Insurance as a farming tool
AGRICULTURE HAS consistently contributed to Jamaica's economic growth. January 25, 2018, item in this newspaper declared that there was a "stark correlation" between agriculture and GDP growth. The sector's share of gross domestic product, according to IndexMundi, amounted to 7 per cent in 2016.
The Planning Institute of Jamaica and JAMPRO – which are at the forefront of the government's drive to grow the economy above the wishy-washy levels recorded over the past decades -recognise the central role that agriculture must play in the country's development. Both agencies are said to be looking to boost the agricultural sector with investments.
Agricultural ventures face two clusters of risks.
Business risks form one cluster. They include production, market, institutional, and personal risks.
Financial risks form the second. They arise from the methods that are used to finance the business.
The relative importance of these sources of risks, according to the September 2016 issue of Outlook on
Agriculture, Volume 45, "may depend on the geographical location, government policies, legislation and the presence of formal and/or traditional riskcoping tools, type of agricultural product, etc. There is a wide array of risk management tools available to farmers ... The adoption of risk management strategies is heavily influenced by the farmers' risk perceptions, their attitude towards risks, farm and farm household characteristics, and farmers' access to publicly provided services, including agricultural credit and information."
Insurance is not one of the tools that the Jamaican farmer has. This is unlike counterparts in other developing countries and most in the developed world. Why? Is it because the island is prone to a wider array of risks than other countries, or are there other less obvious reasons?
Given the other threats that small island states face from climate change, what are the implications for the planned agricultural investments and economic growth in the absence of appropriate risk-transfer strategies?
How will the livelihood of thousands of small farmers who depend on agriculture be affected? Is it beyond the capacity of our private risk takers to find appropriate solutions – like they did with the Caribbean Catastrophe Risk Insurance Facility many years ago?
The development of a local agricultural risk-transfer capacity would be in harmony with Prime Minister Andrew Holness' recent statement that "it was better to invest in climate resilience than to seek to give ... aid after the damage is done".
Rural development, climate resilience, and sustainable agriculture were identified by the prime minister as "three areas of action" at a recent FAO regional meeting in Montego Bay.
Local crops like cocoa, coffee, coconuts, bananas, and sugar cane have all had some form of insurance protection in the past. These programmes were dependent on insurance and/or reinsurance provided by overseas entities. They have all disappeared.
Insurance protection, by and large, is not currently available in the local or regional insurance markets for agriculture. The Government assumes the role of insurer of last resort when disasters occur.
Insurance companies in Jamaica and the rest of the Caribbean have, for the most part, tended to ignore the agricultural sector. Several factors have contributed to this. Among them are:
a) the many risks to which agricultural enterprises are exposed;
b) the shortage of technical skills to assess and underwrite these risks;
c) a propensity to limit the exposure of insurers' shareholders' funds and surpluses to the more traditional classes of insurance; d) the absence of data; e) a tendency not to invest in research and development; and
f) the provision of ad hoc, ex-postemergency response support by successive governments.
This reduces farmers' willingness to pay for insurance ex-ante.
An informal mini-survey was conducted at the Denbigh Agricultural Show last year. It was designed to test the demand for crop insurance. The population comprised eight corporates, middle-sized and small farms.
BUSINESS-ORIENTED
Demand for insurance against praedial larceny, hurricanes, drought, fire, and personal injury was indicated. Some farmers had heard about indexbased insurance, but most had not. When it was explained as insurance, with the payout based on certain triggers associated with weather conditions, the response was positive.
The priority for the farmers varied. All farmers said that they would be willing to pay for index-based insurance, but it depended on cost and payout.
On the reinsurance supply side, Munich Re, a company based in Germany, according to information on its website, is "the world's leading agricultural reinsurer" that offers "insurance companies a broad spectrum of agriculture reinsurance solutions that include and go well beyond traditional reinsurance products. Munich Re has been reinsuring the agricultural insurance sector since 1919 and is active as an agricultural reinsurer on all continents".
Historically, Jamaica suffers losses due to natural disasters of about 2 per cent of GDP annually. Between 2001 and 2010, the impact of natural disasters was estimated at $113.7 billion, according to the Planning Institute of Jamaica.
Data compiled by the Inter-American Institute for Cooperation on Agriculture from statistics maintained by the Rural Agricultural Development Authority suggests that losses to the agricultural sector due to hurricanes, tropical storms, droughts, and bush fires, inclusive of crops and livestock, amounted to $7.5 billion during the period 1994 to 2010.
The May 2017 flood rains were estimated to cost losses of $800 million. Wider afield, several Caribbean countries were devastated in September 2017 by Category 4 and 5 hurricanes.
Local farming is steadily becoming more business-oriented, climate-smart, and better at risk management. This is being done by way of water harvesting systems, fodder conservation, greenhouses, drip irrigation, and hydroponic systems. Technology has advanced, with data on climate and satellite mapping correlated to production.
With the merger of the ministries of industry and agriculture two years ago and the recent transfer of the former head of the finance ministry – who is familiar with CCRIF's operations – to oversee it, the time may now be ripe for the development of a local risktransfer capacity to foster growth in agricultural production.