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May 2016

Munich Re Agro Insurance Info

Keeping the ball rolling and improving agricultural insurance worldwide

Dear Reader,

This is the first newsletter for 2016, summarising for you the essential information on other parts of the world, in some cases far from your home country, in others perhaps closer than you may think in terms of the topic. Community building is an idea that works very well among all agriculture insurance experts around the globe. We hope that this newsletter includes information that is also useful for you.

Georgia: Eastern European experts gather to learn about best practices in agricultural insurance

April 2016. This year’s AgroInsurance Conference for Eastern Europe, CIS, and Asia took place in Tbilisi, Georgia. The dialogue between participants was stimulated by insights into the ongoing Georgian government project to establish a sustainable publicprivate partnership for agriculture insurance. What is the right level of premium subsidy? What is the best insurance product for small-scale farming in Georgia? What are the lessons learned from last year’s claims and how can loss adjustment be improved? What are the roles of the Ministry of Agriculture and the insurance companies? Valuable answers were given, follow-up questions were identified and participants became aware that there are persons involved that drive the momentum.

Munich Re participated on the panel to share its knowledge of MPCI and catastrophe insurance products. Another important topic of discussion that is currently on the agenda again all over the world were the benefits and drawbacks of all types of index insurance, to which Munich Re contributed by presenting its experience with yield index insurance.

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South Africa: This year’s drought calls for solutions from the crop insurance industry

March 2016. A number of experts indicated that South Africa was currently experiencing its worst drought since 1982. Rainfall was below normal from November to February, the peak planting period. Hence there were low plantings in most grain-growing regions.

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Hectares planted with summer crops decreased by 20% from 4 million ha in 2015, and the grain harvest is expected to decline by 26% from 12 million tonnes in 2015. The loss of income in the agricultural sector is estimated at ZAR 10 billion. The worst affected are smallholder farmers, who are more vulnerable to extreme weather events, and have no insurance or alternative income safety nets. Livestock farmers are losing large herds as a result of a lack of grazing, fodder and drinking water. Although the government is providing the farmers with drought relief, the process is rather slow.

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More on drought in South Africa

These weather events almost annually result in significant losses for the farmers and for the insurance industry, such as those suffered in the 2006/07 crop season, and extreme flooding and excessive rainfall in 2009/10 and 2010/11. The exact financial impact for the farmers and insurance industry in the 2015/16 season still needs to be quantified.

As the South African crop insurance industry is strongly impacted by the extreme volatility of the frequency and severity of weather events – arguably linked to climate change – initiatives to develop solutions are currently underway. Together with all stakeholders – government, the banking and crop insurance industries, and farmers’ associations – Munich Re supports a public-private partnership approach to providing all farmers with crop insurance that mitigates catastrophic weather losses through a fast and efficient mechanism of paying losses.

Uruguay: ALASA Congress stressed importance of data and new technologies for index insurance

March 2016. With ever more agricultural-risk-related data becoming available, supply and demand for agricultural index insurance in Latin America seems to be experiencing a renewed wave of interest. This is the takeaway from the XIV ALASA (Latin-American Association for the Development of Crop Insurance) Congress, held in Punta del Este, Uruguay, in March 2016. As in the past, index products are attractive owing to their perceived objectivity and lean administration. Additional sources of data (remote sensing, increasing number of weather stations and yield statistics) now allow more complex and more sensitive parametric (i.e. index) covers to be designed. On a similarly positive note, more resources are being invested into analytics and methods to make these data useful for agricultural risk management. Unlike in the past, however, the considerable disadvantages of index products, namely basis risk and costs, were given greater consideration during the discussion. On two different panels, Munich Re has contributed its experience and shared its expectations: ”Parametric insurance products – lessons learned” and ”Use of satellite technology in agricultural insurance”, encouraging the employment of modern technology whilst keeping an eye on the expected benefit for agricultural producers in emerging and developed markets.

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India: Government of India launches new crop insurance scheme and integrates new technology

January 2016. The Government of India has launched a new crop insurance scheme by the name of Pradhan Mantri Fasal Bima Yojana (PMFBY) to be implemented from 1 April 2016. This comes after two consecutive years of drought faced by the Indian agricultural industry. The scheme, which is to operate on an ‘area approach’ basis, is being hailed as a significant improvement on earlier schemes, which had several shortcomings. The government has set a steep target of doubling the number of farmers covered under crop insurance to 50% under the new scheme.

Under PMFBY, the premium rates would be actuarial, but for the farmers the rates have been fixed at 2% for summer crops, 1.5% for winter crops and 5% for annual commercial and horticultural crops. The differential in the rates, if any, would be shared equally by the state and the central government. This is an improvement on earlier schemes, wherein the premium rates payable by the farmers could go much higher. With the new scheme, the government has moved entirely from a claims-subsidy regime to a premium-subsidy one. The overall market premium is expected to rise from a current €0.6bn to €1.5bn. In the case of losses caused by cyclonic rains or unseasonal rainfall, cover has been extended to comprise the entire country.

With respect to loss assessment under the new scheme, there is a higher emphasis on the use of technology, the results of crop-cutting experiments (CCEs) having to be recorded electronically and the experiments themselves having to be photographed and geo-tagged, and all data transmitted online. The use of remote sensing has been proposed, the aim being to bring down the number of CCEs through ‘smart sampling’. The scheme itself is no doubt forward-looking, but the implementation could be a challenge given the large size of the country and small land-holdings. Munich Re is also very much at the edge of technological advancements in India, as well as worldwide.

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Australia: Multi-Peril Crop Insurance can work in Australia with the support of new technology

March 2016: Climatic variability in Australia is high and presents a major challenge to farmers. Despite this, Australia has developed an efficient agricultural industry with a high degree of innovation and adaptability. This has occurred without Multi-Peril Crop Insurance (MPCI). There have been several attempts at introducing MPCI. To date, all of these have failed due to high levels of adverse selection. Several feasibility studies into MPCI have concluded that, to overcome adverse selection, a meaningful premium subsidy is required. No such subsidy has been forthcoming, and there is no indication that this will change.

The federal government has decided to partly finance the one-time risk assessment costs for MPCI to the extent of AUD 2,500 per farmer, i.e. a total of AUD 20 million over four years. There has been a recent increase in MPCI activity in Australia, with five offerings available. Despite the growing number of offerings, take-up is limited. Premium rates are generally above 7%, adverse selection is high and take-up is low. It is most likely that the funding which has been announced will be spent in one go, with no ongoing benefit. This support will not reduce adverse selection.

Satellite imagery, precision agriculture and crop models have the potential to play a critical role in reducing the cost of managing an MPCI and assisting in risk assessment. Development of MPCI without a premium subsidy will be difficult, and no path forward offers a guaranteed result. However, if a small portion of the current AUD 20 million commitment was made available for research and development with a focus on enabling technologies, the probability of developing a sustainable product would be enhanced.

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We hope you have enjoyed this issue of Munich Re Agro Insurance Info Worldwide.
Your Munich Re Agro Team


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