Agriculture insurance companies from around the world gather to discuss the future outlook for their business in an era of Climate Change
332 delegates from 40 countries attended the 35th bi-annual International Association of Agricultural Production Insurers (AIAG) congress in Bordeaux this October. AIAG organizes this congress for a sharing of the respective national experience in insuring crops and livestock, and for knowledge transfer. Furthermore, AIAG reports on the results of field work for loss adjusters and specialist topics relating to livestock, in the form of specialist seminars or workshops.
Agricultural insurance is above all a national business with a long tradition stemming from its origin in the 19th century in Europe, when farmers established their own mutual insurance companies. A handful of agricultural insurers today venture cross-border into neighbouring markets, a trend that can be observed only in Europe. There is a strong dependency of national agricultural insurers on the globally active large professional reinsurers, who, with huge balance sheets provide not only very substantial aggregate capacity for the natural perils that inflict damage on crops standing in the fields through reinsurance contracts, but are also active with the leveraging of underwriting and/or product expertise gained through their diversified portfolio experience across many markets. Added to which insurtech know-how can create a greater transparency and efficiency across the value chain of crop insurance.
Delegates enjoyed a thought-provoking programme with as guiding topics „risk management for agricultural production“, „climate volatility“, and „the role of the insurance sector and the state“, along with splendid hospitality offered in Bordeaux by the French insurance industry. Naturally it was not possible to avoid a sampling of some of the best vintage Chateau Bordeaux wines.
Meanwhile a standard ingredient of the AIAG programme, was a concise overview with updated experience from the world´s largest agricultural markets: namely with presentations on the USA and China, with only India missing from the big 3. The USA, China and India are collectively reporting gross premium income of $22 Billion in 2017, which accounts for roughly two-thirds of the global agricultural insurance premium. It is well worth studying the market order of these 3 markets, because despite the different political systems in each country, each has adopted a public-private insurance system that has gone a considerable way to reduce the protection gap for farmers.
The morning of the first day was devoted to the host market France, where agriculture is of great national importance and is very well organized, as we learned from the Ministry of Agriculture. It was interesting and surprising to understand just how poor the trading experience of French crop insurers has been in the last decade, with the impact of climate change visible in the loss count, and with a response from French insurers and reinsurers now afoot to introduce index insurance, e.g. for grassland.
The majority of the other presentations focused on the guiding topics of the congress:
1. Risk management for agricultural production
It would make sense to define the term „risk management“ in an agricultural context. It must go beyond the classical agronomical definition, because climate change, sustainable land use, price sensitivity due to trade wars and pollution are changing the game. We need a more holistic appraisal of risks for crop yield, if we are going to succeed with their management. The agricultural insurer must show more creativity here and interact with his clientele. They should also understand the manifold benefits for the insurance processes that can be gained from a clever implementation of Agritech solutions.
We must also talk about the clients or risk population of an agricultural insurer and their respective risk management or indeed risk management needs. Because in the drive for ever more efficient agricultural production to feed the world population, in most markets we now have 5 different customers:
- the part-time smallholder farmer
- the smallholder farmer
- the medium-scale farmer
- the large-scale farmer
- the agro-industrial enterprise
each one with a different financial status, with a different risk management approach, and with a different insurance purchasing perspective.
Agricultural insurers must understand these demographics and cater accordingly with a differentiated service for each client category.
Agro-industrial enterprises are expanding rapidly in many markets, and whilst these enterprises often draw on sophisticated risk management technique including monitoring through remote sensing, there is a lack of sophisticated tailor-made insurance solutions locally to respond to their needs.
2. Climate volatility
The dominant workstream under this heading in the congress presentations was weather risk under the impact of climate change, gloomy predictive analytics relating to this risk, and the featuring of (parametric) insurance and reinsurance solutions that can alleviate the rising loss curve, at a price that must be collected through primary insurance premium. It is fair to say that the initiative here would appear to come from the reinsurance industry alone.
