Insurance options in facilitating risk management in agriculture

1. Insurance options in facilitatingrisk management in agriculture Reinhard KuschkeAgriculture Underwriter Swiss Re 2009 AFRACA Integrated Risk Management Expert Meeting

2. Swiss Re History Swiss Reinsurance Company Ltd Swiss Re is a leading and highly diversified global reinsurer. The company operates through offices in more than 25 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management.

3. Presentation overview • Swiss Re Agro • Intention of insurance • Insurance products • Traditional, re-innovated, parametric products • Micro insurance • Reinsurer’s perspective • Swiss Re position in Africa

4. Swiss Re Agro background • Swiss Re Agro Team formally established in 1991 • Comprises of 15 Underwriters • Physical presence in the Americas, Europe and Africa • Geographical penetration globally • To advise and support the agricultural market • Underwrite on both a facultative and treaty basis • Global 2008 Agro Premium: USD 440 million

5. Swiss Re Africa background • Swiss Re Africa premium production dominated by the South African market • Mainly Crop Hail and MPCI business written in South Africa • Rest of Africa balanced business

6. Swiss Re Africa background • Premium distribution per category

7. Intention of insurance programmes • Risk management option by transferring risk • Loan collateral • Provides stability for long-term business plans • Mitigation of farm level non-recovery risk • Macro level – support towards national disaster plans

8. Reinsurer Government Agro insurer Input suppliers Farmers Traders Processors Consumer Banks/Investors Agricultural value chain risk management participants wide of insurers

9. Insurance products Two types of insurance cover • Traditional indemnity based cover • Covers losses due to one or more perils • Most common are named-peril and multi-peril crop insurance • Well established globally • Parametric • Protection provided against correlated risks such as extreme weather events • Growing awareness

10. Traditional insurance products Multi Peril Crop Insurance (MPCI) • Yield shortfall product • Grouped systemic perils • May affect broad geographical area • Can present excessive losses • Loss determined when yield is harvested • Requires detailed UW, risk evaluation, continuous monitoring • Places a heavy burden on the insurance infrastructure • Asymmetrical information and adverse selection

11. Traditional insurance products Named peril crop insurance • Damage based product • Nominated perils • Localized occurrence • Accumulation of losses tend not to overwhelm capital reserves • Loss adjustment based on physical and visible damage • Requires fair knowledge of crop production • Cover available for most field and horticulture crop, floriculture and as specialised form forestry

12. Re-innovating and tailoring of traditional insurance products Benchmark products • Based on the MPCI product • Applied on micro-level • Field sizes varying between 0,5 and 3 ha • Farmers Cooperative Union as insured and individual farmers populating the schedule • Farmers grouped geographically with at least one field selected as benchmark site • Underwriting and loss assessment based on benchmark

13. Re-innovating and tailoring of traditional insurance products Mauritius • Currently operational • Mauritian Government agreed to subsidize premium from 2009 • Increased uptake anticipated Ethiopia • Pilot launched in 2007 • Scaled up to include a second Farmers Co-operative Union in 2008 • Micro-financing via Farmers Co-operative Union drives insurance need

14. Parametric insurance products • Provides protection against correlated risks • An index is selected that closely correlate with actual losses • Based on historical patterns, be objective and easily observable Mainly two types of triggers: • Meteorological or weather events • Area based yield triggers

15. Parametric insurance products Affinity • Eliminates moral hazard • Immune to adverse selection • Reduces transactional cost Restriction • Basis Risk – the mismatch between amount resulting from the trigger and the actual loss

16. Micro insurance • Micro Insurance is defined as the provision of insurance to the low-income base • Frequently in conjunction with a micro-finance loan • Agricultural micro insurance mainly covers crop (dominated by MPCI) and livestock

17. Micro insurance Micro Insurance feasibility requirements • Cheap and lesser complex • Compulsory participation • Selling to groups • Distribution through entities like agricultural co-operatives • Government support

18. From a reinsurer’s perspective • Long-term view • Government support in legislation, regulation, premium • Market maturity in UW capability, technical expertise, insurance acceptance by agricultural community • Well developed insurance infrastructure • Sound underlying risk analysis • Well developed business plans • Supportive towards the pioneering spirit

19. Swiss Re’s position in Africa Swiss Re … • recognises that the bulk of the African livelihood depends on Agriculture as major constituent of the continental GDP • further recognises the vulnerability of the continent’s agriculture to climate shocks • provides capacity for the African Agricultural insurance market • is supporting and pioneering innovative small-scale risk transfer schemes

20. Swiss Re’s position in Africa Swiss Re … • strategise towards geographical and segment diversification with expansion into Africa as a key priority • aims at establishing long-term business programmes

21. Thank You