Methodologies Applied For Monitoring And Reporting The Crop And Plantation Insurance Effectiveness In The Insurance Industry ABDUL HALIM JANTAN CEO, STERLING INSURANCE BROKERS
TALK SEQUENCE 1. INTRODUCTION TO MALAYSIAN CROP AND PLANTATION LANDSCAPE 2. WHY A COMPREHENSIVE CROP AND PLANTATION INSURANCE IS REQUIRED 3. ISSUES FACED IN IMPLEMENTING CROP AND PLANTATION INSURANCE 4. MOVING FORWARD
INTRODUCTION TO MALAYSIAN CROP AND PLANTATION LANDSCAPE CURRENT INSURANCE MARKET SCENARIO
INTRODUCTION TO MALAYSIAN CROP AND PLANTATION LANDSCAPE Currently, there is NO crop insurance scheme available in Malaysia. However, there was a roadmap towards it beginning in 2009 when Datuk Noh Omar, the then Ministry of Agriculture and Agro-based industry, mooted the idea to introduce an insurance scheme for breeders and farmers. In the early phase, the insurance scheme is targeted and will be made available only to paddy farmers but it will be expanded to other agricultural crops eventually. Eventually, the proposal to introduce crop insurance coverage for agriculture farmers was submitted to the Cabinet for approval in 2012. In terms of the governing bodies, the proposal has identified that the Ministry of Agriculture would implement the program with the support from the Bank Negara Malaysia as a supporting financial agency. However, there was no detailed information on how the insurance program will be managed and financed.
CURRENT INSURANCE MARKET SCENARIO At the moment, our only available option of insuring crops in Malaysia is through the Insurance of Growing Trees which is under the purview of Persatuan Insurans Am Malaysia (PIAM) via its Revised Fire Tariff. All PIAM members are allowed to underwrite the risk on their nett capacity. Hence, data management in relation to crop and plantation insurance is individually managed by the respective members. The perils covered are fire, lightning, animal damage, flood, windstorm, riot, strike, malicious damage and aircraft damage. Cover can be extended to include deliberate burning of undergrowth, plants or trees within the estate. The cover is only applicable to industrial crops i.e. rubber, cocoa and palm oil. However, as the next slide illustrates, Malaysia also produces other crops and plantation products such as rice, tea, tobacco and pineapple.
A SNAPSHOT OF CROP AND PLANTATION PRODUCTS IN MALAYSIA Year Natural Rubber Crude Palm Oil Palm Kernel Cocoa beans (raw/roas ted) Coconut Oil (crude & refined) Copra cake Tea Pineapple Rice Tobacco '000 tonne matrix 2000 927.6 10,842.0 3,162.9 70.3 28.1 8.5 23.5 71.0 1,381.7 11.7 2001 882.1 11,803.8 3,367.8 57.7 33.1 13.0 22.6 65.0 1,351.5 8.3 2002 889.8 11,909.3 3,268.6 47.7 39.1 13.6 20.6 70.1 1,415.1 11.3 2003 985.6 13,354.8 3,627.2 36.2 40.6 11.7 16.5 72.1 1,453.1 11.7 2004 1,168.7 13,976.2 3,661.4 33.4 42.4 11.4 15.6 77.4 1,467.1 12.9 2005 1,126.0 14,961.7 3,963.1 28.0 30.8 12.0 11.4 85.4 1,490.0 9.4 2006 1,283.6 15,880.8 4,125.1 31.9 27.8 8.7 11.1 84.3 1,385.3 6.1 2007 1,199.6 15,823.7 4,096.9 35.0 37.1 11.0 10.8 84.7 1,530.9 6.5 2008 1,072.4 17,734.4 4,577.5 28.0 42.3 8.3 11.6 66.3 1,516.4 6.3 2009 p 857.0 17,564.9 4,500.6 18.2 41.9 10.5 10.2 62.4 1,619.2 2.4 Source: Department of Statistics Malaysia
WHY A COMPREHENSIVE CROP AND PLANTATION INSURANCE IS REQUIRED
WHY A COMPREHENSIVE CROP AND PLANTATION INSURANCE IS REQUIRED Given that the Insurance for Growing Trees only covers industrial crops, there is a need for an insurance scheme to cover the other crops, most importantly is paddy. Paddy is a staple food crop in Malaysia and typically grown in areas which are vulnerable to floods. In the past 30 years, floods have caused the worst damage to Malaysian economy. In 2007, the economic damage caused by floods amounted to 0.1% of country s GDP. This can be illustrated in the following slide.
ECONOMIC DAMAGE CAUSED BY FLOODS Source : Promoting Risk Financing in the Asia Pacific Region: Lessons from Agriculture Insurance in Malaysia, Philippines and Vietnam
WHY A COMPREHENSIVE CROP AND PLANTATION INSURANCE IS REQUIRED Additionally, coverage as provided by the private insurance sector is not sufficient as Malaysian farmers also face other loss exposures such as :- drought crop disease climatic changes pest outbreak reduced rainfall variability of crop production loss of harvest landslide Hence, the need for a comprehensive crop and plantation insurance scheme is crucial, taking into account the impact of the above natural perils that has caused substantial economic loss to the country.
