Crop Insurance: Data is King

Transcription

1 Crop Insurance: Data is King A BRIEFING PAPER Knowledge Transfer Network Financial Services

2 01 Introduction Emerging technology from a range of sources including Earth Observation data bring new opportunities and challenges. From the Insurance markets perspective we need to understand the potential benefits that new data brings but equally important the uncertainties that are inherent in all this type of data. From the suppliers perspective they need to understand the needs of a diverse user base. The KTN has been working with a number of stakeholders including NASA and the European Space agency (ESA) to try and align the suppliers with users in the Insurance market. As new satellites come on stream and new data providers add value it can be a complex process to align these interests. This document attempts to lay down some of the key opportunities, challenges and trends for all interested stakeholders to assist in the process of assimilation. We hope you find it of interest. If you would like more information either as a supplier of new ideas for possible use of the Insurance Industry using satellite data or as a user want to explore new opportunities the Insurance Satellite Application group (ISAG) has been set up to represent the needs of Insurance to the broader supplier of satellite applications and data. Dickie Whitaker Director FS KTN

3 Contents Growing demand The necessity of models and uses of remote imaging The market - a thousand flowers bloom Breakdown by regions Public private partnerships using remote imaging References and further reading

4 03 Growing demand Global agricultural production needs to increase by 60 per cent in coming decades to feed the world s population, which will reach 9 billion by The weather, however, is increasingly erratic and extreme, possibly as a result of climate change and has a profound effect on crop production. Crop insurance has a key role to play in addressing the challenges: creating a continuity of supply by making farm incomes more secure. Overall, worldwide agricultural insurance premiums more than tripled from 2005 to reach more than $25 billion in 2012, according to Swiss Re, yet, globally, still only 20 per cent of farmland is currently insured. Another driver for the growth of crop insurance is that it is often a condition for an agricultural loan. The potential for growth is clearly enormous. In Brazil, for example, there is good insurance coverage for the soy bean crop but just about none for coffee, even though Brazil is the world s largest producer of coffee beans. A shortage or even absence of data is one of the main obstacles to such growth, however. There are four stages in the insurance process where remote imaging could support a material expansion of this insurance market: Modelling and risk management Capital management and underwriting Stakeholder communication Claims management Satellite imagery is already in wide use for short term forecasting of yields and crop management, and this does have value for insurers, but largely at the third stage. Almost all crop insurance schemes compensate the farmer for loss of expected yield, sometimes combined with a minimum price mechanism. Many variables affect the outcome, and insurers traditionally rely on historical yield records to estimate the probability of loss and extent of their exposure to potential claims. Some developed markets such as the US have built up an impressive catalogue of past outcomes. In other countries, however, data is uneven, limited or scant. Further, in some markets such as China, the crop insurance market is in a state of flux. New techniques and products are improving yields. More famers are buying insurance, and policy conditions and premiums are evolving to reflect the changing market. An insurance contract is relatively inflexible. It s usually underwritten at the start of the growing season or the year, and it runs until the harvest. The insurer usually buys reinsurance to cover catastrophe risks or take on additional business, but compared to commodity trading, it s much more difficult to lay off risk if things aren t looking good half way through the season. As a result, lack of good quality historic data has two major consequences: the (re)insurer won t commit capital to underwrite crop risks outside sophisticated markets or the cost of the cover will be weighted to reflect the high level of uncertainty. It also happens sometimes that insurers start underwriting a risk, the losses turn out to be far higher than they expected, and they pull out of the market. None of these scenarios helps create the sustainable crop insurance that s needed.

