AGRICULTURAL MICROINSURANCE: OPPORTUNITIES AND CHALLENGES
Introduction
In Bangladesh, limited access to formal financial services such as agricultural microinsurance prevents smallholder farmers from investing in productive assets, adopting new technologies, and absorbing shocks. Moreover, the existing gender gap in access to agricultural finance warrants greater attention to ensure balanced inclusion of female farmers.
On January 26, 2023, IFPRI organized the stakeholder consultation, “Agricultural Microinsurance: Opportunities and Challenges,” with support from The Bill & Melinda Gates Foundation. The event convened approximately 25 stakeholders from government, regulatory authorities, academia, media, and development partners to discuss the existing implementational issues in the crop and the livestock insurance sector.
Summary of Event
The consultation opened with remarks from the organizers and dignitaries. Dr. Akhter Ahmed, Country Representative for Bangladesh, stated that, despite Bangladesh’s significant advancements in agriculture, emerging challenges at the intersection of climate change, access to finance, agriculture, and gender put the country’s hard-won gains at risk. Climate-resilient crop varieties and livestock/cattle insurance can reduce farmers’ risk, yet very few smallholders are using these. Further research is needed to understand why. Dr. Ahmed closed with a sobering reminder and call to action: “Bangladesh is on the front lines of climate change. We must equip smallholder farmers who are hardest hit by climatic setbacks with effective financial tools to defuse risk [and] strengthen and streamline Bangladesh’s financial institutions and regulatory frameworks for rural financial markets to work well.”
Mr. Siddharth Chaturvedi, Senior Program Officer, the Bill & Melinda Gates Foundation provided an overview of the Foundation’s goal to improve the agricultural sector in Bangladesh. The Foundation is working on various aspects of agriculture, such as equitable consumption, women’s empowerment, localization of institutions, agricultural transformation, and climate adaptation. He thanked the participants in advance for their contributions.
IFPRI Research Fellow Dr. M. Mehrab Bakhtiar stated, “De-risking farmers’ livelihoods has been a long-running policy objective, evidenced by the myriad agricultural microinsurance programs piloted in the country and ongoing efforts to develop a well-functioning market.” Previous efforts in scaling agricultural microinsurance have been constrained by various factors – lack of a microinsurance regulatory framework, low adoption of agricultural insurance products, limited distribution mechanisms, lack of insurance literacy and trust, lack of buy-in from critical government stakeholders, as well as issues related to specific agricultural microinsurance products.
Special Guest Dr. Saleemul Huq, Director, International Centre for Climate Change and Development (ICCCAD) took stock of the immense toll that human- and climate-induced shocks are having on food security in Bangladesh. He warned, “Impacts of climate change will continue and no country will survive it. We are currently taking marginal efforts, but we need massive efforts to mitigate these shocks.” To counter these climatic impacts on agriculture, Dr. Huq asserted that policies and plans are needed to address the destructive impacts of climate change, and there is a need to account for the destructive impacts that cannot be avoided by mitigation or adaptation efforts, achieved through a loss and damage framework.
Chief Guest Dr. Md. Ruhul Amin Talukder, Additional Secretary, Ministry of Agriculture noted that, while Bangladesh has made remarkable progress in ensuring food security for the poor, more work is needed to foster nutrition-sensitive and climate-resilient agriculture in Bangladesh. He reiterated the government’s commitment to using research findings to inform the design of new policies or to improve existing policies for addressing twenty-first century agricultural challenges. “We have seen many pilots in the last 25 years on agricultural insurance…This initiative taken by IFPRI and the Bill & Melinda Gates Foundation will help us to generate the necessary evidence.”
Thereafter, participants were divided into small groups to discuss the current policy gaps in agricultural microfinance and how to address them. What are some of the key policy and regulatory constraints that inhibit agricultural microfinance in Bangladesh?
Long lines and red tape: Policy change can take a long time for several reasons: the government faces challenges in developing policies, adopting changes, and coordinating to update regulatory frameworks. Indeed, regulatory frameworks are not keeping pace with the needs and demands of producers. To illustrate, microfinance institutions (MFIs) are increasingly emerging as informal lenders of crop insurance in the absence of clear guidelines.
Less innovation: Innovation is needed to diversify our agricultural systems; however, various stakeholders noted that stringent, rigid administrative barriers constrain innovation in the agricultural sector in Bangladesh. A representative from Palli Karma-Sahayak Foundation (PKSF), an apex financial institution established by the government, suggested that achieving regulatory change requires flexibility and identifying best practices as evidence to advocate for regulatory change.
Weather data issues: Crop insurance packages are highly dependent on and sensitive to weather data, yet there are few reliable weather data resources in Bangladesh. As a result, insurance companies take significant time to calculate damage pay-outs. Participants agreed that Bangladesh’s weather data management system needs improvement. Participants suggested that privatizing weather data management (possibly, through a public-private partnership, where the government regulator potentially oversees the private partner) or engaging private weather data management companies can help insurance companies expedite insurance claim processing.
Bottlenecks in product development: In Bangladesh, the development of agricultural insurance products is constrained by human resource limitations. Specifically, participants cited that educational institutions do not cover issues on agricultural insurance. Given the scarcity of local specialists that can develop crop and non-crop agricultural insurance products, Bangladesh is largely reliant on foreign experts.
Product development is also undermined by the risk aversion of insurance companies. Agricultural insurance is intended to minimize farmers’ risk, yet most crop insurance products in Bangladesh are offered for less risky crops. For example, Boro rice production depends mainly on irrigation, which makes it less risky than rice varieties that depend on rainfall like Aman and Aus, yet insurance is offered for Boro – not the riskier rice varieties.
Bundling insurance with advisory services holds promise. Participants noted that crop and livestock farmers not only prefer information-based advisory services related to fertilizer use, weather conditions, and pest and disease control, but they are generally willing to purchase insurance when bundled with schemes.
Conclusion
Overall, this consultation highlighted the urgency in rethinking agricultural finance to support smallholder farmers, the challenges in doing so, and considered climate-smart agricultural products and approaches that boost farmers’ resilience. This stakeholder consultation was held as part of the inception phase of the Bill & Melinda Gates Foundation-funded Climate Change x Agriculture investment.
This blog is based on research funded by the Bill & Melinda Gates Foundation. The findings and conclusions contained within are those of the authors and do not necessarily reflect positions or policies of the Bill & Melinda Gates Foundation. For more information on the Climate Change x Agriculture investment, please visit the project page on the IFPRI-Bangladesh microsite.
Mehrab Bakhtiar is a Research Fellow in the Poverty, Health, and Nutrition Division at IFPRI. Raisa Shamma is a Research Analyst in the Poverty, Health, and Nutrition Division at IFPRI. Md. Aminul Karim is a Research Analyst in the Poverty, Health, and Nutrition Division at IFPRI. Julie Ghostlaw is a Country Program Manager in the Poverty, Health, and Nutrition Division at IFPRI.
The blog was first posted on the IFPRI-Bangladesh site here.
