National university of science and technology Essay

National university of science and technology

ASSIGNMENT 2

MICRO INSURANCE CIN 2220

MR TINARWO

LYANE T NJOVHANA

N0174165K

Insurance is whereby the insured’s substitutes a small certain cost called the premium for a large uncertain financial loss that is contingency insured against that would exist if it were not for the insurance (E. J. Vaughan and T. Vaughan), that is it is a contract that provides protection to the subject of matter against any eventuality. Insurance provided to small holder farmers guards against financial losses to the smallholder farmers due to contingencies that are unforeseen or those that are insured against that are beyond the farmers control, and, when providing insurance to smallholder farmers the insurance companies face some major challenges such as lack of an insurance culture amongst the farmers, low risk awareness, poor infrastructure, moral hazards and adverse selection amongst others

Due to lack of an insurance culture amongst the farmers the insurance companies are bound to experience a stunted growth because of the low demand of insurance products. According to Oliver & Stutley, 2008 there is low demand for agricultural insurance in developing countries because of the limited understanding of its benefits. Since most smallholder farmers, in Zimbabwe that is, are rural based farmers these farmers are financially illiterate and insurance is not a familiar concept to most of them thus the insurance products that would have been designed for the farmers as the potential buyers /policy holders are not taken up since they are not understood thus the demand for these products will be very low as the potential buyers would be preferring to retain their risk’s than to transfer it to another party that is the insurance company, hence growth of these insurance companies is stunted which may lead to most of them shutting down because there is no room for expansion due to lack of customers .

When taking up insurance farmers tend to assume the likelihood and severity of the production risk’s they are exposed to or the financial loss they may experience when an insured or catastrophic event occurs thus the insured tends to purchase too little insurance for those events that have a low probability of occurrence and adequate insurance for those that they are well aware of (common events) for example when a farmer insurers his maize crop against diseases that attack the plant such as gray leaf spot, anthracnose bright leaf and eyespot for $4000 since these are common events when producing maize and against drought, or excessive rain at harvesting for $850 when the underestimated event occurs rather than the common event insurance companies only pay for the sum insured. Thus the tendency of underestimating catastrophic events usually makes them reluctant and unwilling to purchase their insurance.

Insurance companies also faces information problems through moral hazards and adverse selection posed by the small holder farmers which makes it difficult for the companies to accurately measure risk as well monitor the farmers behavior and collecting data relevant to the insurance provided. According to N.G.Githaiga, 2010 moral hazards occur when the insured’s alter their production practices in a way that changes their underlying risks for example failure to use good farming practices, their failure to care for the crops or providing adequate requirements for the products such as water and fertilizers, while, adverse selection arises due to lack of information which results in the calculation of wrong premiums thus making individuals who present a higher probability of risk purchase insurance thus making insurance companies unprofitable leading to their failure.

Another challenge faced by insurance companies is that when providing insurance to smallholder farmers to guard against any eventuality to their produce a lot of data is required that is farm level yield data and data on the crops they are producing as well as data on the environment they are operating in terms of weather ",quality of soil texture thus collecting this data is costly and these companies do not have adequate infrastructure to collect the required data and this determines the quality as well as accuracy of the data collected. If the data collected is not accurate and is of a poor quality this then becomes a barrier to the development of the insurance company, and since the data they would have collected becomes the data they would use to set the underwriting guidelines lack of accurate data will then prevent the proper classification of the risks and lead to incorrect pricing of the insurance products thus making the insurance product sell at a loss which may lead to closure of the business since the cannot afford the correct infrastructure

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