It is important to note that there is a vast amount of scientific analytical work available on the climate risk for agriculture, especially from the IPCC network and from top scientific institutions like Wageningen Research (WUR) or the Potsdam Institute for Climate Impact Research (PIK). This must be sorted, classified and put to use by systematic data mining, structuring and digitizing the data and making it available for risk modelling, by country, by region, by crop and by peril. This will serve to prepare for and provide insurance that is tailored to a multi-peril environment in a given market increasingly affected by the impact of climate change.
Climate models are being developed to evaluate the risk of weather-related events. The information generated by them can be used for a technical pricing of crop insurance. Such climate models are instruments to identify changes in the statistics of the weather elements (e.g. temperature, precipitation, drought, wind speeds, flooding). Vulnerability functions are needed to translate weather into predicted losses. The resulting climate statistics cover longer periods of at least 30 years. The climate change can be made transparent by a comparison of statistics of two such time periods. A single extreme weather event cannot prove climate change.
There is clear evidence of rising temperatures worldwide due to increasing greenhouse gas emissions, with the strongest signal in the higher latitudes.
3. The role of the insurance sector and the state
Two markets stand out globally with an optimized public-private crop insurance business model: the USA and Spain. In both markets public sector (government) and private sector (insurance industry) share the risks impacting on crop yield in a pre-agreed market order and a medium- to long-term stakeholder agreement. They can be regarded as „business models“ in principle for emulation, to be adapted in practice for other given market situations.
Agricultural insurance cannot be successful without a deal with the „state“. Interesting that in the dominant market with liberal capitalism, the USA, we find the most comprehensive public-private scheme supporting the farmer! Disappointing and frustrating for agricultural insurers is the situation in the European Union, where a common agricultural policy (CAP) with its subsidies gives farmers the impression that whatever happens they will have public sector „protection“ in the form of a transfer payment. Thus, creating an anti-selection situation for the agricultural insurer, who has to contend with the highly exposed risks.
G&Co. Comment & Summary
Agricultural insurance is a highly complex segment in the insurance industry, and is faced with considerable technical and financial challenges for crop insurance in an era of accelerating climate change, and with a rampant spread of diseases in livestock insurance through globalisation of the livestock trade. This is a business for professionals. Amateurs seeing it as a part-time game should exit the market.
Very regular contact and solution-driven debate is needed amongst stakeholders in agriculture (state, insurance industry, farming associations, scientific institutions) in a joint venture to better understand, monitor and manage the risks and define in a medium to long term perspective the best form of public-private cooperation in each market.
The agricultural insurers must be given access to know-how and technology, and take part in climate risk modelling, which can be carried out via an open source platform.
A reform of the European Union´s Common Agriculture Policy (CAP) due in 2020 will put pressure on single EU governments to address risk management in agriculture with more verve and technical dexterity. We expect this should improve the odds for agricultural insurers operating in these markets.
Viewing the experience of crop and livestock insurance in Europe in recent years, there is certainly no room for any rebate on the premium side. On the contrary, in view of a rising climate-driven loss frequency, premiums must be increased. Climate risk modelling will document and underpin this need.
Costs for many agricultural insurers exceed 30% of premiums and these are simply too high to generate a good return. The implementation of Agritech tools made for the insurers, together with a digital business process reform could significantly reduce the cost ratio.
In the past decade drought has become the Nr. 1 elemental risk for farming, and the technical experts for agriculture in the reinsurance industry are developing and have implemented first workable risk-transfer solutions for this systemic risk. These solutions fall into the technical category of index or parametric insurance, and must be tried and tested for their acceptance by the farming community. A considerable amount of work is still needed in the near term before a true penetration with meaningful sales has been achieved, and the stakeholders in agriculture must dive deep into this topic if the Nr. 1 risk is to be covered by the insurance industry.
Your contacts for an improvement of productivity in agricultural insurance:
Christopher Genillard Lukas Linden Claudia Duggal
Genillard & Co. GmbH
Ismaninger Str. 102