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Crop insurance in developing economies – the insurers' and

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					Focus




                                                                                                                                    Photo: J. Boethling
Crop insurance in developing
economies – the insurers’
and reinsurers’ perspective
Appropriate risk management tools for agriculture will be a key challenge for
agricultural development in the future. One of these – crop insurance systems – has
been successfully implemented in the last decades, mostly however in industrialised
countries. To introduce them in developing countries and emerging markets too, a
system approach is needed incorporating a public-private partnership between the
government, the farmers and the insurance industry.

  Crop losses due to extreme weather       at 70 to 80 percent – are attributable        transfer tools, which in turn limits the
events are a common phenomenon in          either to a lack of rain or excess of mois-   availability and range of agricultural
agriculture, including losses in devel-    ture (either rain or flooding).                production credit offered by banks.
oping countries and emerging markets.                                                    Therefore, the development of sus-
The majority of these losses – estimated      In many developing countries,              tainable risk management systems
                                           farmers operating all sizes of farms          and tools – one of them being agri-
                                           retain the risk of crop losses. Their         cultural insurance – will be a key topic
Dr Joachim Herbold                         risk management mainly consists of            in future agricultural development
Munich Reinsurance Company                 diversifying their income sources by          strategies as well as in climate change
Munich, Germany                            planting a variety of crops and breed-        mitigation strategies (see also article
jherbold@munichre.com                      ing cattle. They have hardly any risk-        on pages 8–10).


14                                                                                                             Rural 21 – 04/2010
                                                                                                                  Focus
n   System approach before                   n   Ability to respond to the heterogenic            ucts, as a basis risk and applying
    product approach                             structures in the crop production                site-specific and sustainable pro-
                                                 sector (e.g. large-scale, medium-                duction methods and techniques
   In the discussion on agricultural             sized and smallholder farms as well              in order to minimise production
insurance in developing countries and            as different production sectors) and             risks.
emerging markets, it is misleading to            provide individual risk management             - Insurance/reinsurance industry:
look for the solution at product level           solutions to each of them. Sustaina-             risk carrier, marketing and admin-
first and foremost. The problem of                ble production methods and the use               istration of insurance policies,
appropriate risk management tools in             of best available production tech-               portfolio and product develop-
agriculture cannot be solved with an             niques are a prerequisite of insur-              ment, loss adjustment.
insurance product alone – neither an             ance. Co-operation with extension
index-based insurance product nor an             services might be beneficial.               n   Joint market approach by all insur-
indemnity-based insurance product.                                                              ance providers and risk carriers, e.g.
This is why none of the proposals of         n   Crop insurance systems to be organ-            in the form of a coinsurance pool.
index insurance over the last few years          ised and financed as public-private             In such a pool, all crop risks of one
have resolved the problem of a lack of           partnerships between the govern-               country or even several (smaller)
risk management tools in developing              ment, farmers and the insurance                countries are combined, thus creat-
countries.                                       industry. The role of these stakehold-         ing a better spread of risk. This joint
                                                 ers is as follows:                             market approach includes market-
   This is not necessarily due to the type       - Government: provide legal frame-             wide uniform insurance terms and
of product, but to the lack of imple-               work, define agricultural insur-             conditions which are technically
menting the adequate framework that                 ance as part of national agri-              sound and applied by all insurance
any insurance product needs. In other               cultural policy, co-financing the            providers. This is a very important
words, a system approach has to be                  risk premium and administra-                element to guarantee the sustain-
pursued first, and before the ques-                  tive costs, risk carrier for cata-          ability of the system.
tion of which insurance product is                  strophic losses. Premium sub-
appropriate. Such a system approach                 sidies and state reinsurance of         n   Centralised technical entity run by
creates the adequate legal, institu-                catastrophic losses contribute to           the insurance industry which bun-
tional and organisational framework                 keeping insurance terms afford-             dles the technical expertise, main-
in which insurance products and other               able for the farmer, thus facilitat-        tains an extensive database, and
risk management tools can work effi-                 ing a large market penetration and          carries out loss adjustment accord-
ciently. This means that the challenge              the stability of the programme.             ing to standardised procedures and
involves developing national agricul-               In developing countries, where              methods.
tural insurance systems corresponding               state institutions may not have
to the specific needs of the different               enough resources, some of these         n   Integrate financial institutions like
production sectors and addressing the               tasks might be assumed by inter-            rural banks as well as agricultural
interests of all stakeholders (producers,           national organisations.                     input, output and extension serv-
government, lending institutions and             - Farmers: financing part of the risk           ice providers (including co-oper-
insurance industry). The objectives of              transfer (insurance premium),               atives) in order to promote and
such a crop insurance system are to                 retaining part of the risk in form of       market the insurance products
make insurance covers available to the              a deductible or, with index prod-           efficiently.
majority of production sectors and to
farmers.



n   SystemAgro – Key success
    factors for sustainable crop
    insurance systems

   Munich Re has systematically com-
piled the elements of sustainable crop
                                                                                                                                          Photo: J. Herbold




                                                  The majority of crop
insurance systems under the name of             losses are attributable
SystemAgro (www.munichre.com/sys-            either to a lack of rain or
temagro). The key success factors are:              excess of moisture.


