Improving the Agricultural Crop Insurance Program to Enhance Resilience to Climate Change

The agricultural insurance program in the Philippines has been beset with a number of problems and limitations that contributed to its modest impact. The problem comes primarily from the non-independence and high covariability of risks in agriculture and the casual empiricism that the elasticity of demand for agricultural insurance, with respect to price, is highly elastic going up and relatively inelastic going down. In addition, there are logistical and operational challenges that contributed to the Philippine crop insurance program’s weaknesses including high overhead costs and lack of sufficient investment fund to cover its operations. Also, at the farmers’ side, payments to insurance premiums are perceived as additional production costs, thereby making enrolment to crop insurance prohibitive. These setbacks contributed to the low and declining coverage rate of Philippine farmers, particularly smallholders, and over time, the annual coverage gradually decreased.

This study aimed to analyze how Good Agricultural Practices (GAP) adoption among rice and corn farmers could be implemented to complement the enhancement of agricultural insurance systems in the Philippines. The rice component of the project was carried out by PhilRice while the corn component was spearheaded by SEARCA. The corn component aimed to identify existing and established GAP technologies and determine its applicability for crop insurance and covered three provinces (Isabela, Pangasinan and Bukidnon) in the Philippines.

More specifically, the study identified existing and matured GAP technologies related to pest and disease resilience in corn production. It also determined the extent of awareness of farmers about these technologies and analyzed uptake patterns and identified the psychological, socioeconomic and demographic determinants of GAP adoption. Furthermore, it assessed the perception and level of awareness on crop insurance system mechanisms among corn farmers and identified appropriate policy recommendations and intervention measures to improve adoption of GAP and the formulation and effectiveness of agricultural insurance program.

The study revealed that credit and farmers’ organizations have positive and major effects on crop insurance adoption. For instance, the corn crop insurance market grows when it directs its services to borrowing farmers and other members of farmers’ organizations. Lower premiums and a more reliable information on the insurance products also speed up the insurance adoption.

The study concludes that with the promotion of good agricultural practices (GAP), the possibility of farmers availing insurance decreases. Most farmers acknowledge the use of recommended technologies as a scheme to cope with pest, disease damage, and natural calamities, thus GAP becomes a substitute for insurance as a risk management tool.

The presence of moral hazard is also evident, which means that corn insurance has a negative influence in the extent of GAP adoption. There is also information asymmetry, which causes to increase insurance premiums. But currently farmers are not that affected due to the subsidy given by the government. However, the subsidy is not sustainable due to the high variability of fund allocation for this purpose. The insurance market is supply driven and highly demand inelastic. To increase demand for insurance, premium rates should be greatly reduced.

Policies designed to reduce the premium subsidy of the government and provide resiliency to climate change can strengthen GAP adoption. With this, farmers are inclined to be less risk-averse. The corn crop insurance provides a mechanism for farmers to be resilient under erratic environmental conditions while GAP adoption is being established. Corn crop insurance with GAP adoption can increase productivity and income of farmers.

These study findings could be used by PCIC to improve the traditional agricultural and weather-based insurance systems for a better program package that will entice farmers to avail of the insurance program. It could also be used by other Southeast Asian Countries, since PCIC is the pioneer government agency in the agriculture insurance program in the region.

Partner:

• Philippine Rice Research Institute