AS the intensity and frequency of typhoons ramp up the past five years, increased effort between the government and the private sector is needed to help boost the agricultural sector, whose programs have often been relegated to the backburners for such a long time the country has fallen behind its peers and has become a laggard in the sector come the economic integration of countries under the Asean.
As a result, the Insurance Commission (IC) came up with a new framework on agriculture micro-insurance through Circular Letter 2015-53 issued by Insurance Commissioner Emmanuel F. Dooc to encourage insurance companies to innovate, design and market products that are tailor-fitted to the needs of small farmers who still account for the bulk of the country’s agricultural sector.
The small-scale farmers are most vulnerable to destruction caused by typhoons on their crops that they depend on for the payment of past debts incurred as planting expenses but unpaid due to previous devastations, each one pulling them one level down in a debt spiral.
The plight of farmers is hard enough even without natural disasters battering them every year, as middlemen exploit to the fullest their need for capital to fund their planting activities, intended initially as their source of income and livelihood. Much later, they end up doing mere subsistence farming.
The plight of farmers
Cristina Lantao, 21, a farmer from the impoverished Compostela Valley, detailed how farmers in his province were forced to enter into agreements so obviously part of a vast scheme to deprive them of cash flow and of how, with each harvest, they dig themselves deeper and deeper into debt.
Lantao is one of the lumad or native farmers who traveled from Mindanao to Manila and camped out at the university grounds of the University of the Philippines (UP) in Diliman, Quezon City, till at least November in protest of alleged land grabbing by big corporations of their ancestral lands in Mindanao and the intimidation and human-rights violations committed by the military there in support of such atrocious activities.
For a loan as little as P10,000 under the informal “5-6” arrangement, a farmer from Compostela Valley is obligated to pay not only a hefty advance interest of 20 percent, but also to sell at a deep discount to the creditor his share of the harvest from his meager landholding.
The arrangement allows the creditor to acquire 40 percent of the harvest as payment for the loan, while the remaining 60 percent represents the farmer’s share of the harvest. If the 40 percent proves insufficient as cover for the loan, then the farmer would have to pay the balance in cash.
Then the creditor has the right of first refusal to buy the remaining 60 percent also at a discount. Lantao said if a kilo of palay has a fair market value of P15, the creditor may buy it from the debtor for maybe P13 per kilo.
And what if the farmer is unable to pay the entire debt? The convention says he should still have to pay it even if it means surrendering possession of his small landholding so that the creditor is able to get another person to farm it at an even more onerous arrangement since the creditor now has possession of the land.
Lantao said there is only one creditor, a certain “Jojo Ang,” running this grand credit scheme that results in servitude that may be considered involuntary if we consider these farmers really have no choice but to borrow money to plant rice because their families have nothing to eat.
We’ve all heard this story before, but Lantao, whose parents and grandparents were farmers themselves, said nowadays the financial standing of farmers is bleaker and weaker than ever.
“There are now more farmers who are forced to borrow money, then when they harvest there would be nothing left after paying off the creditor. And so, they would have to borrow again when the next planting season comes,” she said in Filipino in an interview at UP Diliman, where the lumad farmers are camped out this week in their continuing protest against the land grabbing and militarization of their ancestral lands in Mindanao.
With no cash flow or income, and without access to credit because banks would not accept their untitled agricultural land in their possession, these farmers have no one to turn to except the profit-hungry creditor who would exact his pound of flesh.
Private sector risk-averse in crop insurance
The new agriculture microinsurance framework seeks to help farmers by giving them some money to start over after losing their crops—which is almost everything they have—to natural disasters like typhoons.
The task of giving farmers some form of cover against crop losses sustained in the wake of typhoon visitations is borne mainly by the government through the Philippine Crop Insurance Corp. (PCIC). But this government effort is hardly enough.
Despite the emphasis on food security observed by President Aquino, the so-called market-penetration rate of crop insurance is only 4 percent in 2012 and 8 percent in 2013, with most of the crops covered by insurance policies issued by the PCIC.
Conspicuously absent from the effort to protect the farmers against crop losses is the private insurance sector, which, until now, had been averse to offering crop insurance for fear of losing money on claims given that the Philippines is hit by at least one big typhoon each year.
Some of the biggest general insurance companies like United Coconut Planters Bank (UCPB) General do not even have a product to cover crop losses specifically, nor is the insurer considering to get into the business soon because of the risks involved, although UCPB was originally positioned to help coconut farmers who are also vulnerable to losing their trees and produce to frequent typhoon visitations best illustrated by their experience with Supertyphoon Yolanda in Leyte.
“In the past, because of the many typhoons that hit the Philippines, the private sector did not want to go into this business because the possibility of loss was very big,” said Denis Cabucos, the IC’s point person in the establishment of new micro-agri insurance products.
