AGRICULTURAL INSURANCE

INTRODUCTION
• Agricultural insurance protects against loss of or damage to crops and
livestock. it has great potential to provide value to low-income
farmers and their communities, both by protecting farmers when
shocks occur and by encouraging greater investment in agriculture.
Agricultural insurance can indemnify policy holders for losses, though
such indemnity products are relatively rare due to high costs of
administration and the risk of fraud.
• Ethiopian insurance corporation (EIC) is committed to provide
adequate insurance covers for all agricultural projects that are
financed by financial institutions and individual farmers (commercial
& small holder ).
OBJECTIVES;
 To create awareness about agricultural insurance
 To manage the risks of the insurance product
 To boost EIC’S production
 To increase market demand
RISK IN AGRICULTURE
Agriculture is without doubt one of the riskiest sectors of economic
activity.
Production
 Weather peril –drought
 Disease & insect pests

Strategic
 Enterprise selection
 Marketing channel selection

Financial/market
 Commodity price fluctuations
 Exchange rate
 Input cost fluctuations
Individuals /producers
 Illness
 Accident
 Death
Management
 Skills
 Investment
decisions-
choice of
enterprise
 Cultivation
methods
 Risk
management
methods

agricult
ure risk
SHARE YOUR FARMS RISK TO INSURANCE
manage
- crop insurance -horticulturalist’s/green house insurance
ment- cotton insurance -ornamental plants & herbs ,vegetables
Methods-ofcoffee plantation insurance -poultry insurance
farmer - livestock insurance - tea plantation insurance
employee in
managing risk
in the farm:
key challenges in agricultural insurance
• Moral hazard, adverse selection, fraud
• (insurance) literacy
• Trust
• Geography: Distribution, after-sales service,
monitoring and claims assessment…
• Covariant risks
• Information asymmetry:
• Lack of baseline: often no production data
Reasons for increasing demand for
agricultural insurance
• Increasing investment in Agro enterprises
• Increasing demand for agro- products.
• Increased movement across borders (imports and exports)
• Increase in farm sizes
• Increased disease exposure
• New and aggressive viral & bacterial strains
• Specialized & intensive farm production
• Market fluctuations (input cost/market price)
 Role/Benefits of agricultural Insurance

• Stabilisation of farmers’ income

• Risk management tool for financial institutions
• Collateral
• Adoption of innovative technology
• Loss prevention and minimisation
 AGRICULTURE INSURANCE CAN NOT
COMPENSATE;
 For poor management & cultivation practices
 For inadequate agricultural policy of government
(infrastructure, subsidies)
AGRICULTURAL INSURANCE DIFFER FROM OTHER
INSURANCES;
 Risk sensitivity
 Exposure to climate change
 Land as a production asset that can not be
relocated
 Requirements for a crop Insurer
• Experience and Expertise
• Infrastructure & Systems
• Proven Assessment Procedures
• Financial Backing
• Adequate Reinsurance – Good securities
 THERE IS AN UNDER SUPPLY OF INSURANCE
on insured (demand)side:
– Lack of skills & inadequate/ inequitable access to support services
– High costs of production / Cost price squeeze (cost of insurance is one
such factor of production affecting our competitiveness)
 Premium rates are too high
on insurers (supply) side:
– Asymmetry /irregularity of information brings adverse selection
– Risks are hard to quantify as no sufficient data is available
 Premium rates are high
 Importance of pre-risk assessment.
Pre-risk assessment entails surveys, physical
assessment of a risk to establish if the risk is suitable
for admittance by Insurers:
• Crops and animals are growing risks – nature of risks
is continuously changing.
• Verifies that risks are of insurable stands.
• Validates risk management and husbandry practices.
• Enables determination of terms and conditions
• Acceptance/rejection of the risk.
• NB : Pre-risk assessment is very important for agro
risks.
 RISK EVALUATION
Evaluate ;
o soil
o Climate
o Husbandry practices
o Management skill
o Variety
o area
o Seed quality etc…….
 Perils in Crop Production
ADVERSE WEATHER CONDITIONS:
• Hail
• Storm, Wind , Sandstorm
• Floods, excessive rainfall
• Drought, heat wave
• Fire & lightning
• Uncontrollable disease and pets
 HAIL
Hail is solid precipitation – falling ice particles . These often
cause visible and quantifiable damage on plants. Severety of
damage is influenced by size of pellet and intensity when
striking the plant.
Fire : visible damage caused by fire
 Frost
Visible quantifiable damage caused by freezing of
the plant or parts
of the plant.
Drought (Irrigation Excluded)
 Excessive Rainfall

