Agriculutral Insurance in Indonesia: Prospect and Challenges.
AGRICULUTRAL INSURANCE IN INDONESIA:
PROSPECT AND CHALLENGES
I NYOMAN RAI
Department of Agronomy and Horticulture
Faculty of Horticulrute
Udayana University
International Workshop on
”Food Availability for Sustainable Improvement”
3th Pebruary 2014
2
3
VULNERABILITY OF AGRICULTURE IN INDONESIA
LARGE POPULATION DEPEND ON AGRICULTURE:
In Indonesia, 73.25% population rural
Number of households farming 26.13 million (2013),
decreased by 5.04 million households of 31.17 million
households in 2003, which means an average decrease
per year of 1.75%.
Labor in agricultural sector reached 41.20 million people or
about 43.40%of the total population of Indonesia (2013).
Indonesia ranks third after China (66.0%) and India (53.2%).
VERY LOW BUDGET FOR AGRICULTURE (7% from the total
budget in the Budget 2013), refers to the size of the FAO, the
funds for the agricultural sector of a country, IS REQUIRED 20% OF
THE TOTAL BUDGET TO FINANCE THEIR DEVELOPMENT.
VULNERABILITY OF AGRICULTURE IN INDONESIA
WEAK ASSET BASE:
o Average size of operational holdings : < 0,5 hectares
o 82% holdings small and marginal (2 or less than 2 hectares)
o Low skill, education, health, information access
CLIMATE AND MARKET ABERRATIONS:
o
o
o
o
o
Most of agriculture activities rainfall dependent
Diversity of climatic conditions
Occurrence of floods, droughts, pests and disease
Low accessibility and connectivity
Market vulnerability – disadvantage in price realization
RISKS AFFECTING AGRICULTURE PRODUCTION:
MAJOR CHALLENGE
Vagaries of weather
rainfall
temperature
humidity
drought
wind
Geography : earthquakes, volcanoes, erosion
Pest & diseases
Quality of inputs
Soil
Unexpected declines in price
Market price changes in the country, and beyond
country, the change in standard quality criteria .
MANAGEMENT OF YIELD RISK
• DIVERSIFICATION OF PRODUCTION ACROSS
SPACE AND CROPS.
Don’t
put all crops into one area (if possible)
Don’t plant only one crop
Raise both crops and livestock
• BUY CROP INSURANCE …???
AGRICULTURAL INSURANCE
• Vital for stable agricultural growth and risk management
• Agricultural insurance will protect farmers from financial losses
due to crop failure.
• To provide insurance coverage and financial support to the
farmers in the event of prevented of failure as a result of natural
calamities, pests and diseases, low market price. etc.
• To encourage the farmers to adopt progressive farming
practices, high value in-puts and higher technology in agriculture.
• To help stabilize farmincomes, particularly in disaster years.
HISTORICAL BACKGROUND OF
AGRICULTURE INSURANCE IN INDONESIA
• 1990: scientific studies and news report
• In 2000: Regent of Bantul (Idham Samawi) guarantees for farmers
apply to certain products. The result was purchased by the local
government to keep the market price so that farmers do not loss.
• In 2012: The Ministry of Agriculture has tested Insurance Rice
Farming (AUTP) of 3.000 hectares in three provinces (West Java, East
Java and South Sumatra), protection includes the risk of flooding,
drought, and attacks of plant pest organisms (OPT).
In these trials, the insurance premium for one hectare of rice is
Rp 180.000 (or 3%of the insured value of rice). Fromthe amount,
Rp.144.000 (80%) subsidized by the state fertilizer and the
remaining Rp 36.000 (20%) paid by farmers.
If the crop is damaged (more then 75%/ha) farmer will get
compensation of Rp 6 million.
Seminar Asransi Pertanian untuk Perlindungan10
dan
Kesejahteraan Petani di Pekalongan (2012)
HISTORICAL BACKGROUND OF
AGRICULTURE INSURANCE IN INDONESIA
• In 2013: had passed a lawon the protection and
empowerment of farmers (Act No. 19 of 2013), in
which there is arranged on agricultural insurance.