Rural 21 – 04/2010                                                                                                                 15
Focus
                                                                             Index insurances based           losses, homogeneous regional produc-
                                                                             on meteorological data           tion potentials), too. The potential for
                                                                             bear the risk that the           covers based on meteorological trig-
                                                                             crop-loss of the individual
                                                                                                              gers, however, lies more at aggregate
                                                                             farmer, particularly the
                                                                             small-scale farmer, may          level than at the level of individual
                                                                             not be taken sufficiently         farmers. Instead of covering the indi-
                                                                             into account.                    vidual farmer, the cover should apply
                                                                                                              at aggregate level, e.g. for covering a




                                                         Photo: J. Herbold
                                                                                                              crop credit portfolio or a portfolio of
                                                                                                              a co-operative. Under these circum-
                                                                                                              stances, the basis risk can be absorbed
                                                                                                              by the aggregating body. The problem
                                                                                                              regarding how to distribute indemnifi-
n   Index insurance:                           Consequently, index insurance                                  cation in case of losses to the individual
    The overestimated potential             based on meteorological triggers                                  lenders or co-operative members still
    for individual farmers                  should be offered to individual farm-                             has to be solved, e.g. by providing indi-
                                            ers only under clearly defined condi-                              vidual covers to them.
   In the last few years, index insur-      tions: thorough understanding by
ance based on meteorological triggers       the farmer of the mechanism of index
was promoted as the solution. These         insurance and the basis risk involved;                            n   Microinsurance – the new
policies pay out if a specific meteoro-      financial capability of farmers to bear                                paradigm in crop insurance?
logical value, e.g. precipitation, is not   the basis risk.
achieved or is exceeded in a specific                                                                             With the development of microfi-
period – independently of the actual           This does not mean that index                                  nance in the last decade, microinsur-
yield. The fact that this kind of insur-    insurance might not play a role in risk                           ance has been developed and pro-
ance leaves a considerable basis risk       transfer for the agricultural sector. Area                        moted strongly as well. Nevertheless,
with the individual farmer was simply       yield index insurance for instance has                            so far, neither microfinance nor micro-
overlooked. This is due to the rela-        proved to work for smallholder farmers                            insurance (defined as finance/insurance
tively low correlation (as low as 60 %)     under certain conditions (catastrophic                            designed for low-income people/busi-
between trigger and actually harvested
yield and the fact that only one or – in
                                            Insurance products at a glance
the best case – two natural hazards are
covered. This has resulted in situations
                                            Product type                          Perils covered            Advantages             Disadvantages
where the farmers have suffered con-
                                            Direct loss                           Single perils, named      Sum insured eligible   Loss adjustment in the
siderable crop losses without the pol-      insurance                             perils (e.g. hail, fire,   within certain lim-    field necessary
icy indemnifying – a situation which is     Fixed-sum insured                     frost)                    its; loss adjustment
disastrous for the farmer as well as the    Variable-sum                                                    on percentage loss
insurance industry because of the loss      insured                                                         basis
of confidence and acceptance amongst         Yield guarantee                       All climatic risks as a   High correlation       Yield guarantee dif-
                                            insurance                             package                   between yield loss     ficult to fix prop-
farmers and government representa-
                                            Regional yield                                                  and indemnifica-        erly; individual loss
tives.                                      guarantee                                                       tion; all climatic     adjustment in form of
                                            Individual yield                                                risks covered          yield estimation/yield
   Another problem arising from index       guarantee                                                                              recording necessary
insurance is that the farmer, especially    Index insurance                                                 No individual loss     Basis risk involved;
the smallholder farmer, does not under-                                                                     adjustment neces-      high development
                                                                                                            sary, thus lower       costs (except area
stand and cannot trace the real mecha-
                                                                                                            operational costs      yield trigger)
nism of the cover. To give an example:
                                            Meteorological                        One to two selected
smallholder farmers very often don’t        trigger                               perils only
really know how many millimetres of         Area yield trigger                    All climatic risks as a
rainfall is needed for a decent crop. As                                          package
a consequence, demand by farmers for        Vegetation index                      Only indirect
such covers has generally been much         (remote sensing)
lower than anticipated by the promot-       Multiple factors in                   Selected perils only
ers of index insurance.                     production model


