U.S. Not Alone When It Comes to Crop Insurance, But Stands Out As Model of Success

August 16, 2013

by Cristina Pastor

Approximately 86 percent of planted cropland in the U.S. is protected by crop insurance.

The end result? Even when farmers were hit with a string of natural disasters, there wasn’t a single call to Congress for expensive disaster aid.

While the U.S. is acknowledged as the leader in the crop insurance industry, other countries are following its lead, innovating their own farm support programs and seeking to find one that offers maximum protection for their farmers.

“Crop and livestock insurance is becoming an important tool to manage agricultural risk globally,” said John Drakeford, an analyst for the English insurance company Aon Banfield.

He notes a growing demand for crop insurance products that would protect farmers against hail, excess moisture, frost and other weather-related risks as well as uncertainties in commodity prices.

In France, a system of “risk coping” took effect in 1964 when the government introduced an agricultural disaster payment program, which was jointly shared by farmers and the government.  The program suffered from “low indemnization,” (low compensation) according to Yves Salmon, advisor to the CEO of the Groupama S.A. insurance company, and did not really get enough support from farmers. France is a leading producer of wheat, sugar and wine products.

In 2000, the program became a three-way effort when private sector insurance companies became involved.  French farmers were assisted through a tax-free ‘savings account’ over a period of five to seven years, said Salmon. The government played a big role during major disasters by providing payments and acting as the “insurer of last resort.”

Over the years, France’s insurance subsidy programs evolved.  As of 2010, the crop insurance program subsidized 65 percent of farmers’ premiums, up from 35 percent in 2005.  Yet participation continues to lag, Salmon said.  Twenty-five percent of main crops are not insured, he said, as are 53 percent of wine production and 59 percent of fruit and vegetables.  But some small farmers are “staying out of the program,” Salmon said, again because of low compensation.

Right now, France is looking for ways to fine-tune its crop insurance program to ensure wider coverage and support from the farming sector.  Salmon said the government is seeking to offer subsidies to livestock and dairy to protect farmers and make the industries globally competitive.

“Building an agricultural insurance scheme takes time,” he said. “It’s a long-term effort.”

A variety of crop, livestock and forestry insurance coverage is offered in many countries including those in Asia, Africa and Latin America, said Jose Angel Villalobos, an actuarial consultant for the World Bank’s Disaster Risk Financing and Insurance Program.

The wide range of insurance products seeks to reduce risks for farmers and herders for damaged crops and yield shortfall given that, Villalobos stressed, “farming is an uncertain business.”

Villalobos noted India’s experience, in particular. He said the crop insurance system in this South Asian country is a coordinated public-private partnership between government and the financial sector, with insurers becoming involved “substantially” since 2007.

China, too, has made great strides in farm protection. Starting with just minimal coverage several years ago, the Chinese government introduced a systematic form of premium insurance subsidy in 2007, a volume that has increased from $5 billion to about $20 billion in 2012.

Drakeford noted that China’s comprehensive financial support for its farming sector was $156 billion for the year 2011, which included insurance premiums, disease and fire prevention resources and insurance licenses.  Insurance covers crops and livestock and is typically a combination of compensation offered by the central government, the provincial governments and even some city governments.

“Farming is an inherently risky business,” said Drakeford.  “Crop insurance has developed in most of the major agricultural territories in the world.”