Insurance in Bangladesh: What Do Farmers Want?

At a recent meeting in Bogra district, rice farmers sat in a circle and talked about the risks they face. Their harvests—the main source of their livelihoods—are at the mercy of pests, crop diseases, wind storms, hail storms, and floods. On top of that, farmers face risks to their own health and the health of their family members and must often pay high healthcare bills.

To cope with unexpected calamities, some farmers diversify their incomes by, for example, owning livestock or engaging in a small business. Others are forced to find cash at any price—they may accept gifts or loans from relatives or friends, take high-interest loans from moneylenders, or apply for loans from a bank or microfinance institution, if one is locally available. Solutions commonly available to developed-country farmers—insurance and savings—are often not available to them.

The risks confronting rural people, who make up most of Bangladesh’s population, are increasingly clear, but finding a solution remains challenging. Traditional crop insurance that compensates farmers for their individual crop losses may not be the answer. Such schemes impose high costs in verifying crop losses, rely on the honesty of farmers, and cannot avoid the fact that riskier farmers may be more likely to buy insurance. Now Bangladesh’s BRAC, the world’s largest development nongovernmental organization, has started to experiment with a suite of innovative insurance and savings products for farmers, supported by researchers from IFPRI and the University of Oxford. Others in Bangladesh are following the research program with interest, in the hope that some of the new ideas will have the potential to be scaled up across Bangladesh.

The first step is to identify farmers’ preferences. Do farmers even want insurance, or would they prefer to accumulate a savings fund that could be drawn down in times of need? Researchers introduced farmers to a game in which they were each given 30 stickers to place on an individual game board to show how they would customize their own insurance package. They could allocate the 30 stickers, representing 600 taka in total (about US$8), to choose various levels of coverage for agricultural, life, and disability insurance, or savings. Initial observations have shown that farmers are clearly interested in protecting themselves against risk through a combination of insurance and savings.

The next step is to use the results from this exercise to design attractive insurance and savings options that can be sold at reasonable prices. One new approach to insurance is to base payouts on a subdistrict-wide index of rainfall, river height, or crop losses to compensate farmers for catastrophic agricultural events—once-in-ten-year events that affect everyone in the village. But this kind of insurance will do little to help them with more frequent and idiosyncratic shocks, such as pests that destroy one farmer’s crops and no one else’s. To cope with emergencies not covered by insurance, group savings accounts may be the best solution, but much remains to be learned about how a group savings fund would be created, administered, and monitored. This project will explore how such a fund would work in practice and see if it can really protect Bangladeshi farmers.

The key will be to find the ideal balance between agricultural index insurance, which would cover widespread shocks, and local group savings accounts, which would protect against shocks affecting one or a few individual households. Initial results from the game board exercises conducted with tenant farmers in Bogra and Manikganj districts in July 2011 will provide some insight on the types of insurance and savings options farmers prefer. Then, some groups will be offered customized insurance packages—designed by them—for 2012 coverage. Later, district-specific insurance products will be designed and offered at a larger scale, and their viability will be evaluated. By pioneering methods to improve how farmers manage risk, this joint research project has the potential to drive the promising future of agricultural insurance in Bangladesh.

More than a game
On this board, a farmer has placed 30 stickers to show the combination of insurance and savings he is interested in. The white dots represent where he could place stickers; the yellow dots show where he has placed stickers. This farmer has chosen basic coverage for loss of limb or eye and for a dangerously high river, medium coverage for a low rice yield, and high coverage for natural or accidental death. He has also chosen to participate in group savings by placing stickers on the group savings board at the right.

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