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Credit linked crop insurance      

Fear of risks in doing business with the powerful landed gentry is inhibiting private insurance companies to go in a big way for crop insurance. Nonetheless, the public sector National Insurance Company (NICL) has evolved three crop insurance products (tied to bank credit) for whose launch negotiations are going on with the National Bank of Pakistan (NBP) and Zarai Taraqiati Bank Limited (ZTBL) The NBP and ZTBL are two big lenders which are set to offer Rs92 billion loans to farmers in the current fiscal year.

“We planned to offer insurance cover to farmers-borrowers of NBP and ZTBL for kharif crops this year’’ informed Mr Abid Javed, the NICL Chairman and Chief Executive. But for lack of finalisation of a re-insurance cover, the NICL is expected to offer crop insurance for next Kharif--in June or July 2008-- when sowing season begins. The NICL Chairman, leaving soon for Europe, is confident of formalising re-insurance coverage in the next few weeks.

To begin with, the crop insurance will be offered to selected farmers to cover a maximum amount of Rs2 million against natural perils, like diseases, pest infestations, fire, theft and the accidental death of the borrower who was given insurance coverage. In the initial period, this coverage will be confined to the selected districts in the provinces.

Losses caused by malicious acts will be excluded from the crop insurance compensation, as much of the crop and livestock losses come from such acts’’, explained a chief executive of a private insurance company who is designing crop insurance policy in co-operation with other companies/banks under the supervision of the State Bank of Pakistan.

“Malicious acts are far more rampant than natural disasters’’, he contended. while explaining that political vendetta is a sort of feudal culture. A powerful landlord misses no opportunity to damage crops and livestock of his rival farmer by stealing-putting on fire and other means.

“Farmers inflate their losses in event of drought, rainfalls, floods and other natural disasters’’ a business executive of another insurance company said. It is impossible to carry out a survey of losses in the rural areas as the industry has not developed such a survey discipline. Presently, the insurance business depends largely on officials who lack skills and competence and whose integrity is doubtful. Also excluded from the NICL compensation scheme are losses caused due to war, price fluctuation and impact of the measures taken by the government in public interest.

Syed Qamaruzzaman Shah, the Chairman of Sindh Chamber of Agriculture is happy over the NICL crop insurance scheme with a premium of 1.25-1.75 per cent on the sum insured. ‘’We do not want insurance coverage from private financial companies as dealing with them is full of hassles, he explained. . While the public sector NICL designed its crop insurance scheme, the five top other insurance companies--Adamjee Insurance, Eastern Federal Insurance, New Jubilee Insurance, United Insurance and East West Insurance — are also involved in a similar exercise. A task force has been set up with the President of Habib Bank Mr Zakir Mahmud as chairman to work out a blue print for the scheme. It includes officials from the federal ministry of agriculture, Syed Qamaruzzaman Shah, officials of other banks and insurance companies.

A presentation was made to the Governor of the State Bank of Pakistan sometimes late August. ‘’The Governor asked the task force to come up with a more comprehensive risk management and financial model’,’ a business executive of an insurance company said.

The task force however asked the State Bank to give them the details about the disbursement of agricultural bank loans and recoveries of at least ten years, ‘’We want to know the ratio of loan defaults and causes’’, he said. According to the insurance companies, the State Bank of Pakistan took a long time. The data was supplied to them only this week. Insurance companies’ executives are not sure how relevant this data is to their requirements. ‘’We want to analyse the causes of farm loan defaults to develop an empirical model for our insurance crop scheme,’’ an insurance officer said.

Insurance companies are asking for government subsidy to run the scheme as it has to do more as a social objective than as a business orientation. They have asked for two to four per cent premium which when added with about 12 per cent interest rate on bank loan will put a burden of 16 per cent on a farmer It is for this reason that Syed Qamaruzzaman Shah opts for NICL insurance scheme over private firms..

At present two private insurance companies-- East West and United Insurance-- offer such a coverage to farmers on a very limited scale. The former operats through Askari Bank-- a venture of retired army officials. It goes without saying that Askari Banks generally offer loan facilities to retired servicemen engaged in farming. The United Bank operates through Bank of Punjab that has relatively a big portfolio of farm loans. In the current fiscal year, Bank of Punjab intends to offer Rs5.5 billion loans while Askari Rs4 billion. More than Rs7.3 billion out of Rs9.5 billion being offered by these two banks in 2007-08 will be given to farmers in Punjab.

However no information is available as what have been the experiences of these two companies, the field of crop insurance for last few years. The crop insurance operations of these two companies are very limited and confined to selected farmers. .

The private insurance firms are cautious and they want any crop insurance scheme to be ‘’compulsory, mandatory and linked to agricultural loans for crops,’’ an official of a big privatised bank said. Banks are now set to give Rs200 billion loans to farmers in the current fiscal year of which about Rs150 billion will go for farming. It is a huge portfolio for which private firms will have to seek international re-insurance coverage.

Abid Javed calls crop insurance the biggest challenge of his career as he recalls that three official attempts were made in the past that failed to make any headway as they relied heavily on subsidy. ‘’We have developed our products purely on commercial lines, ‘’ he made it clear. The scheme insures agricultural loan for a farmer to the extent of its exposure and provides the crop against natural calamity and other risks. Such a coverage, he is confident will encourage banks to extend their loan coverage to farms and also to consider bringing down interest rate from 12 per cent.

He disclosed that the first crop insurance product is being backed up by Swiss Re, an AA security that would cover natural and atmospheric perils and will be available to farmers through loaning bank at 1.25 per cent. The second product is more comprehensive in nature and will cover crops and livestock. Premium rates are between 1.5--1.75 per cent and provide coverage against pests, locusts, and other viral diseases. This scheme is supported by Lloyds syndicate. The third product is much more comprehensive and is being offered from NICL’s own resources. Farmers of selected districts of four provinces will be offered this scheme. Claims, he said, will be assessed by specially designated two top surveyors.

With three products of crop insurance scheme, the NICL has developed four products of micro finance being introduced in the rural areas that provide compensation for loss of life, health and of the asset of the poor man in the village.
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Courtesy: Business Recorder

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