC) tie-up
life insurance, accident insurance and loan repayment
Term insurance
protection plan for farmers, fisherfolks and other 2005
power packages
stakeholders in the agriculture sector
Inland fish fishponds, fish cages and fish pens (for losses caused
Pilot tested 2011
structures by force majeure and other fortuitous events only)
Sources: PCIC website and RA 8550 (Fisheries Code of 1998)

PCIC’s main insurance lines are multi-peril crop insurance (MPCI) policies for palay (rice) and
corn; these two products account for 75% and 16% of PCIC premium income, respectively.
Insurance cover includes losses for natural calamity and for pest and disease.

Delivery channels for crop insurance. The most important delivery channel is through the
agricultural credit provided by the Land Bank of the Philippines (LBP). The bulk of formal
seasonal credit for rice and corn production is coursed through the LBP. The state made it
compulsory for borrowing farmers to avail of crop insurance when availing for production
loans.12 With this set-up, the insurance program was greatly dependent on the amount of
loans released by the formal lending institutions, particularly that of the LBP.

10
In 2009, the Malayan Insurance Company underwrote—on on a pilot micro-level—individual crop insurance index
insurance program for typhoon and drought that was developed by a local financial intermediary, MicroEnsure.
11
PCIC’s other regular programs include the following: 1) high value/commercial crop insurance, 2) livestock insurance
against accidental death and disease, and 3) life insurance and accident insurance to individuals or linked to loans
from financial institutions to farmers and fisherfolk.
12
PD 1733 mandates all rice farmers obtaining production loans for palay under the supervised credit program are
required to enroll.
8
Ironically, when insurance coverage fell during the late 90’s and early 2000, LBP consistently
reported increasing loan releases to small farmers and fisherfolks. By 2004, it reported a total
disbursement of 16.6 billion as loan to about 430,000 farmers and fisherfolks.

This might be explained by the fact that LBP mostly released the loans through partner
organizations like cooperatives, rural banks, development banks and QUEDANCOR. The
PCIC, however, failed to tap these institutional partners to fully exploit the market of
borrowing farmers. In turn, these organizations did not impose enrolment in the program, as
a mandatory requirement to its member-beneficiaries.

Program beneficiaries/enrollees. Rice and corn insurance lines account for the bulk of
PCIC’s business. At its peak in 1991, these traditional lines benefited around 336,000 farmers
with total insured reaching at about P3 billion, covering an area over a half-million hectares.
But coverage has since declined with shrinking of the directional rural credit starting in 1992.
This year, coverage is expected to increase by at least 39,000 with the P150 million provided
by the DA as crop insurance subsidy to rice farmers who will go into third cropping.

PUBLIC SUPPORT FOR CROP INSURANCE PROGRAMS

Financial support for PCIC’s operations comes in the forms of: (1) payment of government
equity share to its authorized capitalization as provided for under PD 1467, as amended by RA
817513, (2) government subsidy for farmers’ premium as contained in the “budgetary support
to government corporations” in the General Appropriations Act (GAA), and, (3) earmarked
funds as provided for under RA 8175 and other special laws (Table 3).

PCIC FUNDING SOURCES (as of FY 2011)
Authorization
Annual General Appropriations Act
Sections 8.1 and 8.3 of PD 1467, as
amended (Sec. 7 of RA 8175)
Sec. 8-A of PD 1467 as amended
(Sec. 9 of RA 8175)
Sec. 6.5 of PD 1467, as amended (RA
8175)
Sec. 3.11 of PD 1467, as amended
(Sec. 4 of RA 8175)
Sec. 6.4 of PD 1467, as amended
(Sec. 6 of RA 8175)
Sec. 54 of RA 8550 (Philippine
Fisheries Code of 1996)
Sec. 10 of RA 10000 or the Agri-Agra
Credit Reform Act of 2010
Source: PCIC
TABLE 3
Type of Fund
Government subsidy for farmers’ premium
Payment of government equity share as contained in the
annual GAAs
State reserve fund for catastrophic losses in the amount of
P500 million
10% of the net earnings of the Philippine Charity
Sweepstakes from its lotto operations
Internally generated funds (i.e. floating of bonds, expansion
of insurance coverage to other insurance lines)
Certain percentage from calamity funds to be earmarked by
the government
Initial operating fund of P50 Million within sixty (60) days
upon signing of the MOA to be executed between BFAR and
PCIC.
45% of the penalties collected from banks that fail to lend
14
to the agriculture sector

