Role of Governments in Agricultural Insurance Ramiro Iturrioz Insurance for the Poor The World Bank October,

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 2

Agricultural Insurance Overview (2009) 3 Aus & NZ, US$ 112 Mio (0.6%) Asia, US$ 3.,800 Mio (19,7%) Europe, US$ 3,900 Mio (20.1%) Africa, US$ 55MM(0,3%) LAC, US$ 721 Mio (3.5%) USA & Canada, US$ 10,700 Mio (55,6%) Agricultural Insurance Premiums: Geographic Distribution  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

Government expenditures in agricultural insurance 4 USA & Canada: US$ 7,800 Mio (73% of the total Agricultural Insurance Premiums) LAC: US$ 260 Mio (36% of the total Agricultural Insurance Premiums) Asia: US$ 1,800 Mio (50% of the total Agricultural Insurance Premiums) Europe: US$ 1,500 Mio (37% of the total Agricultural Insurance Premiums) Africa: US$ 1 Mio (3% 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 Estimated Government Expenditures in Agricultural Insurance: Geographic Distribution

Characterization of agricultural insurance systems 5 Pure Market Based Pure Market Based Public Sector based Public Sector based GOVERNMENT INTERVENITON PLAYERS & PRODUCT DIVERSIFICATION 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 Low to moderate penetration. Low risk diversification. Commercial prevails over technical criteria. The competition is for price No fiscal cost Public Private-Partnership is a suitable market model for agricultural insurance

Rationale for Government intervention in agricultural insurance 6 To Manage Natural DisastersTo stabilize income in rural areasTo avoid ad-hoc disaster payments To have budget stabilityTo use it as tool for rural development Rationale for Government Intervention in agricultural insurance Rationale for Government Intervention in agricultural insurance

Why government support to agricultural insurance is needed? 7 Existence of market failuresInsurance industry capacity constraintsCost of agricultural insurance provision Farmers’ affordability issues Why government support to agricultural insurance is needed? 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)

Potential roles of the Government in providing support to agricultural insurance 8 Provide Legal & Regulatory FrameworkEnhancing Data & Information SystemsEducation and Capacity BuildingResearch & Development (Products)Public Premium SubsidiesCatastrophic Risk Sharing / Risk Financing Potential Government roles in supporting agricultural insurance Potential Government roles in supporting agricultural insurance

Government support to agricultural insurance in key countries 9

Agricultural insurance premium subsidies 10 Improves access to crop insurance (Affordability) Improves access to crop credit (replace collateral) Permits income stabilisation Improved credit repayment following catastrophe events Farmers Enables companies to levy technically correct commercial rates Enables higher uptake rates Improves risk spread Reduces adverse selection Insurance Industry 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?) Governments Usual Justification for premium subsidies 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

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 11

Government involvement in agricultural risk financing Wherever possible promote private sector insurance and reinsurance  Certain levels of catastrophic loss (e.g. drought, flood, hurricane) will not be possible to insure / reinsure without government help  Government involvement in catastrophe risk financing (reinsurance) represents an ex-ante planned activity  Government catastrophe reinsurance is a more effective way of using limited financial resources than premium subsidies 12 Retained on farm Return Period years 3-5 years Government catastrophe reinsurance Insurance or funding Insurance and Reinsurance 5-7 years Independent risk Intermediate risk Catastrophic risk Risk Layering

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 13

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 14