5 04 The necessity of models & uses of remote imaging Insurers and reinsurers today need to demonstrate to regulators that they have analysed the risks they are assuming, and that they know the implications for their capital. This means models. To be prepared to underwrite crop risks, insurers want models that show the likely impact on insured crops of uncontrollable, correlated variables, such as temperature, precipitation and wind. The modellers construct a catalogue of thousands of simulated events, taking into account variations in temperature, precipitation and wind, for example, on crops growing in different soil types and terrains to create a distribution of possible losses. The model also must include crop-specific data, such as water requirements at each stage of growth, planting dates and resistance to adverse weather conditions. The scale needs to be able to reflect local conditions. Although imagery can t directly fill gaps in the data record, measurements derived from visual imaging can be used as a proxy for important parameters or yield. None of these is perfect, but work is continuing. One of the longest established methods is the normalised difference vegetation index (NDVI), although relative evapotranspiration or cold cloud duration, which are good proxies for drought and precipitation, respectively, have found more favour with some scientists. Another strong indicator of crop development is photosynthetically active radiation. Near infra-red and visible light is used to determine the density of green cover. The impact of disease or pests on the canopy surface or effect on the photosynthesis capability of the plants could be measured as well by remote sensing. In some pilot projects, historical imagery is being used to reconstruct data needed for modelling. Satellite imagery can also help modellers calibrate locally available information against an independent 3rd party source. For example, former Eastern Bloc countries do have yield figures, but they are not necessarily complete. In the final step of the process, the insurer incorporates its own portfolio locations, sums insured, terms and conditions into the model. As output, it gets an exceedence probability curve of the potential loss distribution. From this, the insurer can allocate capital against the risks according to its maximum risk appetite, for example a 1 in 50 or 1 in 100 year event. Above this level, it will reinsure or not take on additional business. The model output also forms a major element of the pricing of risks, although other factors come into play, including the size of the account, business development objectives and level of competition. Where the policy uses an objective measurement rather than the farmers own losses to trigger claims payment, which tends to be the approach in underdeveloped or remote locations, the issue is basis risk. Satellite imagery is used to support the calculation of a trigger, such as ground moisture, that is considered the closest indicator for loss of yield. Stakeholder communication Today, (re)insurers are expected to keep stakeholders informed of events that could affect their results in more or less real time. Here satellite imagery can be very useful to show, for example, increasing drought severity or the extent of storm damage. The imagery can be interpreted using the company s models to estimate likely losses. Claims management High definition remote imagery is most directly valuable in claims management. If insurers can see the worst affected areas, they can position loss adjusting staff most effectively. This is especially important in catastrophe events when it may not be possible to get people into all affected areas quickly. It is also helpful to validate claims.

6 05 The market - a thousand flowers bloom Worldwide the commercial crop insurance market is varied and complex. Some markets are purely private, such as in the UK and Netherlands, and some are largely subsidized the US, for example. Particularly in emerging markets, a multiagency public-private partnership may be responsible for the development of programmes. In most countries, reinsurance is placed with private companies in the international market, with some exceptions or limitations. Most Lloyd s crop insurance business comes as reinsurance of US crop companies. The crop reinsurance market worldwide is estimated at around $3 billion in Policies may be for a single peril, most commonly hail, or multi-peril crop insurance (MPCI). Private insurers are most comfortable with single peril insurance, while MPCI tends to rely on government support in some form. While dominated by the government-backed Federal Crop Insurance Corporation (FCIC) program, the US, for instance, also has a purely private sector crop hail insurance market, which collected premiums of almost $1 billion in Only a few crop insurance schemes cover biological risks, such as disease or pest. These are also generally public supported schemes, such as the US FCIC and the government owned and controlled the Philippine Crop Insurance Corporation (PCIC). Cover can be written on an indemnity or index basis. The usual basis of indemnity payment is yield, although some schemes also cover revenue shortfall. If the latter, the trigger for payments can be an area yield or parametric index, such as minimum rainfall This map prepared by the Joint Research Centre of the European Commission in 2009 illustrates the variety even within Europe: Single Risk Insurance Private Non Subsidized Private Part Subsidized Public SE FI No Data Combined Insurance EE Public E UK BE NL DK DE CZ PL LV LT Private Non Subsidized Private Part Subsidized Yield Insurance Private Part Subsidized FR AT SK HU SL RO PT ES IT BG GR TR

