New Directions in Canadian Crop Insurance

New Directions in Crop Insurance Douglas Wilcox, Ph.D., P.Ag. Manager, Agronomy & Program Development MCIC National Crop Insurance Research & Operations Conference Penticton, June 6, 2002 Presentation Outline • Key Trends and Catalysts in Agriculture • Implications of These Trends for “NEW DIRECTIONS” in Crop Insurance C I Must Evolve …... • “It is not the strongest of the species that survives, nor the most intelligent, but rather the one most responsive to change.” – Charles Darwin New Directions in Agriculture in Canada • We must step back and examine the trends and key catalysts that are responsible for the current changes in agriculture. • Why?….Only in this way will our crop insurance industry recognize new opportunities and understand how to respond in a way that best meets the needs of our clients. 3 Major Catalysts • Scientific Revolution in Biological and Information Technology • Increased Social and Political Activism • One-World Growing Pains Scientific Revolution • The Biological and Information revolution has succeeded the Mechanical and Chemical revolution and is a major catalyst of agricultural change. Scientific Revolution Examples • Increased Productivity – larger & better equipment, more educated farmers, better access to knowledge, GMOs • Shift From Commodities to Biologicals – food types, industrial types, pharma types • Fewer Farms - more vertically integrated – increased contracting, thinner markets • Consolidation of Agri-Business – genetic monop, anti-trust conc, increas links • Shift from Hand Power to Mind Power – eCommerce, info overload, centres of excellence Increased Activism • The desire of social and political activists and voters to have current agricultural practices changed towards some perceived ideal will continue to be a catalyst for change. Increased Activism Examples • Consumer Preference Changes – safety, health, convenience, nutrition, variety • Environmental Protection reFocus – inc legislation, water tracking, biodiversity, multifunctionality, carbon sequestration • Government Policy Changes – APF, cheap food, food security, transparency of information, save family farm • Societal Changes – gender issues, off-farm income One-World • World scale international issues are likely to be significant catalysts of agricultural change, although their extent of influence is still largely unknown. One-World Examples • Climate Change – crop changes, weather changes, policy changes • Uneven Distribution of Wealth – protectionism, international aid, toxic weapons • Biosecurity Concerns – transboundary disease, biodiversity erosion, introduction of plant and animal pests • Market Globalization – regional blocks, protectionism What does this mean for CI ? C I Must Evolve …... • “If the rate of change outside an organization is faster than the rate of change inside the organization, then the organization is in trouble”. – Joel Barker Increased Productivity • Farmers are better educated and using better inputs than at any other time in history – this is showing up as increased productivity. However, increased productivity means that the susceptibility of agriculture to vagaries of weather is also greater than ever, this makes CI increasingly important. New Directions • Increased yields means may have to base coverage more on yield predictions than on historic yields. • Rates may go down because larger, better equipment and inputs may mean some risks have declined (e.g. DTP changes). • May need to focus on “large farms” or more custom products (e.g. small farms able to “selfinsure” with off-farm income). • Increased on-farm use of computer, internet and data mapping will occur (e.g. precision ag)- CI could take that data use for business purposes and client solution purposes (e.g. MMPP). Shift to Biologicals • The food system is undergoing structural change brought about by biotechnology. What, how and when food products are produced has changed, rendering structures based on the old system increasingly irrelevant – this includes CI. New Directions • To be relevant to farmers CI will likely have to expand its programs to cover production beyond yield of traditional commodities (e.g. enzyme yield, oil yield, fiber production, etc) • Current CI rules reflecting traditional commodity production will need to be revised to allow alternative use production (e.g. seeding dates, production practice, harvest management). Fewer Farms • Fewer producers means less influence on government although the resulting larger farms remaining have a better ability to pay for valueadded solutions to short and long-term concerns including greater risk sharing. • Useful technology now embraced more quickly (e.g. GMO) • To maximize profits less farmers will be growing the same crop decade after decade. • ROP more the standard - leading to advances in info collection and dissemination New Directions • Less votes means that government support for farm support programs including CI is likely to decline, even though the need is likely as great as ever. The challenge is for CI to show value beyond votes in eyes of government (increase PR, new utility, etc). • Need for CI may reduce as larger farmers lean towards