Food Security and Sustainable Agriculture Forum and

The Third ODA Roundtable Conference for Agricultural Development Cooperation in Asia
30 October-1 November 2019, Seoul, Republic of Korea

Establishing social protection system

including agriculture insurance for
inclusive rural development

Arup Chatterjee
Principal Financial Sector Specialist
Sustainable Development And Climate Change Department
Asian Development Bank
The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute
(ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in
this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.
DISCLAIMER: The views expressed in this presentation are those of the author and do not necessarily reflect the views of the Asian Development Bank, its management, its Board of Directors, or its members.
 Outline
I. The rural risk landscape

II. Role of social protection in targeted

rural development

III. Financial inclusion – the missing half

of social protection

IV. The future is rural – Rethinking social

protection for inclusive rural
transformation 2

Source: https://www.khmertimeskh.com/540269/abandoned-by-banks-indonesias-poor-
farmers-turn-to-crowdfunding/
Source: https://www.thenational.ae/world/asia/flooded-residents-on-roofs-as-typhoon-koppu-pummels-philippines-1.59527

I. The rural risk landscape

3
Extreme poverty remains highly
concentrated in rural areas

Source: https://blogs.adb.org/blog/do-we-know-what-inclusive-growth-really-means
 Constraints for rural development

Under Access to means Access to Access to Access to know-

investment of production finance markets how
Unfavorable Lack of and reforms Reliance on informal Inadequate Low desire to
investment climate Dependence on avenues infrastructure modernize
Risky business groundwater Community based Market volatility Lack of access to
Low participation of solidarity systems Links to value chains agriculture extension
youth and women weakening missing services
Migration Lack of instruments Little access to Lack of R&D
for the market information
diversification of
risks Subsidies to farmers
in developed
countries
5
 Share of labor force employed in agriculture
declining

Source: https://ourworldindata.org/grapher/share-of-the-labor-force-employed-in-
agriculture?tab=chart&time=1991..2017&country=South%20Asia+East%20Asia%20%26%20Pacific+Europe%2 Source: https://www.urdupoint.com/en/pakistan/rural-women-comprises-of-43-percent-of-
0%26%20Central%20Asia agricu-45331.html
Rural populations face contingencies during their
lifetime that have financial consequences

Sickness &
Maternity Accidents Disability
healthcare

Death of
Old age Seasonal Loss of
bread
income employment assets
winner

Loss of Loss of Loss of

Loss of crops
income assets livestock
7
Climate change poses additional risks to rural development

Source: https://blog.richmond.edu/geog250/files/2016/02/Geography1.png
More than half of Asia’s population is poorly
protected

9
 Short-term coping strategies can
carry long-term costs
Micro (Household level)

• Draw down assets (e.g. skip meals, mine soil, not pay school fees).
• Use underemployed assets (e.g. off farm employment, child labor)
• Sell assets
• Encroach on assets of others
• Illegal activities
• Formal and informal credit
• Depend on charity

Meso (Community level)

• Draw down community assets (e.g. reduce maintenance, harvest or mine natural
resources)
• Depend on charity or aid from outside community

Macro (Extra-community level)

• Targeted safety nets (transfers, public works) –

• Social investment projects (e.g. social funds)
• Depend on charity or aid from national or international organizations
10
Source: https://sabrangindia.in/article/modi- • International food aid
govt%E2%80%99s-demonetisation-gst-moves-
destroyed-india%E2%80%99s-rural-economy- • Donor assistance
krishna-prasad
Particular groups are more likely to remain
excluded from formal social protection system

Migrant Labor Rural elderly Socially and Women

• Household registration • Patriarchal norms, values
system
marginalized and customs
castes/ Ethnic • Unpaid domestic
responsibilities
Groups/ Religious • Destitute women (elderly)
minorities
• Prejudices and biases

Need for adequate understanding of the situation, constraints,

priority needs and preferences to create more comprehensive and
integrated social protection system
11
https://www.adb.org/news/features/helping-rural-women-philippines-break-business

II. Role of social protection in

targeted rural development
12
 Social protection can
be a catalyst for rural
development efforts

