An Empirical Study to Determine Rice Insurance Premium: A Case Study of the Vietnamese Mekong Delta

Introduction

Vietnam is a country located in the tropical monsoon climate, with many favorable factors for agricultural production such as its river system and suitable land for rice and many other crops. Agricultural production has a stable growth rate of 4-5% per year, and its contribution to gross domestic product (GDP) is about 20-30% of export output (Dinh, 2013). Despite having an important position and role in the economy, agricultural production is greatly influenced by nature, often facing many risks due to weather, such as storms, floods, and droughts, as well as diseases. According to the World Bank (2009), Vietnam ranks sixth on the list of countries with heavy losses due to natural disasters and epidemics affecting crops, causing great losses to the economy up to 1.5% of GDP. Additionally, more than 70% of the population lives in rural areas that are at risk from climate change.

The Mekong Delta is a strategically located land and is a key producer of rice in the country, contributing an annual production of over 50% of the total national rice output, ensuring food security in the country, and meeting over 90% of rice exports (Ministry of Agriculture and Rural Development, 2021). However, it is projected to be one of the regions most affected by sea level rise due to climate change, vulnerable to damage from extreme events such as severe flooding and extensive salinity. These adverse climatic conditions have affected the growth and development of rice plants and have also threatened the annual rice production of the entire region (Wassmann et al., 2004).

Given the position and role of the agricultural sector in the economy, Vietnam can be considered a potential market for agricultural insurance. However, agricultural insurance in Vietnam is still a small and underdeveloped insurance market, with premium revenue in 2010 accounting for only 0.05% of the total premium revenue of the non-life insurance industry. According to the report of the Ministry of Finance, the proportion of participation in agricultural insurance is only about 1% of the total area of crops and livestock (Dinh, 2013).

The results achieved on agricultural insurance have not met expectations, which is attributed to a variety of factors, such as unsuitable products, limited knowledge of agricultural insurance among farmers, and state policies that have not supported producers (Khoi & Khanh, 2015). The opposite of insurance options is a lack of communal and moral hazard (Son, 2008). Agricultural production is still fragmented, farmers' awareness of risks and agricultural insurance is low, risks occur frequently, and damage is systematic, thus insurers remain hesitant to deploy it (Dinh, 2013).

Rice is the most important food crop in agricultural production, but it faces many risks, particularly serious ones that affect the productivity, income, and livelihood of rice growers. Agricultural insurance is one of the effective tools to reduce losses, but so far it has not been effective for many different reasons, with the insurance premium (product price) being one of the most important factors when considering whether to participate in insurance. In Vietnam, research on agricultural insurance has been conducted modestly, with no mention of the content of research on calculating premiums for insurance products. Therefore, it is necessary to design and calculate rice crop insurance premiums for the Mekong Delta region. This result would be very useful for insurers in designing rice insurance premiums and applying solutions to remove bottlenecks to respond more effectively to this potential market. At the same time, the research results can be flexibly and appropriately applied to research insurance for other crops, thus contributing to the development of insurance services in the Mekong Delta.