Insurance and Credit
Agricultural insurance market review
History of agricultural insurance
Agricultural insurance is relatively undeveloped in Pakistan. Livestock insurance was first introduced on a pilot basis in 1983 by two private insurers, Adanijcer Insurance Company and the Eastern Federal Union Insurance Company. Crop insurance is new and was introduced in 2008 under a public private partnership for a national (in scope) crop loan insurance scheme.
Agricultural insurance market structure 2008
Livestock and poultry insurance has been written on a small-scale in the past by various private insurance companies Since rabi season 2008/09 a group of ten insurance companies in conjunction with 20 commercial banks have been involved in the implementation of the national crop loan insurance scheme. The insurers include New Jubilee, EFU General, East West, National Insurance Company, UBL, Adamjee, United, Silver Star, Atlas and Alfalah.
Agricultural insurance products available
Livestock insurance is available on a limited basis and includes both livestock cattle, buffalo, small ruminants and poultry insurance. Since rabi 2008/09 individual grower multiple peril crop insurance has been available for field cereal crops and sugar cane. The policy adopts a unique two-trigger indemnity procedure: 1) catastrophe losses as a result of an insured peril that exceeds 50 percent of the normal average regional (e.g. block) area yield must first be declared by a competent authority, and 2) this opens the policy for a loss adjustment at the individual farmer level.
Delivery channels
For crop insurance, the most important delivery channel is through linkage to agricultural credit for farmers through the banks.
Voluntary versus compulsory insurance
Agricultural insurance is compulsory for farmers who have taken seasonal loans from the banks.
Agricultural reinsurance
The scheme carries a maximum agreed indemnity limit of 300 percent loss ratio. There is a stop loss reinsurance cover that is placed with international reinsurers. It is understood that on account of the very severe flooding in 2010 the stop loss reinsurance programme has incurred high losses. No further details of the stop loss treaty are available.
Public support for agricultural insurance
Types of public support for agricultural insurance
The crop loan insurance scheme attracts premium subsidy support from government (SBP, 2010).
Premium subsidies
According to SBP (2010), in 2008/09 the government reimbursed the banks Rs 183 million (US$2.2 million) for the cost of premium subsidies to subsistence farmers. This would be equivalent to a premium subsidy level of 58 percent.
Agricultural insurance penetration
Insurance penetration rate
In the first year of operation, the crop loan insurance scheme generated premium of US$3.8 million or a 2.1 percent penetration rate for the insured crops, ranging from 1.0 percent penetration rate for maize to 4.0 percent for sugar cane.
Financial performance
Five-year results
The crop loan insurance scheme has only been operating for the past two years. According to SBP (2010), in 2008/09 the scheme written premium was US$3.8 million against paid claims up to December 2009 of US$0.28 million with an implied loss ratio of about 73 percent. In 2010, Pakistan incurred devastating flooding that has destroyed much of the kharif 2010 crop. It is understood that the 2009/10 premium may be in the order of about US$6 to 8 million, and that the value of crop losses resulting from these floods may be as high as between US$10 to 20 million. However, these preliminary and informal estimates need to be confirmed. It is also understood that there have been severe flood losses in the livestock and poultry sectors in 2010 and that at least part of these losses are insured. No further details are available.
Crop Loan Insurance Framework in Pakistan
In spite of various initiatives taken in the past to introduce crop insurance, no fruitful result could be come out mainly due to little involvement of private sector insurance companies and non-availability of reliable data on calamities, cropping pattern, etc. As such, the risk of losses of natural calamities to farming community remained without insurance cover and also banks considered agri. credit a high risk and non-viable business which hampered the expansion of credit to the farming community. Therefore, in order to improve access to credit to the farming community especially to the small farmers, SBP initiated the task of development of crop loan insurance framework with the help of stakeholders. The member insurance companies of the Working Group reviewed the existing structure of agri. financing and various schemes and products of agricultural production loans with the objective of perspective risk portfolio and size of the business to develop a workable market based insurance framework. The biggest challenge was the acquisition of data on calamities, district wise & crop wise agri. disbursements/recoveries, NPLs, cropping cycles, etc. The required data was collected and compiled by SBP to facilitate insurance companies in assessing potential risks and negotiating with reinsurers abroad. Insurance companies also reviewed the crop loan insurance schemes offered by two insurance companies viz. East West Insurance and United Insurance to the agri. borrowers of The Bank of Punjab and Askari Bank Ltd. respectively. Based on the information provided by SBP, banks and negotiations with reinsurers, a well-structured & comprehensive framework was jointly prepared by the member insurance companies of the Working Group. The framework covered all dimensions of crop loan insurance which, inter alia, include crops to be covered, insured risks, maximum sum insured per borrower, maximum rate of premium, indemnities, etc. It was also suggested that in order to save the time and efforts, the insurance companies could jointly reinsure the entire portfolio of agri. crop production loans but the suggestion was not supported by insurance companies as most of them have developed their own products based on the SBP framework.