Improving the Efficiency of Agricultural Insurance Markets: Policy Experiences

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1 1 Risk Management in Agriculture: Towards Effective Policies OECD Workshop, Paris, November 22-23, 2010 Improving the Efficiency of Agricultural Insurance Markets: Policy Experiences Olivier Mahul Program Coordinator Insurance for the Poor & Disaster Risk Financing GCMNB and GFDRR The World Bank

2 2 Agenda Role of public sector in improving efficiency of agricultural insurance markets Review of international experience Case study: Crop insurance in India

3 3 World Bank Business approach for agricultural insurance Why the World Bank is interested in Agricultural Insurance High exposure of low income countries to weather risks (drought, floods ), pests and diseases Lack of insurance and other agricultural risk management tools Costly government ad-hoc schemes Need for innovative approaches to deal with the covariate nature of agricultural risks

4 4 Improving efficiency of agricultural insurance markets: What potential roles for governments? Market/regulatory failures Informational asymmetries Post-disaster assistance programs Systemic risk Limited access to global reinsurance Undeveloped risk market infrastructure Low awareness Regulatory impediments Affordability Potential public role Enhancing data & information systems Discipline in post-disaster assistance Public private catastrophic risk sharing Public private catastrophic risk sharing Research & development (products) Enhancing data & information systems Education and capacity building Enabling legal & regulatory framework Public premium subsidies

5 5 Agricultural insurance market efficiency: What can we learn from international experience? Estimated 2007 agricultural insurance premium

6 Types of government support to agricultural insurance: selected countries 6

7 7 Government premium subsidies are very popular in 63% of all surveyed countries, but are available in only 40% of low income countries World Bank Survey Results reported in Mahul & Stutley 2010

8 8 Justification for agricultural insurance premium subsidies from a market perspective Farmers: Improved access to crop insurance (affordability) Improved access to crop credit (replace Collateral) Crop insurance permits income stabilisation & improved credit repayment following catastrophe events Insurers: Enables companies to levy technically correct (often high) commercial rates (for individual grower MPCI 7.5% to 15%) Higher uptake and improved risk spread (reduced adverse selection) Governments: Incentives for farmers to purchase crop insurance Replace (supposedly) ad hoc disaster relief by formal agricultural insurance Stabilise farm incomes Social objectives (stabilise rural population / reduce urban migration)

9 9 Premium subsidies: words of caution Premium subsidies are the most widely practiced form of government support to agricultural insurance WTO legislation exempts (permits) premium subsidies (for major losses) BUT Premium subsidies: Can create moral hazard, Promote agriculture in unsuitable (marginal) areas, Benefit larger farmers disproportionately, Create huge financial costs to society (e.g. USA/Europe) and few developing countries could afford to fund this level of subsidisation of agricultural insurance. Government subsidies are often better used in: Developing agricultural risk market infrastructure (enhancing data & information, training & education, R&D) Catastrophe risk financing / reinsurance of top risk layers

10 10 Government involvement in agricultural risk financing major international examples India National public agricultural insurance company AICI that is jointly reinsured by central and state governments Brazil Individual companies can contract stop loss reinsurance from public fund (Fundo de Estabilidade Rural ) and global reinsurance Portugal Private commercial insurers can purchase government Stop Loss Treaty protection under public fund (SIPAC) and global reinsurance. Spain Agricultural insurance pool (Agroseguro) protected by a national reinsurance insurance company (Consorcio de Compensaçion de Seguros) and involvement of global reinsurers Mexico National public reinsurance company (Agroasemex) providing voluntary reinsurance to private agricultural insurers and global reinsurers Canada Government insurance which is shared between provincial and central governments with some global reinsurance participation United States A special public/private reinsurance agreement (Standard Reinsurance Agreement) with global reinsurance participation

11 11 Public-private partnerships increase efficiency Improved management and accountability and increased premium rates have led to improved performance on the Public-sector MPCI programs reviewed by Hazell in the 1980s; Few programs (exceptions are Mexico and Brazil), however, currently operate at a producer loss ratio of < 1.0 and therefore require external financing and / or reinsurance by governments at favourable terms (e.g. USA, Canada, India, Philippines, Costa Rica). Experience tends to suggest that implementation of agricultural insurance is most efficient and effectively managed by the private commercial agricultural sector.

12 12 Ways in which the public sector can contribute to improving efficiency of 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

13 13 Case Study: Improving efficiency of the National Agricultural Insurance Scheme in India 60% of the population depends on agriculture Drought hits Indian subcontinent almost every 2 years Farmers covered under NAIS India has the world s largest crop insurance scheme, with more than 20 million farmers insured every year The NAIS area-yield approach has been implemented for almost three decades Loss Ratio for major crops, NAIS is facing technical and operational challenges

14 Moving towards an actuarially sound scheme 14

15 15 Modified NAIS: Moving from social crop insurance to market-based crop insurance Actuarial regime. The mnais scheme operates on actuarially sound premium rates Up-front premium subsidies. AICI receives premiums (farmer collections + premium subsidies from the government) and is responsible for managing the liability of the mnais. On-account partial payment. The mnais product are based on an area yield-based approach, with a provision for an early part payment to farmers (in season) based on weather indices. Involvement of the private sector. Private insurance companies are allowed to underwrite the modified NAIS. International reinsurers provides reinsurance capacity to the domestic insurers.

16 16 Modified NAIS: Political Economy Dimension Illustrative Example of Budgetary Impact of Change in Premium Subsidy Structure For illustration only Note: Bubble area is proportional to total NAIS Sum Insured in that state in the agricultural year

17 17 Contact Olivier Mahul

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