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Global Agriculture Insurance & Reinsurance Market Overview

 

Global Agriculture Insurance & Reinsurance Market Overview

Guy Carpenter presentation

July, 2006

1. Background – The changing role of Government / the World Market2. Overview of Mature Crop Insurance Systems – U.S. & Canada 3. Recent Market Developments – North America4. Global Agriculture Market Premium Volume Estimates 5. Brief Overview of the Agriculture Reinsurance Market

Background – The changing role of Government / the World Market

Increasingly, Governments around the world are seeking to become less and less involved in providing ad hoc disaster relief to farmers, favoring instead the introduction of insurance-based systems where economically feasible.

Simultaneously, primary insurance companies are preparing to become the one-stop shop for farmers wanting to protect themselves against crop losses.

Today we are going to take a look at some of the developments in the world of crop insurance and see how Governments, insurers and reinsurers are responding to the needs of farmers. To give you some idea of the size of this market, we estimate that the current “reinsurable” crop insurance market worldwide represents approx. US$8 Billion of insurance premium.

Of this US$8 Billion, North America represents some US$5.5 Billion or 69%, so most of our focus today will concentrate on the U.S. and Canadian markets.

Overview of Mature Crop Insurance Systems – U.S. & Canada

Three major types of crop insurance coverage are sold in North America today: multiple peril, crop hail, and named peril.  Multiple peril, which accounts for the highest percentage of overall crop insurance premium, covers crop losses as a result of all types of natural disasters, including drought and flood. The crop hail policy insures against loss as a result of damage by hail and / or fire.  Named peril covers loss due to a specific peril affecting a specific crop (e.g. citrus freeze in Florida), which may not be recoverable under a multiple peril policy.

The most important distinction amongst these products is that multiple peril is federally sponsored in the United States and both federally and provincially sponsored in Canada.  Although the product is sold and serviced by the primary insurance companies, the rates and regulations of each program are controlled by the respective federal governments.  Crop hail and named peril coverages, on the other hand, are almost exclusively private market products, not regulated or sponsored by government (some programs in Canada being the exception).

The second major difference involves precisely how the amount of insurance recovery is determined.  Multiple peril coverage is based on the farmer’s yield, because the major perils covered under this policy tend to aggregate during the growing season and ultimately affect farm yields. Crop hail and named peril coverage on the other hand is usually based on a dollar value per acre.

Under the multiple peril policy, the farmer elects to cover the crop at a particular price at the start of the season.  The dollar amount of loss recovery is determined by multiplying this price election by the percentage shortfall in yield, minus a deductible. Typically, the farmer is required to take a deductible on the policy of up to 35 percent of the farm’s average production over five years, referred to as the “actual production history” (APH).

Under crop hail and named peril policies, the crop is valued at a certain dollar amount per acre, which typically falls somewhere between the amount of input costs into the crop and the value of the crop on the open market.  If a hailstorm, for example, were to affect the acreage, the amount recovered would be a percentage of the dollar value of the policy minus the deductible.

The players in the market get involved at different levels, with the federal governments of the United States and Canada at the top. Then, in Canada, the provincial governments are involved.  The next level comprises the primary insurance companies and the reinsurers.  At the ground level, particularly in the U.S., is the relationship between the independent agents and the farmers.

In the United States, farmers seeking crop insurance typically turn to independent agents, who produce business on behalf of the primary insurance companies. In the case of multiple peril coverage, insurers are contracted by the federal government to sell, service, and underwrite this product. The relationship between these parties is set forth in the Standard Reinsurance Agreement [SRA], which defines the risk each party will bear and specifies the risk pools into which the insurer can choose to cede business to the government.  Three risk pools are available in each state—commercial, development, and assigned risk —and the insurer can elect different crop, fund and state retentions based on its specific concerns.

The federal government in the U.S. reimburses the primary insurance companies under the SRA contract for the cost of administering the multiple peril program. Insurers, in turn, pay a percentage of this amount to the independent agents for producing the business.

In Canada, multiple peril programs work a bit differently in that agreements are between the federal government and each of the provinces, which in turn – through Crown corporations – sell the programs to farmers in that province.   The provinces are expected to manage their own affairs, calling on the federal government only as a last resort.

International reinsurers and reinsurance brokers become involved in this relationship after the agreements between the primary companies / Crown corporations and the respective governments are established. Although multiple peril crop insurance is reinsured by government, insurers still retain significant amounts of risk on this business, in addition to their crop hail and named peril writings. Insurers therefore look to the international reinsurance market for coverage on some or all of those retentions.

The governments of the United States and Canada have been very active in helping to protect the farm base in their respective countries.  In the past, this help was often in the form of ad hoc disaster relief paid to farmers sustaining substantial crop losses.

Over the past 20 or 25 years however, governments have recognized that their funds are limited and are strained by competing demands from other areas. What these governments have done in response is to develop crop insurance programs that directly aid farmers whilst also helping to budget for the amount of support given to the overall agricultural community year after year.

Ad hoc disaster relief still exists, but crop insurance programs have become the first port of call for farmers in need.  Governments significantly subsidize both the premiums charged and the losses incurred on these programs, recognizing that their assistance is necessary so long as there are widespread shortfalls in yields and / or prices of produce.

Recent Market Developments – North America

This market has grown significantly over the past 15 to 20 years. Together, the United States and Canada now constitute 69 percent of the $8 billion global market.  Of that 69 percent, the U.S. accounts for 58 percent, or  $4.6 billion. To give you an idea of the rate of growth, this $4.6 Billion = almost  6 times the approx. $800 million of total premium volume for all types of crop insurance written in the U.S. in 1988, when a serious drought last hit the Midwest.