13
Currently, PCIC has an approved capitalization of P2 billion from whose yield, it was supposed to source its
operational requirements. However, the total subscribed shares have yet to be completely paid thus the high
operational expense of PCIC is not being fully met by yields from its investment funds. Instead, it mainly relies on
yearly government subsidies.
14
RA 10000 which was approved last February 23, 2010 provides that penalties collected are computed at one-half of
one percent (0.5%) of non-compliance.
9
The bulk of the funds for PCIC are allocated though the annual General Appropriations Act.
Table 4 shows the funds annually appropriated for the insurance program for years 2005-2013.
For equity requirements, no funds were allocated for years 2011-2013 despite the fact the
government has not yet fully paid its subscribed shares to the PCIC. However, P1 billion is
provided under the 2013 budget as insurance premium subsidy for Agrarian Reform
Beneficiaries (ARBs).

TABLE 4
GAA - GENERATED FUNDING SUPPORT TO PCIC
(in million pesos)
2005 2006* 2007 2008 2009 2010 2011 2012 2013**
For Subsidy
113.77 113.77 113.77 113.77 183.77 183.77 113.77 183.77 1,183.77
Requirements
For Equity
30.50 30.50 30.50 30.50 30.50 30.50 - - -
Requirements
* re-enacted budget
** includes the P1 billion subsidy for ARBs
Sources: 2005-2012 GAA and 2013 NEP

Meanwhile, PCIC’s rice and corn MPCI are subsidized. Premium subsidies are payable by the
government and vary between 48% and 63% of the original gross premium in the case of rice
insurance (Table 5). For borrowing farmers, the lending institutions (banks) also make a
contribution of between 16% and 21% for rice. The farmer only pays a variable rate
according to the risk area between 16% and 36%.

TABLE 5
NATIONAL COMPOSITE RATES AND PREMIUM SHARING ON
MULTI-RISK COVERAGE PER HECTARE (as of 2011)
Low Risk Medium Risk High Risk
Type of Farmer/Crop Amount % to Amount % to Amount % to
( P) Coverage (P) Coverage (P) Coverage
Inbred Rice Varieties
Farmer 569.40 1.45 1,134.90 2.91 1,704.30 4.37
Lending Institution 780.00 2.00 780.00 2.00 780.00 2.00
Government 2,301.00 5.90 2,301.00 5.90 2,301.00 5.90
Total 3,650.40 9.36 4,215.90 10.81 4,785.30 12.27
Self-Financed Rice Farmer
Farmer 1,349.40 3.45 1,914.90 4.91 2,484.30 6.37
Government 2,301.00 5.90 2,301.00 5.90 2,301.00 5.90
Total 3,650.40 9.36 4,215.90 10.81 4,785.30 12.27
Hybrid Corn Varieties
Farmer 1,132.00 2.83 2,260.00 5.65 3,392.00 8.48
Lending Institution 1,200.00 3.00 1,200.00 3.00 1,200.00 3.00
Government 4,248.00 10.62 4,248.00 10.62 4,248.00 10.62
Total 6,580.00 16.45 7,708.00 19.27 8,840.00 22.10
Self-Financed Corn Farmer
Farmer 2,332.00 5.83 3,460.00 8.65 4,592.00 11.48
Government 4,248.00 10.62 4,248.00 10.62 4,248.00 10.62
Total 6,580.00 16.45 7,708.00 19.27 8,840.00 22.10
Source: PCIC

National composite rates on these crops vary according to the type of farmer enrollees and the
scope of insurance coverage. Premium rates among rice farmers, for instance, are slightly

10
lower than those of corn farmers. Rates among borrowing farmers, meanwhile, are a bit lower
than those who are self-financed.

