Agricultural Risk Management and Insurance

Agricultural Risk Management and Insurance

DOI: 10.4018/978-1-5225-3059-6.ch012
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Abstract

Risk management in agriculture can be described as the art and science of choosing among alternatives aimed at reducing the adverse effects of foreseen and unforeseen variability in the production process. Because agriculture is a biological activity, the practice is prone to risks and uncertainty. The need is urgent and cogent to continue to draw attention to the risky nature of the practice of agriculture and thereby proffer effective risk management strategies. This chapter therefore focuses on the basic concepts of agricultural risk management and insurance as they relate to agricultural finance and enterprise expansion. The discussions are based on a review of relevant literature. The chapter concludes that granted that the practice of agriculture is a private sector activity, the need for institutional support, especially in the area formal agricultural insurance schemes, cannot be overemphasized. It is recommended that relevant institutions involved in agricultural insurance as a formal risk-management strategy should ensure that famers obtain due compensation for their insured enterprises in the event of the relevant catastrophe in the farm enterprise.
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Risks And Uncertainty In Relation To Agricultural Insurance

One of the typical characteristics of agricultural enterprise is that it is beset with considerable risks and uncertainties. These attendant risks and uncertainties are on account of agricultural enterprises being predominantly dependent on nature. Risk and uncertainty define the probability of exposure to occurrences that are capable of engendering losses. While risk refers to the occurrence of adverse events of known probabilities, uncertainty refers the occurrence of adverse events of unknown probabilities. Risk and uncertainty both define a situation a varying number of outcomes are possible.

According to Cervantes-Godoy et al., (2013), risk refers to a combination of the probability of an event and its consequences. According to Teweldemedhin and Kapimbi, (2012), and Nto et al., (2014), risk refers to the probability of occurrence of an event or condition that, if it occurs, would have a negative or positive effect on one or more project objectives. According to Surbhi (2016), in the ordinary sense, risk is the outcome of an action taken or not taken, in a particular situation which may result in loss or gain. The probability of winning or losing something is known as risk. The terms risks and uncertainty are usually associated with the exposure to outcomes that can result in losses. So, reference to the probability of positive effects of the occurrence of risk or the probability of winning being a component part of the definition of risk should be interpreted with caution. The interpretation can be found in the maxim that the higher the risk, the higher the returns in the event of gain; the higher the risk, the higher the cost, in the event of loss. It can also be interpreted from the view point of the concepts of downside risk and upside risk. While upside risk refers to the uncertainty of gain, down side risk is associated with loss.

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