Crop Insurance as a Risk Management Strategy in Bangladesh

Second, the knowledge that the government is likely to “bail out” affected parties creates
moral hazard conditions and depresses the market for private crop insurance. Farmers do not
do all that they can do to reduce individual vulnerability to adverse climatic conditions and
other biological threats. Similarly, insurance companies have little incentive to enter rural
markets and offer costly insurance products since they fear that demand for their products
will be weak since farmers would prefer free ex post assistance from the government as
opposed to paying a premium ex ante. The negative results are represented in Figure 3.13.
Central governments should provide disaster assistance but should set rules of eligibility so as
to encourage the purchase of private insurance and/or precautionary actions to reduce
vulnerability to losses.
Third, well-organized groups of farmers have a strong incentive to lobby the government for
relief from a wide and varied number of adverse climatic and price effects. Thus, government
can be called upon to provide relief for non-catastrophic events, which normally should be in
the domain of private insurers. Many times, the farmers that are more organized and most
influential tend not to be the poorest. Political motivation might be there as well. Thus, nonpoor
farmers and a group with vested interest might be the beneficiary there.
Moral
Hazards
Increased Income
Inequality
Increased
Public Deficits
Destroy
Repayment
Culture
Figure 3.11: Unintended consequences of ex-post emergency disaster programs
Fourth, the ready willingness of central governments to use debt forgiveness of formal
agricultural loans undermines the solvency of banks, destroys repayment culture and
dampens the willingness of financial intermediaries to expand and innovate in rural areas.
Financial intermediaries tend to retreat from the agricultural sector after such an event, and if
they stay, they only lend to collateral rich and well-known clients. Thus, financial markets
remain shallow, noncompetitive, and incomplete. Debt forgiveness, while timely and easy to
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Shallow Financial
And
Insurance market