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Climate change is a growing concern for insurers of agriculture and property in India
Managing the shifting impact of extreme weather
Climate change is a growing concern for insurers of agriculture and property in India
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    Extreme weather events, by their nature, are difficult to predict. But what can be expected in future is that floods, typhoons, torrential rainfall and droughts may increase in frequency or severity due to climate change. Munich Re is committed to helping the insurance industry, governments and public private partnerships respond accordingly throughout India, as well as in Thailand and other parts of Southeast Asia.

    Major floods and landslides killed over 700 people and caused US$ 11bn worth of damage in India over the course of 2018 and 2019. It is an unfortunate fact that climate change will make events of this kind increasingly likely. Insurers and their clients have little choice but to consider this in their risk management strategies.

    Munich Re’s ability to assist in this regard goes well beyond providing traditional covers or even alternative insurance solutions. We enable insurers to better service agriculture, property owners, governments and public private partnerships in a number of ways. They include helping to structure capital to meet growing demand, building greater climate risk awareness in the marketplace, and not least by sharing the experience we have gained in catastrophe modelling and catastrophe risk management over 40 years. 

    Storms, flooding and drought are the key weather perils for the Indian region and will likely become more severe in the future.  Since they are unpredictable and extreme, these weather events are driving ever greater loss volatility, which makes structuring reinsurance solutions all the more challenging. 

    Asia had the warmest temperatures on record for the first 10 months of 2020
    Source: NOAA

    The all too real impact of extreme weather

    There is no shortage of examples that demonstrate the effect of extreme weather in India: “The central part of the country is historically a dry area, but it has had consistently heavy rainfall for the last three years. The water holding capacity of the soil being low in this region, the crops in the area are destroyed year after year due to the rains and resultant inundation,” explained Ajeet Phatak, Munich Re’s regional head of agriculture for India, Japan, South Korea and Southeast Asia. “We are also seeing very high cyclonic activity on the Indian subcontinent,” he added. “We are seeing regular cyclonic hits, and quite a few of them. Unfortunately, with climate change, severe cyclones may become more likely, rather than the exception.”

    Recent weather events in Thailand, which also falls under Ajeet Phatak’s area of responsibility, provide a particularly stark example of the effects of extreme weather. The country, a major rice producer, was struck by a one-in-50-year event in 2019. “It was the result of drought followed by a pest infestation, followed in turn by excessive rainfall and then another one-in-40-year drought, a very unusual combination of events in a single year, the cumulative effect of which resulted in huge losses,” said Phatak. “One of these events would be rare enough on its own, but no government could reasonably have anticipated four in the same year,” he pointed out. “Roughly 10 to 12% of the country’s overall rice production was affected, which resulted in a loss ratio of over 200% for us in one year. It was unprecedented,” he added.

    The challenge extreme weather poses for the region is clear. The only question is how best to tackle it? “We can add most value where the overall agri-value chain is exposed to floods, unseasonal rainfall and droughts,” said Phatak. "These are the three main areas under immediate and growing exposure to extreme weather events.”

    2019 flood/excess rainfall-related crop losses for three major agricultural states in India.
    Source: Munich Re, India – economic losses from news reports; crop insurance losses are from central/state ministry database

    Attempting to narrow the insurance gaps

    There is much ground for the insurance industry to cover when it comes to addressing insurance gaps in India. “If you look at insurance penetration for agriculture, we have roughly 30/35% penetration, which is a large gap of course, but it's not that big when compared to the other insurance lines in the country,” explains Phatak. “The actual insurance penetration in India is only about 1%, far below the Asian penetration of 1.85% and global penetration of 2.8% (of GDP). There is far more insurance in agriculture because it's heavily subsidised, with 30% of the overall area under cultivation covered under the current government scheme. Despite that, it’s clear a lot more could still be done to close the gap,” he said.

    Making a difference with reinsurance solutions

    Munich Re provides reinsurance support to the Indian Agriculture Scheme and, more broadly, to the Thailand Rice Scheme in Southeast Asia. It will, in all likelihood, also cover increasing numbers of other crops and agricultural schemes in these regions as pressure from climate change increases. “If I look at where we can make most impact as a reinsurer, I’d say it's in the capacity we bring in and our understanding from a global market landscape perspective of how we can enable a particular government initiative,” said Ajeet Phatak. “The fact is, we don't really have to reinvent the wheel. Sometimes a simple solution is what the market needs, and basic climate change cover is certainly something all governments should consider. And we certainly have the experts and experience necessary to offer highly specialized support to our customers in this area,” he said.

    Parametric insurance

    Covers triggered by specified meteorological events are ideal for providing rapid relief in disaster situations. They are particularly well-suited to floods and droughts because they can be precisely tailored to specific risks in a given region. “Let’s take a banana plantation, for example. We’d probably look at wind speed and extreme precipitation as two triggers, and then build a parametric product around them,” said Ajeet Phatak. “Payment is automatic and immediate in the event that the cover is triggered, and the insured party doesn’t have to file a claim or haggle with insurance companies. The bottom line is that weather parameter products for crops are very transparent thanks to satellite and other technologies, so they leave nothing to argue about,” he said.

    Capital relief solutions

    Munich Re offers customised capital relief solutions for various business sectors, including agriculture and property. “We don’t offer any climate-specific capital relief solutions at the moment due to lack of market for these products,” said Phatak. “Nevertheless, we are able to offer sophisticated prospective and retrospective covers to our clients, which are always worth bearing in mind when covering agriculture, motor or property.”

    The role of public private partnerships

    Munich Re engages with insurers and governments to discover the best ways to support them in both India and Thailand. “In India we have one state-owned company, the Agriculture Insurance Corporation, and it plays a big role in supporting the country. But there's also a group of private insurance companies that are equally important, and support more than 50% of capacity for the Indian Agri scheme,” Phatak explained.

    “I think our partnership approach with the government and the insurance community works well with regard to public private partnerships. However, I believe all stakeholders could benefit from better natural catastrophe-related data collection and analysis. And we should look at factors such as the risk of state default, the opportunity cost of neglecting risk prevention and before-the-event risk-financing tools. In addition, there should be more discussion and contact between the public and private sectors. They need to intensify their partnership, and we are doing what we can to facilitate this,” he said.

    Improving awareness of risks and solutions

    As is the case in most developing markets, there is a lack of awareness of insurance capabilities and benefits. “It is certainly necessary to educate our market about the real need for extreme weather cover and for people to understand the changing risk landscape due to climate change, especially in this region,” said Ajeet Phatak. “Indeed, the crucial factor in coping with flood risk is awareness on all levels, and much flood risk can be mitigated up front. For example, proper selection of the site where a house or plant is to be built has a major bearing on the risk – flood plains are inherently risky, no matter what measures are taken,” he explained.

    Ultimately, risk and loss minimization call for an integrated course of action. Flood and other extreme weather risks should be shared between government, communities, the enterprises concerned and the financial sector, in particular the insurance industry. “Only if we all cooperate with each other in a finely tuned relationship and in a spirit of risk partnership can extreme weather prevention be truly effective,” said Phatak. “As always, I invite insurers and government to join us on a journey to shared success. We're all in this together.”

    Munich Re Experts
    Benny Zhou
    Benny Zhou
    Head of Agriculture & Actuarial Dept, GC NL
    Greater China