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Role of Governments in Agricultural Insurance
Ramiro Iturrioz
Insurance for the Poor
The World Bank
October, 2010
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Contents
Overview of the Agricultural Insurance Market
Government expenditures in agricultural insurance
Characterization of agricultural insurance systems
Rationale for Government intervention in agricultural insurance
Why Government support to agricultural insurance is needed?
Potential roles of the Government in providing support to agricultural insurance
Agricultural Insurance Premium subsidies
Government involvement in agricultural risk financing
Lessons and Conclusions
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Agricultural Insurance Overview (2009)
Agricultural Insurance Premiums: Geographic Distribution
Europe, US$ 3,900 Mio (20.1%)
USA & Canada, US$ 10,700 Mio (55,6%)
Asia, US$ 3.,800 Mio (19,7%)
Africa, US$ 55MM(0,3%)
LAC, US$ 721 Mio (3.5%)
Aus & NZ, US$ 112 Mio (0.6%)
Premiums : US$ 19.4 billons (estimated)
USA , China, and Canada: 66% of the premium volume
BRIC countries are gaining importance (US$ 3. billons)
MPCI is the most agricultural insurance product
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Government expenditures in agricultural insurance
Estimated Government Expenditures in Agricultural Insurance: Geographic Distribution
Europe: US$ 1,500 Mio
(37% of the total Agricultural Insurance Premiums)
USA & Canada: US$ 7,800 Mio
(73% of the total Agricultural Insurance Premiums)
Asia: US$ 1,800 Mio
(50% of the total Agricultural Insurance Premiums)
Africa: US$ 1 Mio
(3% of the total Agricultural Insurance Premiums)
LAC: US$ 260 Mio
(36% of the total Agricultural Insurance Premiums)
Australia & NZ: US$ 0 Mio
(0% of the total Agricultural Insurance Premiums)
In average, the estimated public sector expenditures in agricultural insurance
(US$ 11.5 billions) accounting for 59% of the total premiums written
worldwide in 2009
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GOVERNMENT INTERVENITON
Characterization of agricultural insurance systems
Public Sector
based
High Insurance penetration levels
Well Diversified Portfolios
Social criteria prevails over Technical criteria
Monopolies. Several issues with the service..
Government assumes full liability (not reinsured)
High Fiscal Cost
High Insurance penetration levels
Well Diversified Portfolios
Technical criteria over commercial criteria
The competition is for service.
Government adds stability to the system
Private Sector adds know how.
Reasonable Fiscal Cost
Pure Market
Based
Low to moderate penetration.
Low risk diversification.
Commercial prevails over technical criteria.
The competition is for price
No fiscal cost
PLAYERS & PRODUCT DIVERSIFICATION
Public Private-Partnership is a suitable market model for agricultural
insurance
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Rationale for Government intervention in agricultural
insurance
To Manage Natural Disasters
Rationale for
Government
Intervention
in agricultural
insurance
To stabilize income in rural areas
To avoid ad-hoc disaster payments
To have budget stability
To use it as tool for rural development
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Why government support to agricultural insurance is
needed?
Existence of market failures
Why
government
support to
agricultural
insurance is
needed?
Insurance industry capacity constraints
Cost of agricultural insurance provision
Farmers’ affordability issues
The above Constraints are most applicable to Developing Countries?