• In 2014: the Ministry of Agriculture has
proposed a budget of Rp 345 billion to
subsidize insurance premiums in the draft
budget 2014. The plan, the government will bear
80% of the cost of premiums while farmers bear
only 20%%or Rp 36,000 per hectare.
12
ULTIMATE GOAL OF IMPLEMENTATION OF
AGRICULTURAL INSURANCE IN INDONESIA
INSURANCE PROGRAM MUST BE ENSURED PROFITABLE
FOR FARMERS so that farmers could eventually pay a
premiumon their own without government subsidized.
AGRICULTURAL INSURANCE IS ALSO EDUCATING THE
FARMERS TO INCREASE THEIR FARM PRODUCTION AND
PRODUCTIVITY. Farmers are required to follow the advice
of technical and continuously monitored by the insurance
company that the suggestion of rice farming in the
insurance required to be carried out as part of the
obligation to obtain insurance coverage
KEY FACTORS THAT CAN DETERMINE THE EFFECTIVENESS
OF AGRICULTURAL INSURANCE SYSTEM
1. Farmers Objectives
2. Coverage Farm Commodity
3. Insurance Coverage
4. Value Premium and its Collection Procedures
5. Loss Adjustment Mechanism
6. Organizational Structure Associated with the Selected
Scheme
7. Insurer and its insurance Scheme
8. Communication with farmers.
KINDS OF AGRICULTURAL INSURANCE
SINGLE-RISK INSURANCE: coverage only on one type of
risk (flood, drought, pest attack)
MULTI-RISK INSURANCE: coverage on some risks (2 or
more risk)
YIELD INSURANCE: insured for risks that affect production
and profits to be gained.
PRICE INSURANCE: coverage is paid based on applicable
minimum prices.
REVENUE INSURANCE: combination of yield insurance
and price insurance are where the coverage given to the
specific product or type of farm as a whole (package) so it
will be cheaper than if bought separate insurance product.
CHALLENGES IN THE DEVELOPMENT OF
AGRICULTURAL INSURANCE IN INDONESIA :
SOCIO-CULTURAL ASPECTS:
The mind set of farmers to insurance has not been established
Lack of public confidence to the institutions insurance
Moral hazard that affects the business element of intent in the
insurance claims process.
TECHNICAL ASPECTS:
The absence of complete legal framework for the implementation of
the national agricultural insurance and law enforcement in
implementing of spatial.
Lack of adequate data base to obtain information for determining
design of agricultural insurance products.
Lack of personal who have knowledge both in the field of insurance
and agriculture
CHALLENGES IN THE DEVELOPMENT OF
AGRICULTURAL INSURANCE IN INDONESIA :
ECONOMIC ASPECTS:
The characteristics of the agricultural sector in Indonesia :
the location of a business that is scattered , varied product
systems , small-scale businesses that have implications on
administrative costs in the insurance business.
Lack of knowledge and understanding of the technology that
led to a relatively high chance of failure in the production of this
relates to the cost (benefit/cost) of the act attempts to overcome
the risk .
Use of informal credit commonly adopted by most of the
perpetrators of the agricultural sector.
AGRICULTURAL VALUE CHAIN RISK MANAGEMENT
Reinsurer
Government
Agro insurer
Input suppliers
Farmers
Traders
Processor
Consumer
Banks/Investors
Rajivmehta (2003)
HOLISTIC INSURANCE APPROACH
Banks
Farmer
Support
Insurer
State
AGRICULTURE DEVELOPMENT
Key Drivers
•
•
•
•
•
•
Resources
Knowledge
Access to technology
Access to markets
Insurance
Government support
MOST IMPORTANT KEY DRIVERS
Insurance
• Catalyst for Development
• Productivity
• Profitability
Knowledge
• Human Resource Development
• Skills
• Advisory Service
Resources
• Capital
• Technology
• Land
HOLISTIC AGRICULTURAL
DEVELOPMENT
State
Insurer
Banks
Full cooperation is required
from all stakeholder for successful &
holistic agricultural development
23
PROSPECT AND CHALLENGES
I NYOMAN RAI
Department of Agronomy and Horticulture
Faculty of Horticulrute
Udayana University
International Workshop on
”Food Availability for Sustainable Improvement”
3th Pebruary 2014
2
3
VULNERABILITY OF AGRICULTURE IN INDONESIA
LARGE POPULATION DEPEND ON AGRICULTURE:
In Indonesia, 73.25% population rural
Number of households farming 26.13 million (2013),
decreased by 5.04 million households of 31.17 million
households in 2003, which means an average decrease
per year of 1.75%.