Overcome Build Manage Raise

Overcome Build assets for Manage risks Raise nutrition
liquidity the future better and food security
constraints and •Increase on-farm
poor access to production and
credit yields
•Invest in off-
farm income
generation
activities.
•Resilient
households

Social protection can pull out the

greatest number of people out of
extreme poverty

Lasting effects as Improving the abilities13 of

investments in human tomorrow’s workforce
Source: https://www.intrepidtravel.com/adventures/cycling-vietnam-from-
hanoi-to-ho-chi-minh/
capital
 Social protection systems are fragmented
and incomplete with large coverage gaps

Source: http://www.ugogentilini.net/?m=201811

Establishing universal social protection systems, including social protection floors 14

(SPFs), countries can ensure that no one is left behind and that prosperity is shared
 Social protection --
Vertical
A minimum entitlement, not a safety net dimension
(higher levels of
benefits for those
who can
contribute)

100% full Voluntary

coverage private insurance

Statutory
Intermediate contributory social
coverage Partially contributory
insurance
& linked schemes

Basic Basic benefits / social protection floor for all.

coverage Noncontributory for the poor; other groups may contribute …

Poor and Informal Private Civil servants

Source: Schmitt, Valerie Decent
near poor economy sector Armed forces
Work for All Asian Decent Work
Decade 2006-2015 Extending social
employees
protection: an ILO
Perspective (2010)
Horizontal dimension (SPF & schemes for informal economy)
 Using social assistance to develop nationally
appropriate rural social protection system

Compulsory Voluntary
Old age pension Occupational schemes
Disability pension National Provident Funds
Income, consumption

Life & Accident insurance Microinsurance including crop and livestock

Health insurance Mutuals and community based schemes
Crop and livestock insurance for loanee farmers Supplementary pensions, health, accident and life insurance

Poverty line Risk reduction

Minimum Subsidies Loan waivers Direct cash Universal basic Employment

support price transfer income guarantee
Benefit large farmers Fertilizer Only 30% of income/investment Economic stimulus Livelihood security
who have marketable Seeds agriculture household support with fixed days of
surplus take loans Fixed amount to wage employment
Electricity
Economic inefficiency Only benefits farmers every farmer before
and leakages who obtain sowing season
institutional credit 95% farmers get
Destitution/ covered 16

Poverty traps
 Source: https://www.joinuplift.org/why-the-ultra-poor/

Social protection is not a panacea-

Need to transform livelihoods for a sustainable and
resilient future 17
 III. Financial inclusion – the missing
half of social protection

18

Source: https://www.afi-global.org/sites/default/files/publications/2017-
11/AFI2017_Gender_full_AW_ISBN_digital.pdf
Financial sector not
adequately catering to
economic importance of
agriculture and rural
development

Source: http://www.fao.org/economic/ess/investment/credit/en/

Total commercial credit to

19
agriculture lower than the contribution
of agriculture to GDP Source: https://www.indiafilings.com/learn/prime-ministers-rural-development-fellowship/
 Rural and agricultural households are
accessing a range of financial services
BUT informal financial services continue to
dominate
Spectrum of Financial Services of Providers
Informal Member-based NGOs Mobile Formal
Network financial
Operators& institutions
Differentiated
banks
Friends Money- Rotating Self- Cooperative Microfinance Small Non-bank Finance Co’s
& Family lenders Savings & Help Financial NGOs Finance
Credit Groups Institutions Cooperative State-owned banks
Associations (SHGs) & Payment
Savings
(ROSCAs) + Banks
collectors Rural banks
Village
Accumulating Savings & Specialized microfinance
Mobile
Traders Savings & Loan banks
Money
Credit Associations
Associations (VSLAs) Full
20 service commercial
(ASCAs) banks
Source: Adapted from Ravi, Shamika. “Accelerating Financial Inclusion in India,” Brookings India Report, 2019
 Agriculture is a risky business

Agriculture
Sector

Production Financial Institutional

Market risk Human risk
risk risk risk

Insurance
Forward Transport Drought Personal
Drought Typhoon cover & Death
selling delays policy injury
costs