7 06 Breakdown by Region North America continues to dominate the crop insurance market today but the breakdown by region indicates the enormous potential for growth: In the US, 86 per cent of all planted farmland of 281 million acres is covered. Total premium value through FCIC program in 2012 was $11.1 billion, with insured crops valued at $117 billion. The scheme covers 128 different crops, including corn (34 per cent), soybeans (31 per cent) and wheat (19 per cent), which account for the majority of the coverage. There are 18 companies registered with the US Department of Agriculture (USDA) to deliver this insurance for the year Market share by region 2012 Region % US and Canada 56 Asia 25 Europe 14 Latin America 3 Australia/NZ <1 Africa <1 Source: Swiss Re Canada remains in the top three for crop coverage, with MPCI supported by central and provincial governments. It is also one country where government supports crop hail and named peril coverage. Asia Driven by growth in China and India, Asia is an increasingly important part of the market, and accounts for 25 per cent of premiums in 2012, according to Swiss Re. China is already the second biggest agricultural insurance market in the world. China s market for crop insurance has boomed since subsidies were introduced in Premiums were $3.9bn in Most Chinese provinces now have a crop insurance program and the most common form of coverage is multi-peril. International reinsurers such as Swiss Re provide reinsurance capacity alongside public authorities for some schemes. India first introduced state-run crop insurance in the 1970s, but take-up was poor until the introduction of a modified National Agricultural Insurance Scheme in 2010, including participation of private sector insurers and reinsurers. The scheme covers all food crops, oil seeds and commercial crops, and offers a 10 per cent subsidy on premiums for small farmers. Cover is against shortfalls in the current season yield determined by state governments using results from crop cutting experiments, against historic averages for the same area: an index approach. The government also supports a Weather Based Crop Insurance Scheme (WBCIS). It uses parametric triggers, such as rainfall, temperature, frost or humidity measured by local weather stations, to determine payouts. By 2011, the scheme had been implemented in 17 states, and covered 35 crops. Overall, emerging markets generated about $6 billion of total premiums in 2012, up from $1.1 billion in 2005 growing as much as 30 per cent a year, against 20 per cent globally. By 2025, reckons Swiss Re, premiums for emerging markets could reach $15-20 billion. Much of the market is underpinned by state support, particularly for MPCI, but the private sector plays a significant role in delivering most schemes.

8 07 Breakdown by Region Europe is also a significant player, accounting for 14 per cent of premiums written. Crop insurance in Spain, traditionally the largest market in the EU, is focussed on catastrophic risks, with cover for floods, freeze, hail, wind and frost, although cover is wider for some crops determined by the state entity for agricultural insurance ENESA. The public reinsurer CCS heavily subsidises premiums. Private insurers operate in a pool known as a co-insurance group, Agroseguro. Multi-risk damage insurance is most common, and covers losses caused by agreed risks or events. However, area-based yield insurance and individually-written yield insurance is also available. In France, yield-based products have been available since 2005 with a high level of government subsidy. Premiums in 2011 are estimated at 216 million, with coverage still at only 30 per cent. Hail crop insurance remains significantly more common than MPCI. Finally, Italy, Lloyd s second largest European market after France, also offers both single and multi-peril policies, again subsidized by the government. Germany, Netherlands and the UK have long been exemplars of the private-market approach, offering single peril, primarily crop-hail, insurance. This is done without subsidy, although crop insurance in Germany is underwritten by a mix of mutual, and public and private insurance companies. Penetration in the country is relatively high. Estimates of penetration in the UK vary and in the past premium volumes have been too small to attract significant reinsurance participation, but a variety of reinsurers are active for Germany and the Netherlands. Currently, Australia-New Zealand, and Africa each accounts for less than 1 per cent each of global crop insurance programs. For Australia and New Zealand, the low volume of premiums mainly reflects the nature of their agriculture and size of the crop production. Australia does have a solid private crop insurance market but until recently it has been limited to hail and named perils.