Labor in agricultural sector reached 41.20 million people or
about 43.40%of the total population of Indonesia (2013).
Indonesia ranks third after China (66.0%) and India (53.2%).
VERY LOW BUDGET FOR AGRICULTURE (7% from the total
budget in the Budget 2013), refers to the size of the FAO, the
funds for the agricultural sector of a country, IS REQUIRED 20% OF
THE TOTAL BUDGET TO FINANCE THEIR DEVELOPMENT.
VULNERABILITY OF AGRICULTURE IN INDONESIA
WEAK ASSET BASE:
o Average size of operational holdings : < 0,5 hectares
o 82% holdings small and marginal (2 or less than 2 hectares)
o Low skill, education, health, information access
CLIMATE AND MARKET ABERRATIONS:
o
o
o
o
o
Most of agriculture activities rainfall dependent
Diversity of climatic conditions
Occurrence of floods, droughts, pests and disease
Low accessibility and connectivity
Market vulnerability – disadvantage in price realization
RISKS AFFECTING AGRICULTURE PRODUCTION:
MAJOR CHALLENGE
Vagaries of weather
rainfall
temperature
humidity
drought
wind
Geography : earthquakes, volcanoes, erosion
Pest & diseases
Quality of inputs
Soil
Unexpected declines in price
Market price changes in the country, and beyond
country, the change in standard quality criteria .
MANAGEMENT OF YIELD RISK
• DIVERSIFICATION OF PRODUCTION ACROSS
SPACE AND CROPS.
Don’t
put all crops into one area (if possible)
Don’t plant only one crop
Raise both crops and livestock
• BUY CROP INSURANCE …???
AGRICULTURAL INSURANCE
• Vital for stable agricultural growth and risk management
• Agricultural insurance will protect farmers from financial losses
due to crop failure.
• To provide insurance coverage and financial support to the
farmers in the event of prevented of failure as a result of natural
calamities, pests and diseases, low market price. etc.
• To encourage the farmers to adopt progressive farming
practices, high value in-puts and higher technology in agriculture.
• To help stabilize farmincomes, particularly in disaster years.
HISTORICAL BACKGROUND OF
AGRICULTURE INSURANCE IN INDONESIA
• 1990: scientific studies and news report
• In 2000: Regent of Bantul (Idham Samawi) guarantees for farmers
apply to certain products. The result was purchased by the local
government to keep the market price so that farmers do not loss.
• In 2012: The Ministry of Agriculture has tested Insurance Rice
Farming (AUTP) of 3.000 hectares in three provinces (West Java, East
Java and South Sumatra), protection includes the risk of flooding,
drought, and attacks of plant pest organisms (OPT).
In these trials, the insurance premium for one hectare of rice is
Rp 180.000 (or 3%of the insured value of rice). Fromthe amount,
Rp.144.000 (80%) subsidized by the state fertilizer and the
remaining Rp 36.000 (20%) paid by farmers.
If the crop is damaged (more then 75%/ha) farmer will get
compensation of Rp 6 million.
Seminar Asransi Pertanian untuk Perlindungan10
dan
Kesejahteraan Petani di Pekalongan (2012)
HISTORICAL BACKGROUND OF
AGRICULTURE INSURANCE IN INDONESIA
• In 2013: had passed a lawon the protection and
empowerment of farmers (Act No. 19 of 2013), in
which there is arranged on agricultural insurance.