The new framework should now encourage private insurance companies to do their share in helping farmers recover from the destruction of their crops due to typhoons, which, given the average of 20 typhoons hitting the Philippines every year, is an almost certainty. But the framework, so officials said, should extend insurance companies some savings and sufficient margin for profit so that they could turn micro-agri insurance into a viable and profitable business.
Cabucos said the new framework was crafted with the inputs of the umbrella organization called the Philippine Insurers and Reinsurers Association and the Philippine Life Insurance Association Inc., and that the resulting framework was “very acceptable” to them.
Jonathan Batangan, general manager of micro-insurance distributor Cebuana Lhuillier Insurance Solutions, said the private sector used to be wary of engaging in crop insurance because it was not considered a viable business given the number and intensity of typhoons that hit the Philippines every year.
“We are now the most vulnerable country [to typhoon destruction] and the farmers are the most vulnerable sector. It’s simply because the private sector is looking at the viability of the product because if they offer it, it might not be sustainable because of the potentially huge number of claims,” Batangan said.
But with the new framework for micro-agri insurance for crops in place, Batangan said the private sector should be more confident there would be enough volume of insurance policies sold so that the risk of crop loss is spread among the most number of Filipino farmers as possible.
Cebuana Lhuillier is currently negotiating with the PCIC to become a distribution channel for PCIC’s crop-insurance business, which, according to Batangan, could materialize by the middle of 2016.
How it works
Cabucos said that under the old framework on crop insurance, it was very expensive for private insurance companies to offer and administer their own crop-insurance products. This was because in processing any claim, they need to send adjusters to check on whether there were indeed losses suffered by an insured farmer. The expense of sending adjusters was on top of the high risks that insurance companies had to take due to the country’s susceptibility to natural disasters, it being part of the so-called Pacific Ring of Fire.
Just two weeks ago, Typhoon Lando barreled through the Philippines’s food basket of Central Luzon, destroying an estimated 326,000 metric tons of rice or seven days’ worth of supply for the whole 100 million population of the Philippines. Total destruction by Lando in all the typhoon-hit provinces was at an estimated P9.8 billion.
Before that, in 2012 Typhoon Pablo wrought huge losses to the agricultural sector to the tune of P26.53 billion; Yolanda brought losses of P20.26 billion to the agricultural sector in 2013; and Typhoon Glenda brought losses amounting to P6.34 billion in 2014.
In the aftermath of Yolanda, the government touted a P500-million payout made by private micro-insurance companies to those adversely affected by the typhoon. But most of the micro-insurance policies insured against personal accident and damage to property, not to crop losses due to natural calamities.
Now under the new micro-agri insurance framework, insurance companies may use the official reports of government weather bureaus such as the Philippine Atmospheric Geophysical and Astronomical Service Administration (Pagasa) in determining whether a particular insurance policy has been “triggered” for payment.
Cabucos explained the new framework now allows insurance companies to compile typhoon-related data over a number of years such as volume of rainfall, wind speed and the like. Such data form the basis for computing the premium payment for each of the crop-insurance policies that are then sold to framers. The “parametric data” registered by typhoons and gathered by Pagasa act as the “trigger” on whether a particular claim on an insurance policy has accrued, regardless of whether there is actual loss suffered by the policyholder.
These parametric data could be data on wind speed and volume of rainfall brought by such typhoon at a particular province.
Cabucos said the use of parametric data in determining whether an insurance claim has accrued will result in savings for the insurance companies because they would no longer have to send adjusters to verify whether a particular claim is payable or not, because once the wind speed of a typhoon reaches a particular point as certified by Pagasa, then there arises a conclusive presumption that the claim is payable, regardless of whether the farmer incurred actual losses or not.
The new framework also has a provision that allows insurance companies to require the policyholder to prove insurable interest on the crops insured, apparently to protect these companies from unscrupulous persons trying to get a windfall from the misfortunes of others by paying a small premium to insure against an almost certain calamitous event.
How it can help the farmers
The premium for the micro-agri insurance products is mandated under the circular to be affordable, which means any micro-agri insurance product offered by insurance companies would have to comply with the micro-insurance framework in terms of the price of the premium to be paid.
This means that like the typical micro-insurance product, the premium cannot exceed more than 7.5 percent of the computed daily income of the insured farmer to make sure that the policyholder still has enough money for daily expenses for himself and his family.
Cabucos said that aside from providing farmers with insurance cover for crop losses, the new micro-agri insurance framework also allows for life-insurance protection for the farmer himself.
“Most of the time, when a farmer dies, he is succeeded to his livelihood by the children and it would be very difficult for them to start over without any financial assistance from anywhere. Which is why we’re encouraging the micro-agri life insurance so that they would be able to get cash assistance in cases of death to help them in continuing the livelihood of their father,” Cabucos said.
Image credits: AP/Malacañang Photo Bureau, Ryan Lim