16                                                                                                                                      Rural 21 – 04/2010
                                                                                                                                                      Focus

  Crop insurance loss adjusting and management
  Crop Insurance programmes in devel-                                          feeding of the crop to livestock or personal    develop a relationship with the farmers
  oping countries and emerging markets                                         consumption.                                    to better understand their management
  are normally limited to weather-related,                                                                                     abilities and as an opportunity to gain
  named perils, until the programmes                                           Limited resources require innovative prac-      their confidence by helping them under-
  stabilise and accumulate sufficient sup-                                      tices, and substantial progress has been        stand the insurance programme and by
  porting data to justify more advanced                                        made in the use of sophisticated satellite      helping to keep them within the guide-
  programmes. Crop losses are either ad-                                       imagery programmes with the capability          lines throughout the growing season.
  justed using a conventional percentage of                                    to measure planted area, monitor crop de-       Adjusters selected for programmes in de-
  loss formula, which compares the original                                    velopment, and to some degree determine         veloping countries and emerging markets
  crop to the remaining crop after damage,                                     the rainfall volumes and percentage of          need a strong agronomic background,
  or a weather index formula with a trigger                                    crop damage remotely. It is still necessary     but they also need the patience and abili-
  mechanism designed to pay losses when                                        to physically visit the insured area, to give   ty to communicate with farmers who may
  insured weather risks inhibit normal crop                                    it the electronic address (GPS co-ordinates)    have a very limited understanding of the
  development.                                                                 needed to identify the specific parcel on        policy coverage they have purchased and
                                                                               the satellite image, and also to calibrate      who may become extremely emotional
  Both conventional and indexed policy                                         the satellite image characteristics with the    when their crops are damaged.
  forms require basic confirmation of an                                        actual field conditions.
  insurable crop, actual planted area, and                                                                                     The loss adjustment process goes more
  cause of loss. Conventional policy forms                                     Growing season and loss inspections may         smoothly if it is clearly and tactfully ex-
  still require a physical inspection of the                                   be accomplished using a combination             plained, and it is much easier to accom-
  insured parcel to adjust the loss, whereas                                   of satellite images and physical, onsite        plish if a working relationship and base of
  an indexed-based policy adjustment is                                        inspections. For index programmes, the          confidence is established with the farmer
  an automatic calculation based upon                                          onsite inspections also provide an op-          and farming community prior to crop loss.
  recorded weather data at the nearest au-                                     portunity to verify proper operation of the
  thorised weather station. Indexed policies                                   weather stations and proximity to insured                                  Carey Dunford
  have become very popular as an efficient                                      farms; confirming the data being reported                           Agro International, Inc.
  method to offer crop insurance cover-                                        is accurate and relevant to the insured risk.                       Tucson, Arizona, USA
  age for many small farms in developing                                                                                                 cdunford@agrointernational.com
  countries and emerging markets, but are
                                                                               n   Creating a base of confidence
  still limited by distribution density and
                                                                                   between farmer and insurer
  reliability of the weather stations needed
  to record the data.                                                                                                          Onsite inspections are necessary
                                                                               While the onsite inspections provide            to obtain accurate information
                                                                               necessary information, they also serve to       but also to develop a relationship
  n   Without accurate information                                                                                             with the farmers.
      no insurance

  Accurate information is the key to properly
  adjust any crop loss, and it is important to
  develop the human, technical assets nec-
  essary to collect, validate, and interpret the
  relevant information. The ultimate success
  of the programme will depend upon the
  selection of the adjusters, the quality of the
  training they receive, and the existence of
  clear and concise loss guidelines and crop
  production standards for the insured crop.

  Both conventional and indexed policy
  forms require inspections to adequately
                                                   Photo: Agro International




  document initial insurability, crop develop-
  ment, proper management, and actual
  cause of loss. Uninsured causes of loss may
  include improper management, unin-
  sured perils, theft, and in many cases, the



Rural 21 – 04/2010                                                                                                                                                       17
Focus
Examples of crop insurance systems in emerging markets

Crop insurance systems were developed in the last years/decades in various emerging markets and are nowadays an important risk management
tool for farmers. The systems mentioned all come within the framework of a public-private partnership. Market penetration is still unsatisfactory.

