Crop Insurance as a Risk Management Strategy in Bangladesh

can be classified under different risk categories. Methodology for such risk quantification
based on historical climatic time series data is explained in the study. Even the risk level in
near future under climatic changes can be predicted here as well based on future prediction of
climate attributes by different GCM or other predictions. Within a unit area variation in risk
level is possible, like the inundation height for different land segments might be different
even though they are within one unit. Problems like this can be solved by including the
elevation of each segment of land in the contract, etc as explained in detail in next chapter.
However, this might be complicated and may not be practiced in the initial years. Rather a
farmer's risk pooling technique can be applied as explained in the next paragraph.
Less number of perils to cover and provision for multi-peril: In a weather insurance contract,
it is actually impossible to cover all perils if it is not related to climatic attributes. Again,
including all perils in the contract make it highly vulnerable to high losses. Instead, there
should be provision that someone might take wider coverage of 2-3 perils, but have to pay
more for it. It also reduces administrative and technical complexity.
Risk pooling among the farmers and formation of cooperatives: Community or cooperative
formation among the farmers within a homogeneous unit area and introducing provision of
risk pooling among the farmers is possible to reduce the local variation of risk level among
the farmers living within a homogenous unit area defined by Weather Index Approach. It
means for a unit area if flood is defined as water level above 10m MSL, the entire region will
get indemnity. However, say 10% of land was not flooded. Similarly, if the water level is
below 10 m MSL, no one will get compensation. In that case when the entire land gets
compensation, there should be provision that farmers themselves have a cooperative and recollect
the indemnity bills from those who are not affected at all, and later compensate it to
those who were affected due to flooding in a normal year but not having indemnities because
that year does not satisfy weather index level. Such a cooperative can be free of influence by
the insurer, but can be introduced and formed at the beginning of the contract with the
support of insurer, local govt. and the government cooperative authority.
When crop production is not affected, such a cooperative can collect certain quantity of crops
in kind from all the member farmers and put together as a deposit. This can be utilized later
to pay premium for a season while a situation occurs that most of the farmers are affected by
some other disaster, which was not insured.
Varying weather index value: Instead of defining just one value of climatic attribute as the
index level, a varying loss of crops can be defined based on variation in that climatic attribute.
For example if precipitation is below 25%, 50% or 75% below average level, the indemnity
might vary as well.
Wider coverage: Insurance works based on the laws of large numbers. But usually, the
farmers along the risky zones like highly prone to flood, drought and cyclone will only like to
take CI, but no agent can show interest because of the potential of heavy losses. Therefore, a
wider risk pooling is needed. To overcome the problem, government can make CI mandatory
for all farmers taking Agri-loan. In that case CI policy holders will be distributed over
different regions ranging from low to high risk areas. Micro-credit organizations can help as
well. If the Credit is related to crop production, CI should be made mandatory. Otherwise,
farmers can be encouraged to take CI by offering low interest loans for those who will take
CI, etc. Varying premium level for varying risk will encourage low risk farmer to take a
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