MITIGATING FARMING RISKS

Akila Wijerathna stresses the need for insurance for the farming community

Sri Lanka is severely at risk from the impacts of climate change. Agriculture production can decrease if there’s an unexpected change in nature such as erratic rainfall patterns, soil degradation, salinisation, prolonged droughts, intense floods, storms and landslides.

This makes effective risk management and transfer mechanisms a high priority for the country, particularly in the agriculture sector. Effective crop insurance schemes can play a major role in protecting the livelihoods of the population as well as food security.

Broad access to insurance
is stipulated as part of the Sustainable Development Goals (SDG) action plans. Insurance in agriculture is directly aligned with SDG 1 (No Poverty) and SDG 13 (Climate Action).

By stabilising farm income through insurance payoffs, poverty can be reduced and climate initiatives promoted. SDG 2 (Zero Hunger) can also be achieved by ensuring food security under inconsistent climate conditions and building stable farm incomes.

Of Sri Lanka’s labour force of almost 8.6 million people, over 2.1 million are working in the agriculture sector. Roughly one in four Sri Lankan workers is employed in agriculture and around 90 percent of poor households earn their living from the rural agricultural economy.

Even if the GDP contribution by the agriculture sector is smaller than it is, a vast number of people are still dependent on it.

Traditional crop insurance products in Sri Lanka take the indemnity-based approach, according to which insurance payments are calculated on field level assessments of losses due to identified disasters. This involves high costs in terms of both time and money.

There are also many transparency related issues for farmers, which lead to a loss of trust. Almost all problems associated with indemnity-based insurance are seen in the Sri Lankan context including adverse selection and moral hazard. These issues may have led to low coverage of crop insurance over the years.

The alternative is to move to index-based climate insurance. This makes use of an objective parameter such as rainfall, which is associated with crop yield. It also provides a means of moving past problems that are connected to indemnity-based insurance.

There are several methods of risk management that can help in the event of a natural disaster. The advent of new technologies such as machine learning, advancements in remote sensing and crop modelling have opened up opportunities in agriculture although their use in risk management in Sri Lanka is still limited.

Insurance can be an effective instrument to provide incentives for good farming practices and risk reduction. However, it’s still not widely adopted in the island due to poor design and implementation challenges. Biophysical crop modelling plus tools of remote sensing and machine learning can play a role in enhancing insurance design.

Agricultural insurance in Sri Lanka began in 1958 and was provided with a legal framework by the Crop Insurance Act of 1961. In 2006, the government created the National Insurance Trust Fund (NITF), which is the main body responsible for government-run crop insurance schemes in the country.

According to studies, many farmers are not aware of crop insurance or have little trust in its effectiveness. Other problems involve the indemnity-based nature of the insurance schemes, and the fact that they only cover certain types of events and losses.

There doesn’t appear to have been any formal assessment of risk as yet, either for the livestock or crop sectors. Livestock mortality statistics are accessible only at an aggregated national level and for a limited number of years.

Although time series production and yield data for annual crops are available at district level, these don’t distinguish between irrigated and non-irrigated yields at farmer level. Therefore, district production and yield data have to be used to develop a risk model for annual crops.

The private commercial insurance sector in Sri Lanka appears to lack the underwriting capability and rural infrastructure needed to implement and administer smallholder agricultural insurance.

Therefore, this sector is unlikely to become directly involved in individual farmer crop or livestock insurance although there could be exceptions – either under a carefully designed pilot weather index insurance cover or larger commercial livestock operations.

In the short term, an important role of the private insurance sector could be to provide an excess of loss insurance (reinsurance) and the government might also participate as a catastrophe reinsurer.

The implementation of an effective awareness creation programme to educate farmers on the benefits of index-based crop insurance is vital. And given the recent variations in climate patterns, it’s important to identify gaps in crop insurance take-up as a risk management strategy.