• In 2014: the Ministry of Agriculture has
proposed a budget of Rp 345 billion to
subsidize insurance premiums in the draft
budget 2014. The plan, the government will bear
80% of the cost of premiums while farmers bear
only 20%%or Rp 36,000 per hectare.
12
ULTIMATE GOAL OF IMPLEMENTATION OF
AGRICULTURAL INSURANCE IN INDONESIA
INSURANCE PROGRAM MUST BE ENSURED PROFITABLE
FOR FARMERS so that farmers could eventually pay a
premiumon their own without government subsidized.
AGRICULTURAL INSURANCE IS ALSO EDUCATING THE
FARMERS TO INCREASE THEIR FARM PRODUCTION AND
PRODUCTIVITY. Farmers are required to follow the advice
of technical and continuously monitored by the insurance
company that the suggestion of rice farming in the
insurance required to be carried out as part of the
obligation to obtain insurance coverage
KEY FACTORS THAT CAN DETERMINE THE EFFECTIVENESS
OF AGRICULTURAL INSURANCE SYSTEM
1. Farmers Objectives
2. Coverage Farm Commodity
3. Insurance Coverage
4. Value Premium and its Collection Procedures
5. Loss Adjustment Mechanism
6. Organizational Structure Associated with the Selected
Scheme
7. Insurer and its insurance Scheme
8. Communication with farmers.
KINDS OF AGRICULTURAL INSURANCE
SINGLE-RISK INSURANCE: coverage only on one type of
risk (flood, drought, pest attack)
MULTI-RISK INSURANCE: coverage on some risks (2 or
more risk)
YIELD INSURANCE: insured for risks that affect production
and profits to be gained.
PRICE INSURANCE: coverage is paid based on applicable
minimum prices.
REVENUE INSURANCE: combination of yield insurance
and price insurance are where the coverage given to the
specific product or type of farm as a whole (package) so it
will be cheaper than if bought separate insurance product.
CHALLENGES IN THE DEVELOPMENT OF
AGRICULTURAL INSURANCE IN INDONESIA :
SOCIO-CULTURAL ASPECTS:
The mind set of farmers to insurance has not been established
Lack of public confidence to the institutions insurance
Moral hazard that affects the business element of intent in the
insurance claims process.
TECHNICAL ASPECTS:
The absence of complete legal framework for the implementation of
the national agricultural insurance and law enforcement in
implementing of spatial.
Lack of adequate data base to obtain information for determining
design of agricultural insurance products.
Lack of personal who have knowledge both in the field of insurance
and agriculture
CHALLENGES IN THE DEVELOPMENT OF
AGRICULTURAL INSURANCE IN INDONESIA :
ECONOMIC ASPECTS:
The characteristics of the agricultural sector in Indonesia :
the location of a business that is scattered , varied product
systems , small-scale businesses that have implications on
administrative costs in the insurance business.
Lack of knowledge and understanding of the technology that
led to a relatively high chance of failure in the production of this
relates to the cost (benefit/cost) of the act attempts to overcome
the risk .
Use of informal credit commonly adopted by most of the
perpetrators of the agricultural sector.
AGRICULTURAL VALUE CHAIN RISK MANAGEMENT
Reinsurer
Government
Agro insurer
Input suppliers
Farmers
Traders
Processor
Consumer
Banks/Investors
Rajivmehta (2003)
HOLISTIC INSURANCE APPROACH
Banks
Farmer
Support
Insurer
State
AGRICULTURE DEVELOPMENT
Key Drivers
•
•
•
•
•
•
Resources
Knowledge
Access to technology
Access to markets
Insurance
Government support
MOST IMPORTANT KEY DRIVERS
Insurance
• Catalyst for Development
• Productivity
• Profitability
Knowledge
• Human Resource Development
• Skills
• Advisory Service
Resources
• Capital
• Technology
• Land
HOLISTIC AGRICULTURAL
DEVELOPMENT
State
Insurer
Banks
Full cooperation is required
from all stakeholder for successful &
holistic agricultural development
23