Many governments subsidize agricultural insurance for farmers. There are several reasons behind these subsidies, 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 introduced, 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 government budgets, and the creation of 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. 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.

The paper “Best practices for subsidizing agricultural insurance” by Peter Hazell and Panos Varangis (Global Food Security, Volume 25, June 2020) discusses these issues and proposes some best practice guidelines for the design and implementation of subsidized agricultural insurance.

Particularly the paper highlights that:

• Agricultural insurance is subsidized in many countries, at a global cost to governments of well over $20 billion each year.
• There are several reasons for this expenditure, but very little is really known about the effectiveness of insurance subsidies in achieving their intended purposes or in justifying their costs.
• Much more is known about the problems that arise when subsidies are channeled through badly run insurance programs or are poorly designed.
• "Smart” subsidies are cost effective in achieving its underlying purpose, they minimize disincentive problems, and avoid becoming a growing financial burden on the government.
• Before subsidizing insurance, governments should first ensure that the basic public goods needed to create an enabling environment for insurance are in place.