Crop Insurance as a Risk Management Strategy in Bangladesh

The government provides subsidies to farmers to pay the premium. In 2004, the average
premium subsidy was 59%. In addition, the government reimburses administrative and
operating expense for private insurance companies that sell and service FCIP policies. The
reimbursement is approximately 22 percent of total premiums. Lastly, the government
provides reinsurance to the private insurance companies at an estimated subsidy rate
equivalent to 14 percent of total premiums. In total, the government is subsidizing 70 percent
of the total cost for the FCIP. Net government costs for administering the program (total
costs less premium paid by producers) have ranged from $1.1 billion in 1995 to $1.7 billion
in 2000(EU, 2001). Recent estimates put the cost of crop insurance subsidies (2004-05) at
approximately $3 billion.
Commodity coverage is extensive. Policies cover over 100 commodities in 2004, up from 59
in 1994. However, four crops-- corn, soybeans, wheat, and cotton—accounted for 79 percent
of the $4 billion in total premiums collected in 2004. Six different yield and revenue
insurance products are offered, with the most popular being the revenue ones. Approximately
70 percent of the nation’s crop acreage (excludes pasture, rangeland, and forage) is insured,
yielding a high penetration rate. The participation rate, however, is not so high.
Approximately, 400,000 farmers out of 2 million farmers or 20% participate in the program.
Actuarially, the programs are not sound and represent more of an income transfer program
than a risk management tool. Over the period of 1980-98, the average loss ratio was 1.88,
meaning that for every dollar in premium cost; a farmer was receiving a $1.88 (Goodwin,
2001). Also because of the high degree of variation in the distribution of subsidy benefits,
cropping and acreage decisions seem to be have been affected. Some crops are being grown
in high-risk areas than should be the case if subsidized insurance were not available (EU,
2001). One such example is cotton in Texas.
Figure 3.20: Crop insurance premiums and indemnities in the
United States (Source: Babcock et al. 2004)
The program objective of promoting social welfare clearly outweighs the efficiency objective.
Premium rates tend to be very stagnant and farmers with long loss histories cannot be
excluded from the program by law. Even with such a huge subsidy, participation rate is still
low and approximately 20%.
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