Based on scope, premium rates involving multi-risk perils are slightly higher than those
pertaining solely on natural disasters. Multi-risk perils involve natural calamities as well as crop
destruction due to plant diseases and pest infestation.15 The amount of premium also varies
among low, medium-and high-risk areas. For instance, rice crops in Isabela which are
frequently visited by typhoons are assessed with higher premium rates than those from the
almost typhoon-free province of South Cotabato.

PERFORMANCE OF PHILIPPINE CROP INSURANCE

The government has provided explicit subsidies to support the crop insurance program. Yet,
this has not resulted to better outcomes in terms of demand for insurance products (e.g.
higher penetration rate among farmers) and higher financial returns for insurer.

High administrative/operating costs constrained profitability. Determining the full

economic cost of the program would entail more than looking at conventional gross loss
ratios. Loss ratio16 is a common measure of annual operating performance for insurance
products. If the loss ratio is greater than one (1) or 100%, the crop insurance is a loss-making
business since more was paid out in indemnities than was received in premiums. But it is
important to note that over the long-run, profitability of insurance requires that premiums
collected must exceed not only indemnities paid but also the administrative costs of
developing and delivering the product.

In the case of PCIC, annual premiums paid by farmer-enrollees for the period 1996-2006
(except in 1998 and 1999), were higher than indemnities paid, which initially suggest that the
crop insurance program was financially sound. Over the period, the average loss ratio was
pegged at 70-71% (Table 6).
TABLE 6
COMPARATIVE TABLE OF TOTAL PREMIUM PAID AND
INDEMNITY CLAIMS FOR RICE AND CORN INSURANCE PACKAGES
(in thousand pesos)
Premium Indemnity Difference Loss Ratio
Year Paid (a) Claims (a-b) (b/a : 1)
(b)
1996 147,870 68,019 60,315 0.46 : 1
1997 131,547 71,232 60.315 0.54 : 1
1998 113,721 126,275 (12,554) 1.11 : 1
1999 102,729 108,006 (5,277) 1.05 : 1
2000 115,246 60,078 55,168 0.52 : 1
2001 94,127 40,920 53,207 0.43 : 1
2002 70,123 37,615 32,508 0.54 : 1
2003 74,872 64,050 10,822 0.86 : 1
2004 104,920 73,520 31,400 0.70 : 1
2005 97,510 74,990 22,520 0.77 : 1
2006 96,338 77,911 18,427 0.81 : 1
Jun 2007 45,879 27,364 18,515 0.60 : 1
Source of Basic Data: PCIC

15
The PCIC is now on the process of phasing out insurance coverage for pest infestation to encourage farmers employ
sound agricultural practices.
16
Loss ratio is the sum of all indemnities paid divided by the sum of all premiums collected for a given period.
11
However, to account for administrative and operational costs, Hazell (1992) examined the
ratio of paid indemnities to the non-subsidized portion of the premium (P) paid by the farmer
or the producer loss ratio (I/P). Accordingly, an (I + A)/P ratio of more than 1.0 indicates that a
program is not collecting adequate premiums from the insured to cover not only indemnities
but also administrative costs. As it turned out, Hazell’s review indicated the unsustainability of
the crop insurance programs in six countries (Table 7).

Table 7 shows that for every dollar in collected premiums paid by producers, the paid
indemnities (value of claims) and administrative costs on these programs ranged from $2.40
(in the United States) to $5.70 (in the Philippines). Estimates of administrative cost (including
marketing and acquisition) incurred by PCIC for crop insurance is as high as 97% of original
gross premium (Mahul and Stutley 2010). The resulting overhead costs lead to operational
expenses in excess of the premiums collected from farmers. Apparently, these programs only
remained in operation because of huge government financial subsidies.