other risk sharing mechanisms such as contracting out (opportunity for CI to set up commodity exchanges for new crops, etc) • New technology being embraced faster than ever (e.g. GMOs) it will be a challenge for CI to keep up (more solutions such as Diversification Option). New Directions • More production in storage means storage risk increases - storage insurance more important? • Look to new line of business in non-ag sector (e.g. Corporate lending, insurance, etc) Agri-Business Consolidation • Increasingly we are seeing more and more agribusinesses forming strategic alliances across input sectors (e.g. lenders, input supply services, info & eCommerce delivery) there are potential opportunities for CI to get-on-the-boat. New Directions • CI can merge its products with that other agribusiness to provide better service (better protection) at reduced cost for our clients. – e.g. input insurance with chemical companies (e.g. DuPont, Monsanto), – e.g. lenders (ag-credit mergers), – e.g. one-stop shops (sell Private hail, farm building insurance, livestock insurance) • CI will have the opportunity to generate revenue from information sales to consolidated companies with deep wallets. New Directions • CI could be privatized to gain efficiencies through bundling with other private sector businesses or client solutions (e.g. private hail Cos) • CI has opportunity to contract out services (e.g. Wheat Board Audits, adjusting, adjustor training, etc) • Increased opportunity for collaboration between provincial, federal, and international agencies including maintaining corporate memory. Mind Power Dominance • In the past on the farm hard assets were prized most of all (e.g. land, machinery, equipment) the new structure puts more value on knowledge, information and relationships and CI can capitalize on this fact. New Directions • More than at any time in the past CI clients are more knowledgeable than ever – CI agencies need to increasingly listen to what they have to say (e.g. producer consultations) • The increasingly central role of information technology will allow greater access to client information increasing the opportunities for individualized underwriting and improved product options (e.g. less dependence on “book” values). • The info glut will has increase the need for filtering to provide useful info – CI can assist (e.g. MMPP, mind burn-out – bundled solutions). • As the Tech improves satellite imagery modeling may provide opportunities for CI programs. New Directions • Opportunity to provide value added services such as orthophotos and acreage measurements, GPS, GIS mapping, etc. Consumer Preference Changes • Preferences and attitudes of consumers continue to evolve in directions which have implications for producers. Changing demographics, lifestyle changes, and increased awareness of food safety, health and environmental issues have segmented the market for farm products and has implications for CI. New Directions • Food safety issues will become increasingly important - the ability to track the product from farm gate to end user will be increasingly done. – CI can get more involved in this tracking – CI can capitalize on this tracking - less reporting, more reliance on audits, etc Environmental Protection • Cost sharing of CI leads not only to a public sharing of risk but a public sharing of the management of these risks. This will likely include increasing recognition of environmental protection concerns through CI. New Directions • Increased government/industry regulation is likely – CI can be an agent for this regulation (e.g. farm plans) – Cross-compliance may be developed – ROP agent, benchmark provider • Agriculture provides more services to society than producing food. The sector is increasing held responsible for environmental services such as preserving watersheds, maintaining biodiversity, rural aesthetics, carbon sequestration, and production of renewable energy. CI can administer/police multifunctional programs. Government Policy Changes • Government trade policy or a general economic cycle can have a direct impact on the bottom line. Environmental regulations, food safety requirements, farm subsidies, trade sanctions, IP rights, to name just a few - all influence farmer behaviour and receptivity to CI products. New Directions • Trend towards more Integrated risk management, and increased Cross-compliance (e.g. APF?) • Trend towards fewer direct farm payments (e.g up until recent?) • Trend towards user pay (esp likely with larger farms?) • Increasing conflicts with agencies of enforcement (e.g. PFRA adaptation efforts, unreg product use?) • Trend towards increased “Transparency” – may lead to increased client disputes - increased admin costs? New Directions • Trend towards revenue generation may provide opportunities to develop ag-related business streams (e.g. soil testing, grading, etc) • Trend towards dumping special operating agencies means that privatization of CI possible. Societal Changes • Considerable changes in society have occurred over the years (smoking, baths, etc) and continue to occur in both urban and rural areas – this has influenced agriculture and CI. New Directions • The farmer of tomorrow is more likely to