MEMO #2
TO: National Farmers’ Bank
FROM: Yuxiao (Sophy) Yang
DATE: March 24th, 2014
SUBJECT: Advantages and Disadvantages of Index Based Insurance
Introduction:
For those whose livelihoods are closely linked to their environment such as farmers, a variable and unpredictable climate can critically limit development. A type of insurance, called index insurance, can help farmers tremendously as a climate-risk management tool in developing countries. Index insurance is different from a loss adjusted insurance in that it uses a weather index, such as rainfall, temperature, or humidity, to determine payouts. In rural parts of developing countries, traditional insurance is sometimes unworkable due to certain issues and index insurance resolves that. Weather index can only be used for risk that can be measured by an index. For example, we can use the rainfall index to determine whether or not there was a drought. A weather variable that can form an index must be observable and easily measured, objective, transparent, independently verifiable, reported in a timely manner, consistent over time, and experienced over a wide area.
Advantages:
Before, with traditional insurance, banks might be unlikely to lend to farmers if they think a drought will cause widespread defaults, even if the farmer could eventually pay back the loan.
The farmer’s lack of access to loans limit their ability to invest in improved inputs. Farmers in poor rural areas are not only at direct risk from weather events but even if there was no bad weather, they’re also at a disadvantage because lenders might not extend credit to them due to the possibility of a risk. Research shows that farmers often sacrifice 10-20% of income when using traditional risk management strategi...
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...dressed. Basis risk is a huge disadvantage of this insurance, in order for the index insurance product to be successful, its payouts must be closely correlated with agricultural yields, especially in catastrophe-prone countries. We should offer lower premiums for it to be a more attractive product to consumers. However this puts more costs on the bank. But without the need for field assessors, a lot of money from that cost is being saved. It is very hard to come up with an insurance product that both parties much better off due to the fact that weather extremes can be highly unpredictable and there are so many factors associated with crop loss. However, weather based index insurance does make both parties better off even though there are extra costs added into it. Overall, it would improve the livelihood of farmers as well has be financially sustainable for our bank.
Allstate insurance is the second largest property and casualty insurance company by premiums in the United States. Allstate insurance handles about 12% of the U.S home and auto insurance market. (Allstate, 2014). Many of Allstate’s customers fall under what one could refer to as a traditional selection of insurance for automobiles. Recently, Allstate has noticed a major shortcoming in lifestyle insurance, which includes coverage for motorcycles, boats, and other recreational vehicles, in comparison to its competitors. The motorcycle insurance sector is a 10.4 billion dollar industry and growing (PRWEB, 2012). The U.S. Department of Transportation website reports some astounding figures, including that 5,370,035 motorcycles were registered three years before the article, 7,138,476 motorcycles registered at the time of the article, and grew to 9,477,243 registered motorcycles at the end of 2012 (NHTSA, 2013). It is obvious as to why Allstate would identify motorcycle insurance as a worthy lifestyle product to devote marketing research dollars into in order to develop new strategies for cornering a share of the market.
Farmer also did very badly from this. Overproduction meant that prices fell to the advantage of the consumer, and so farmers had to sell
I watched the movie called Bitter Seeds in my environmental class. The movie talked about the problems in India about farming. The movie also talked about the suicide rate, how high it is compared to our country. It said that every 30 minutes, a farmer commits suicide. In India, the economy is not that great so they went with the seeds that were more expensive. The culture is completely different from ours, they celebrate Pola, which is the bull festival, they do rituals when something bad is happening. Most of the seeds were rotting and they were not getting enough water, which resulted in the seeds not germinating, eventually the plants died out and the farmers killed themselves. The people who were selling the seeds wanted more money than what it really should have cost. Banks rarely loan people any money, they had to go to a Loan shark. Loan sharks were basically thugs because they would charge the people 7% to 10% interest per month to grow seven acres. I think Indian farmers should be able to get loans from the bank at a higher percentage rate so they won't have to go to loan sharks and get ripped off.
Not only did companies on main street become affected by the depression so were small farmers. Dust storms destroyed crops they not only could not pay back money borrowed from banks for seeds; they...
...ld. Globally, more intense hurricanes and downpours could cause billions of dollars in damage to property and infrastructure. Declining crop yields due to prolonged drought and high temperatures, especially in Africa, could put hundreds of thousands of people at risk for starvation. The Ski resorts located in the lower altitudes of the Swiss Alps have difficulty obtaining bank loans because of declining snow.
