Agricultural Risk Transfer

From Insurance to Reinsurance to Capital Markets

Roman Marco Hohl

• Publisher: Wiley
• Year: 2018
• ISBN:
  9781119345657
• Edition: 1
• Topic: Business
• Subtopic: Financial Risk Management
• Index: Business

Gain a holistic view of agricultural (re)insurance and capital market risk transfer

Increasing agricultural production and food security remain key challenges for mankind. In order to meet global food demand, the Food and Agriculture Organisation estimates that production has to increase by 50% by 2050 and requires large investments. Agricultural insurance and financial instruments have been an integral part to advancing productivity and are becoming more important in increasingly globalized and specialized agricultural supply chains in the wake of potentially more frequent and severe natural disasters in today's key producing markets.

Underwriting, pricing and transferring agricultural risks is complex and requires a solid understanding of the production system, exposure, perils and the most suitable products, which vastly differ among developed and developing markets. In the last decade, new insurance schemes in emerging agricultural markets have greatly contributed to the large growth of the industry from a premium volume of US$10.1 billion (2006) to US$30.7 billion (2017). This growth is bound to continue as insurance penetration and exposure increase and new schemes are being developed. Agricultural (re)insurance has become a cornerstone of sovereign disaster risk financing frameworks.

Agricultural Risk Transfer introduces the main concepts of agricultural (re)insurance and capital market risk transfer that are discussed through industry case studies. It also discusses best industry practices for all main insurance products for crop, livestock, aquaculture and forestry risks including risk assessment, underwriting, pricing, modelling and loss adjustment.

• Describes agricultural production risks and risk management approaches
• Covers risk transfer of production and financial risks through insurance and financial instruments
• Introduces modelling concepts for the main perils and key data sources that support risk transfer through indemnity- and index-based products
• Describes risk pricing and underwriting approaches for crop, livestock, aquaculture and forestry exposure in developed and developing agricultural systems
• Become familiar with risk transfer concepts to reinsurance and capital markets
• Get to know the current market landscape and main risk transfer products for individual producers, agribusinesses and governments through theory and comprehensive industry case studies

Through Agricultural Risk Transfer, you'll gain a holistic view of agricultural (re)insurance and capital market solutions which will support better underwriting, more structured product development and improved risk transfer.

CHAPTER 1
Agricultural Markets and Risk Management

1.1 INTRODUCTION

Agriculture has always been a core human activity, and over the past century it has made enormous progress in increasing the production of food and agricultural raw materials. Much of the growth is due to specialisation, verticalisation, expansion in land use and water resources, the improvements in farming techniques and risk management. At the same time, food production has become globalised, is dominated by a few producing countries, and has managed to keep pace with population growth and increasing demand.

The large growth in production, verticalisation and industrialisation has led to increased stress on natural resources and a higher vulnerability to unexpected shocks, including natural disasters and epidemic diseases that impact local and global markets. Climate change, including more extreme weather events, and future economic developments are major factors that drive supply and demand for agricultural products and food security. Risk management, including risk transfer, has been an integral part of advancing agricultural production in coping, mitigating and transferring production risks. The (re)insurance industry and capital markets have been developing products to satisfy the growing need of farmers, agribusinesses and governments to transfer risks.

This chapter provides a brief introduction of the main trends that drives demand and supply in agriculture, while trends in the individual sectors are discussed in subsequent chapters. Key risks and risk management options are discussed for producers, agribusinesses and governments.

