Exploring the Role of Crop Insurance in Increasing the Agricultural Productivity in Developing Countries

Highlights:

• Introduction
• Automobile lubricants for hybrid and electric vehicles
• Growing shift towards biodegradable lubricants
• Integration of advanced technologies in lubrication systems
• Innovative product launches in the industry

 

The agriculture sector in developing countries of the world is riddled with various problems; the productivity of this sector in developing countries is quite low as compared to that in developed countries. For instance, as per an agricultural study, the per hectare rice yield in India is around 2100 kg, while the global average is around 300 kg. Similarly, the global average yield of wheat was more than 3200 kg, while India’s average wheat yield was less than 2800 kg.

There are many reasons behind the dismal performance of the farming industry in such developing countries; firstly, there is very little farm mechanization, and most of the agricultural activities in these countries are performed manually. Secondly, the agriculture sector in these countries is prone to natural disasters like floods, droughts, hailstorms, etc., which destroy the entire crop production in an instant. Active steps are being taken to address both these issues, with special emphasis on crop insurance to provide relief to farmers affected by natural disasters and other accidents.

How does crop insurance help improve agricultural productivity in developing countries?

Crop insurance, as the name suggests, is a holistic yield-based insurance policy that is designed to protect agricultural producers against the losses faced due to natural disasters like floods, droughts, cyclones, hailstorms, fires, etc. Typically, crop or agriculture insurance covers sowing or germination losses, standing crop losses, and post-harvest risks.

Crop insurance policies have proven to be advantageous for agricultural producers due to various reasons. Firstly, the most obvious benefit of agriculture insurance is that it stabilizes farming businesses by offering compensation to farmers in case of crop failures. Secondly, as with any insurance policy, the farmer is required to pay a monthly premium to the insurance company. This monthly payment mechanism assists the farmer in developing a habit of thrift and savings. Ultimately, due to this habit of thrift, the investment capabilities of the farmer become better over time.

A characteristic feature witnessed among agricultural producers in developing countries is their over-reliance on non-institutionalized or informal channels of credit. Generally, farmers in these countries, in case of crop failures, take loans from informal sources like local moneylenders who charge exorbitant interest rates. Most of the time, due to the high interest rates, farmers are unable to repay the loans which, in turn, leads them to take loans from another moneylender to pay off their first debt. Thus, the farmer inadvertently gets stuck into a debt trap, thereby negatively impacting his/her ability to carry on the farming activities efficiently. Many moneylenders even ask the farmer to mortgage the land which may result in the farmer losing his farmland altogether. Financial institutions in the crop insurance industry, by guaranteeing compensation during crop failures, prevent the farmer from taking a loan from informal channels in the first place.

Since farmers registering for agriculture insurance policies need not take loans in case of crop failure, they can avail themselves of credit for more productive purposes like irrigation facilities, advanced farm equipment, high-yielding seeds, fertilizers, etc. This, in the long run, improves the productivity of the agriculture sector in developing countries.

How have insurance companies improved the scope of the agriculture insurance sector?

In the past few years, several banks, financial institutions, and insurance companies have harnessed the power of innovative technologies to deliver advanced agriculture insurance policies. For instance, in October 2022, HDFC ERGO, a general insurance company, announced the launch of a satellite index-based farm output policy. The company released a statement after the launch stating that as part of this scheme, the farmer will get comprehensive cover for crop failure at any stage from sowing to harvesting. The assessment of the crop failure will be done using advanced satellite imagery and is available for all types of crops including food crops, oilseeds, horticulture, and commercial crops.

Similarly, in July 2023, Agi3 Risk Services, an insurance technology company, announced a partnership with Definity Financial Corp., a financial institution, to launch an AI-powered agriculture insurance solution. The partnership will help both companies to offer comprehensive insurance coverage to agriculture producers based on real-time pricing of the crops that have been destroyed due to natural disasters.

To conclude, agriculture insurance offers a safety net to farmers, thereby enabling them to take risks in the farming business. It also brings agricultural producers into formal credit channels, which ultimately helps increase the productivity of the agriculture sector.

For a comprehensive study on the different growth drivers and investment opportunities in the industry, feel free to contact us.

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