Crop Insurance as a Risk Management Strategy in Bangladesh

Adverse selection
The tendency of individuals with poorer-than-average risks to buy and maintain insurance.
Adverse selection arises when insured select only that coverage which is most likely to result
in losses. In agricultural insurance, this can arise when:
Basis risk
• High-risk farmers or farmers using backward practices participate, while other
farmers, with more certain production expectations, do not;
• Farmers apply for insurance only on their high-risk crops or plots, withholding
other units. An example would be buying insurance only for crops grown on
flood-prone areas of a particular property. Crop insurance models can be broadly
categorized into two categories: traditional crop insurance and index based
insurance.
This is the potential mismatch between insurance payout and actual insurance losses.
Franchise
An amount of loss that has to be reached before the insurer will pay a claim. Once this
threshold is met, the insurer has to pay the claim in full. e.g. A farmer insured his crop for
US$1000 with a franchise of US$100. If the claim is for US$99, then this is borne by the
farmer. If the claim is for US$101, however, then the whole amount of the US$101 is paid by
the insurer.
Guaranteed yield
The expected physical yield of a crop stated in the insurance policy, against which actual
yields will be compared when adjusting any losses.
Index Insurance
This is a very new type of crop insurance in which an indemnity becomes payable upon the
certified occurrence of the weather event to which the insurance relates. This is also known as
“Coupon insurance” since coupons or tickets replace the normal insurance policies. The main
difference between this and standard crop insurance is that crop losses are not measured,
either on individual insured farms or on an area basis. Rather, reliance for triggering the
coupon is based upon data generated by weather recording instruments, with the possibility of
verification of the occurrence of the insured weather event by recourse to aerial or satellite
photography.
Insured
The person or business entity covered by an insurance policy.
Insurer
The company which issues an insurance policy and is named in the policy as being
responsible for paying a claim should a loss event result in damage to the insured property.
Indemnity
The amount payable by the insurer to the insured, either in the form of cash, repair,
replacement or reinstatement in the event of an insured loss, is termed the indemnity. The
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