Excessive rainfall
 FLOOD
Where the water of a river and/or stream overflow the river and/or stream bank due
to excessive rain in the catchment area and the overflow water cause damage to the
insured crops.
 Excessive Heat Waves (Irrigation excluded)

An event where irreversible damage is caused

to the growth or developmental process in the
crop resulting from a persistent hot
temperature spells above the upper lethal
temperature threshold values of the crop/crop
development stage.
 WIND STORM
An event where
mechanical damage is
evident to such an
extent that
the plant is permanently
damaged or the harvest
severely lodged.
 Application of insurance products vary for commercial
and smallholder farming:
 Named Peril Crop Insurance  Weather-/satellite
index insurance
Product alternatives: Product alternatives:
•Fixed sum insured •Fixed sum insured
Application: Application:
•Named perils (e.g. • Perils: Excessive or rainfall deficit, extreme
hail, frost)
Advantages: temperatures, wind
• Simple product design • Payouts based on weather station measurements
• Individual loss adjustment Advantages:
based on % loss • Low administration costs, low loss assessment
• Reliable, scientifically based expenses: independently verifiable
loss adjustment procedure • No adverse selection and moral hazards
used
• Ideal for catastrophic losses: can be reinsured
 CONTINUED…….

Named Peril Crop • Weather-/satellite index

Insurance Disadvantagesinsuranc
:

Disadvantages: e basis risk remains with the farmer:

• Considerable
Limited suitability to serve as collateral.
• Only applicable to few risks
• Development and marketing costs are high.
• Product based on meteorological trigger or
vegetation indices for farmers is often difficult
to understand. Therefore low acceptance,
especially amongst smaller and less skilled
farmers.
• Integrity of weather stations
• Difficult/complex setting of index parameters
 Yield Guarantee Insurance (MPCI)
• Yield Guarantee Insurance (MPCI) • Area-yield insurance
Product alternatives:
• Individual historic yield (farm level)
Application:
• Applicable for all climate risks
Advantages:
• Comprehensive cover, all climate risks
• Easy to understand
• Very good correlation between yield and
indemnification
Disadvantages:
• Determination of yield guarantee is a
challenge
• All climate risks have to be insured.
• Indemnification of non-insured perils (e.g.
pest and diseases)
Product alternatives
• Regional average yield
Application :
• Farmers are treated in groups over a wide
area, district, province or country.
• Effective in areas with similar exposures.
Advantages
• Low administration costs
• No adverse selection and moral hazards
• Ideal for catastrophic losses
• Low loss assessment expenses
• Can handle large farmer groups
Disadvantages :
• Lack of reliable local yield information/
stats.
• Basis risks: eg, localized perils like fire/hail
will not result in pay-outs.
 BASIS OF SUM-INSURED
• YIELD BASE ;5years average yield x
price(market price)x cultivated land
• COST BASE ;
-production cost
- production credit
-market value
 RATING IS BASED ON;
• Susceptibility
• Type of crop
• Location
• Growth cycle
• Spread
• Loss experience
 EIC
A. MULTIPERIL CROP INSURANCE
OFFERS
Loss Cost or “pure premium”
It covers crop loss due to:-
• Actual or expected cost to an insurer of
 Fire and Lightning
indemnity payments and allocated loss
adjustment expenses
 hail and Storm
• Loss costs do not include overhead costs or
profit loadings.
 Excessive rainfall
• Historical loss costs reflect only the costs
 Frost
and assessment costs associated with past
claims.
 flood
• Prospective loss costs are estimates of future
 Uncontrollable disease
loss costs, which are derived & pests(additional premium is needed)
by trending
and developing historical loss costs.
 GENERAL EXCLUSIONS;
GENERAL EXCLUSIONS:-
The Insurance does not cover
• Any crop which has been harvested prior to inspection by the Assessor
• Hay and Straw
• Theft except whilst in direct transit to the insured’s permanent storage
• Loss or damage occasioned by or through or in consequence directly or indirectly
of any of the following occurrence namely:
 War, Invasion, act of foreign enemy, hostilities or warlike operations.
 Volcanic eruption, subsidence, landslide, erosion, or other convulsion of nature.
 Infestation, vermin, pests animals, birds, insects and other natural enemies or disease of
every description whether evident in the crop before or after an insured event.
Specific exclusions:-
• Consequential loss due to delay, detention or confiscation.
• Weight losses unless due to theft or fortuitous circumstances.
• Theft by the insured or its employees.
• Transit risks outside the borders of Ethiopia
• Theft of the crop whilst in or on a road vehicle which has been left
unattended.
• Unexplained disappearance or unaccountable losses of any form
or kind whatsoever or normal shrinkage or normal loss of weight.
• Loss or damage due to bad state of roads or rail.
 SUM-INSURED CALCULATION
EXAMPLE ; Sidama seed enterprise notify to insure its seed maize as follows;
TOTAL LAND -500HA
CULTIVATED LAND-300HA YIELD -
30QL/HA MARKET PRICE-
1800/QL PREMIUM
RATE-3.2%
DEDUCTIBLE-25% OF EACH &EVERY
LOSS
1,pre-risk assessment = to decide
whether it is insurable or not
2 ,sum insured calculation ,
SI=CULTIVATED LAND*YIELD
/HA*MARKET PRICE
=100HA*30QL*1800
=5,400,000.00BIRR
3,PREMIUM = 5,400,000.00*3.2%
=17
2,800.00BIRR
B. Weather- Index Crop Insurance
• Insurance policy based on an independent measure of
weather(rainfall) outcome.
-Local weather station: keeps record of daily rainfall
-Index: a function of rainfall data
• Eliminates moral hazard
-Farmer’s behavior does not affect rainfall outcome
• Adverse selection
-There is no relevant asymmetric information , e.g. type
of farmers
• Cheaper to provide
-Avoids individual costly verification
Satellite rainfall data…
The location of the area should be
marked using a GPS device.
The longitude and latitude of the
specific area has to be determined from
the GPS and entered into the computer i n
the form of (23.29N,32.45E)
•The maximum payout point is called “exit”.
•The payout would be:- 1.Full
payment, if rainfall < exit
2. Partial payment, if trigger >
rainfall > exit
3. No payment, if rainfall >
trigger
• Trigger point…rainfall
at which payout
begins.
• Exit point… rainfall at
which 100% payout
begins.
 Example :- Given rainfall data for eight dekads and ,If trigger = 70mm,
Exit=35mm,Cap=15mm
1 2 3 4 5 6 7 8 dekads
20mm 3mm 0mm
9mm 40mm 5mm 10mm 45mm RF

