October 30, 2014

30/10/2014: Agricultural insurance has the potential to reduce global poverty

by Gaby Ramm in Cologne and Roland Steinmann in Zurich of the Guardian Professional

Agriculture is a main source of income for rural communities in many developing countries. More than two billion people depend on smallholder farms for their livelihoods, so improving conditions for smallholders would reduce global poverty levels.ii

Should agricultural insurance be packaged as part of a wider disaster strategy for farmers? Photograph: Design Pics Inc/Alamy
Life for rural smallholder farmers is often marred by difficulties and there are many constraints limiting their economic potential. Challenges include uncertain weather conditions affecting harvests, insecure land ownership limiting farmers’ propensity to invest, restricted access to capital and farm inputs such as fertiliser or seeds, unfavourable trade policies and price fluctuations.

Many of these constraints are beyond the farmers control as they depend on environmental conditions, policies or market players. For example, a female farmer in a traditional rural community is unlikely to own the land she works on. She will have no collateral and, as market prices and demand are volatile and her activity is heavily exposed to natural calamities, creditors could consider her business too risky to invest in. Banks are also unlikely to lend to farmers in disaster-prone regions if the shocks might result in widespread loan defaults.

Agricultural insurance has the potential to address some of these constraints by facilitating access to means of production and changing behaviour by reducing uncertainty. Coverage can enable farmers to invest in riskier but potentially more lucrative farm activities. Timely insurance pay-outs after crop losses can help smallholders smooth consumption and prevent the sale of assets. Insurance can also be a catalyser, as lenders will be more likely to extend credit to farmers covered by insurance, allowing them to make productivity-enhancing investments.

Evidence from pilot studies suggests insurance does have an impact on farmers’ behaviour. In India, farmers covered by rainfall insurance shifted investments towards cash crops, which are more sensitive to rainfall deficit but expect higher returns. In Ghana, farmers with rainfall insurance increased their cash investments, cultivation area and labour inputs. The ultimate effect of insurance on the total value of farm outputs remains less evident though.

Read more HERE.

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