Montereal, King Anthony M.

October 19, 2018

3C

AGRICULTURAL INSURANCE: NECESSITY TO ENHANCE

Agriculture is very much vulnerable to the unpredictability of nature. With

agricultural production representing the major livelihood of many resource constrained

Filipino farmers, the impact of natural disasters and other agricultural risks cannot be taken

lightly.

A perusal from the World Risk Report of 20161 would dictate that the Philippines is

the third most disaster-prone country in the world. The country suffers an average of 20

typhoons per annum. As our country’s economy is highly reliant on the agribusiness sector2,

agricultural insurance is vital. To elucidate the problem, when Typhoon Pablo made a

landfall on the island of Mindanao in 2012, it poured heavy rains with winds of 175 mph or

280 km/h. It was the strongest hurricane to ever hit the southern island of Mindanao to

date3. With a Category 5 classification, Pablo has destroyed P36.95 billion worth of

infrastructure including private properties and agricultural products. P26.5 billion thereof

was accounted to the latter.4

Taking this into consideration, let us recapitulate the status of the agricultural and

crop insurance in the Philippines. Crop insurance is a risk management mechanism designed

1 Garschagen, Matthias, Hagenlocher, Michael, Comes, Martina, Dubbert, Mirjam, Sabelfeld, Robert, Lee, Yew Jin,

Grunewald, Ludwig, Lanzendörfer, Matthias, Mucke, Peter, Neuschäfer, Oliver, Pott, Simone, Post, Joachim,
Schramm, Stephanie, Schumann-Bölsche, Dorit, Vandemeulebroecke, Bruno, Welle, Torsten and Birkmann,
Joern. (2016). World Risk Report 2016. Bündnis Entwicklung Hilft and UNU-EHS.
2 Philippines Statistics Authority. (2018). Performance of Philippine Agriculture January-March 2018.
3 Masters, J. (December 4, 2012). Dr. Jeff Masters' WunderBlog. Retrieved http://www.wunderground.com.
4 National Disaster Risk Reduction and Management Council. (2012).

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to even out agricultural risks and blunt the consequences of natural disasters to make losses,

especially to the marginalized farmers, more bearable. 5 Agricultural insurance is a

government program that provide insurance protection to agricultural producers against

loss of the crops, livestock and agricultural assets on account of natural calamities, plant

pests and disease and/or other perils. The Philippine Crop Insurance Corporation (PCIC) is

directly responsible for its implementation6.

There are only four agricultural or crop insurance products approved in the

Philippines by the Insurance Commission (IC). These products were applied for by: a) PGA

Sompo Japan Insurance; b) CARD Pioneer Microinsurance; c) Bankers Assurance; and d)

Western Guaranty. Of these four products, only two, belonging to Bankers Assurance and to

Western Guaranty, are considered parametric-based and MicroAgri or Microinsurance.

MicroAgri shall refer to both standard indemnity- based and parametric-based

Microinsurance which may be used to insure all assets and economic activities related to the

agriculture, forestry, fisheries, and agro-processing sectors in the Philippines. 7 They were,

however, sold as part of a package-deal with fertilizer providers. Western Guaranty’s

product was only available in the Isabela region as well.

The offer of the two aforementioned parametric-based and MicroAgri products lived

shortly. Bankers Assurance’s product lasted for only two to three months, while Western

Guaranty’s product was run for only six months in the market. The marketing of these

5 Estacio BF and NB Mordeno. (2001). Agricultural Insurance: the Philippine Experience.

6 Philippine Crop Insurance Corporation. (2006). The Philippine Crop Insurance Corporation: Frequently Asked
Questions
7 Department of Finance. (2016). Agriculture Microinsurance Framework: Microinsurance Segurong Pang-
agrikultura

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products was hampered by the lack of efficient channels for distribution of their products

and the high cost of evaluating and approving claims.8 In addition, farmers simply lacked the

understanding on the necessity and importance of agricultural insurance. A research of the

Philippines Institute of Philippine Studies even provides that about 95% of insured farmers

did not pay any premium and most of the farmers were not aware that they were actually

insured.9 Insurance is simply availed of because it is required by lending institutions and if

not, it was because these were farmers availed of the free insurance provided by the

government.

Apart from the weakness of agricultural insurance products in the Philippines,

particularly those with parametric and microinsurance MicroAgri features, the IC issued

Circular Letter 2015-53 on October 15, 2015, adopting the Agriculture Microinsurance

Framework or MicroAgri Framework. This was done mainly under the microinsurance

initiative. Under this framework, the IC recognized parametric-based microinsurance or

index-based microinsurance as a means to indemnify the insured when one or more

predefined parameters or indices have been breached within the term specified in the policy

contracts. Instead of indemnification based on actual loss measurement, the benefit amounts

are determined by one or more parametric formulas or indices, which yield proxy estimates

that are correlated to the actual losses. However, these yielded to other branches of problems

as well.