TABLE 7
INDEMNITY & ADMINISTRATIVE COST VIS-À-VIS PREMIUM AMONG SELECTED COUNTRIES
(in US$)
Country Period I/P A/P (I +A)/P
Brazil 1975-1981 4.29 0.28 4.57
Costa Rica 1970-1989 2.26 0.54 2.80
India 1985-1989 - - 5.11
Japan 1947-1977 1.48 1.17 2.60
1985-1989 0.99 3.57 4.56
México 1980-1989 3.18 0.47 3.65
Philippines 1981-1989 3.94 1.80 5.74
USA 1980-1989 1.87 0.55 2.42

Note: I/P=indemnity/premium paid by the producer; A/P=administrative cost/ premium paid by the producer;
Sources: Skees (2003 and Hazell (1992)

The agricultural insurance program is characterized by a low penetration rate.17

Notwithstanding the high premium subsidies, the penetration rate of the country’s agricultural
insurance program especially on rice and corn has been very low (Figure 1). While the
penetration rates have improved during the last five years, the figures, particularly for rice, are
still way below that of the early 1990s when the penetration rate averaged more than 10%. At
present, the number of rice and corn farmer enrollees/beneficiaries, which averages around
50,000 is just less than 2% of the 5.2 million estimated number of smallholder farmers in the
Philippines.

17
Penetration rate is expressed as the ratio between agricultural insurance premium volume and agricultural GDP

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 FIGURE 1
PCIC PENETRATION RATES (RICE AND CORN), 1982-2011
(in percent)
3.00 16.00
14.00
2.50
12.00
2.00
10.00
Corn

Rice
1.50 8.00
6.00
1.00
4.00
0.50
2.00
- -
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Corn Palay

Source: PCIC

Funding deficiencies affect operations of the PCIC. Another constraint to improve

penetration rate is the absence of sufficient funds to fully finance PCIC’s operation.

 Unpaid government equity share. PD 1467 as amended by RA 8175 increased

PCIC’s authorized capitalization from P500 million to P2 billion (P1.5 billion
government equity share and P500 million preferred shares) in 1996. The increased
capitalization is supposed to allow PCIC to come up with internally generated funds
through investment strategies and earnings to answer for the agency’s overhead
expenses. After 15 years, the increased capitalization as stipulated by law has not yet
been fully paid; hence its high operational expense is not being fully met by investment
yields. The Commission on Audit in 2008 reported that its total equity still stands at
about P1 billion, or 50% of the P2 billion authorized capitalization provided for under
the law. An updated data gathered from the PCIC also shows that as of October 6,
2011, NG has yet to pay P259.05 million for the common stock it subscribed.

 Under-delivered or undelivered premium subsidy. Government subsidy for

premium payments of subsistence farmers is supposed to serve as an incentive to
attract enrollment in the insurance program. However, subsidies are either not
delivered on time or not delivered completely. Out of the P542.94 million total
premium arrearages after the passage of RA 8175, actual releases from the NG totaled
only P374.18 million leaving an unreleased/unpaid balance of P168.76 million (Table
8). Unreleased/unpaid premium subsidies after RA 8175 (1996-2010) totaled P286.91
million.
TABLE 8
SCHEDULE OF PREMIUM RECEIVABLES FROM NG FOR THE PERIOD 1981-2011
(as of October 2011)
Particulars Amount
Unreleased/Unpaid GPS for CYs 1981-1995 P 168,758,000.00
(Balance of arrearages; under RA 8175)
Unreleased/Unpaid GPS for CYs 1996-2010 286,906,181.66
(After RA 8175)
Premium Receivable – Current 37,923,000.00
(Approved GPS-CY 2011 GAA, RA 10147 less Releases)
Total Premium Receivables P 455,664,381.66
Source: PCIC
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  Other non/under remittances. Another funding unremitted by the NG is the State
Reserve Fund in the amount of P500 million, as mandated by RA 8175. Said fund,
which was created exclusively to answer for catastrophic losses has yet to be received
by the agency. Meanwhile, the 10% share of PCSO’s net earnings from lotto
operations earmarked for PCIC’s equity requirement may not have been fully tapped.
The 2008 COA report revealed that “PCIC has no way of ascertaining the correctness
of the amount of P4.852 million remitted by PCSO in 2008, as they just accept
whatever amount is remitted by the latter”.

