Agro insurance: reaping the harvest

With food security and scarcity becoming increasingly global concerns, agricultural re/insurance is viewed with growing interest by the industry. Bermuda players are already involved in providing coverage for crops, livestock, aquaculture and forestry, and this involvement looks set to deepen still further. Many provide reinsurance directly to local insurers, while others work in partnership with local governments.

Many in Bermuda are positive about the sector’s potential. As Joseph Monaghan, senior managing director with Aon Benfield, outlined: “The agriculture sector has gained in importance over the past decade and with an expanding world population and the resulting higher commodity prices, we expect this to continue.”

The US remains the largest buyer of crop insurance, followed by Canada and China. But as Monaghan said, “We expect China and Asia more generally to be an area of exceptional growth over the next decade. Countries like India, China and Brazil have low, but rapidly growing, participation rates.”

Growing global demand

Interest is not limited to Asia. As Ramiro Iturrioz, vice president, Latin America for non-property lines at Aspen Re, outlined: “According to the Food and Agriculture Organisation for the UN, total demand for agricultural products will increase by around 60 percent by 2030.

“Higher demand means greater pressure on resources and calls for an increase in productivity, which itself brings risks. Risks faced by the agricultural sector will materialise at the production level and all along the value chain.”

The market for agricultural insurance products has “increased exponentially in recent years. World Bank estimates indicate that agricultural insurance premiums rose from $8.9 billion in 2005 to $24 billion in 2011”, he added.

While the three main agricultural insurance markets are the US, China, and Canada—accounting for some 70 percent of the total agricultural insurance premiums written—Iturrioz said that emerging economies offer considerable prospects. “The increase in demand for agricultural insurance has been observed in developing countries such as India and Brazil.

“In Latin America, total agricultural insurance premiums written have risen from $311 million in 2005 to $770 million in 2011. Asia is also a booming region for agricultural insurance; estimated total agricultural insurance premiums written currently amount to $5.6 billion. And China and India have recorded double-digit annual growth rates in recent years thanks to government support of agricultural insurance,” said Iturrioz.

Addressing the US market, Charles Cooper, president and chief underwriting officer of XL Re, said that “given the extent of US drought conditions this year, we expect there to be opportunities in the near term. Farmers are recouping catastrophic losses through insurance, and once again the product is proving its worth to US farmers. As a result, we expect insurance demand to increase. In addition, lower yields will likely result in higher spring pricing and a resulting increase in demand for reinsurance stop loss protection”.

“Outside the US, we would expect demand for insurance protection to increase as global farming becomes more sophisticated and investments more significant. Agricultural insurance is also an area where we see significant potential for micro insurance solutions in less developed geographies.”

Facing up to challenges

Despite its potential, agriculture is a volatile sector which poses a number of challenges. As Jean Christophe Garaix, head of agriculture and weather at Liberty Syndicates, highlighted, a lack of data on new agricultural schemes is a significant challenge. “The main concern in this sector is a lack of information. Even when you get historical data, you face new technical practices, yield improvement, weather change. The only way to assess agriculture risk is to look at weather correlations and weather-event return periods and their impact on yields.”

Iturrioz added that “complexities arise from the nature of the risk faced by agriculture; the existence of asymmetries of information in agricultural production, and the complex biological processes governing agricultural production”.

There are also challenges relating to the skills required to assess agricultural risks. “The underwriting of agricultural risks is extremely technical and requires specialist underwriting skills,” said Iturrioz. “Agricultural production is governed by complex biological processes that must be understood, and underwriting teams are typically highly technical and usually comprise professionals from the agricultural or biological sciences.”

Further complicating matters is the fact that insured regions are often remote and expansive. “This often contributes to the existence of asymmetric information which in turn can lead to adverse selection and moral hazard. Understanding what may cause asymmetric information is key to the success of any agricultural insurance programme.

“Spread of location also brings additional operational costs, relative to other lines of business, in terms of marketing, risk surveys and loss adjustment. Loss assessment procedures can be complex and expensive, and often crop-specific. Delivering and servicing agricultural insurance in rural areas, particularly to scattered small and marginal farmers, can be very expensive and significantly impact the commercial premium.”

"Delivering and servicing agricultural insurance in rural areas, particularly to scattered small and marginal farmers, can be very expensive and significantly impact the commercial premium."

Monaghan agreed that “the biggest challenge is understanding risk. This is true in both established and new markets, but for different reasons. In established markets such as the US there is plenty of historical data. However, the programme and products have changed significantly over time. The addition of revenue products, which include coverage for the impact of market price changes, has changed the risk profile of the US programme. This means that historical performance is not necessarily a useful indicator of future risk”. For immature markets, there are all the challenges associated with new markets and partners.

Underwriters also need to understand risks linked to particular crops or livestock. “Crops insured vary by country and region,” said Monaghan. “Corn (maize) is king in the US. Soybeans are the dominant crop in Brazil. Wheat is grown just about everywhere and many countries also grow cotton. And livestock represents a significant percentage of the insurance premium in China.”

Due to the nuances of the market, reinsurers take an individualised approach to what is a specialist area. Liberty Syndicates, for example, underwrites hail and multi-peril crop reinsurance either in stop loss or on a quota share basis and is also developing index-based solutions employing weather, yield or normalised difference vegetation index (NDVI) parameters.

“The fact that we underwrite worldwide allows us a level of geographical diversification: when we cover a lack of precipitation in US, we also cover excess of precipitation in India,” said Garaix.

XL Re, for its part, writes aggregate stop loss protection for US multiperil crop insurance as well as US crop hail, Canadian crop and a small amount of Chinese crop business out of its Singapore platform. Aspen Re provides risk transfer solutions for agricultural activities including crops, forestry, aquaculture, greenhouses and livestock. Its range of crop reinsurance solutions is broad, extending from traditional indemnitybased products to index-based reinsurance solutions.

A bumper future crop

Looking ahead, the market is poised for further growth—although the industry is well aware that the likelihood of significant losses will increases as take-up deepens. Risk management is improving, but due to changing weather and climatic conditions, it is an area that will remain challenging. As modelling develops, this may provide some solutions, but economic realities will inevitably need to align. Meanwhile the market will be held back by a lack of expertise— although as the market develops, so too will the expertise base.

Iturrioz concluded that agricultural risks remain what some term ‘in-between risks’, because they are neither fully independent in order that they can be managed under an optimal insurance portfolio, nor fully systemic or correlated, which would make them uninsurable.

“As a consequence, portfolios of geographically dispersed agriculture insurance contracts can be considered to be more risky than an equally valued portfolio of health and automobile insurance contracts. Risk assessment—linked to ongoing product development—is a precondition for the development of sustainable agricultural insurance, but portfolio risk management is equally important. Expertise in both fields is required from agricultural insurance underwriters.”