9 08 Public Private Partnerships The multi-agency public private partnerships that are developing programmes for crop insurance in emerging markets are demonstrating some of the most innovative uses of remote sensing. Two case studies Remote sensing-based Information and Insurance for Crops in Emerging Economies (RIICE). The RIICE project focuses on rice-growing areas in seven Asian target countries, namely Bangladesh, Cambodia, India, Indonesia, the Philippines, Thailand and Vietnam. The partners include sarmap, a Swiss-based technology company supplying the necessary remote sensing technology, and the International Rice Research Institute (IRRI) with headquarters in the Philippines, collecting field data estimating rice yield. The partners of RIICE are using radar based satellite data provided mainly by the European Space Agency. To map and monitor the rice growing areas of the seven target countries, sarmap uses high resolution imagery. The result will be a rice map that indicates the areas where rice is grown, during how many crop seasons and what cultivation method is used. In a further step, sarmap will monitor the crop growth while IRRI and local partners perform tests on the ground to calibrate the observations from space and use them along with weather, crop management and soil information to develop a remote sensing-driven crop growth model to estimate actual rice yields. Food Early Solutions for Africa (FESA) Micro-insurance EARS is a Dutch consultancy that specialises in the physical description and mathematical modelling of object-sensor interaction. It uses visual and thermal infrared satellite data in mapping temperature, radiation, evapotranspiration and precipitation from space. In 2009 the company received a grant from the Netherlands Minister of Development Cooperation to carry out the Food Early Solutions for Africa (FESA) Micro-insurance project. The objective is to develop satellite-based microinsurance that reaches every farmer in Africa. In the framework of this project, EARS compiled a 30-year retrospective database of Meteosat hourly visual and thermal infrared data and processed it to daily and 10-day climatic data fields. FESA uses relative evapotranspiration (RE), which is proportional to crop yield. The RE data developed in the FESA project covers the entire African continent at 3 km resolution. A 30 year data series can be extracted for any location on the African continent. Thus FESA based insurance can truly reach every farmer, according to EARS. EARS completed its first drought insurance design for maize growers in Burkina Faso and Mali in early The corresponding pilot project took place during the 2011 growing season. EARS monitored the index and every 10 days provided a data report with information on the start and progress of the season and the temporal development of the index. Based on this successful first pilot, this insurance initiative is now being scaled up to more than 800 locations. Millions of African farmers could be insured in about five years. The technology may also be extended to other parts of the world, in particular to eastern Asia, where Japanese and Chinese geostationary meteorological satellites can provide years of data.

10 09 Summary - Demand for crop insurance will grow Demand for crop insurance is growing and will continue to grow. To feed the world s growing population without devastating environmental impact, farming must become more productive. Making crop insurance available is a major factor in supporting this more intensive agriculture, because it requires famers to invest more in their inputs and so take more risk. The drive to produce more energy from plant sources is adding to this demand. In the US, annual maize-based ethanol output is expected to double between 2006 and 2016, as is the output of oilseeds in the European Union. In Brazil, annual ethanol production is projected to reach 44 billion litres by 2016, while Chinese ethanol output is also expected to rise significantly. Fortunately similar crops have similar requirements wherever they are grown planting and harvesting at the right times, and moisture, sun and warmth at certain times in the growing cycle. This means that once tested, crop insurance schemes can be scalable. In markets where the insurance industry is not developed, index-based solutions are cheaper and quicker to apply. Data is crucial for the supply of insurance to meet this demand at risk-related prices, yet few countries have the records needed for robust modelling. Monitoring the development of insured crops and accurate and rapid claims settlement are also important to a sustainable market in crop insurance globally. Remote sensing can be useful at all stages in crop insurance from simulating historical data to the management and settlement of losses. Crop producers and agribusiness entities around the world are realizing the value of forward-thinking insurance providers who can provide innovative products, financial strength, and superior risk management. RenRe Lloyd s syndicate 1458

11 10 References and further reading Recent market breakdown: Includes premiums from government-supported agricultural insurance schemes: documents/sigma1_2013_en.pdf Ibid AgriculturalMicroinsuranceGlobalPracticesandProspects.pdf A World Bank document provides a useful summary table that details the characteristics of various types of insurance (Table 2.1, p10): WEATHER%20INDEX%20INSURANCE%20FOR%20AGRICULTURE_WB_WII_Paper_Nov_2011.pdf This provides a useful table giving an indication of the relative sizes and penetration of agricultural insurance in Europe (p15, table 2), although it is a few years old: report_2009_09_agri_ins.pdf A good explanation and illustration of the complexity of some yield-based insurance systems can be found here: Remote sensing-based Information and Insurance for Crops in Emerging Economies (RIICE) php?option=com_k2&view=item&id=12196&lang=en FESA Microinsurance: and

12 FS-KTN Lighthill Risk Network Knowledge Transfer Network Financial Services