push a pencil than a plow – means CI can do less handholding? • It used to be that farmers had higher moral standards, a stronger work ethic and generally higher values than those of the rest of the population - farmers are now no different than the rest of society. – has the moral hazard issue increased for CI? • Gender issues – women increasingly important on farm – CI materials and approaches need to reflect this? • Off-Farm income increasingly important – less need for CI to insure small farms? • Increased urbanization – new CI products (garden insurance, landlord insurance, etc)? • Demographic issues – CI needs to consider greater accessability – farm safety, large print, etc? New Directions • Impersonal delivery of services becoming more ubiquitous (computers, internet, call center)-CI can change delivery approaches (on-line forms, call centers). Climate Change • The potential for changes in growing seasons and growing regions, the development of new crops and varieties, as well as changes in farm management practices, will all need to be reflected in CI programming New Directions • CI may be reduced or eliminated if it discourages adaptation too much. • CI may be asked to get more involved in mitigation of climate change through weather modification. • If carbon credits become accepted CI could function as a broker/policing agent. • CI could become involved in impact monitoring providing benchmark info (regions, yields wildlife) & regulatory compliance. • Increased weather monitoring may create new opportunities for CI (e.g. weather derivatives). Uneven Distribution of Wealth • Understanding of cultural, social and political aspects of the world economy will be increasingly important to the success of any countries agriculture and could strongly influence CI design. New Directions • Food security policies are likely to become increasing important (e.g. trade sanctions). Pressures will exist for one-size-fits-all international CI design (e.g GATT Green). • International Aid programs are likely to be more important creating opportunities to share our CI expertise (e.g. AB Chile Project). Biosecurity Concerns • Management of all biological risks associated with food and agriculture including GMOs, alien species, erosion of biodiversity, and spread of transboundary diseases and toxic weapons of war is an increasing issue for agriculture. It has intensified as a result of economic globalization, rapid improvements in communication, transport and trade, technological progress, and increased awareness of biodiversity and the environment. As biological risk managers, CI likely has a role here. New Directions • Authority for biosecurity is scattered over a variety of ministries (EMO,agriculture, health, environment, forestry, fisheries, trade & Industry) it may be appropriate for CI to become involved in biosecurity risk reduction (e.g. business interruption insurance, livestock disease insurance, centralized biosecurity administration). • If CI does not get involved in direct biosecurity risk reduction it should still strengthen linkages with those authorities who are, so all can be better prepared in the event of some biosecurity breech. • CI may need to develop non-Ag Dept funding sources for new programming (e.g. CFIA and Fed TB) Market Globalization • As an exporting nation, global demand for food and fiber will drive the demand for Canadian agricultural products and the location of production. This means that crops insured on large acreages one year may not be produced the next. New Directions • Because farmers will increasingly be competing against international block economies, government assisted risk management will increasingly be important to stabilize agribusiness (current APF safety net?). • Continually shifting agricultural markets means continually shifting focuses in CI (e.g. SK Chickpeas). • Post Sept 11 - Trading now confronts a gamut of security and logistics barriers. Protectionist policies may increase suddenly creating CI concerns (e.g. marketable production). Core Principles • In the quest to develop “NEW DIRECTIONS” don’t forget the lessons of the past !!! • For example we need to remember the core principles of good crop insurance. CI - Core Principles • Appropriate Coverage – coverage should at least cover the minimum cash investment of he farmer • Management Neutral – farm management should largely be uninfluenced by the presence of an insurance program (similar to house insurance) • Predefined – costs, benefits and rules should be well defined and laid out - before the disaster/problem hits Description then Prescription! • A strong agricultural economy in Canada is dependent on prescribing good solutions. Good solutions only come after careful reflection. Careful reflection only comes from reviewing a well though out description of the issue. • It is therefore critical that our CI industry take some time to look at the trends and key catalysts influencing agriculture, including the CI industry. • Before prescribing “new directions” the CI industry must have a good description of the trends and catalysts likely to impact on it, it’s partners, and it’s clients - hopefully time will be allowed for this reflection. The End……….