                                Brazil (data of 2009)                   India (data of 2005)                    Mexico (data of 2009)
Cultivated area (million ha)    38.0 (soybean, corn and wheat)          142.0                                   26.5
Insured area (million ha)       4.6                                     27.8                                    1.9
Market penetration              12 % (soybean, corn and wheat)          20 %                                    7%
Number of insured farmers                                               16.5 million
Market premium                  208 million euros                       93 million euros                        80 million euros
Premium subsidies               104 million euros or approx. 50 % 50 % approx.                                  47 million euros or 58 %
State reinsurance               In start-up phase                       at 100 % L/R for crops group 1,         Mainly for the “fondos de auto-
                                                                        at 150 % L/R for crops group 2          aseguramiento”
Insurance product types         Yield guarantee (50 %, 60 % or          Index products: mainly area yield       Direct loss yield guarantee
                                70 % of regional yield)                 with coverage levels 60 % to
                                                                        90 %; in the last years also mete-
                                                                        orological trigger policies as pilots
Main insured crops              Soybean, corn, wheat                    Food crops and oilseeds (group 1)       Corn, wheat, sorghum
                                                                        and annual commercial/horticul-
                                                                        tural crops (group 2)
Operating since                 2006                                    1985                                    1990
Comments                        System in development;                  Rates presently not set actuarially     High market share (58 % of pre-
                                presently an appropriate govern-        and system therefore technically        miums and 63 % of subsidies) of
                                ment reinsurance lacking;               unbalanced.                             “fondos de autoaseguramiento”,
                                market penetration estimated to         Cover is available for all farmers;     a form of collective crop insurance
                                increase to 31 % by 2014 and to         compulsory for credit users             organised as a mutual
                                67 % by 2018



nesses not served by typical social or              keting services along the agricultural             yield estimations as well as assessment
commercial insurance schemes) have                  value chain. Furthermore, the (micro)              of loss events and vegetation status are
made their way into the area of crop                finance and insurance industry as well              only some examples which will enhance
production. Although this is not surpris-           as the government need to form a pub-              crop insurance and other risk manage-
ing, it is often not realised because rural         lic-private partnership (see also article          ment tools (see also pages 24–25).
microfinance/insurance normally does                 on pages 11–13).
not include crop production.                                                                              Once it is possible to determine
                                                                                                       yields accurately with remote-sensing
   To serve smallholder farmers with                n   New remote-sensing                             technology, yield-based coverages
much needed capital via production                      technologies will enhance                      might be feasible also for smallholding
credits, a joint effort by different sectors            crop insurance                                 farming. Furthermore, insurance prod-
is necessary. Microfinance institutions                                                                 ucts using a remotely-sensed vegeta-
play a vital role in this process, but they            Nowadays, remote-sensing tech-                  tion index will gain further importance,
will be successful only if they integrate           nology for agricultural applications is            especially in covering extensive farm-
their efforts with input and output mar-            rapidly developing: plot identification,            ing, e.g. grassland.



Zusammenfassung                                     wird erläutert, warum auf Public-Private-          últimas décadas, aunque sobre todo en los
Geeignete Risikomanagementinstrumente               Partnerships beruhende Ernteversicherun-           países industrializados. Sólo los sistemas
für die Landwirtschaft werden künftig ein           gen künftig an der Spitze der Entwicklung          basados en cooperaciones público-priva-
wichtiger Faktor für die Entwicklung des            in Entwicklungs- und in Schwellenländern           das (PPP) han demostrado ser exitosos y
Agrarsektors sein. Eines dieser Instrumente,        stehen werden.                                     sostenibles. En cambio, los sistemas exclu-
nämlich die Ernteversicherung, wurde in                                                                sivamente privados o sólo organizados por
den letzten Jahren erfolgreich eingeführt,          Resumen                                            los gobiernos han fracasado. Este artículo
jedoch hauptsächlich in den Industrielän-           Los instrumentos apropiados de gestión de          describe las razones por las cuales los sis-
dern. Nur Konzepte, die auf einer Public-           riesgos en la agricultura constituyen uno          temas de seguros de cosechas basados en
Private-Partnership basieren, haben sich als        de los desafíos clave para el desarrollo agrí-     cooperaciones público-privadas liderarán
erfolgreich und nachhaltig erwiesen. Da-            cola futuro. Uno de dichos instrumentos            la evolución de estos instrumentos en los
gegen sind rein private oder rein staatliche        – los sistemas de seguros para cosechas –          países en desarrollo y también en los mer-
18
Konzepte gescheitert. In diesem Beitrag             ha sido implementado con éxito en las              cados emergentes.         Rural 21 – 04/2010

				
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