Nov 09, 2008 News
Crop insurance may be critically needed
By Nadia Guyadeen
There are fears that global warming and, by extension climate change, could cause detrimental effects to Guyana.
A major concern in Guyana is that changes to the weather pattern and other implications of climate change could badly affect our agriculture industry.
In fact, it is very possible that if the agriculture industry collapses, the Guyana economy would implode.
An avenue that has been examined over the years, to offer some level of security and compensation to farmers in light of a natural catastrophe, is crop insurance.
Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others, to protect themselves against either the loss of their crops due to natural disasters such as hail, drought, and floods, or the loss of revenue due to decline in the prices of agricultural commodities. The two general categories of crop insurance are crop-yield insurance and crop-revenue insurance.
Agriculture Minister Robert Persaud told this newspaper that, given the most recent report of the Intergovernmental Panel on Climate Change (IPCC), which outlines changes in the frequency, spatial distribution and magnitude of a number of climatic conditions, extremes and weather events likely to occur in coming decades, the Government feels that crop insurance is critically needed.
He added that crop insurance is essential, since the risks posed in agriculture, such as constant flooding, continuous rising of sea levels, and other effects of adverse weather conditions, are all manifestations of climate change.
“We also have to look at the hardship experienced by some of the farmers, who can see a reduction of their exposure through crop insurance.”
According to Minister Persaud, natural disasters like flooding hit hard and may cause heavy losses to farmers.
Insurance, he noted, can assist in managing these losses, and crop insurance is that branch of this financial mechanism that is especially geared to covering losses from adverse weather and similar events beyond the control of growers.
“In any business arrangement, both sides of the transaction must expect to benefit. Crop insurance transactions are no different.”
He said that crop insurance is sold and bought in a market. The purchasers must perceive that the premiums and expected benefits offer value; the sellers must see opportunities for a positive actuarial outcome, over time, and profit.
Crop insurance is, therefore, important if feasible, given the vulnerability of farmers’ investment in crops on a small, medium and large scale, the minister asserted.
“This is long needed in the region and moreso Guyana, if we are going to ensure food security.”
Given that crop insurance has been discussed for at least the last 15 years, Minister Persaud said, what is preventing the implementation is the lack of boldness by the respective financial institutions.
Given that Guyana is a developing country, he added, with emerging capital and insurance markets across regions, the development of crop insurance is linked to the availability of funds from a macro-perspective, with Government facilitating the development of this market.
However, it is the challenge for the private sector to pursue such insurance on a large scale basis as various premiums depend on the associated risks, according to Minister Persaud.
As far as funding goes, the minister said, there is currently no scope in the Government’s budgetary framework for funding crop insurance.
However, he opined that it is an excellent opportunity for the private sector and development financing institutions within and outside of Guyana, but there can be means through which the Government can offer its support to such a scheme other than full funding.
He also pointed out that there is a study conducted by Dr. Richard Blair entitled, “An Assessment of Agricultural Risk and Diversification on Farming Families ‘Living standard under Fuzzy Conditions – A case study from Guyana.
This study presents a comprehensive sample analysis of a farm area in Guyana and the underlying risks involved in farm/crop activities.
“Another study is Agriculture Insurance revisited “New development and perspectives in Latin America and the Caribbean.” These do serve as useful guides for Guyana.”
He added that different agencies and groups have looked at this issue, and the IDB Caribbean Catastrophe Insurance Programme has been studying the possibility of increasing its scope by including agriculture and flooding.
The ministry does interact with these groups, and we hope to see tangible results flow, such as support for crop insurance and resources for adaptation measures.
Minister Persaud contended that the Ministry of Agriculture supports farmers from time to time, depending on the circumstances, by way of cash, seeds, technical services and infrastructure. There are incentives and programmes designed to support our farmers, but these are not a substitute for crop insurance.
The minister pointed out that the factors that are on top of Government’s agenda are adaptation to cope with the increasing effects of climate change, and mobilising international support for a market-based mechanism to compensate Guyana for the global environmental services our rainforest play in mitigating climate change.
Former President of the Insurance Association of Guyana and Director/Manager of the Hand in Hand Insurance Company, Howard Cox, has said that though crop insurance is something good for Guyana, there are several things that may have been procrastinating its implementation. One of those things, he noted, is the cost associated with it.
Cox said that in light of climate change, one of the things that the insurance industry can do, apart from flood insurance, is crop insurance, which is essential because Guyana is heavily dependent on agriculture, mainly rice and sugar.
Due to this, he added, Guyana could be heavily impacted by variations in the climate.
“I think it’s beyond dispute now that global warming exists, and there is a lot of climate change going on and it could affect badly a country like Guyana.”
He pointed out, with regard to rice, that of course this can be affected by things other than rainfall — drought and pests. “Rice is something you always have to be spraying, and a pest invasion could wipe out a substantial amount of the crop.”
According to him, crop insurance has been talked about, especially by politicians for probably the last 20 years, but nobody seems to have an idea how it worked and how expensive it was.
Cox said that he did some research into it a few years ago and found out that somebody has got to invest heavily in preparation for the information for the underwriters.
He emphasized that crop insurance is written by specialist underwriters, and there is probably six to a dozen people in the London Market doing this. Cox noted that there are also specialists in the USA as well as in Canada.