 Missed investment opportunities. As stated earlier, increased PCIC capitalization

was effected to allow it to come up with internally generated funds through investment
strategies. However, existing policies and procedures on investments are not adequate
to ensure that investments would generate the highest possible income. First, PCIC is
limited by law to invest only in government securities missing possible positive
opportunities in other higher yielding investment portfolio (COA 2008). Second, part
of the government’s equity share is being used for PCIC’s operation instead of
investing it. A COA report revealed that out of the government’s share of P
950.809M, only P267.889M was invested as of December 2002. This scheme, if left
unchecked, would in the long run deplete the agency’s funds.

CONCLUSION

Crop insurance can serve as an important risk-mitigating tool to address the perils of climate
change. However, the country’s crop insurance badly needs institutional reforms to correct
market/structural inefficiencies in the system. As it stands, the traditional insurance programs
impose huge financial burden because of high administrative costs and unresolved adverse
selection and moral hazard problems. A number of administrative and legislative remedies are
then necessary to address some of these problems.

Specifically, the following strategies can be pursued to help mitigate market/structural

deficiencies in traditional crop insurance:

 Fast-track the pilot-testing of index-based insurance products. Pilot testing of

this alternative to the costly and hard to sustain traditional insurance products must be
fast-tracked. The scheme decreases monitoring and administrative costs since actual
losses do not need to be individually assessed and calculated. Theoretically, it can
reduce asymmetrical information since the farmer enrollees/policyholders cannot
influence the changes in the index and both the insurance provider and the insured
would know if there is a shift in the index. However, there’s a need to fast track pilot
testing of various index-based insurance schemes to ascertain whether these could really
reduce moral hazard and eliminate adverse selection problems.

Currently, the Philippines has adopted a number of indexed-based insurance schemes

which are now being experimented in some parts of the country. These include the
weather-based insurance scheme jointly undertaken by the Department of Agriculture,
World Bank and Swiss Re. in Cagayan Valley and Panay Island. Another index-based
modality currently studied is the area yield-based insurance scheme. Pilot-testing of
such products are being conducted in some irrigated farmlands in Leyte and Agusan del
Norte.

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 Continue access in the international reinsurance market of affordable yet
reliable products. Access to the international reinsurance market is a limited among
developing countries, particularly in specialized fields of business such as agricultural
insurance. Only those that are properly designed and have rates that generate enough
premium volume to cover expected losses, operating costs, and costs of capital are
usually accepted. Thus, PCIC’s insurance program has to be properly designed and
adequately priced, using international standards for underwriting pricing and loss
adjustment to be able to access the international reinsurance market as suggested by
Mahul and Stutley (2010).

At present, the country has only one professional reinsurance company, the National
Reinsurance Corp. of the Philippines (PhilNaRe) which reinsures part of PCIC’s
insurance portfolio. PCIC’s reinsurance requirement was earlier underwritten by
Honnover Re and Novae Re. The country’s livestock re-insurance program, meanwhile,
is being underwritten by a public-private co-insurance pool composed of the
Government Service Insurance System and the Philippine Livestock Management
Services Corp. which has 14 participating co-insurers.

 Pursue legislative reforms to ensure efficient funding for the implementation of

the crop insurance. Several legislative measures are pending in the House of
Representatives to help strengthen the Philippine crop insurance program. Most
notable is HB 3758 by Rep. Gina de Venecia which is geared towards addressing the
financial capacity of the PCIC and the expansion of insurance coverage. Congress
needs to fast-track the passage of these measures to allow the PCIC to come up with
internally generated funds sourced from adequately funded investment strategies as
mandated by RA 8175, the original PCIC reform measure. Review of existing policies
and procedures on investments are also needed to ensure that said investments would
generate the highest possible return. The legislature shall likewise advice the DBM to
review and eventually release NG’s un-remittance and under-remittance to PCIC.