Weather and climate dependent

Source: Weather and Climate Risk in Agriculture, Bureau of Meteorology, Australian Government (Adapted from J. Hay, WMO,
2006)

21
Source:
https://www.businesstoday.in/sectors/agriculture/nor
mal-monsoons-can-boost-farm-income-by-20-pc-in-
fy17/story/233157.html
 Livelihood losses are left to the
governments and poor farmers

Stress Stress Stress Stress

Agriculture
Removal Resistance Recovery Relief
stresses

Agriculture
development
policy and Irrigation
interventions
Land reform

Technical change
Crop insurance

Food price stabilization

Input delivery systems/ subsidies

Public works
Cash/ Food Transfers
Social
protection
Other policy and
22
stresses interventions

Source: Dorward Andrew et al Promoting Agriculture for Social Protection or Social

Protection for Agriculture: Strategic Policy and Research Issues (2006)
De-risking agriculture finance

Risk reduction Risk taking Risk reserves Risk transfer

Strengthen the Access to finance Community saving Insurance of crop
productive capacity through group groups and and livestock,
of smallholders by lending which mobilizes capital to assets, and lives of
providing input and leverages social cope with shocks smallholders with
technical training, capital to reduce private insurers
improving access to repayment risks
irrigation, and
improving soil
quality

23
Opportunities to strategically link social protection
programs with financial inclusion interventions
• Promote synergies POVERTY LINE

• Optimize economic multiplier effects

• Institutionalize durability of development
impact

Operationalizing requires
• Complex coordination
• Public and private buy-in
• Awareness raising
• Technical assistance

Financial institutions need to

develop Source https://twitter.com/UNDP_Botswana/status/976095328410718208/photo/3

• Domain expertise
• Tailored financial products and services Critical for becoming
• Data "bankable" 24

• IT & distribution systems

A theory of change for microcredit

Inputs Outputs Outcome Impact

Business Investment Business Activity Increased Rural Increased Rural Physiological

Start new business Increased Sales Household Income Household Saving/ Health
Improve current Increased Profit Spending on
business Health Intellectual
Education Education
Other Assets
Physical
Life satisfaction

Social
Empowerment
Investments Improved Standard of Living
Improved
Well-Being

25
Source: https://www.povertyactionlab.org/policy-insight/microcredit-impacts-and-limitations
Credit insurance

Credit disability insurance -

Credit life insurance - Pays Covers loan payments if the
off a debt if the borrower dies borrower becomes disabled
and is unable to work.

Credit property insurance -

Covers property used to secure
Credit unemployment
a loan, such as a fishing boat
insurance - Covers loan
or tractor. Coverage is only
payments if the borrower is
applicable if property is
laid off from your job.
damaged or destroyed during
the period of the loan

26

https://www.aljazeera.com/indepth/features/2015/05/india-shocking-farmer-
suicide-epidemic-150513121717412.html
 Linking insurance with credit
High Risk Level of risk to banks
above which banks are not
willing to lend or not
allowed to lend
Moral Risk
As risk
increases
interest
Moral Risk
rate rises Weather Risk Weather Risk
Miscellaneous Risk Miscellaneous Risk
Crop Disease Risk Crop Disease Risk

Farmers Health Risk Farmers Health Risk

Price Risk Price Risk

Low Risk Rainfed Irrigated Farmer with

Farmer Farmer Weather insurance &
27
Risk management
Source: Adapted from Hess, Ulrich -Innovative Financial Services for Rural India Monsoon-Indexed Lending and Insurance for Smallholders (2003)
 Potential insurance solutions

Catastrophic Market failure

Disaster relief
layer
risk
Layer II
Crop and
Hail insurance livestock insurance Margin insurance
In-between Risk transfer
Revenue insurance Futures and options layer
risk
Private pooling through cooperatives, mutual, price contracts
Layer I
On-farm strategies (ex-ante strategies e.g., diversification
Household strategies (e.g., off-farm income)
Income smoothening by tax systems
Farm retention
layer

