Crop Insurance as a Risk Management Strategy in Bangladesh

spontaneously and are based on solid fundamentals tend to be deeper and more efficient in
the long-run.
Last but not least, developing countries should not convert crop insurance into an entitlement
or disguised income transfer tool. Many do not have the economic wherewithal and it would
be more advisable to keep insurance as a risk management tool.
In developing agricultural insurance markets, the role of governments is crucial. An action
agenda should be laid out—adjusting legal and regulatory frameworks, if necessary;
developing public information depositaries easily accessible by insurance companies and
others; training staff; educating farmers, policymakers, and superintendents; conducting pilot
experiments; scaling-up activities; designing catastrophic disaster relief programs that do not
undermine incentives to undertake on-farm risk management activities and/or to purchase
formal insurance---that could serve as a model for operations. Moreover, it was argued that in
this model, all public money should be spend on creating public goods and sustaining
favorable conditions and not necessarily on subsidizing the insurance premium. The principal
reasons for this allocation are based on efficiency and sustainability. Regardless of the
product, the guiding criteria for design and implementation of products should be based on
achieving the lowest administrative cost possible, pricing for actuarial soundness, fostering
transparency, and maintaining affordability.
A tradeoff, however, does seem to exist between actuarially fair crop insurance schemes and
the limited financial means of farmers in developing countries. Farmers prefer individual,
multiple risk coverage but an actuarially fair premium would be unaffordable for most.
Parametric products (indexes based on area yield averages or weather triggers) are less costly
but imply basis risk and would be attractive to less risk adverse farmers. The historical record
for writing multiple peril products is generally unsatisfactory and great caution should be
exercised in expanding these products unless historical data exist that would permit reliable
loss estimations and actuarially sound premiums are charged (UNCTAD, 1995; Hazell, 1992,
Just, et. al, 1999).
Greater emphasis and government support should be given immediately to developing
information systems, modeling yield losses, quantifying degrees of risk aversion, determining
better fits between individual losses and aggregate triggers so that less costly insurance
schemes can be introduced that are attractive and of interest to low-income farmers. In short-
to medium-term, more attention should be paid to promoting better on-farm risk reducing and
risk coping strategies through better extension services and the use of single peril and
parametric products. Ripe areas for research and pilots include eliciting farmer risk attitudes,
blending crop insurance with other financial products; using modern information technology
to reduce costs; better modeling and understanding of weather phenomena and the impact of
climate change; and improving reinsurance capabilities.
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