 Utilize government support more in funding the development of agricultural

risk infrastructure. Government financial support should also focus on developing
agricultural risk infrastructure like enhanced weather and data information, training and
education and research and development instead utilizing most of it on premium
subsidies. The country has to create and manage a centralized database of agricultural
and weather statistics, and make the database available to agricultural insurance
practitioners. Crop insurance, especially index-based insurance schemes, requires huge
load of information to make accurate estimates. Without it, implementation of index-
based insurance products would not be successful. Besides, the availability of good
quality data infrastructure creates benefits that extend well beyond individual farmers
and insurers (i.e. businesses and agricultural lenders).

15
REFERENCES

PUBLICATIONS

Estacio BF and NB Mordeno. Agricultural Insurance: the Philippine Experience. Paper presented at the
Corporate Planning Conference, PCIC. 2001
Faltermeier, Gertraud. Risk Management with Agricultural Insurances. Deutsche Gesellschaft für
Technische0 Zusammenarbeit (GTZ) GmbH Division 45 – Agriculture, Fisheries and Food Eschborn,
Germany.
Food and Agriculture Organization. Insurance of Crops in Developing Countries. FAO Corporate Document
Repository. 2005.
Hazell, P. B. R., Pomareda, Carlos and Valdés, Alberto. Crop Insurance for Agricultural Development: Issues
and Experience. International Food Policy Research Institute, Inter-American Institute for
Cooperation on Agriculture. 1986.
Itturioz, Ramiro, Agricultural Insurance: Primer Series on Insurance, Issue 12, the World Bank. November
2009.
Mahul, Olivier and Stutley, Charles. Government Support to Agricultural Insurance: Challenges and Options
for Developing Countries. The World Bank, Washington DC. 2010.
Raju, S. S. and Chand, Ramesh. Agricultural Insurance in India Problems and Prospects. National Centre for
Agricultural Economics and Policy Research, India. 2008.
Reyes, Cecilia M. and Domingo, Sonny N. Crop Insurance: Security for Farmers and Agricultural
Stakeholders in the Face of Seasonal Climate, Discussion Paper Series No. 2009-12.
Roberts, R. A. J., Insurance of Crops in Developing Countries. Food and Agricultural Organization of the
United Nations, Rome. 2005.
Roberts, M., Key, N. and O’Donoghue, E. Estimating the Extent of Moral Hazard in Crop Insurance Using
Administrative Data. Paper presented at the Allied Social Sciences Association annual meeting,
Boston. January 6–8, 2006.
Sivakumar, Mannava and Motha, Raymond. Managing Weather and Climate Risks in Agriculture. Springer-
Verlag Berlin Heidelberg. 2007.
United Nations Department of Economic and Social Affairs, World Bank, 2007.
Wenner, Mark. Agricultural Insurance Revisited: New Developments and Perspectives in Latin America and
the Caribbean, 2005.
Wenner, Mark and Arias, Diego. Risk Management: Pricing, Insurance, Guarantees. Agricultural Insurance
in Latin America: Where Are We?. Inter American Development Bank. 2003.

WEBSITES

Association of Bermuda Insurers and Reinsurers (ABIR). www.abir.bm

Department of Agriculture. www.da.gov.ph
Novae Re. www.novae.com
PhilNaRe. www.ncrp.com.ph
Philippine Crop Insurance Corporation. www.pcic.gov.ph

GOVERNMENT DOCUMENTS

2008 COA Audit Report.

2013 National Expenditure Program.
DA Administrative Order No. 18, Series of 2011.
General Appropriations Act (various years).
PD 1467 – An Act Creating the “Philippine Crop Insurance Corporation”, Prescribing its Powers and
Activities, Providing for its Capitalization and for the Required Government Premium Subsidy, and
for Other Purposes.
PD 1733 – Amending PD 1467 Creating the “Philippine Crop Insurance Corporation” by Adding Penal
Sanctions Therein.
RA 8175 – Revised Charter of the Philippine Crop Insurance Corporation Act of 1995.
RA 8550 – The Philippine Fisheries Code of 1999.

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