Agricultural microinsurance: Need of the time

On March 1, 1960, Father of the Nation, Bangabandhu Sheikh Mujibur Rahman, joined Alpha Insurance Co. Ltd. as the head of its then East Pakistan Operation. As such, the government has declared March 1 as National Insurance Day to commemorate the contribution of Bangabandhu. We feel proud of having him as a member of the insurance family. By observing National Insurance Day every year, the country's insurance sector will move forward and play a vital role in economic development by overcoming the crisis of climate induced vulnerability for the most vulnerable segment of country's population. The day is expected to be observed more meaningfully by all the insurance companies, development partners and other key stakeholders of the sector. The theme of this year's National Insurance Day is 'Build the country by availing insurance, Bangladesh will be smart'.
Background on agricultural microinsurance: Agriculture is the backbone of this country, and a large portion of its population depends on agriculture for their livelihood. The following features characterise Bangladesh's agriculture:
• A large number of small-sized farms holding
• Poverty & illiteracy of farmers
• Varied levels of agricultural practices and farm technology
• Unorganised marketing stills rules, with intermediaries taking away most of the margin
Climate change is a long-term issue. It is expected to significantly contribute to extreme temperatures, floods, droughts, the intensity of tropical cyclones, and rise of sea level. The impact of climate change on agriculture could result in problems with food security and may threaten the livelihood of a significantly large percentage of the country's population. To mitigate different climate induced risks in the agricultural sector, agricultural microinsurance can play a critical role in mitigating and transferring such risks.
Bangladesh is one of the few countries in the South Asian region to enter the crop insurance world at an early age and was least successful in reaping benefits for various reasons. Shadharan Bima Corporation, under the then Ministry of Commerce, was entrusted with implementing a pilot project on crop insurance in 1979. The program was suspended in 1995. After that, there have been many experiments in the last two decades. Many MFIs and several NGOs in Bangladesh worked on developing microinsurance in Bangladesh. Microinsurance has now been recognised in Bangladesh as one of the prime activities of commercial insurers. Prospects for microinsurance are very high in this country. The Prime Minister of Bangladesh, Sheikh Hasina, said, "Bangladesh aspires to emerge as a developed country by 2041 by eradicating poverty and improving the living standard of the people. Microinsurance can play a vital role in eradicating poverty by providing social security and economic benefits to the poorest segments of society. Over the last two decades the microinsurance market has evolved in Bangladesh, with over 25 million subscribers.
Insurance is based on the principle of the spread of risk. Achieving this spread could be difficult for micro-insurance providers, particularly if they operate in a limited geographical area or among their members with identical risk profiles. The other aspect of the spread of risk is that the insurers need a sufficiently substantial number of policyholders to increase the likelihood that the actual loss experience will be close to expectations.
Agricultural micro-insurance operations will be viable eventually only if the premium income is sufficient to pay out all claims. For this, insurers must develop reliable estimates of the expected claims and premiums.
Need for agricultural micro insurance: There is no denying that the penetration of insurance in Bangladesh is very low, and the image of the insurance sector is poor. Although the rural sector offers substantial opportunities, the development of new products in any insurance branch in Bangladesh has been far from encouraging, even in comparison to the neighboring countries.
Microinsurance and social protection go hand in hand. Microinsurance is defined as the protection of low-income people against specific perils in exchange for premiums. Even though many farmers continue to live below the poverty line, they are desperately looking for a solution that can reduce their vulnerability to climate induced shocks, microinsurance in Bangladesh over last five years has demonstrated its potential to be an effective tool for Bangladesh in managing climatic risks.
The first microinsurance in the private sector was introduced in 1972 by Gonoshashthya Kendra (GSK). Although MFIs, NGOs, and CBOs already serve 35 million households, much of the potential of microinsurance still needs to be explored. At the same time, GoB has not actively promoted agricultural microinsurance except through PKSF, which has developed the "Inclusive Insurance Sector Project" as an NGO of the public sector.
Current scenario of agricultural microinsurance: Most of the non-life insurance companies in Bangladesh are unlikely to have any worthwhile infrastructure outside their primary activities in urban areas. Private non-life insurance companies have yet to design ideal products for crops, livestock, poultry & aquaculture. There is a substantial amount of untapped general insurance business in rural areas, such as:
• Dwellings, stables, stores, shops,
• Pumpsets, harvesters, threshers,
• Handicrafts and household productions,
• Personal accident and hospitalisation.
