Credit linked crop insurance
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
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
“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.
Courtesy: Business Recorder