By António Sobrinho
Farmers must live with agricultural risks. Among them, meteorological risks may affect agricultural activity and farmers` revenues. There are several ways to meet agricultural risks and insurance is one of them. By insuring their crops, farmers transfer risk to a third party, limiting their losses. However, uncertainty is an important factor to be taken into account, as there is more and more evidence of climate change affecting standard weather patterns. In that sense, insurance can play an important role in influencing land use planning, as well as setting guidelines for an efficient use of natural resources.
Agriculture is a risky enterprise. It depends on numerous factors, some of them beyond human control. Nevertheless, one can consider three main ways to deal with agricultural risks, such as avoidance, prevention and assumption:
– risk avoidance seems to have a limited application as farmers cannot elude the uncertainties of weather (meteorological risks). It seems clear that avoidance is not the best way of meeting agricultural risks;
– risk prevention means the reduction of uncertainties through “improved facilities and techniques as well as organization”, as stated by P. K. Ray in his book “Agricultural Insurance (1981)”;
– risk assumption is a way to meet unavoidable risks through self-insurance or by transferring risks to a third party through insurance or speculation. While insurance offers protection in case of physical loss, speculation is basically a cover against probable loss of value.