DISASTER RISK INSURANCE FOR SMES AND AGRICULTURE Vijayasekar Kalavakonda Senior Financial Sector Specialist Finance & Markets Global Practice The World Bank Group
Asia-Pacific is the world s most disaster prone region accounting (in 2015) for 45 percent of World s Natural Disasters <20 percent of insured losses, and >41 percent of economic losses 2015 FACT SNAPSHOT ASIA-PACIFIC NATURAL DISASTERS IN 2015 Source: UNESCAP Report (2015)
Insured losses is significantly low compared to expected losses due to natural disasters EXPECTED LOSSES PER ANNUM (% OF GDP) UNINSURED LOSS (% OF TOTAL LOSS AND AVERAGE UNINSURED LOSS PER NATURAL CATASTROPHE 2004-2011, $BN) Source: LLOYD S GLOBAL UNDERINSURANCE REPORT (2012)
1. World Bank support to Agriculture Insurance While agricultural insurance can bring large benefits to vulnerable rural households, the market is still under-developed particularly in low-income countries Agriculture is an uncertain business, and improvements in risk mitigation, transfer or coping can bring large benefits to vulnerable rural households: Although it is not a solution to every agricultural risk, agricultural insurance can be a powerful solution as part of an integrated agricultural risk management strategy It can help prevent vulnerable rural households from falling into deep poverty following a natural disaster, and also improve their access to agricultural credit Globally, the market for agricultural insurance is still under-developed, particularly in lowincome countries: In 2010, agricultural insurance penetration ranged from 1.99% of GDP in high-income countries to as low as 0.01% in low-income countries, compared to 3.15% and 0.69% respectively for non-life insurance Source: Mahul and Stutley (2010) 3
Annual Premium (USD) Global Agriculture (Re) Insurance Premiums AGRICULTURE INSURANCE PREMIUM VOLUME AND GROWTH RATE COUNTRIES THAT CUMULATIVELY ACCOUNT FOR >90% OF AG INSURANCE PREMIUM IN 2016 30.00 25.00 20.00 15.00 10.00 5.00 - Annual Premiums (USD) Premium Growth (%) 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% Hail Non-Hail Total USA 882 8,400 9,282 CHINA - 3,591 3,591 INDIA - 2,800 2,800 CANADA 170 1,250 1,420 JAPAN - 810 810 SPAIN - 538 538 BRAZIL 49 257 306 FRANCE 180 238 418 ITALY - 400 400 MEXICO - 294 294 ARGENTINA 194 9 203 GERMANY 175 15 190 Sub-Total 1,650 18,602 20,252 Source: Munich Re
Main barriers/challenges to develop insurance markets against natural disasters/agriculture insurance 1. High level of informality / unorganized sector challenges in targeting/reach increased/high distribution/transaction cost 2. Income levels and volatility in incomes 3. Demand Supply mismatch in product features/needs Example Weather Index-Based Insurance vs. Indemnity Based Product 4. Usual suspects a) lack of awareness/financial illiteracy b) documentation/processes drudgery c) claims settlement & rejection rates
S-curve demonstrates the empirical relationship between disposable income and insurance penetration Source: insurancelinked.com/the-s-curve/ A minimum GDP per capita of $5,000 appears to be the magic number at which insurance take-up really picks up, as this reflects the growth of an economy's middle class For low income countries elasticity between insurance & GDP is around one insurance market growth is at the same pace as GDP Catastrophe pool(s) that encourages/mandates homeowners to take out insurance, is one solution for such markets Publicly funded & social insurance programs are options
Addressing the barriers/challenges 1. Focusing on PPP (Public Private Partnership) solutions a) publicly funded & privately managed insurance programs addresses the issue of affordability, achieving scale, and crowding-in private sector risk management solutions medium to long term potential to shift the cost/burden to the individuals. Example insurance programs in India, China, Thailand, Kenya b) incentivizing participation/voluntary enrollment increase in take-up rates: bundling of insurance with farm input support programs. Example Sri Lanka, Zambia, Nigeria c) disaster insurance pools. Example Turkish Catastrophe Insurance Pool, Romanian Homeowners Insurance Pool, Agriculture Coinsurance Pool in Kenya
Addressing the barriers/challenges 2. Flexible product offerings addressing the needs Agriculture Insurance Risk Categories Natural Risks: hail, storm, fire, frost drought / flood frost / heat diseases / epidemics insects / pests wild animals (climate change) Social risks: fire burglary / theft strike / riot vandalism war / terrorism moral hazard Economic risks: price fluctuations (input /output) loss of income depreciation currency RoE interests rates On farm risk management Agricultural production
DISTRIBUTION MODELS Addressing the barriers/challenges 2. Flexible product offerings INDEMNITY INDEX Classical insurance with onsite loss assessment Underwriting of an index (rather than specific risk) INDIVIDUAL GROUP For all lines of business Dominating product worldwide Index as a proxy for crop and livestock More in use in Agriculture Insurance in Developing Country PORTFOLIO
Addressing the barriers/challenges 3. New risk management solutions. Example risk sharing facility Challenges/Barriers High premium rates High volatility of net account results Low institutional capacity Limited reinsurance capacity PROPOSED SOLUTION Risk Share Facility
Addressing the barriers/challenges 4. Technology-based solutions Mobile telephony payments, transaction processing, claims management/settlement (e.g., mobile CCEs) Smart-phone based technology capturing images and converting the images using machine language technology for estimating crop yields (bypassing the need for crop cutting experiments or on-field /physical inspection of losses Satellite-based/remote sensing and UAVs/Drones
How can Governments/Donors/Regulators help in developing the market? 1. Regulators a) Ensuring that insurers don t cannibalize the market race to the bottom b) Risk based supervision and monitoring the adequacy of capital/reserves & quality of reinsurance c) Standardize catastrophe reporting 2. Governments a) Effective market makers b) Addressing the S-Curve challenge affordability c) Financial awareness d) Investing in market infrastructure public good in nature
How can Governments/Donors/Regulators help in developing the market? 3. Donors a) Investing/supporting Patient Capital b) Moving away from perpetual piloting to strategic pilots and supporting scaling-up c) Sharing of global experience & advocacy 4. Industry need to realize that these are commercial & for profit organizations with responsibilities to shareholders. Also, many of the firms in developing countries do not have deep pockets unlike to global MNCs hence the ability to indulge in medium to long term development products like Natural Disaster and Agri Insurance is very limited.
Way Forward 1. Global Initiatives Insurance Development Forum/ InsuResilience/ G7 Initiative on Climate Insurance. 2. Recognition by Governments in many developing countries on the need/role of insurance, particularly in dealing with the risks in the Agriculture Sector. Examples Indonesia, Thailand, Kenya, Bangladesh, Pakistan, Sri Lanka, India 3. Technology could be a game changer in the years to come moving to both customized and commoditized insurance products
BACK-UP SLIDES
Insured vs Uninsured Losses, 1970 2015 (USD billion) Source: Sigma Report (2016), Swiss Re Publication
Agriculture Insurance Premium AGRICULTURE INSURANCE INDEMNITY INSURANCE PRODUCT(S) PREMIUM/TYPE OF PRODUCT (%) IN 2012 Hail Fire Storm Flood Frost Crop Hail Excessive Rainfall Drought Price 4% 2% 1% 1% 1% Hail + Named Perils Multi-Peril Crop Insurance (Yield Revenue Insurance 11% Multi Peril Insurance 80% MPCI Livestock Aquaculture Forestry Named Risk Peril Blodstock Greenhouse