Crop insurance protects policyholders if their crops are destroyed by natural calamities such as floods or droughts. However, it is tough to come up with a good program design considering covariant risks and other risk elements inherent in crop insurance, and, as a result, it has yet to be introduced in many countries. Some countries, including Bangladesh, where crop insurance coverage was provided, had to abandon it in the past because the expenditures far outstripped the revenues. The following challenges have contributed to the underdevelopment of the sector:
• Lack of awareness.
• Lack of affordability and viable climate risk insurance.
• Lack of availability and accessibility to climate and hydrological data to design.
• Insurance companies need more technical capacity to design and develop climate sensitive customer oriented products and services.
• Low-income beneficiaries do not trust insurance companies (ICs)
• Lack of patroniosation of microinsurance service by the government.
Despite these challenges, More than 1.3 million farmers purchased crop and livestock insurance without any subsidy from the government or donors under different pilot schemes in between 2015-2024. More than BDT 32 crores premium was paid by the farmers. A total of 154,648 farmers received a payout of more than BDT 11crores. Despite challenges, Bangladesh has achieved this without any direct subsidy by the government or development partners.
These pilot schemes has demonstrated that microinsurance can be an effective tool for managing climatic risk for the farming households and at the same time can be profitable without subsidies. It was reported that in 2023, 11% of the total Government budget was allocated for disaster risk reduction. This additional expenditure can be significantly minimized by introducing microinsurance as a risk mitigation tool.
Potential of micro-agricultural insurance in Bangladesh: Bangladesh is one of the most vulnerable countries in the world to climate change. However, the country is expected to reach a middle-income level by 2041. Since the 1970s, the GoB has invested in flood management schemes to raise agricultural productivity. Disaster management projects, irrigation schemes, and agricultural research programmes. Since 2005, Bangladesh has prepared the national adaptation program, considering insurers' role in reducing farming risks and providing appropriate life, non-life, and health insurance coverage. The GoB adopted the Insurance Act 2010 by repealing the Old Age Insurance Act of 1938. GoB is keen to explore the insurance industry to a greater extent. Recently, a report was submitted by a development partner in Bangladesh that highlighted the challenges, opportunities, and areas where multilateral agencies, bilateral agencies, and development partners may support Bangladesh in creating an environment that would enable inclusive insurance development to serve the underserved and most vulnerable population. Another study revealed that the market size of crop microinsurance alone is US$547 million per year.
Role of government and other agencies: Microinsurance must be considered part of a broader approach to addressing agricultural risk, beginning with a risk assessment of the target population. All products should constitute part of a more comprehensive, income-enhancing package of services. The problem of appropriate risk management tools in agriculture cannot be solved with an insurance product alone.
The role of the government is essential in defining the market segmentation between large-scale commercial farmers and small, vulnerable farmers. Governments need to identify susceptible farmers and those in need of particular assistance. The next step is to address those particular insurance needs through a general system with distinct advantages targeted at smallholder/low-income farmers or a separate system for this group.
To achieve scale, governments of different developing countries (including our neighboring country) made it mandatory to purchase agriculture insurance policies for all subsidized agricultural loans provided by the Government. This mandatory policy increased the number of farmers insured and the premiums paid.
Microinsurance in Bangladesh is poised for growth, so it might be worthwhile not to disturb its natural growth phase.
To enhance the value of the product and give access to value-added services such as consumer education, research, farming inputs, training, weather information from meteorological authorities, agriculture inputs distributors, insurance associations, agribusinesses, agriculture extension services providers, NGOs, research institutions and success stories of the recent pilot schemes can be eye-opening examples for all the stakeholders.
Most importantly, there is a need for cooperation from the Department of Agriculture Extension (DAE) Department of Livestock (DLS), the Department of Fisheries under the Ministry of Agriculture, Ministry of Fisheries and Livestock, in promoting microinsurance service through the government extension systems.
Points to ponder: Microinsurance can grow in agriculture when the financial sector and broader agriculture sector functions collaboratively. Therefore, financial sector and broader agriculture sector must cooperate to promote microinsurance on a larger scale with necessary support from development partners.
To promote agricultural microinsurance in Bangladesh, the following measures should be taken:
• Development and implementation of mobile and modern technology in insurance product development and distribution system.
• Cooperation and integration of the public & private sectors.
• Developing awareness and providing training to agricultural micro-insurance providers.
• Development of a conducive regulatory environment for the microinsurance sector.
• Patronization of public extension system for promoting agriculture microinsurance.

The writer is Director, Bangladesh Institute for Professional Development (BIPD).
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