Agriculture_ENG

Insuring Agriculture
Traditional and Non-Traditional Approaches
Dr. Karl J. Schneider Global Head Agriculture Globals & Large Risks May 14, 2007

Topics
Risks in agriculture Traditional crop insurance Non-traditional crop insurance Role of insurer and reinsurer Limitation of private agriculture insurance Transfer of agricultural risks Global agriculture insurance market Set-up and services of Swiss Re
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What is agriculture?
The science, art, and business of cultivating soil, producing crops, and raising livestock.
Source: https://www.wendangku.net/doc/b23664690.html,/topic/agriculture The American Heritage? Dictionary of the English Language, Fourth Edition
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Categories of Risks in Agriculture
Natural Risks hail, storm, fire, frost drought / flood frost / heat diseases / epidemics insects / pests wild animals Social Risks fire burglary / theft strike / riot vandalism war / terrorism moral hazard Economic Risks price fluctuations
(input – output)
depreciation loss of income interests, currency
On Farm Risk Management
Agricultural Production
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Risk Management Strategies in Agriculture
Avoidance of risk
stop or change current farming activities
Prevention of risk
choosing appropriate farming techniques (crop rotation, nutrition, variety, protection; soil & site management) use of hail nets in fruit growing specialisation into suitable crops or livestock Good Agricultural Practice (GAP)
Minimisation of risk/loss
e.g. intentional slaughter spreading/timing of sales salvage opportunities
Insurance
losses need to be accidental and measurable (frequency / severity) farmer’s behaviour should not change (deductibles, bonus/malus)
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Important Underwriting Criteria
Moral Hazard
– The intention of the insured to have a claim
Asymmetric Information
– The insured has more information than the insurer
Systemic Risk
– A peril affects a high number - if not all - insured’s at the same time
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Sub-lines of agricultural risk insurance
Crops Glasshouses Forestry, plantations Livestock Bloodstock Aquaculture
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Causes of Crop Losses
4% 2% 2% 1%
Drought Excess Moisture
9% 13% 47%
Frost Hail Disease Windstorm
22%
Flood Insects
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Source: United States Crop Insurance Scheme 1981 – 2001

Risks in Crop Production
The farmers and the insurers view
Farmer Price High Hail Wind
Pest / Dise ases
Ex. Rain Frost Flood
Drought
Low Fire
Ins. Comp. Low
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High

Traditional Crop Insurance Products
– Hail Crop Insurance – Single peril Insurance with low moral hazard – Named Peril Crop Insurance – various perils like e.g. hail, fire, frost – Multi Peril Crop Insurance – comprehensive cover based on yield reduction – Crop Revenue Products – Multi Peril Covers and limited Price coverage
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Traditional Crop Insurance Products
Multi Peril Insurance
The cover comprises all weather perils and other certain unavoidable perils incl. pest and disease Insured yield is based on an agreed % of the individual actual production history of the client’s farm, usually between 50% and 75% The sum insured corresponding with the yield is usually chosen from a range of 60-100% of an expected sales price at the end of the season.
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Traditional Crop Insurance Products
Multi Peril Insurance Losses are adjusted pre-harvest, infield and individually The loss incurred is calculated as the amount of yield shortfall below the guaranteed yield multiplied by the chosen price per unit of yield There is usually no coinsurance with a deductible. The insured yield level is a % of the actual yield and with a selected 75% yield level the first 25% loss on the average yield will not be indemnified
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Traditional Crop Insurance Products
Multi Peril Insurance: Data Requirements Meteorological data on frequency, severity for all perils insured referenced to a geographical location as detailed as possible Yield data referenced to a geographical location Event PML (Probable Maximum Loss) and return periods Grouping of crops into vulnerability classes Establish damage functions for each crop at each growth stage to estimate plant damage impact on final yield by correlating yield and meteorological data
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Pricing of Agricultural Insurance
modelling of data - loss history? -> experience rating (if not: exposure rating) - frequency? - severity? - trends? technical rate - as if analysis “loadings” - external costs - internal costs - capital costs - profit & insecurity
final rate
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Problems of Traditional Crop Insurance for Natural Disasters
Can have high transaction costs – inspection, loss assessment Investments need for monitoring and actuarial services to overcome information asymmetric Often no product innovation due to Government Regulations and influence, one size fits all High Capital/Reserve requirements due to the Systemic Risk Problems in assessing low probability/high catastrophic risk (farmer sees no risk) Moral Hazard/Management Influence high premium rates and low participation
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Non-Traditional Crop Insurance Products
Group Risk Plan (Area based indemnity coverage) Aggregate Shortfall Policy Index Policy
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Group Risk Plan
Non-Traditional Crop Insurance Products
Origins: India, 1980’s. USA 1990’s. Current examples are in Brazil, India, Mexico Area-based Yield-Shortfall Indemnity Policy Insured Unit = defined Geographical Area (e.g. county) Optional Coverage levels set at 60% to 90% maximum of county long-term average (l.t.a) yield Rates calculated on variation in l.t.a. county yields Indemnity payable by the amount actual average county yield falls short of coverage level elected by each grower
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Non-Traditional Crop Insurance Products
Aggregate Yield Shortfall Policy
Target Clients: Agricultural lending Banks, Agribusiness, Commodity Traders, Agricultural Project Financiers, Input Suppliers, Governments Highly flexible yield & production shortfall policy which responds to loss at an aggregate “portfolio” level as opposed to the individual grower level. Basis of indemnity can be tailored to client’s needs, including:
– Loss of aggregate crop production credit or pre-finance – Increased Cost of Working; – Overhead or Machinery Leasing Fixed Costs; – Purchase of Alternative Raw Material Supplies; – Loss of Revenue or Loss of profits turnover formula; – Specific exposures e.g. importation tax on Alternative Raw Materials
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Non-Traditional Crop Insurance Products
Index Policy
Weather trigger indemnity product. Examples include: – Excess Rainfall – Rainfall deficit (drought) – Freeze (temperatures < zero Celsius) Rates calculated on basis of Pure Probability of trigger threshold being exceeded Indemnity Options: – Single fixed payment: e.g. 100% of SI payable if growing season rainfall < 500 mm – Graduated payout-: e.g. Rainfall 400 - 500 mm, 25% indemnity; Rainfall 300 - 400 mm, 50% indemnity; rainfall < 300 mm, 25% indemnity.
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Example for a Parametric Weather Index Cover
Maize Yield Shortfall
Structure – covers the risk of too little rainfall (shortfall) in the period from sowing to maturity Rainfall index – weighted sum of rainfall during each growing phase growing phase sowing/establishment vegetative flowering yield formation ripening duration 20 days 30 days 20 days 40 days 20 days weight 4% 16% 26% 52% 2% Coverage on: farm level retailer level processor level
Sowing date is defined by the first 10 days after beginning of historical plant date (e.g. Oct-Dec for India) with aggregate rainfall greater than 30mm Growing phases, durations, and weights are determined from Food and Agriculture Organization (FAO) maize water requirements studies.
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