8 Hazell, P., Pomareda, C. and Valdez, A. (1986). Crop insurance for agricultural development: Issues and
experience. John Hopkins University Press, Baltimore, MD
9 Philippine Institute of Development Studies. (2016). Evaluation of Agricultural Insurance Programs.

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 With its dire situation, it has become imperative for the government to act on it. The

principal government instrumentality in this regard is the Philippine Crop Insurance Corp.

(PCIC), established on June 11, 1978 by Presidential Decree (PD) 1467, as amended by PD

1733 and Republic Act No. 8175. PCIC is an attached agency of the Department of

Agriculture. The PCIC’s principal mandate is to provide insurance protection to farmers

against losses arising from natural calamities, plant diseases and pest infestations of crops10.

It also provides protection for non-crop agricultural assets, such as machineries, equipment,

transport facilities and other assets. It offers livestock and fisheries insurance. It operates

outside the regulation of the IC.

However, PCIC claimed that the operation of the agricultural insurance program is

problematic because “the non-independence and high co-variability of risks in agriculture

and the casual empiricism that the elasticity of demand for agricultural insurance with

respect to price is highly elastic going up (and relatively inelastic going down)”. 11 The

following elaborate on the constraints in operating the Philippine crop insurance program.

First, there is a need for Larger Investment Fund. PCIC is not allowed to load its

overhead and profit margins to the price of insurance particularly for the rice and corn lines.

Because of this, PCIC was authorized under RA 8175 to increase its capitalization to P2B so

that earnings on its investments will answer for its overhead expenses. 12 Unfortunately, the

National Government was unable to fully fulfill its financial obligation to the program. Capital

contribution from the government came in trickles and far between and as of June 2001, only

10 Section 1, PD No. 1467

11 Estacio BF and NB Mordeno. (2001). Agricultural Insurance: the Philippine Experience.
12 Section 7, Republic Act No. 8175

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amounted to P 905M. This was complicated by the non-remittance and/or late remittance of

the government’s share in the premium for the traditional lines resulting in illusory premium

rates. Total premium arrears due the national government has been growing. These

shortfalls in capital contribution and premium shares greatly diminished PCIC's investment

funds, making investment income insufficient to cover administrative costs. Despite

management's efforts, the funding gap between overhead cost and investment earnings still

persisted.13

Second, as stated earlier, the current operation demands for high overhead costs.

High Overhead Cost. A study from the John Hopkins University14 suggested that the

reasonable claims figure for crop insurance programs worldwide should be around 15% of

the total sum insured whilst overhead cost should be around 5%. In the case of PCIC, the

damage rates for rice and corn ranged from 2.68% (1991) to 18.51% (1988), or an annual

average of 8.2%. Or in terms of loss ratio, the national composite rate over the last 10 years

is 0.82:1 - meaning, PCIC is doing well and within worldwide norms on the underwriting

side. Cost wise, however, the delivery of agricultural insurance to the countryside is quite

staggering. Cost-trimming measures could have been easily adopted if PCIC were a private

entity, but the organization is bound by its legal mandate to serve the small marginalized

farmers, even in the out-of-the-way places. The huge operational overhead is further

aggravated by the individual underwriting and claims approach PCIC has been using. Cost-

cutting measures had been instituted by PCIC in response to financial pressures, including

13 Estacio BF and NB Mordeno. (2001). Agricultural Insurance: the Philippine Experience.

14 Hazell, P., Pomareda, C. and Valdez, A. (1986). Crop insurance for agricultural development: Issues and
experience. John Hopkins University Press, Baltimore, MD

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the drastic downsizing of its personnel from over 500 to 222 in mid2000. Benefits from the

measures were significant but not enough to pull PCIC out of the bind.15

Lastly, there is an underlying question for its stability. There is a growing realization

in the agriculture sector that agricultural insurance is important in yield risk management

owing to the ill-effects of the vagaries of nature as well as pests and diseases. However,

because of the inherent low-income stature of small farmers, continuing government

intervention is needed to bring down insurance cost to their level of affordability. With

insufficient government support, the viability and sustainability of the program seems to be

in peril.16

With the PCIP’s existence for almost three decades and with its operational

fluctuations, it still has relatively slight impression to display. Its mandate of providing

security for agricultural producers, particularly subsistence farmers, has been met with

logistical and operational trials over the past decades. For the reason that its operation is

based on the captured market of formal lenders, it effectively operated as a supporting body

and not as a fully functioning autonomous institution.

PCIC should have been more efficient and effective to cajole more farmers. PCIC must

go after its mandated target market—the small farmers and the implementation of the

MicroAgri because that is where the majority of our farmers are. If the insurance program is

not allowed by law to impose commercially competitive rates and profit from smallholder

farmers, then the program has no choice but to stick close to formal lenders and avail of

15 Estacio BF and NB Mordeno. (2001). Agricultural Insurance: the Philippine Experience.

16 Ibid.

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promised subsidies. The program just has to find resourceful ways to enlarge its share of the

market.

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