 Amount of rainfall(ARF)= 15+3+0+9+15+5+10+15=72mm(no payout)

 (ARF)=10+3+0+9+10+5+10+10=57mm(partial payout)

 (ARF)=5+3+0+5+5+5+5+5=33mm(full payout)
 Graphical presentation of the payout function
Seasonal Payout (% insured value)

Maximum
Payout (%)

Minimum
Payout (%)
Czndvi_pos
Exit Strike

Max payout Partial payout Min payout No payout

Higher –ve values Smaller –ve values & towards +ve

•
 Loss Assessment

• Best and scientific way of solving claims

• accurate damage determination
• Includes all growth stages
• Quantify damage
• Objective measurement
• Create trust
• International procedures
• Backed by research
 LIVESTOCK INSURANCE
.Like any insurance product, the purpose of livestock
insurance is to compensate clients for the death of animals
due to disease or accident .
As a general rule all animals of the same group on the farm must be
insured because :
• insurers obtain a better spread of risk
• minimization of moral risks
• Animals to be uniquely identified
• Stock values to be homogeneous
 LIVESTOCK PERILS
Health factors ;
Mortality (death)
Low production
Climate;
Drought
Lightning
Accident
Fire
Poison
swel
 LIVESTOCK INSURANCE
Mortality / herd insurance Grassland index insurance
Product alternatives: Perils:
•Fixed sum insured • Loss of grazing as a result of drought/ rainfall
deficit
Application:
Application
• All risk of
• Payouts based on value of grazing loss per
mortality for millimeter of rainfall deficit.
large and small
Advantages:
stock.
• Low administration costs, low loss assessment
Advantages: expenses
•Simple • No moral hazards: independently verifiable
product • Ideal for catastrophic losses, can be reinsured
design
Disadvantages:
•Loss
• Considerable basis risk remains with the
adjustment farmer
only
• Development and marketing costs are
conducted by high
qualified
• Huge anti-selection risks
vets.
Disadvanta
Types of animal
The major type of insured objects in the Livestock
Insurance policy is an animal for domestic
purposes. The animals type are listed below:
1. Fattening steer
2. Draft ox
3. Dairy cow
4. Bulls/bullock
5. Draft horse
6. Sheep & Goats
 Period of insurance and renewals
Type of animal Age at entry Period of cover
( cannot be less
than fixed period )
Draft ox or dairy cows 2 ½ or 3 years 5 years

