Use your social profile entry

The Role of Reinsurance in Agricultural Insurance

Reinsurers are playing often a key role in developing new agricultural insurance markets. In agriculture, finance of inputs and lending for crop inputs is very often linked to the availability of crop insurance and hence reinsurance.

Being in the financial service industry Partner Re sees its role in providing risk capital for risk transfer with all the financial services that go along with that process. For Partner Re the sector of agriculture insurance has been defined clearly as a main strategic target.

We have already committed ourselves to allocate:- sufficient capacity at first class security- substantial human resources- the necessary operational infrastructure for our staff

Our services to crop insurers range from basic research of the production risk at the producer’s level to structuring risk transfer into a tailor made reinsurance treaty. Our understanding of that chain is complete. Being a PartnerRe client you will enjoy services from an experienced team managing a growing international portfolio, which will soon reach US$100 mio reinsurance premium. This is already an adequate pool to contribute for our assumed liability on regional disasters.

What is the reinsurer’s role to develop agricultural insurance?

Reinsurers share general crop insurance information in providing an international overview of:- agricultural development trends – agricultural cat. events and exposures- agricultural crop scheme performances in the context of the respective political, meteorological and economic environment

To identify our own strategy of growth and expansion we need to analyse the major market trends and communicate those findings to our clients.

Demography:

Judging from the demographics, the outlook for agricultural products in general should be bright. The ever increasing population will require more food, increasing incomes demand food with higher nutritional value and the move from large numbers of people from rural to urban areas will require those people to be fed in urban areas whilst they were self-sustainable when living in rural areas before. This results in more food going through the food market before it reaches the consumer. The agricultural products today are worth some US$1300 billion globally. The value adding food industry will triple that figure before we all eat it.

Price:

Despite the general increasing demand of food the prices are getting ever more volatile especially for those agricultural commodities traded internationally at exchanges such as the Chicago Board of Trade (CBOT). This is due to the fact that supply and demand on those markets are geared by relatively small volumes which are traded internationally. If one of the few producing countries for such trade suffers from over or under production the world market price moves on that commodity erratically in proportion to the global production. Furthermore some crop prices e.g. for coffee or cotton are dominated by very few buyers. Last, not least the trading volume of such commodity may exceed the real production by factor 20 or more. This distortion has led to the demand of insuring the price risk in those markets where the governments are no longer fixing commodity prices because they have decided to respect free trade agreements.

Technology:

The shift from traditional to modern farming could only be done with specialisation and investment in technology. To entertain these investments capital was drawn from banks or investors. Those loans are requested to be secured by insuring as many production risks as insurers can offer and the farmer can afford.

Weather:

With the increasing understanding of climate models such as ENSO or NAO the weather forecast in certain regions has become very precise compared to 2-3 years ago. Today farmers, suppliers, banks insurers and stock markets, base their own business planning to an increasing extends on those models.Insurers have to be aware that they may face anti-selection by from their clients and insurers will work on models, which vary the rate according to the long-term weather pattern. There will soon be El Nino and La Nina rates for crops at a given location.

The combination of all:

Combining increasing- production risk From technology and less diversification.- increasing price risk- increasingly freak weather

The demand for extensive risk transfer to insurance is high. Analysing the frequency and severity of insurable events premium rates in crop insurance become very fast unaffordable in view of the average profit margin realised for the crop.

Most endeavours to newly implement a commercially viable crop insurance scheme are frustrated by this finding. The farmers in marginal growing areas who seek insurance coverage most cannot afford the premium that would have to be charged to leave crop insurers a profit expectation over time.

Crop insurers would rather offer coverage in areas with gentle climate and stable yields exposed to rare natural catastrophes only. These are however the areas where farmers are pretty confident about retaining the cat. risk specially when they cannot memorize any event on their own farm.

Designing an acceptable new crop insurance scheme becomes then the fine art or jointly analysing all the available local data (weather, yield and prices) to create an affordable coverage (named perils). Very often, the liability arising in crop insurance from perils such as drought, flood, pest and diseases must be transferred to the Government as the exposure cannot be handled within the private insurance sector at a premium affordable for the farmer. Under MPCI schemes Governments outsource the handling of crop insurance including loss adjustment into the private sector. The catastrophic results are capped by Stoploss coverage provided by the government or other loss limit guarantees. In managing the ground up losses for the government, the private sector has proven more cost efficient and the governments can minimize administration of the catastrophe funds for those disasters. In such scheme designs the cat. losses are paid by the government while the attritional losses from more frequent but less catastrophic perils are paid by the farmer.

Reinsurer’s Role

Reinsurers consult on a given crop insurance project design in assisting the analysis of the present situation regarding

– production risks catastrophic for the individual farmer.- production risks catastrophic for the portfolio of a crop insurer.- weather models describing long-term and short-term weather trends.- affordability of crop insurance In view of the profit margin of the crop.- historic or present risk transfer solutions applied by the farmer.

If a feasibility study has identified the potential of a new scheme all ingredients of an insurance scheme have to be elaborated.

Reinsurers can assist in the design of crop insurance tools such as:

– tarrification soft ware- policy wordings- risk survey sheets/questionnaires- underwriting guidelines- accumulation control- loss adjustment procedures manuals

Based on the analysis of the catastrophic exposure of a given crop insurance portfolio both parties finally negotiate a reinsurance contract.

Reinsurers provide capacity with structured solutions- to transfer cat. risks that can only be spread internationally or overtime- to satisfy the supervisory authorities capital demand- to channel an identified part of the risk back into the  governmental cat. funds because it is unaffordable for the farmer for the risk transfer into the private insurance sector- to produce an adequate risk reward for both parties.

The multitude of the aforementioned objectives along the process emphasizes the need for careful analysis and planning. Any crop insurance project requires time and understanding. The reinsurer’s role in agriculture is to support sustainable development in agricultural and insurance. This is only achieved in very close cooperation with our clients and in a spirit of partnership. Based on this foundation Partner Re will carefully expand their portfolio in the aforementioned role of managing agricultural risk.

Thomas Heintz