Agricultural insurance in Thailand shifts focus to crop protection

Thailand is currently working to encourage farmers to protect their crops with insurance products. The authorities are using a combination of subsidies and education in order to increase the acceptance and purchase of the relevant policies. However, the roll-out may not be straightforward, and the long-term prospects are uncertain. Agricultural insurance products have historically been expensive, under-appreciated and lacking the numbers to make them a sensible proposition, for the government, the insurance companies and the farmers.

Agricultural insurance policies have been introduced a number of times in the country, but never with much success. Indemnity insurance for cotton was made available from the late 1970s. That was followed by indemnity insurance for corn, sorghum and soybean crops in the 1990s, weather index insurance for corn and rice between 2006 and 2008 and, later on, microinsurance for rice.

Generally, agricultural insurance that is sold to individuals incurs high administrative costs, experiences a high level of loss and is ultimately more a public service or form of international aid than actual insurance. Thailand’s rice microinsurance scheme, which was about 10% insured locally and the rest reinsured internationally through Swiss Re, had a loss ratio that was over 400%. Meanwhile, the weather index insurance programme had no direct public support, but was supported by the Japan International Cooperation Agency and the World Bank.

Covering Rice

A new programme is now being introduced, and with some success. The rice insurance scheme was first proposed in 2014 and went into effect that year. In the first year of operation, about 800,000 rai or 128,000 ha, was covered. In early 2015 the Cabinet again approved a rice insurance scheme for the year and committed BT476m ($14.3m) to the programme. According to press reports it hopes to double coverage from the previous year, with 1.5m rai (240,000 ha) insured out of a total 63m rai (10.1m ha) of farmland in the country.

Under the programme, the cost of the premiums are shared by the government and by the farmers. Farmers pay BT60-100 ($1.81-3.01) per rai (0.16 ha), depending on the risk of the location, while the government will pick up BT64-383 ($1.93-11.53) per rai. The payouts are also subsidised by the government. Of the BT2224 ($66.94) paid per rai, the government will provide BT1111 ($33.44).

The Bank for Agriculture and Agricultural Cooperatives (BAAC) is heavily promoting the product, and the state entity appears to be achieving some success. Reports indicate that the BAAC is seen as a positive stakeholder in the agricultural community and the advice of the bank is often taken. It also offers financial incentives, such as a BT10 ($0.30) discount if farmers pay their premiums on time.

The farmers are often enthusiastic buyers. The country has been facing drought conditions in recent years, and they understand the need to protect their investments. The BAAC expects total area covered to double in 2016 to 3m rai (480,000 ha) as the El Niño effect is expected to make drought conditions worse.

More RAI

The plan is to expand the programme to make sure it doesn’t get caught in the trap of being too small to make economic sense. In early 2016 a government reform panel recommended requiring farmers to purchase crop insurance. It is currently voluntary and only covers major crops. Economies of scale and efficiency are being argued as the authorities try to overcome the challenges that are faced by almost all agricultural insurance programmes.

Calculations suggest that by enlarging the risk pool and expanding the number of customers, the pricing will begin to work better for all involved. The government says that the cost for crop insurance will decline significantly if the area of cover is increased. It sees premiums falling by a third if the area covered is above 10m rai (1.6m ha), and by another third if more than 20m rai (3.2m ha) is covered. The Thai General Insurance Association told the local press that the sector has lost BT2bn ($60.2m) in two years because the area covered is too small.

Drought Conditions

There is a substantial need for insurance, given the recent climactic conditions in the country. Thailand is suffering its worst drought in many years, and the fourth consecutive year of below-average rainfall. Some researchers say that the country may be experiencing the worst drought in decades. The government is taking extraordinary measures to aid farmers, including drilling wells, diverting rivers, forcing rationing and declaring parts of the country to be disaster areas.

A proper response is of utmost importance to the entire country and has political implications. The concern is that trouble in the farming areas will exacerbate the rural-urban conflict in Thailand and that this could increase the tensions that led to political violence in the past. The current water shortage caused by prolonged drought is seen as a test of the military government, as it works to keep the peace in the most difficult of circumstances.

Longer term, there is a need for Thailand to reduce its dependence on rice to better manage its water assets. The over reliance on irrigation intensive crops, as well as urbanisation and urban sprawl have led to an increase in the use of water in the country. Prayut Chan-o-cha, the current prime minister, has called on farmers to lower rice production and to begin to plant other crops. The hope is to diversify the country’s agricultural base over the next 20 years. The drought has not led to an increase in prices despite a lowering of output, given the huge stockpile that has amassed as a result of the unsuccessful rice support scheme of the previous government. The BAAC is offering loans of up to BT300,000 ($9030) to farmers who agree to store rice, while the government is pledging BT10bn ($301m) in assistance for farmers.

Catastrophe Fund

International partners are enthusiastic supporters of crop insurance. GIZ, a global service provider of international cooperation for sustainable development from Germany, serves as a technical advisor to the BAAC through its ASEAN Sustainable Agrifood Systems project. In general, NGOs and related organisations believe that insurance is a part of developing a sustainable agricultural system. However, even the supporters have doubts. According to the BAAC, traditional crop insurance suffers from a number of problems. These include moral hazard, adverse selection and high monitoring and administrative costs. It has found that the best types of insurance deliver a direct benefit to the farmers and are easy for farmers to understand.

A total of seven insurers were offering rice crop insurance via the BAAC in 2015. Insurers say that the National Catastrophe Insurance Fund (NCIF) should also participate in the programme. This would reduce the amount the government would have to spend in support of rice insurance as well as reduce the amount that must be reinsured overseas. The insurers themselves would also like to take on more risk and transfer less out of the country.

The NCIF was established in 2012 following the floods of 2011. It covers damage related to wind, earthquake, floods and any other event defined as a catastrophe by the government. It is aimed at protecting businesses from major losses, providing cost effective cover and, importantly, providing cover to encourage foreign businesses to stay in the country following disasters. Commercial insurance companies cover between 0.5% and 1% of the risk, and the rest is taken care of by the fund, which itself redistributes risk to the international reinsurance market. Rates vary between 0.5% of the sum insured for households to 1.5% for industry.

The government already directly supports farmers who have lost crops, paying BT1113 ($33.50) per rai for up to 30 rai (4.8 ha) per farmer. Those who have insurance can collect insurance payments over and above government support. Over time, more of the cost is likely to be shifted to the private sector. The Fiscal Policy Office has suggested that the government payment be dropped to BT800 ($24.08), while insurance payouts be increased to BT1500 ($45.15).

Rice Support

Protecting the interests of farmers in Thailand has always been difficult and is ultimately a matter of getting the balance right. A rice support scheme, which ran from 2011 to 2014, contributed to the impeachment of the then prime minister, Yingluck Shinawatra. The programme aimed to stifle the supply of rice on the global market by creating stockpiles, which the government bought from farmers. It was a major failure. The current government claims the scheme was simply an expensive way to buy votes from rural and agricultural supporters. This has led to an emphasis being put on ensuring future insurance programmes benefit farmers without stressing the national budget or creating political liabilities.