4.2.4. Crop/Life Insurance
Crop insurance is purchased by agricultural producers, including farmers, ranchers and others to protect against either the loss of their crops due to natural disasters, or the loss of revenue due to declines in the prices of agricultural commodities. There are two major types of crop insurance: multiple peril crop insurance (MPCI) and crop-hail insurance (Source: Understanding Crop Insurance).
Ability to resolve bankruptcies in a timely manner
Appropriate capital to meet borrower needs
Ease / cost of collecting payments
Exchange rate risk
Interest rate risk
Potential for higher inflation
Unpredictable fiscal policy
Off-take risks associated with target sector/region
Production costs associated with target sector/region
Rate of return on lending in target sector/region
Lower risk, “reliable and timely financial relief for recovery of livelihoods and reconstruction,” pooled risk resulting in risk diversification (Source: UNDP Disaster Risk Insurance). “The ever-present uncertainties in weather, yields, prices, government policies, global markets, and other factors can cause high volatility in farm income. In developing countries, smallholder farmers (and other small enterprises within the value chain) often do not have access to risk management products such as insurance to protect themselves from shock. Key barriers to the development of insurance markets in developing countries include: (i) lack of awareness and understanding about insurance among households, (ii) high overhead costs associated with data collection and claims processing, and (iii) the limited availability of insurance products that meet the needs of poor and low- income farmers” (Source: Using Digital Tools to Expand Agricultural Insurance).
Insurance cannot prevent risks or the loss of lives or assets, disaster risk insurance can be comparatively costly compared to other risk reduction strategies (Source: UNDP Disaster Risk Insurance)
MUST HAVE’S, CRITICAL POINTS, OR QUESTIONS TO CONSIDER
More than half of the Georgian workforce lives in rural areas and relies heavily on farming to support their families. While agriculture accounts for 9% of Georgia's GDP, the total amount of loans disbursed to the agricultural sector is only 1% of the Georgian loan portfolio, indicating that lenders find the agriculture sector too risky for investment. Additionally, many small-holder farmers do not have access to the required collateral to receive traditional loans, meaning that they are unable to secure financing to grow and improve their farming practices and yields.
USAID's Economic Prosperity Initiative (EPI) partnered with the Bank of Georgia and Aldagi BCI, an insurance company, to develop a pilot program to offer a combined loan and crop insurance product to small-holder farmers. Farmers leverage the crop insurance policy as alternative collateral to receive a loan.
By pairing a loan with crop insurance, farmers are able to pay back their debts if all or a portion of their crop is lost due to natural disasters, which reduces the risk for lenders who would otherwise deem agriculture too risky of an investment. This integrated loan/insurance product is the first of its kind on Georgia, and provides a dual benefit, allowing banks and insurance companies to reduce administrative costs while lowering the high premium rates for growers and setting a precedent for purchasing crop insurance.