Normal
risk 28

Idiosyncratic risk Systemic risk Source: Study on risk management in European Agriculture, European Commission (2017)
A small portion of the risk is transferred through crop
insurance - typically covers agro inputs

29
Source: Comprehensive Disaster Risk Modeling for Agriculture Stojanovski, Pane, and
Muir-Wood, Robert planet@risk Vol 3, No.1 (2015)
Benefits of linking agriculture credit
with crop insurance
• Insures debt service exposure against catastrophe events & maintains creditworthiness
• Smoothens income over time
• Builds up remunerated savings & collateral
• Eventually optimizes earnings through a credit line (in addition to crop loans)

• Secures lending & reduces default rates

• Improves collateral
• Increases lending amounts and savings in rural areas

• Increases business due to large loan amounts

• Increases farmers loyalty through multi-year savings programs

• Benefits from stabilized farmers' incomes through reduced emergency assistance outlays
• Can stabilize the risk management account with fixed ad valorem grant & thereby
efficiently and equitably enhance rural access to finance 30
How agriculture insurance works?

Private-sector Government contributes

Before planting, Agents help farmers fill
companies enter into premium + Farmers pay
farmers work with out paperwork and file
contracts with farmers premiums from their
insurance agents to needed production
to provide protection at own pockets – for the
tailor insurance records to secure crop
rates set by tariff risk management pool
protection to fit coverage from insurers
their unique needs

Claims adjusters, who

work for insurers, meet
with farmers and verify
Since claims arrive in losses
days or weeks, not Upon loss verification, If disaster strikes before
months or years, insurers cut indemnity the crop is harvested,
farmers have the checks, minus policy farmers file claims as
capital needed to pay deductibles they would with any
back loans and plant other insurance product
again the next season Losses or damages that
are correlated to the
parametric trigger
31
verified
 Governments are using a range of mechanisms
to ensure financial protection for all
vulnerable agriculturists
Income Level Safety Net and Insurance Program Cost Share
Above

Unsubsidized insurance 100 % of premium covered

by farmers
Low Income

Subsidized insurance Partial premium cost sharing

Vulnerable

Government purchases insurance for

agriculturists above social protection Premium 100 % subsidized
threshold
Chronically
vulnerable

Social protection Cost 100 % subsidized

32
32
Governments can support agriculture
insurance through a variety of interventions
Data Outreach Risk Financing

Collect Link to social safety nets

Public sector reinsurance
Link to credit
Audit
Premium subsidies
Promote coinsurance pool
Manage Awareness building

Financial support

Support product design and

Enabling environment
development
Product development and Institutional framework
pricing (short run)
Legal framework
Technical support for insurers
(long run) Consumer protection 33
 Social pensions play a role in bridging inequalities
in countries with significant informal employment

Source: https://www.un.org/development/desa/dspd/wp-content/uploads/sites/22/2018/06/rwss2018-full-advanced-
copy.pdf
Older persons living in poverty are covered by means-
tested, tax-financed schemes
Source: https://www.theepochtimes.com/chinas-rural-poverty-line-far-below-international-
standard_1729013.html
BUT

What about those living just above the poverty line…

…continue working in old age or dependent on family’s 34

financial support
Scaling up existing social
protection programs are not
enough…
 Multiplier effects are
boosted significantly
when rural households
have greater linkages to
agricultural markets
Source: http://www.newindianexpress.com/business/2019/aug/08/asian-
development-bank-to-provide-usd-200-million-for-rural-road-project-in-
maharashtra-2016059.html

35

https://development.asia/explainer/what-asia-can-do-protect-against-animal-borne-diseases Source: https://www.viendong4.com/

 Need to create employment
opportunities for engaging youth along
the agriculture value chain

Source: https://economynext.com/sri-lanka-seafood-exports-dive-36-pct-in-
first-half-after-eu-ban-2364/

Source: Nteranya Sanginga, Youth in Agribusiness, ILO

36

Source: https://economynext.com/sri-lanka-seafood-exports-dive-36-pct-in-first-half-
after-eu-ban-2364/
 Fintech must collaborate with Agtech
to transform access to finance
Instant credit disbursal can be made in rural areas