Major developments that have affected this market—particularly during the past 20    to 25 years —include the shift from government-funded disaster programs to private market-delivered crop insurance products, consolidation amongst primary writing companies, an increase in farm size and farmer sophistication, and an escalating interest in price- and revenue-based crop insurance products.

The multiple peril crop insurance program as developed by the U.S. federal government over many years really came into the private market arena in the last twenty five years. The watershed development that caused this shift was the 1980 Farm Bill, which was designed to make crop insurance the preeminent vehicle for helping farmers survive major agricultural disasters.  Now, 25 years after the passage of this bill, almost 100 percent of the federal program is delivered by the private market.

15 years ago, there were at least 50 insurance companies writing multiple peril crop insurance in the United States. The business was dominated by MGAs [Managing General Agents] that underwrote the business with a fronting company in place.  Today, there are only 17 companies writing this business; However, these companies are much stronger both financially and technologically; In fact the top 3 write more than 50 percent of the total premium volume.

The average size of farms has increased significantly over the years, and farmers’ sophistication has increased substantially in line with the operation of larger farms.  Historically, farmers’ initial investment into their farms would have given them a reasonable amount of margin on their crops at harvest time.  Now there is much more uncertainty in the whole production process as a result of tremendous price variabilities in the world markets.  As a result, more and more farmers are buying multiple peril crop insurance and are looking to maximize the amount of coverage they can buy.

Over the past few years, farmers have also become increasingly interested in price- and revenue-based coverage, which can protect them against price and yield variations on their produce. The federal government—particularly in the United States—and the private market have introduced more of these types of coverage to respond to this growing need.

For two main reasons, crop insurers have had only limited interest in capital market products.  First, reinsurers have been doing a good job of protecting the primary companies. Reinsurance coverage is seen to be efficiently priced, and the contracts between the parties facilitate the development of strong relationships.  In addition, because they are specialists, reinsurers are better-able to spread risk geographically and by class, whereas the insurance-related risk taken on by the capital markets would typically constitute only a very small proportion of their overall risk portfolio.

The second major reason for the disinterest in capital market products involves insurers’ concern about potential mismatches between what the capital markets have to offer by way of coverage and the actual financial crop insurance losses sustained by each respective insurer.

There are a number of elements that have had an affect on the price of crop insurance.  First, the size of farms has increased dramatically over the past number of years as farmers attempt to achieve economies of scale in their overall operations.  In addition, because of improved crop varieties and positive changes in crop technologies, the yields that farmers are getting from any given amount of acreage is substantially more than it was in the past.  Thus, the liability that is at risk per acre or per unit of production has increased substantially over the years.

Taking these elements into consideration, the price that farmers now pay per acre for crop insurance has probably gone up but the value to farmers is greater because the liability being protected is much larger.

The amount of interest from the reinsurance community in this area has also grown significantly.  15 years ago, the average reinsurance capacity available for a crop insurance program was $10 million.  Today, brokers can easily place ten times that amount.  The caliber of players in the market has also improved, and stronger companies with better ratings continue to increase their involvement.

Global Agriculture Market Premium Volume Estimates

Global Agriculture Premium Volume Estimates – Insurance Market

Top 10 Territories   Territory                                                         Estimated Insurance Premium                                             % of Total,  US$   U.S.                                                                           4,600,000,000                                                                 57.500%Canada                                                                         900,000,000                                                                 11.250%Spain                                                                            550,000,000                                                                   6.875%Italy                                                                              350,000,000                                                                   4.375%France                                                                          300,000,000                                                                   3.750%Germany                                                                       200,000,000                                                                   2.500%South Africa                                                                  100,000,000                                                                   1.250%Australia / NZ                                                                100,000,000                                                                   1.250%China                                                                               80,000,000                                                                   1.000%South Korea                                                                    60,000,000                                                                    0.750%  Total                                                                          7,240,000,000                                                                    90.50%

Global Agriculture Premium Volume Estimates – Reinsurance Market

Top 10 Territories   Territory                                                                      Estimated Reinsurance Premium                                        % of Total US$   U.S.                                                                                           672,000,000                                                             50.40%Canada                                                                                        95,000,000                                                               7.13%Spain                                                                                           12,000,000                                                               0.90%Italy                                                                                           150,000,000                                                             11.25%France                                                                                         60,000,000                                                               4.50%Germany                                                                                      30,000,000                                                               2.25%South Africa                                                                                 47,000,000                                                               3.53%Australia / NZ                                                                               50,000,000                                                               3.75%China                                                                                             4,000,000                                                                0.30%South Korea                                                                                20,000,000                                                                 1.50%  Total                                                                                       1,140,000,000                                                                85.50%

Brief Overview of the Agriculture Reinsurance Market

The most common forms of reinsurance applicable to Agriculture Insurance are Quota Share and Stop Loss. Surplus Treaties & Facultative Reinsurances are rarely used – except sometimes where there is a need for capacity for specific crops / coverages / areas [for example, Windstorm on Jamaican Bananas] – and in any event these placements tend to offer much lower ceding commissions to Clients and are therefore less attractive to Clients than Quota Share.

The major International reinsurers / markets for this business include:

Munich Re
– Swiss Re [now incorporating GE Insurance Solutions]
– Partner Re
– Endurance Re
– Hannover Re
– Various Bermuda markets [example AXIS Specialty]
– Various London markets [example QBE / LIMIT]
– Various other International markets [like Singapore, etc.]

 

Author: Guy Carpenter – reinsurance broker (July 2006)