System Dynamics Approach for Financial Strategy Assessment of Cattle Insurance Program: A Conceptual Model

Abstract

Livestock is one of the sectors contributing to economic development, including job creation, poverty alleviation, and improving rural communities' revenue. Nevertheless, in conducting their business, farmers face risks, including climate changes, livestock accidents, diseases, and emergency slaughtering that reduce their income. Due to farmers' enormous risks, Indonesia's government issued a law of protection and farmers' empowerment (Law No. 19 of 2013), stating that agricultural insurance is one of the seven farmer protections. Cattle Insurance Program is one of the agricultural insurance forms of protection for farmers who experience losses in their livestock cultivation business by receiving compensation to be used as capital. However, this program has not provided an economical business scale for the insurance company that the government appoints. It can be seen from the high loss ratio of more than 200% on average since the program was first implemented in 2016, and this can affect the sustainability of the cattle insurance program. This research aims to develop a conceptual model that can be used to understand the structure and the causality between elements using a system dynamics approach. This model shows that loss ratio influencing factors are premium tariff, sum insured, the number of cattle participating in the program, a claim ratio, compensation, and deductible. This study results can be used to develop financial strategies and scenarios to decrease the loss ratio.