Role of Governments in Agricultural Insurance

Ramiro IturriozInsurance for the PoorThe World Bank

October, 2010

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Contents

Overview of the Agricultural Insurance Market

Government expenditures in agricultural insurance

Characterization of agricultural insurance systems

Rationale for Government intervention in agricultural insurance

Why Government support to agricultural insurance is needed?

Potential roles of the Government in providing support to agricultural insurance

Agricultural Insurance Premium subsidies

Government involvement in agricultural risk financing

Lessons and Conclusions

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Agricultural Insurance Overview (2009)

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Aus & NZ, US$ 112 Mio (0.6%)

Asia, US$ 3.,800 Mio (19,7%)

Europe, US$ 3,900 Mio (20.1%)

Africa, US$ 55MM(0,3%)

LAC, US$ 721 Mio (3.5%)

USA & Canada, US$ 10,700 Mio (55,6%)

Agricultural Insurance Premiums: Geographic Distribution

Premiums : US$ 19.4 billons (estimated)

USA , China, and Canada: 66% of the premium volume

BRIC countries are gaining importance (US$ 3. billons)

MPCI is the most agricultural insurance product

Government expenditures in agricultural insurance

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USA & Canada: US$ 7,800 Mio (73% of the total Agricultural Insurance Premiums)

LAC: US$ 260 Mio (36% of the total Agricultural Insurance Premiums)

Asia: US$ 1,800 Mio (50% of the total Agricultural Insurance Premiums)

Europe: US$ 1,500 Mio (37% of the total Agricultural Insurance Premiums)

Africa: US$ 1 Mio (3% of the total Agricultural Insurance Premiums)

Australia & NZ: US$ 0 Mio (0% of the total Agricultural Insurance Premiums)

In average, the estimated public sector expenditures in agricultural insurance (US$ 11.5 billions) accounting for 59% of the total

premiums written worldwide in 2009

Estimated Government Expenditures in Agricultural Insurance: Geographic Distribution

Characterization of agricultural insurance systems

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Pure Market Based

Pure Market Based

Public Sector based

Public Sector based

High Insurance penetration levelsWell Diversified PortfoliosSocial criteria prevails over Technical criteriaMonopolies. Several issues with the service..Government assumes full liability (not reinsured)High Fiscal Cost

High Insurance penetration levelsWell Diversified PortfoliosTechnical criteria over commercial criteriaThe competition is for service.Government adds stability to the systemPrivate Sector adds know how.Reasonable Fiscal Cost

Low to moderate penetration.Low risk diversification.Commercial prevails over technical criteria.

The competition is for priceNo fiscal cost

Public Private-Partnership is a suitable market model for agricultural insurance

Rationale for Government intervention in agricultural insurance

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Rationale for

GovernmentIntervention

in agricultural insurance

Why government support to agricultural insurance is needed?

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Why government support to

agricultural insurance is

needed?

The above Constraints are most applicable to Developing Countries?

BUT…. The highest levels of Government Financial support to Agricultural Insurance are found in High Income Countries (North America and Europe)

Potential roles of the Government in providing support to agricultural insurance

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Potential Government

rolesin

supporting agricultural insurance

Government support to agricultural insurance in key countries

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Agricultural insurance premium subsidies

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Usual Justificatio

n for premium subsidies

HOWEVER,

Premium subsidies are not necessarily a pre-condition for high agricultural insurance penetration rates

Even in heavily subsidized markets it may take many years to achieve high levels of agricultural insurance uptake

That currently nearly all Public Private Partnership crop insurance schemes are dependent on premium subsidies to cover their claims costs

Agricultural insurance premium subsidies

Premium subsidies are the most widely practiced form of government support to agricultural insurance

WTO legislation exempts (permits) premium subsidies

BUT,

Premium subsidies can create moral hazard,

Premium subsidies can promote agriculture in unsuitable (marginal) areas,

Premium subsidies can benefit larger farmers disproportionately,

Premium subsidies can create huge financial costs to society (e.g. USA/Europe)

Few developing countries could afford to fund high level of subsidisation of premiums

Government funding can be better used in:

Developing agricultural risk management infrastructure (enhancing data & information, training & education, R&D)

Catastrophe Risk Financing / acting as a reinsurer of last resort

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Government involvement in agricultural risk financing

• Wherever possible promote private sector insurance and reinsurance

Certain levels of catastrophic loss (e.g. drought, flood, hurricane) will not be possible to insure / reinsure without government help

Government involvement in catastrophe risk financing (reinsurance) represents an ex-ante planned activity

Government catastrophe reinsurance is a more effective way of using limited financial resources than premium subsidies

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Retained on farm

Return Period

20-30 years

3-5 years

Government catastrophe reinsurance

Insurance or funding

Insurance and Reinsurance

5-7 years

Ind

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Risk Layering

Government involvement in agricultural risk financing

• United States — A special public/private reinsurance agreement (Standard Reinsurance Agreement) with global reinsurance participation

• South Korea— Government provide a crop insurance loss cap for the insurance and reinsurance industry for loss ratios above 200%

• India — AIC, a national public agricultural insurance company that is jointly reinsured by central and state governments

• Brazil — Individual companies can contract stop loss reinsurance from “Fundo de Catastrofe” (managed by IRB) + global reinsurance + public sector

• Portugal — Private commercial insurers can purchase government Stop Loss Treaty protection under SIPAC + global reinsurance.

• Spain — An agricultural insurance pool (Agroseguro) protected by a national reinsurance insurance company (Consorcio de Compensaçion de Seguros) + involvement of global reinsurers

• Mexico — A national public reinsurance company (Agroasemex) providing voluntary reinsurance to private agricultural insurers + global reinsurers

• Canada — Government insurance which is shared between provincial and central governments with some global reinsurance participation

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Key lessons and Conclusions on Government support to agricultural insurance

• Underwrite agricultural insurance through Private Commercial Insurers wherever possible

• Promote Private-Public Partnerships (PPPs)

• Promote agricultural reinsurance through local and global international reinsurance markets

• Important areas of government support:

▫ Creation of enabling legal & regulatory framework

▫ Education and training

▫ Data & information enhancement and dissemination

▫ Product design & rating (technical support)

• Exercise extreme caution with agricultural insurance premium subsidies

• In some circumstances, government support as a reinsurer of last resort may be justified

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