4 years 4 years

5 Years 3 years

6 years 2 years

7 years 1 year

Draft horses 6-8 years 4 years

9 years 3 years
Type of animal Age at entry Period of cover
(cannot be
less than fixed
period )

Bulls/bullock
2 up to 3 years 5 years
from 3 up to 4 4 years
from 3 up to 4 3 years
from 5 up to 6 2 year
from 6 up to 7 1 year
Type of animal Age at entry Period of cover
(cannot be
less than fixed
period )

Draft horses 6-8 years 4 years

9 years 3 years
10 years 2 years
11 years 1 year
Fattening steer 2 ½ -8 3,6 or 12
months
Renewal
s
Renewals, therefore, apply to insurance issued
in respect of ;
- fattening steers which can be insured for
further periods of 3,6 or 12 months until the
animal attains age 9 years; and
- Draft horses which can be insured for further
periods of 1 or 2 years until the animal attains
age 12 years.
 Rating considerations
• Type of animal
• Susceptibility
• Location
• Age ( Growth cycle )
• Overall Management
• Spread
• Loss Experience
• Normal Mortality
• The excess structure
EIC
OFFERS
A.MULTIPERIL LIVESTOCK INSURANCE
 Covers more than one peril.
 It covers livestock death due to disease or accident.
 Possibly extension be made to such risks of death due to surgical
operations, breeding and parturition and permanent total disability
of draught animals ,Dairy and Breeding animals.
 This does not cover : Injury, Loss of use , Emergency slaughter .
• EXCLUSIONS
• Moral hazard
• Pre-existing conditions
• Theft ,Disappearance
• Sales
• Accumulations of :-
- Drought
- Famine
- War like risks
Multi Peril Livestock Insurance -Dairy cows
MULTIPERIL LIVESTOCK INSURANCE-Fattening Steers
Coverage for 3,6 and 12 months
Underwriting Conditions
Selection: the basic selection factor are age and state of health of the animal;
an animal to be considered for cover should fall within the range specified
above.
Vaccination :Vaccination at least three communicable diseases of the area. It
may be Anthrax, Black leg or pasteurellosis .
Ear –tagging or deep skin tag
• Distinctive natural mark and ear-tag number need to be registered.
Other considerations
• Photo graph shall be taken for high value animals from three dimensions.
• Healthy and free from any injury.
• Absence of pre existing diseases
• Zero-grazing in urban and may be field grazing in rural.
Example
• Let say Kebede insured 20 Goats,10 Sheep
and
20 Cattle in yirgalem.
• 1cattle = Br.15,000
• 1Goat = Br.800 and
•TIHV
1sheep=
= Br. 700
[800*20+700*10+15,000*20]
= [16,000+7,000+300,000.00]
= 323,000.00
Premium = ETB 7.54%*
323,000.00
= ETB 24,354.2
B. INDEX BASED LIVESTOCK INSURANCE

is used to protect against shared rather than individual risk

such as the risks associated with weather fluctuations,
disease out breaks or price loss.
 The IBLI contract stipulates five key parameters:

1. The geographical area that the contract covers.

2. The “premium” or the price paid for insurance coverage.
3. The “strike point,” meaning the index level at which the insurance is
activated and payouts begin.
4. The value that will be paid for each livestock unit that is later
estimated to have been lost.
5. The length of time for which paid coverage lasts.
 Unlike traditional insurance which assesses loses on a case by case basis and makes
payouts based on individual client’s loss realizations, IBI offers policy holders a
payout based on the external indicator which triggers a payment to all insured
clients within a geographically defined space.
E.g:-damot gale family insures an index insurance for there cattle as follows;
1TLU= Br. 10,000.00 and
 Damot gale has 10TLU,then the
Sum insured=10*10,000 =Br.100,000.
Premium=100,000*3.5%(assumed) = Br. 3,500.00
Strike point = 15%(assumed)
First period predicted mortality rate = 12%
Second period predicted mortality rate =20%
First period=nill
Second period=20-15%=5% there fore damot
gale family will receive 5%*100,000.00=5000
birr
Claims Loss Assessment
- Insured to report loss immediately
- Responsible for loss prevention
- The animal is the property of the insurer following a
loss
- Post- mortem, to be conducted by a vet to
determine cause of loss.
- Quantum determined, agreed and claim settled
 Farmers

Legal framework:

Government agricultural Insurance

THANK YOU !!!