ISSUES FACED IN IMPLEMENTING CROP AND PLANTATION INSURANCE
ISSUES FACED IN IMPLEMENTING CROP AND PLANTATION INSURANCE 1. High Administrative Costs High costs to have the risk-classification and monitoring systems. Other costs are associated with acquiring the data needed to establish accurate premium rates and conducting claims adjustment. Most studies have reported high cost of implementing crop insurance (as much as approx. USD 275 million per annum).
ISSUES FACED IN IMPLEMENTING CROP AND PLANTATION INSURANCE 2. Lack of Statistical Data Currently, data management in relation to crop insurance is individually managed by the respective insurance companies. There is no common platform for data pooling or data management for crop and plantation insurance, unlike the motor insurance which can rely on ISM services for the maintenance of the Central NCD System with the objective to reduce premium leakages within the motor insurance class. With introduction of a similar agency like ISM, relevant data related to crop and plantation insurance can be collated centrally.
ISSUES FACED IN IMPLEMENTING CROP AND PLANTATION INSURANCE 3. Skewed Perception Being the backbone of the agriculture industry, the insured (farmers) generally have more knowledge about their own risk profile and probability of losses than the insurer. Therefore, the farmers find themselves being able to discern whether the insurance premium accurately reflects the risk they face. Consequently, only farmers who bear greater risks will purchase the coverage and the insurer are left insuring the higher risk portfolio. Hence, the risk is not well spread and in the event of losses, the likelihood for the indemnities paid will be much higher than the premiums collected. This creates a vicious cycle i.e. the insurers will keep on charging higher premiums on the farmers to recover from the previous huge losses. As such, they believe that the compensation disbursement is complex, unreasonable and unfair.
ISSUES FACED IN IMPLEMENTING CROP AND PLANTATION INSURANCE 4. Inadequate Information Some farmers adopt industrial agricultural practices with large farms and these farmers wanted to be covered in order to avoid risks. However, these farmers are not convinced by the way the insurance companies sell their products and the information they get from the insurance marketing channels. It can be said that the farmers lacked knowledge on procedures for buying insurance, claims settlement and the appropriate channel to address their grievances. This require improvements in the way the insurance products are communicated to the prospective insurance buyers and those who have already enrolled in the insurance.
ISSUES FACED IN IMPLEMENTING CROP AND PLANTATION INSURANCE 5. Moral Hazard Moral hazard is another problem that lies within the incentive structure of the relationship between the insurer and the insured. After entering the contract, the farmer's incentives to take proper care of the crop diminish, while the insurer has limited effective means to monitor the eventual hazardous behaviour of the farmer. This behaviour might also result in greater losses for the insurer (World Bank, 2005).
MOVING FORWARD PROPOSED CROP AND PLANTATION INSURANCE FRAMEWORK
MOVING FORWARD 1. Product Must be comprehensive enough to address the coverage requirements of various crop and plantation communities in Malaysia. It should tackle the common perils faced by the farmers, such drought, crop disease, climatic changes, pest outbreak, reduced rainfall, variability of crop production, loss of harvest and landslide.
MOVING FORWARD 2. Price A fair pricing mechanism will attract larger percentage of adaptation among the plantation community toward the proposed crop and plantation insurance. Bigger number of subscriptions will ensure a sizable pool of premiums and the spread of risks for the insurer to write the risk at a more competitive level (Economies of Scale). In relation to this, the government could also play a role to influence the price structure via subsidization incentives.
MOVING FORWARD 3. Promotion The current proposal on crop and plantation insurance coverage which was submitted to the Cabinet for approval in 2012 needs to be promoted to all parties within the crop and plantation insurance chain, most importantly the end users, i.e. the farmers and breeders.
MOVING FORWARD 4. Distribution The marketing channels must be technically sound and capable to assess the risks and requirements of the prospective buyers. They must be able to persuade the farmers to purchase crop insurance as a risk transfer mechanism. In order to create an effective and sound crop and plantation insurance ecosystem, we are proposing the following Crop And Plantation Insurance Framework:-
PROPOSED CROP AND PLANTATION INSURANCE FRAMEWORK 1. Government (MOA) 2. BNM Policy Maker To promote large-scale farming To set the relevant policies in the crop and plantation insurance implementation 1. Insurer & Reinsurer 2. Banker 3. Data Management Agencies 1. Direct Marketing 2. Brokers 3. Agents 4. Bancassurance Policy Enforcer The agencies responsible for covering risks To provide financial capacity to the crop & plantation community The agency responsible to administer data related to crop insurance Marketing Channels Marketing is done directly by the insurance companies Work in partnership with the clients to protect the risk Work on behalf of the insurance companies to market the product The product is promoted by bank s channel 1. Farmers 2. Breeders End Users Paddy, tea, tobacco, pineapple and coconut farmers Aquaculture and livestock breeders