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July 2014

Munich Re Agro Insurance Info

Are there lessons to be learnt from the experience of existing agriculture insurance systems?

Dear Reader,

During recent months, the agriculture insurance community has gathered on quite a number of occasions to exchange experience gained with setting up and improving sustainable risk management systems.

Slovenia: Round table on agricultural insurance in Ljubljana

April 2014. The Slovenian Insurance Supervision together with the Centre of Excellence for Finance organised this round table with more than 40 high-level representatives from ministries of agriculture, insurance supervisory authorities and insurance industries of Western Balkan countries and Turkey. The main topic discussed was agricultural insurance and elements for long-term sustainability.

Munich Re shared the view with participating experts that a set-up in the form of a public-private partnership (PPP) is the best way of achieving a win-win situation for all stakeholders involved. Agricultural insurance within a PPP system enables high insurance penetration and can withstand catastrophe losses. In several countries of the Adriatic region, public co-financing of premiums already exists, e.g. in Slovenia, Serbia and Macedonia, but a sustainable PPP requires more systematic elements such as a public co-financing of catastrophic losses.
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USA: Major change in the economics of the Federal US Crop Insurance Program

May 2014. The US continues to be the world's largest crop insurance market in terms of insured liability and is based on a comprehensive and complex public-private partnership, its two most pivotal elements being governmental reinsurance and premium subsidies. In order to justify and control the deployment of public funds, the US government, through its Risk Management Agency (RMA), also sets terms and conditions of any subsidised insurance policy. Following a series of years with low losses, RMA has been reducing governmental reinsurance and premium rates in hitherto profitable regions with effect from 2011. Adding to the rate decrease, RMA increased guarantees by introducing trend yields. At the same time, low price volatilities for agricultural commodities have aggravated the premium rate reductions because they determine the price component of rates in revenue insurance.

Because the financial results of the insurance industry have since been negative, in part due to yield and price events in 2012 and 2013, the sector has started discussing the economic impact of the programme changes on insurance providers and reinsurers at various events, including the AIR Crop Symposium on 13 May 2014, where Munich Re also participated. At this event, the University of Illinois (UoI FarmDoc), a leading crop insurance research and extension facility, not only presented its findings on rate reductions of up to 25% and more for major crops throughout the United States, but also highlighted the negative impact on loss ratios.
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The event organiser, AIR Worldwide as an independent US crop insurance risk modelling firm, assessed the expected reduction in underwriting gains, which trend to a point where insurance providers face difficulties to produce sustainable business and need to consider changes in their underwriting strategy.
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Another important school of crop insurance analysts, Kansas State University's AgManager, has recently shed light on increased loss ratios and pertaining distortions that RMA's activities have inflicted on some of the most important US crop regions.
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Germany: Workshop on insurance solutions for climate change

May 2014. MCII (Munich Climate Insurance Initiative) and GIZ (German Development Agency) hosted an expert workshop to better assist decision-makers and climate negotiators in exploring ways to implement climate risk insurance solutions through a comprehensive approach in policy and in practice. The workshop was a follow-up to last year’s workshop and featured over 30 participants, including policymakers and practitioners from NGOs, development organisations, insurers and reinsurers such as Munich Re, and the public sector – with expertise in weather risk and agricultural insurance, disaster risk management, and adaptation. It provided participants from across the globe with a space to engage with each other and share lessons learned from existing climate-related insurance approaches.

On the basis of different country scenarios such as the Caribbean, Kenya, Ethiopia, Pakistan and others, working groups discussed the steps and stakeholders needed. Moreover, challenges and solutions to successfully implementing insurance as part of comprehensive climate risk management were addressed.

Especially for the developmental context, the function of insurance and its costs was revisited. Risk transfer for rare catastrophe events has to be financed differently from insurance that pays out frequently and hence has a social and developmental function. In the latter context, donors and development agencies also play a vital role in the concept and financing.
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Germany: Workshop on agricultural extreme weather and risk management options

May 2014. As a milestone of the common research project, BMEL (German Ministry of Agriculture) invited experts from the field of science, research institutes, the National Meteorological Service of Germany, agricultural insurers and Munich Re to the workshop. The objective of the workshop was to present the findings of the research so far and to look beyond the results to draw conclusions for further research issues.

Extreme weather days, especially with heatwaves and excess rainfall, are expected to increase up to 2050 in Germany. The main findings are based on the regional samples of the study, which also found that different perils accumulate in different regions, mainly depending on soil conditions. As a consequence, the experts advise politicians not to favour any one insurance product over another. For more detailed analysis, the project requests yield data over a longer period and more detailed weather data to be able to also spot frost events, for instance.
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Romania: Agricultural insurance workshop to explore the EU law on farmers’ mutual funds

June 2014. UNSAR (Romanian re/insurance association), together with GDV (German Insurance Association), organised a workshop on agricultural insurance in Romania.

The Romanian government has issued a law that will provide support for farmers’ mutual funds which cover the frequent catastrophic events of drought, flood and winter frost. The law is in line with the EU directive which allows EU resources to be dedicated to mutual insurance funds. In connection with issuing the law’s rules and regulations, MADR (Romanian Ministry of Agriculture and Rural Development) invited international specialists to learn from their experience. The workshop was attended by representatives from local and European insurers and from Munich Re and other reinsurers, as well as members of MADR and ASF (Financial Supervisory Authority).

In Europe, Romania would be the first country to work with this fund model. Today, the Romanian crop insurance market offers hail cover plus a few named perils and has a premium volume of €20m.
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Peru: Munich Re and GIZ are cooperating on an agricultural model project

July 2014. GIZ (German Development Agency) and Munich Re are supporting the establishment of a risk transfer system for agriculture in Peru. To this end, they have launched the project "Integrated Financial Management of Climate Risks in Peru's Agricultural Sector". The aim is to develop, together with the Peruvian authorities, a legal, institutional and structural framework for a system to protect agricultural production against weather-related risks.

The focus of the project is a risk transfer system for farmers based on a public-private partnership between the Peruvian government, farmers and the insurance industry. Munich Re and GIZ are providing advice to the partners. The project plan also includes the creation of an agricultural information system to improve available data on production and yields. Besides this, the project will train specialists to manage and supervise the risk transfer system.
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We hope you have enjoyed this issue of Munich Re Agro Insurance Info Worldwide,
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