BUT…. The highest levels of Government Financial support to Agricultural
Insurance are found in High Income Countries (North America and Europe)
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Potential roles of the Government in providing support
to agricultural insurance
Provide Legal & Regulatory Framework
Potential
Government
roles
in supporting
agricultural
insurance
Enhancing Data & Information Systems
Education and Capacity Building
Research & Development (Products)
Public Premium Subsidies
Catastrophic Risk Sharing / Risk Financing
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Government support to agricultural insurance in key
countries
Forms of Government support to agricultural insurance
Agricultural
Insurance
Pool
Public sector
MPCI Insurer
Premium
Subsidies
A&O cost
subsidies
R&D cost
subsidies
Catastrophic
Risk sharing/
financing
USA
No
No
Yes
Yes
Yes
Yes
Canada
No
Yes
Yes
Yes
Yes
Yes
Spain
Yes
No
Yes
No
No
Yes
Portugal
No
No
Yes
No
No
Yes
Italy
No
No
Yes
No
No
No
France
No
No
Yes
No
No
No
Turkey
Yes
No
Yes
No
No
No
India
No
Yes
Yes
Yes
No
Yes
Philippines
No
Yes
Yes
Yes
No
No
South Korea
Yes
No
Yes
Yes
No
Yes
China
Yes
No
Yes
Yes
No
Yes
Brazil
No
No
Yes
No
No
Yes
Mexico
No
No
Yes
No
Yes
Yes
Chile
No
No
Yes
No
Yes
No
Colombia
No
No
Yes
No
No
No
Country
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Agricultural insurance premium subsidies
Farmers
Usual
Justification
for premium
subsidies
•Improves access to crop insurance (Affordability)
•Improves access to crop credit (replace collateral)
•Permits income stabilisation
•Improved credit repayment following catastrophe events
Insurance Industry
•Enables companies to levy technically correct commercial rates
•Enables higher uptake rates
•Improves risk spread
•Reduces adverse selection
Governments
•Provides Incentive for farmers to purchase crop insurance
•Replaces ad hoc disaster relief by formal agricultural insurance
•Stabilises farm incomes
•Social objectives (reduce urban migration?)
HOWEVER,
 Premium subsidies are not necessarily a pre-condition for high agricultural insurance
penetration rates
 Even in heavily subsidized markets it may take many years to achieve high levels of
agricultural insurance uptake
 That currently nearly all Public Private Partnership crop insurance schemes are
dependent on premium subsidies to cover their claims costs
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Agricultural insurance premium subsidies
Premium subsidies are the most widely practiced form of government support
to agricultural insurance
WTO legislation exempts (permits) premium subsidies
BUT,
Premium subsidies can create moral hazard,
Premium subsidies can promote agriculture in unsuitable (marginal) areas,
Premium subsidies can benefit larger farmers disproportionately,
Premium subsidies can create huge financial costs to society (e.g. USA/Europe)
Few developing countries could afford to fund high level of subsidisation of premiums
Government funding can be better used in:
Developing agricultural risk management infrastructure (enhancing data & information,
training & education, R&D)
Catastrophe Risk Financing / acting as a reinsurer of last resort
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Government involvement in agricultural risk financing
Risk Layering
Wherever possible promote private
sector insurance and reinsurance
Return Period
Catastrophic risk
•
Government
catastrophe reinsurance
 Certain levels of catastrophic loss (e.g.
20-30 years
Insurance and
Reinsurance
 Government involvement in catastrophe risk
Intermediate risk
drought, flood, hurricane) will not be possible
to insure / reinsure without government help
financing (reinsurance) represents an ex-ante
planned activity
5-7 years
 Government catastrophe reinsurance is a
3-5 years
Retained on farm
Independent risk
more effective way of using limited financial
resources than premium subsidies
Insurance or funding
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Government involvement in agricultural risk financing
• United States — A special public/private reinsurance agreement (Standard
Reinsurance Agreement) with global reinsurance participation
• South Korea— Government provide a crop insurance loss cap for the insurance and
reinsurance industry for loss ratios above 200%
• India — AIC, a national public agricultural insurance company that is jointly
reinsured by central and state governments
• Brazil — Individual companies can contract stop loss reinsurance from “Fundo de
Catastrofe” (managed by IRB) + global reinsurance + public sector
• Portugal — Private commercial insurers can purchase government Stop Loss Treaty
protection under SIPAC + global reinsurance.
• Spain — An agricultural insurance pool (Agroseguro) protected by a national
reinsurance insurance company (Consorcio de Compensaçion de Seguros) +
involvement of global reinsurers
• Mexico — A national public reinsurance company (Agroasemex) providing voluntary
reinsurance to private agricultural insurers + global reinsurers
• Canada — Government insurance which is shared between provincial and central
governments with some global reinsurance participation
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Key lessons and Conclusions on Government support to
agricultural insurance
• Underwrite agricultural insurance through Private Commercial Insurers wherever
possible
• Promote Private-Public Partnerships (PPPs)
• Promote agricultural reinsurance through local and global international reinsurance
markets
• Important areas of government support:
▫ Creation of enabling legal & regulatory framework
▫ Education and training
▫ Data & information enhancement and dissemination
▫ Product design & rating (technical support)
• Exercise extreme caution with agricultural insurance premium subsidies
• In some circumstances, government support as a reinsurer of last resort may be justified