“But what I learnt is that somebody has got to commission a study, and some experts have got to come and actually carry out a countrywide study of the agriculture, how it is set up especially with relation to these two crops; and among the data they will need are things like the weather patterns, the rainfall patterns over the past 10-15 years, and they will need details like pests, and then, of course, the yields, and they will probably write a report given recommendations whether it’s feasible or not, or feasible if certain things are done…The underwriters will not even look at it unless they see a report like this.”
Cox stated that commissioning such a study and the experts needed would cost a lot of money.
“That is why governments get involved in crop insurance, because initially these experts cost a lot to come here and do the job, and no company or companies would put up that money if they’re not sure that at the end of the day there will be a report. And even if the people say they will underwrite it, somebody got to buy it.”
He added that the Government or a body such as GuySuCo or the Rice Producers Association will have to put up money for the study if they are really interested in crop insurance.
Cox also pointed out that the premiums seem to be extremely high, because companies offering crop insurance calculate the anticipated yield of the crop.
“A lot of research is done into production and yields. You anticipate that you will get so much for sugar and so much for rice, and if something happens — some climatic problem or pest, and your yield is way below expectations, then that is when the insurance kicks in.”
Apparently the premiums would be a percentage of the yield, and they are very expensive, Cox said.
He added that he has leant from a recent climate change meeting that NGO’s and international bodies are looking at other ways to assist countries like Guyana, which would find the cost of crop insurance to be high, into finding a way to underwrite the crop insurance without having to involve these expensive experts.
He also pointed out that there are policies that are sold elsewhere that also cover livestock.
“If we had a very large livestock industry, weather patterns could affect that as well.”
In summing up, Cox said that crop insurance in Guyana basically seems to be rice and sugar, since they are the major exporters while the other crops grown are basically for local consumption.
“I think the Government would be most concerned about those crops that give us foreign exchange, and there are bodies which should be pursuing this, like the Rice Producers Association and GuySuCo. It seems that we in Guyana are more aware of crop insurance, and it definitely seems like there is some positive move afoot to get some kind of crop insurance in place.”
Very different opinions have been expressed about crop insurance and the possibility of having it in Guyana.
Commissioner of Insurance, Maria van Beek, said that she does not believe that the insurance industry in Guyana is capable of offering crop insurance, since it is so small and the risk level is also very high.
She said that crop insurance has been something talked about over the years, but there are many problems associated with actually doing crop insurance here.
Van Beek noted the cost as one of them. “Insurance companies will not typically go into an area unless it is viable. In other words, if you are going to have crop losses every year, it’s not really an insurable event, it’s something that is certain.”
An insurable event, she said, has to have a level of uncertainty, because insurance companies have to make some money out of it, and the majority of insurance companies here don’t have the capacity to really offer this, so what they will have to do is partner up with overseas companies.
Van Beek added that another difficulty with that is that overseas companies do not have the data here, so they are reluctant to come in as an unknown.
“And I think they were having talks in the past for there to be a feasibility study on crop insurance, and I think that died a bit of a death because the feasibility study in itself would cost money. You have to get international consultants that people are going to depend on, and you got to bring them in, and that would cost quite a bit of money.”
According to her, the insurance companies are not against being involved in the project, but they have stepped back in some way.
“I don’t know they’re averse to sharing some of the cost, but I don’t think they want to take the brunt of the cost, and certainly the external people will not necessarily look to put money into this unless they believe there is some commitment as well.”
She also stated that there are various approaches that can be taken, and there is one approach that seems to be cheaper, and that is parametric related insurance.
“My view is that somebody has to say I’m going put the money down and we are going to get this thing going, but I think the Government is reluctant in a way to do this.”
Although the interest is there, Van Beek said, she does not see crop insurance around the corner very soon for Guyana.
Van Beek also said that there is a team of consultants from McKinsey and Company, a global management consulting firm currently conducting a study in Guyana in an effort to quantify the potential losses that Georgetown and surrounding areas would suffer should there be any catastrophe relating to climate change.
During last week, one of the consultants held a meeting with representatives from the insurance industry to exchange information.
Van Beek stated that the researchers are specifically focusing on flooding and are looking at two main risk factors, which are breach of sea defences and increased rainfall.
She added that the consultants are here trying to put a number on what the potential losses could be for this area and, obviously, the cost to the economy.
According to her, she is hoping that out of all the reports and studies that are being done relating to this, crop insurance may come as a spin-off. “We may even get funding to do a feasibility study.”
Another thing to look at is this Caribbean Catastrophe Risk Insurance, she said.
“At one point, it was thought that we may participate in that if it was expanded to include crop insurance.”
That fund is triggered by an event, and they measure wind speed. “So, for hurricanes it is wind speed, but for flooding it would typically be rainfall. But the problem is how do you measure rainfall?”
She noted that rainfall is not as independently assessed as wind speed and hurricanes, so, basically, the difficultly with including rainfall or crop insurance in that fund would be more of a technical thing until they rule out the technical angle, and that would include some feasibility or consultant study on it. She does not see Guyana going there.
Crop insurance is a valuable risk management tool that allows growers to insure against losses due to adverse weather conditions, fire, insects, disease, and wildlife.
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