Statement of Need

There are no institutions that offer more than a brief introduction to crop insurance and, when available, the treatment may not address agricultural examples nor focus on practical development and application of crop insurance programs.

Because of this, there is not a ready pool of people with a formal technical education in the nuances of crop insurance worldwide. Those administrators, bureaucrats, officers, and actuaries who deal with crop insurance have generally obtained the bulk of their knowledge of this unique insurance “on-the-job”. So within the industry, the pool of knowledgeable personnel is limited.

The pool of knowledgeable individuals with practical design and delivery experience is also limited in the academic research community. The markets for crop and livestock insurance are relatively small by insurance industry standards, and those markets are often characterized by unique “local” conditions. These restrictions have shaped the pool of researchers who focus on crop insurance per se. Furthermore, educational institutions have not devoted substantial resources to course development and instruction in this area, most likely because the limited audience for such courses is dispersed over the entire globe. Many governments have explored, and some have implemented, public policy alternatives to commercial insurance products. This role of governments in the industry has limited the incentive for local educational programs focused on crop insurance and especially on the practical development and delivery of programs.

Appropriate design and deployment of agricultural insurance requires a very specialized set of skills and knowledge. Expertise in agriculture insurance resides within a relatively small resource pool. Government agencies, private insurance companies, and reinsurance firms must generally rely on on-the job training or the training available in general risk management courses for personnel development. This on-the-job training takes time and although it has produced some very good programs there have also been some noticeable disasters. With appropriate training, the outcomes will be improved and crop insurance could become more widely available.

As noted in the following excerpts from sigma, an award-winning, Swiss Re research series on the insurance industry, a substantial commercial market for crop insurance could be developed:

 

Few emerging markets currently offer sufficient insurance coverage against the broad range of production risks inherent in agriculture activities. Total agricultural insurance premiums in emerging markets were estimated at around USD 1.1 billion in 2005, less than 20% of the global total, although emerging markets account for nearly 70% of food production worldwide. A properly-designed risk management system is thus essential for protecting farm operators and reinforcing rural development.

A review of existing agricultural insurance regimes in emerging economies shows a mixed record. Some schemes suffer from low penetration and consistent underwriting losses due to factors ranging from high administration costs to adverse selection. Commercial insurance in general still has a low take-up but could gain in importance. Economic fundamentals, including trade liberalization and the shift from subsistence farming to commercial farming, point to growing sophistication in farm production and intensifying competitive pressure. This will further enhance the importance of commercial agricultural insurance, which could be introduced via a broad spectrum of hybrid systems combining actuarial disciplines as practiced in commercial underwriting with the affordability stressed in public insurance schemes.

Practitioners in agricultural insurance are keenly aware that this line of business tends to attract political scrutiny, due to its implications for the livelihood of a large segment of an emerging market’s population. Many of today’s agricultural insurance schemes involve government participation in distribution, administration and risk-sharing and financing. The politically sensitive nature of this line of business suggests that, properly engaged, private/public participation can create an environment more conducive to agricultural insurance growth by designing risk management strategies that articulate the distinctive but complementary roles between public disaster relief and private insurance support. Government efforts in improving rural financial infrastructures and weather data collection, for example, can also ease insurers’ access to potential clients and support their underwriting activities.

The coming years will see more emerging economies being able to benefit from an expanding global market for their farm output as a result of ongoing trade liberalization and increasing focus on rural development. To take advantage of these opportunities, however, they will have to strengthen their agricultural sectors in terms of both risk management and commercial incentives. By providing indemnification and risk-pricing functions, a vibrant agricultural insurance market can significantly contribute to achieving these goals. The current market size for agricultural insurance in emerging markets is estimated to be below USD 1.1 billion, but growth is likely to pick up in the coming years, powered by the following drivers:

  • High catch-up potential. Considerable growth is expected to come from Asia, which has a large agricultural sector but very low insurance penetration. Countries like China that have endorsed policies for promoting rural sector income growth should see the strongest potential.
  • Adoption of “private/public” risk management models. Even as many governments still play a dominant role in their risk management framework, more are widening the scope for private-sector participation to bring actuarial discipline to the system.
  • Financial deepening and innovation. Developments in microfinance and parametric products allow insurers to side-step several major obstacles and offer “second-best” solutions to communities that otherwise would be too costly to service.
  • Higher risk awareness and the need to diversify. Recent high-profile events, from the 2004 Southeast Asia tsunami to Hurricane Katrina, have raised awareness of the potential devastation that a region-wide event could wreak and may prompt more countries to tap international capacities for protection.

The combination of sound economic fundamentals and propitious national agricultural policies can enhance insurance penetration significantly. If governments and insurers adopt appropriate initiatives to bring insurance penetration in the emerging markets up to levels commensurate with more developed economies, the size of the agricultural insurance market could reach USD 10 billion.4

 

Successful private and public investment in crop and livestock insurance schemes in developed countries requires supportive legislation and governance models, clear definition of roles among stakeholders, specialized training to support personnel development and succession planning as well as the practical application of emerging technologies. The need for specialized training in agriculture insurance principles, technology, processes, and business management is an integral component to the viability of schemes in both developed and developing markets. The International Institute for Agriculture Risk Management is a practical means to provide efficient and effective crop insurance education and technology transfer opportunities world-wide, regardless of the maturity of the insurance network in client countries.

4 Swiss Re, sigma No 1/2007, p 41.

Storage

Goals for the Institute

Developing Countries:
To develop sustainable agricultural risk management programs for developing countries that result in economic stability and new sources of “risk capital” for their agriculture sectors.

Developed Countries:
To provide a training, succession planning, and “analytical research capability” environment for developed country governments and private companies engaged or expanding their work in agricultural risk management.




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April 15, 2010