Contents lists available at ScienceDirect Global Food Security journal homepage: www.elsevier.com/locate/gfs Best practices for subsidizing agricultural insurance Peter Hazell *,1 , Panos Varangis 1 ARTICLE INFO Keywords: Agricultural insurance Subsidies Smart subsidies ABSTRACT Many governments subsidize agricultural insurance for farmers. There are several reasons behind these sub- sidies, some having to do with market failures that constrain the development of private insurance markets, and some having more overt political and social objectives. While there would appear to be many contexts in which subsidized agricultural insurance has the potential to offer attractive benefits, experience shows that once in- troduced, well known challenges with the design and operation of agricultural insurance programs, poor design of subsidies, plus political dynamics can all contribute to disappointing results, an expensive draw on govern- ment budgets, and the creation of disincentive problems that lead to significant economic costs and in- efficiencies, and in some circumstances, to environmental degradation. To avoid these problems, any insurance subsidy needs to be carefully designed to be “smart”, in the sense that it is cost effective in achieving its un- derlying purpose, minimizes disincentive problems, and does not become a growing financial burden on the government. Also, before subsidizing insurance, governments should first ensure that the basic public goods needed to create an enabling environment for insurance are in place, without which insurance markets cannot be expected to work well nor subsidies to achieve their intended purposes. This paper discusses these issues and proposes some best practice guidelines for the design and implementation of subsidized agricultural insurance. 1. Introduction Agricultural insurance is subsidized in many countries, at a global cost to governments of well over $20 billion each year. There are many reasons behind these subsidies, some having to do with market failures that constrain the development of privately provided and unsubsidized insurance, and some having more overt political and social objectives such as helping specific segments of poorer farmers access insurance, protecting agricultural lending institutions, reducing the need for dis- aster assistance payments, or simply as a politically acceptable means of supporting farm incomes. Very little is really known about the effec- tiveness of insurance subsidies in achieving their intended purposes, or whether the impacts they generate justify their costs, and there is a real need for more evaluations and impact assessments of subsidized agri- cultural insurance programs. Much more is known about the challenges that can all too easily undermine the benefits from agricultural in- surance subsidies. These include well known challenges with the design and operation of agricultural insurance programs themselves, poorly designed subsidies added to those programs, plus political dynamics that make it hard to terminate or contain the amount of the subsidy. Poorly designed subsidies can also inadvertently create disincentive problems that lead to significant economic costs and inefficiencies, and in some circumstances, to environmental degradation. To avoid these problems, any insurance subsidy needs to be carefully designed to be “smart”, in the sense that it is cost effective in achieving its underlying purpose, minimizes disincentive problems, and does not become a growing financial burden on the government. Moreover, governments also need to ensure that the basic public goods are in place for in- surance markets to develop and work, including maintaining weather station infrastructure and data systems, and providing an enabling legal and regulatory environment. Without such an enabling environment, insurance markets cannot be expected to work well and neither are subsidies likely to achieve their intended purposes. This paper discusses these issues in detail and draws upon available literature and case study experiences to propose some good practice guidelines for the design and implementation of subsidized agricultural insurance. 2. Extent of agricultural insurance and its subsidies Agricultural insurance is widespread around the world. In 2007, an estimated 104 countries had some form of agricultural insurance, of which about 90% of the total premium collected was for crop insurance https://doi.org/10.1016/j.gfs.2019.100326 Received 1 September 2019; Received in revised form 8 October 2019; Accepted 9 October 2019 * Corresponding author. E-mail address: pbrhazell@gmail.com (P. Hazell). 1 Peter Hazell, formerly director of the Development Strategy and Governance Division at the International Food Policy Research Institute (IFPRI) is an independent researcher; Panos Varangis is Head, Agricultural Finance at the Finance, Competitiveness and Innovation, Global Practice, the World Bank Group. This paper draws on a larger report prepared for the Global Index Insurance Facility (GIIF) and published as Hazell, Sberro-Kessler and Varangis (2017). Global Food Security xxx (xxxx) xxxx 2211-9124/ © 2019 Elsevier B.V. All rights reserved. Please cite this article as: Peter Hazell and Panos Varangis, Global Food Security, https://doi.org/10.1016/j.gfs.2019.100326