Index-based-Insurance in Agriculture: A suitable Production Risk Management Tool for ECA? Martin Odening, Oliver Mußhoff, Roman Shynkarenko, Federica Angelucci.

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Presentation transcript:

Index-based-Insurance in Agriculture: A suitable Production Risk Management Tool for ECA? Martin Odening, Oliver Mußhoff, Roman Shynkarenko, Federica Angelucci Presentation prepared for the EastAgri 2008 Annual Meeting, Paris

Competitiveness Rural Income Background Productivity Growth Farm Investment Financing EquityDebt Risk

Analysis of (Dis) Advandages of Index-based Insurance (IBI) For which ECA countries are IBI suitable risk management tools? Objectives of the Study

Success Factors / Preconditions for IBI Indicators Theoretical AnalysisExperiences with IBI Quantification ‘Portfolio Matrix’ Aggregation Data on ECA Pre-Assessment of Feasibility of IBI in ECA Recommendations for Donors / Goverments Methods and Data Sources

Definition: Indemnity payments are not directly related to actual losses but to the value of a predefined index Possible indexes: Weather (rainfall, temperature), livestock mortality, area yield Potential advantages: no moral hazard, no adverse selection, low transaction costs for loss adjustments, prompt indemnity payments Potential disadvantages: high basis risk, un- familiarity with the concept Index-based Insurance

Hedging Strategy Using Weather Derivatives Put-Option Profit Weather index on expiration Strike Hedged position Production revenue Long put

Revenue Distribution with and without Hedging Probability (€/ha)

ART at Different Risk Layers Farmer Insurance transaction Insurance industry Capital market weather bond price principal & coupons recoveries insurance premium compensation payment when weather event occurs unconditional payment Securitization

1 ENSO – El Nino Southern Oscillation is the index measuring the Pacific sea surface temperature Overview about Practical Experiences with IBI

Factors determining the demand for IBI - Risk exposure of the farms - Hedging effectiveness of the instrument - Risk attitude of the decision maker - (Non) Existence of effective alternative risk reduction instruments - Transparency of insurance products - Cost of insurance - Policy environment Preconditions and Success Factors of IBI in Agriculture

Factors determining the supply of IBI - Cost of insurance product development - Cost of delivery - Cost to control adverse selection and moral hazard - Cost of loss adjustment - Market potential and volume - Risk premium - Political, legal and institutional factors Preconditions and Success Factors of IBI in Agriculture

Indicators for the Potential of IBI in ECA Countries (1)

Indicators for the Potential of IBI in ECA Countries (2)

Example of a Country Profile

Factors Influencing the Potential of IBI in ECA Countries

good poor low high Romania Bulgaria Hungary Croatia Uzbekistan Moldova Azerbaijan Tajikistan Armenia FYR of Macedonia Belarus Russia Turkey Kazakhstan Albania Georgia Serbia Kosovo Kyrgyzstan Ukraine Demand for IBI Preconditions for establishment of IBI Portfolio Analysis for ECA Countries

1. Rigorous ex post assessment of IBI 2.In-depth feasibility studies in selected countries 3. Dissemination of study results  policy dialogue 4. Support to the introduction of IBI -Improvements in legal and regulatory environment -Improvement in data collections -Assistance in product development -Knowledge transfer and educational efforts -Financial support for the coverage of catastrophe losses Recommendations

good poor low high Bulgaria Hungary Croatia Uzbekistan Azerbaijan Tajikistan Armenia FYR of Macedonia Belarus Russia Turkey Albania Georgia Serbia Kosovo Kyrgyzstan Ukraine Demand for IBI Preconditions for establishment of IBI Portfolio Analysis for ECA Countries Romania Moldova Kazakhstan