To really begin to understand this complex topic a person really needs to understand the basics of agricultural subsidizing. A subsidy is defined as a grant by a government to a private person or company to assist an enterprise deemed advantageous to the public (Mish, 2003). More specifically, in the agricultural industry the government provides financial assistance to producers in the farm industry in order to prevent decline in production. The government does this by providing financial assistance to farmers and by managing the cost and supply of certain commodities. There a few reasons for this. One reason is to provide assistance to family sized farm owners who have trouble competing with commercial farms. This is supposed to maintain an efficient market balance. Another reason is to control the prices of commodities and keep the global food prices low. There are two main ways that payments are made. The payments may be made directly based on historical cropping patterns on a fixed number of acres. Or they can also be made depending on current market prices. Farmer’s may be guaranteed...
Our nation was founded on agriculture, and for hundreds of years we were able to migrate across the nation bringing our farming tools and techniques with us. Technology has driven populations away from rural areas towards industrialized cities. With money now being pumped into cities, rural farmers are suffering the most. Farmers are taking out large loans in order to sustain their farms, leading to debt and in some cases suicide. Patel spoke about a farmer in India whose husband took his life because he was unable to live with the amount of debt from his struggling farm. This man left his wife and chi...
However, the storms, floods, fire and drought that are already playing havoc with agriculture are likely to have a significant negative impact, along with the longer term flooding of coastal areas.
Farmers are essentially the back-bone of the entire food system. Large-scale family farms account for 10% of all farms, but 75% of overall food production, (CSS statistics). Without farmers, there would be no food for us to consume. Big business picked up on this right away and began to control the farmers profits and products. When farmers buy their land, they take out a loan in order to pay for their land and farm house and for the livestock, crops, and machinery that are involved in the farming process. Today, the loans are paid off through contracts with big business corporations. Since big business has such a hold over the farmers, they take advantage of this and capitalize on their crops, commodities, and profits. Farmers are life-long slaves to these b...
It’s likely that climatic change will impact rural communities in various ways as compared to urban areas due to a number of aspects containing the categories of occupations that are common, poverty levels and demography. “Climatic gap” refers to the lowe...
...t too expensive for the farmers. The second step is that broader awareness is required. According to Sarah Alexander, “different farmers trust different sources, such as vendors, crop consultants, and university extension services.” Farmers are going to need to be open minded to new things, in order to feed the human race. The last step is farmers need the right incentives. Farmers want to know about the good that they are doing. Farmer’s want to know how they are saving the environment, and how they are producing more food, and feeding more people than they were before.
...earch and extension, rural infrastructure, and market access for small farmers. Rural investments have been sorely neglected in recent decades, and now is the time to reverse this trend. Farmers in many developing countries are operating in an environment of inadequate infrastructure like roads, electricity, and communications; poor soils; lack of storage and processing capacity; and little or no access to agricultural technologies that could increase their profits and improve their livelihoods. Recent unrest over food prices in a number of countries may tempt policymakers to put the interests of urban consumers over those of rural people, including farmers, but this approach would be shortsighted and counterproductive. Given the scale of investment needed, aid donors should also expand development assistance to agriculture, rural services, and science and technology.
However, South Africa is not rich in agricultural resources; rather it has low rainfall, impoverishment and greater susceptibility of vegetation to drought, resulting in soil degradation. Soil degradation is also caused by excessive fuel wood collection, inappropriate land use, population density and overgrazing. Rural areas lack good roads and bridges, small-scale irrigation systems, post-harvest storage facilities, processing and market facilities, clinics, electricity and telecommunication facilities, and also have poor financial markets. As a result, the poor find it difficult to cope with risks of various sorts and cannot afford to purchase important inputs such as fertilizer, chemicals and farm machinery. Globalization There is an increased competition for South Africa’s agricultural products both on export markets and locally.
The tropics are effect by many weather conditions which makes the jobs of farmers difficult. Overall subsistence and the GNP are effected by changes in weather, which for the most part is not always predictable. In a world that is divided up into the haves and the have nots, government influence is crucial in regulating practices and the overall distribution of wealth Despite this fact, programs implemented did not always succeed in benefitting the Filipinos. One major attribute of the Philippines is the wide variety of crops produced in this region. Crops which many not be able to grow during the rainy season may grow during in the period of December - May when there is little rainfall (and vice versa).