It is important to have mechanisms in place to manage risks faced by the poor farmers. But, Agriculture insurance is only one of the tools among many. As agriculture is inherently risky, agriculture insurance is not attractive to the commercial insurers. It has both a price risk and a production risk. Due to the problem of adverse selection, the insurance companies try to reduce such exposures. As somebody mentioned earlier, this is the rationale for government intervention in agricultural insurance. But still it is an expensive way of managing the risk. So, emphasizing on alternative risk management tools (such as better flood prevention systems), along with crop insurance would be more effective and beneficial for countries like ours.
One of our studies (which is on microinsurance, not specifically of farmer households) shows that the households lack awareness of benefits insurance policies can bring in compared to other coping methods they use. When households have clear idea of the concept of insurance, they tend to obtain insurance more and when they have insurance, they often use it as a risk managing tool, with other financial tools (microfinance, informal finance). Poor households also rely a lot on family networks in managing risks rather than on financial tools. So awareness creation is one important aspect, not only in agric insurance but on overall insurance as well. As mentioned earlier in the blog, bundling agric risk (only certain elements) with other risks farmers face and offering it as microinsurance, linked to microfinance is a possibility. But the extent MFIs are able to handle it will be a question, as the same fears applying to the commercial insurers apply to the MFIs too, and to a greater extent. Further, the benefits offered by microinsurance in SL are low as MI is still at an infant stage in SL.
