A multi-stakeholder approach, innovation and, most importantly, trust are among the key factors needed for sustainable success in agriculture insurance, said speakers at the 2nd Agriculture Insurance Conference.
Trust is the most basic issue in insurance, said Prof Dr David Dror, Chairman and Managing Director of the Micro Insurance Academy. “If there’s trust, nothing needs to be sold.”
Insurers are seen as rich and farmers are seen as guaranteeing the profits of the rich. One of the questions on farmers’ minds is how are they assured they will reap a return for the premiums they pay while “rich insurers are ensured profits upfront”.
So there has to be transparent pricing, which is another factor needed for agriculture insurance to be successful and sustainable. “If actuarial numbers are the basis for pricing, there has to be much more transparency,” he said.
“We think we know better than the farmers,” said Dr Dror. But insurers need to be “modest”. If trust does not exist, what insurers may hear from farmers is “I’m too poor to pay”. But often, this means “I’m too poor to pay for your mistakes”, he said, speaking of his experience working with smallholder farmers, mainly in South Asia.
“It is extremely difficult to go and tell farmers, here’s the premium you have to pay and the coverage you are going to get, take it or leave it. The results will be disastrous, and premiums and density will remain as they are,” said
Dr Dror.
Strong drivers of growth in Asia
It is important that Asia gets the formula right as there are strong drivers of growth in agriculture insurance in the region.
Asia’s large population will continue to dominate and the forecast is that only in 2068, will the region’s population account for less than 50% of the total global population, said Mr Peter Book, Head of Agriculture, Asia Pacific, Guy Carpenter.
The region’s population size and its rise in GDP per capita will boost demand for food and result in a supply gap that needs to be filled.
Existing risk management not ideal
However, existing risk management strategies – largely retaining or avoiding – are not ideal in reducing risk and increasing supply, Mr Book said.
For example, farmers may choose diversification over specialisation to mitigate risk, but this reduces efficiency and results in sub-optimal investment and lower production, he said. Also, a government which provides post-loss funding faces an unpredictable impact on its national balance sheet and does not encourage active risk management in the sector, he added.
Microinsurance as a tool
As an effective risk transfer tool, Dr Vicky Hu, Head of Global Partnerships, Southeast Asia, Swiss Re, spoke about microinsurance.
A large percentage of agriculture activities are performed by “smallholder” farmers. “An estimated 2.5 billion people worldwide are involved in full- or part-time smallholder agriculture. These smallerholder farmers provide over 80% of the food consumed in large parts of the developing world, particularly South Asia and sub-Saharan Africa,” she said.
A large percentage of farmers are under the poverty line with most of the 1.4 billion people who live on under US$1.25 a day living in rural areas and largely dependent on agriculture for their livelihoods, she said. And underinvestment in agriculture and climate change, among other factors, have caused poor smallholder farmers to be less able in escaping poverty, she added.
Multi-stakeholder approach needed
For a microinsurance scheme to be successful, a multi-stakeholder approach is needed, said Dr Hu. Among the factors listed, she said that the scheme must be accessible to as many potential policyholders as possible, with the support of local communities and NGOs working together to supplement traditional channels and the use of mobile and internet technologies.
Supportive government policies and policy makers also play an active role in enabling greater participation from the private sector. “Through premium subsidies, they can stimulate higher agricultural risk protection uptake from low-income farmers. And governments can also provide essential infrastructure and services such as collecting weather and yield data,” she said.
Sharing a success story as proof of the concept in which Swiss Re is involved in, Dr Hu said that in Kilimo Salama, Kenya, insured farmers invested 20% more in their farms and earned 16% more income than their uninsured neighbours. From covering 185 farmers in 2009, it has grown to cover 185,000 farmers in 2013 with an insured value of approximately $25.4 million.
Greater government focus
Moving forward, governments are expected to place increased focus on agriculture risk. “Food security is a crucial issue for all governments as we ‘need to feed’ the population. Governments also want to control demographics and slow the rural exodus,” said Dr Suzanne Corona, Chief Underwriter, Asia Catastrophe Pool/Asia Agriculture Pool, ACR Malaysia.
Many governments in Asia are subsidising the agriculture industry in various ways, including kick-starting a budding agriculture insurance market.
Using insurance as a risk transfer tool, as opposed to funding losses with cash hand outs, clearly places responsibility into the hands of the citizens in the long term. And a sense of ownership and responsibility are key drivers to a sustainable industry, said Dr Corona.
The shift from small family farms to large commercial and industrial operations will also drive demand for insurance and increase the quality of risks, she added.
Innovation for growth
Sharing the example of his company in China was Mr Olivier Pequeux, Vice President, Groupama-AVIC Property Insurance, who said that innovation is at the core of the strategy to support its growth in agriculture insurance.
Agriculture insurance in China is a fast growing and – although increasingly open and competitive – still oligopolistic market. Only PICC and China United are licensed at the national level, and Groupama-AVIC is the only JV insurer authorised to operate in this market. But more insurers are entering or expanding their operations, he said.
One way it differentiates itself is to gain local influence and market share, and open new markets through innovation, said Mr Pequeux.
Some of the pilots for new products introduced by Groupama-AVIC are: pig price index in Chengdu, corn yield insurance in Shaanxi, and commercial grassland index insurance in Jilin. It had also started to work in collaboration with universities on a drought weather index.
Yak insurance
Giving the example of yak insurance, Mr Pequeux said “it was experimented for a long time by leading Chinese insurers with small volume and mixed results, despite the availability of subsidies from the authorities up to 80% of premiums.”
Thanks to a new approach, Groupama-AVIC underwrote premiums of around CNY22.5 million (US$3.63 million) in 2014 in the Tibetan minority area of Sichuan. The cover is CNY2,000 per yak, with a 6% premium rate (economic value of a yak is CNY5,000 to 8,000), concentrated in one area to cover a big proportion of animals to avoid anti-selection and moral hazard, and only female yaks are insured. “Because farmers tend to care more about females due to the ability to breed.”
There was also very strong lobbying and communication toward authorities. The 12 local village heads in the area were mobilised to convince everyone to insure their yaks. And in this Buddhist area, even local religious authorities became a channel for outreach, Mr Pequeux said. This is yet another example of a multi-stakeholder approach and trust in the different parties to achieve success.
Delegates from more than 17 countries attended the two-day conference in Singapore, organised by Asia Insurance Review.