The Asian Development Bank (ADB) and the government of Japan will fund the trial of new crop insurance products that would give small-holder farmers in Bangladesh income protection from increasingly severe storms and natural disasters.
A $2m grant from the Japan Fund for Poverty Reduction for the pilot project on Weather Index-Based Crop Insurance was recently approved by ADB, which will administer the grant. Bangladesh is providing in-kind support of $420,000, said a statement issued yesterday.
“Small scale farmers with few resources are typically unable to insure their crops against extreme weather events and can lose their entire income every time a storm hits,” said Rezaul Khan, ADB’s Senior Natural Resources and Agriculture Economist.
“Extreme weather events are on the rise and the goal of the project is to develop a new affordable type of insurance product which will allow and encourage more farmers to protect their livelihoods.”
Bangladesh is one of the most climate-vulnerable countries in the world due to its geography, and there are estimates that agricultural gross domestic product from 2005 to 2050 will be 3.1% lower each year as a result of climate change.
In addition, no crop insurance has been available in Bangladesh recently due to huge financial losses incurred in the traditional agricultural insurance.
Weather index-based crop insurance, which incorporates historical weather and crop production data, is considered to be more cost-effective and efficient than traditional agriculture insurance as it reduces farm-level monitoring and transaction costs.
Several countries in Asia, including India, Indonesia, Mongolia, the Philippines, Sri Lanka, and Thailand, have begun piloting or providing these products but this is the first time they are being trialed in Bangladesh.
The project will design and pilot crop insurance products over a three year period in selected districts, with the goal of providing coverage to at least 12,000 farm households.
High transaction costs and poor outreach networks can make it costly to distribute insurance in rural areas—up to 40% of premium costs in some cases. This makes traditional crop insurance less affordable, leading to lower uptake and an unviable product.
This project will collaborate with different partners such as agricultural banks, multilateral financial institutions, and farmer cooperatives and try models of distribution that reduce transaction costs and make the business sustainable.