Crop Insurance as a Risk Management Strategy in Bangladesh

amount is measured by the extent of the insured’s pecuniary loss. It is set at a figure equal to
but not more than the actual value of the subject matter insured just before the loss, subject to
the adequacy of the sum insured. This means for many crops that an escalating indemnity
level is established, as the growing season progresses.
Multi-Peril Crop Insurance (MPCI)
A type of crop insurance in which a number of perils are covered and where the basis for
establishing the sum insured is the expected yield, as determined by production history over a
number of years.This type of policy is known as “yield-based”.
Peril
A potential cause of loss or damage to the property. Perils can be insured or uninsured, both
are normally named on the insurance policy. It is therefore important that loss adjustment
procedures enable distinction to be made between damage caused by insured and by
uninsured perils respectively. The main natural perils mentioned in agricultural insurance
policies include: fire, flood, freeze, hail, wind, excess rain and drought.
Premium
The monetary consideration payable by the insured to the insurers for the period (or term) of
insurance granted by the policy.
Reinsurance
When the total exposure of a risk or group of risks presents a hazard beyond the limit which
is prudent for an insurance company to carry, the insurance company may purchase
reinsurance i.e. insurance of the insurance. This purchase is also known as ‘ceding’.
Reinsurance has many advantages including (i) levelling out the results of the insurance
company over a period of time; (ii) limiting the exposure of individual risks and restricting
losses paid out by the insurance company; (iii) may increase an insurance company’s
solvency margin (percent of capital and reserves to net premium income), hence the
company’s financial strength; and (vi) the reinsurer participates in the profits of the insurance
company, but also contributes to the losses, the net result being a more stable loss ratio for
the insurer over the period of insurance.
Moral hazard
The risk or danger to look for from human nature, both individual and collective. Moral
hazard depends mainly on the character of the society, the character of the insured, and on the
character of his employees and the manner in which they work and behave at work. Examples
resulting from moral hazard include: carelessness, fraudulent claims, crime or arson,
irresponsibility, gross over-insurance, general decline in moral climate due say to a period of
recession, and unreasonable demands over claims settlements.
3.7 Models of Crop Insurance
3.7.1 Traditional Approaches of Crop Insurance
There are two main approaches of crop insurance: individual and area approach (Figure
3.17). In general, different models in practice or applied in the crop insurance arena falls
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