1.2 TRENDS AND CHALLENGES IN THE AGRICULTURAL SECTOR

At the change of the millennium, there was a reasonably high level of confidence that projected food demand could be met by improved crop production. In more recent years, the consensus is that future food production will struggle to keep up with growing demand. Part of the change in viewing future global food security is that (i) grain prices were initially assumed to decrease in future decades, (ii) rates of economic development in the most populated countries have exceeded initial projections, (iii) the demand for grain, energy and livestock products has increased more rapidly through higher than anticipated increases in purchasing power, (iv) increases in grain yields have been slowing, and (v) climate change is perceived to have larger impacts on most agricultural activities. The global 2017 World Economic Forum (WEF) risk survey revealed that (i) extreme weather events ranked as the likeliest of the 10 most likely risks and ranked as number 2 of the 10 risks with the largest impact and (ii) food security was ranked seventh among the 10 risks with the largest impact.¹

Generally, a more sustainable approach to agriculture is needed to use land, water and input supplies more efficiently (conservation agriculture) and to increase farm incomes and food security while adapting to climate change through mixed crop–livestock systems and sustainable livestock production (climate-smart agriculture).² Producing more with fewer resources, reducing greenhouse gas (GHG) emissions (global warming) and enhancing the livelihoods of smallholders in low- and middle-income countries remain key challenges for the agricultural sector. Increasing investments that are backed by safety nets of more specialised and verticalised agriculture (risk transfer) is essential to increasing production.

RISING DEMAND

Recent projections on demand and supply conclude that the agricultural sector will need to produce almost 50% more food, feed and biofuel by 2050 compared with 2012.³ This means global markets will need to produce on average one third more, while sub-Saharan Africa and South Asia will need to double production. There is a consensus that the additional food will need to come predominately from yield increases since expansion of arable land is challenging as it is not readily available due to a lack of infrastructure in remote locations and a concentration of available land in only a few countries.

A key driver of demand is a growing human population that is likely to reach 9.73 billion in 2050 and 11.2 billion in 2100. Demand is undergoing structural changes in that increasingly affluent middle classes in low- and middle-income countries can afford to change their dietary pattern towards more resource-intensive dairy and meat products. As the global demand for livestock products is projected to increase by 70% by 2050 relative to 2010, production of feed from grains and cereals has to increase substantially to satisfy demand for meat and dairy products.⁴ Additionally, the demand for biofuels, which use the same grains and oilseeds as livestock feed, is projected to continue growing and has increased the competition between food and non-food uses of biomass and created an interlinkage between food, feed and energy markets.

After peaks in 2008 and 2011, food prices have stabilised, but price volatility seems to have increased since 2000. Future food price levels are difficult to estimate and depend on how production systems will respond to resource constraints and climate change. On average, imports are 0–20% of domestic food supply, with some large agricultural economies exporting 50% of their domestic production while many African and Asian countries are among net food importers.

CHALLENGED SUPPLIES

While productivity in all agricultural sectors and key markets has significantly improved over the past 50 years, intensification and industrialisation put increased stress on natural resources, while the industry is going through structural changes. In a number of countries, faulty and distortionary government policy incentives led agriculture production to be highly inflexible to market demand. Global free trade and stringent domestic agricultural policies have added to the vulnerability of individual agricultural sectors and producers. A growing number of interrelated and longer-term trends that are likely to include more frequent natural disasters (climate change), rural transformation, stresses on natural resources and financial shocks in the global economy are difficult to estimate, but all have the potential to severely impact all agricultural sectors.

Structural Changes

The agricultural sector has undergone large structural changes, particularly in high-income countries where farming's share of gross domestic product (GDP) has decreased and where the industrial and service sectors have...

Table of contents

• Cover
• Table of Contents
• Foreword
• Introduction
• Acknowledgements
• Special Thanks
• CHAPTER 1: Agricultural Markets and Risk Management
• CHAPTER 2: Concepts of Insurance
• CHAPTER 3: Agricultural Perils and Risk Modelling Concepts
• CHAPTER 4: Agricultural Data and Proxies
• CHAPTER 5: Agricultural Insurance
• CHAPTER 6: Crop Insurance
• CHAPTER 7: Livestock Insurance
• CHAPTER 8: Aquaculture Insurance
• CHAPTER 9: Forest Insurance
• CHAPTER 10: Risk Transfer to Reinsurance Markets
• CHAPTER 11: Risk Transfer to Capital Markets
• Acronyms and Abbreviations
• Index
• End User License Agreement