Farmer’s data fed into
digital platform
KYC, geo-coordinates of farms,
history of crops sown, crop size,
yield & potential earnings
Information collated with
remote-sensing data
Predicting a farmer's
productivity, estimates of the
yield, and selling price.
Risk scores are plotted
using a machine-learning
algorithm
Assessing cost of input/output,
positive cash flow & profitability,

After the loan has been issued, satellite imagery helps the bank
conduct remote monitoring and evaluation
Bank is alerted when Insurance companies
Provides periodic
the crop approaches alerted during pre-
data
the harvest stage harvest stage
•If farmer has used •Initiating the •For crop losses or
the disbursed loan repayment process. yield losses
for the intended
purpose
37
In the dairy sector, insurance firms are now able to finance cash flows and insure farmers for loss of
https://www.digitalnewsasia.com/insights/digital-
solution-towards-data-driven-agriculture-malaysia
income due to climatic factors by determining the amount of compensation payable to a farmer based on
both quantity and quality of milk produced
 Embedding risk financing as a component of value chain financing can
enable better risk management
38
Source https://www.researchgate.net/publication/319204176_A_satellite-based_drought_impact_assessment_in_Eastern_Cape_South_Africa_Earth_Observation_capabilities_to_support_the_implementation_of_the_Sendai_Framework
 https://blog.abodoo.com/smart-working/smart-villages-future/

IV. The future is rural -Rethinking social

protection for inclusive rural transformation

39
Investing in expansion of rural social protection systems is critical

POVERTY INCLUSIVE
REDUCTION GROWTH

Integrating into broader rural development strategies will generate

a broader impact

building the
boosting achieving food
enhancing the resilience of
economic security and
productivity poor rural
growth nutrition
families

40
 Bridging information gaps between financial & agricultural sectors

Fostering new •Financial sector, Agricultural sector and

dialogue Policymakers.

Strengthening •Articulating the needs of farmers in

farmers’ outreach to the government and to the
organizations financial sector

Help in making rural and agricultural transformation inclusive

Attracting new Spurring the use of Accumulating Creating

investment innovative human capital employment
technology opportunities
41
Supporting transformation of the agricultural sector
Incentivizing longer-term on-farm
investments
• Water supply/irrigation
• Fencing and farm buildings
• Warehouses/ cold storage
• Weather-stations
Encouraging commercialization of
agriculture and of farming as a
business
• Consolidation of small holdings
• Involvement of the private sector
• Introducing pilot schemes and
scaling up
• Farmer business education
• Value-added agricultural products
and services
• Market and risk information

Developing financial markets

Investing in Improve
Results based Improving access to
financial sector Innovative Financing financial literacy &
financing finance
infrastructure consumer protection
• Leveraging new • Securities & • Advanced market • Women • Access
technologies to Derivatives commitments • Youth • Usage
enhance payments • Bonds and Notes • Development Impact • Elderly
system development • Guarantees Bonds
• Risk assessment • Microfinance • Performance-based
Investment Funds contracts

42
 Expanding access to financial services

Credit Savings Insurance

Remittance Guarantees Fintech

Zipping social protection with private insurance to better manage risks

Assets Lives Income

Loss Health Unemployment
Damage Maternity Seasonal employment
Theft Disability
Old age 43

Death of bread winner

 Must be mindful of unintended
consequences

Behavioral anomaly
Promoting welfare among farmers

Crowding out
Ex-post mechanisms like welfare crowd out ex-ante
instruments like insurance

Inefficient price support mechanisms

Distorting markets without substantially benefiting
poor farmers

Insurance creates a moral hazard for credit providers

Increasing insurance portfolio risk

Need for land reforms

Land policies ties-up the farmer to a small piece of
land – an asset that can neither produce enough nor
44
can be easily liquidate
Source: https://thelibertarianrepublic.com/cobra-
effect-lessons-in-unintended-consequences/
 Source: https://development.asia/summary/four-ways-smart-technology-can-help-farmers

achatterjee@adb.org
45