The basics of agricultural insurance Will we have sustainable agricultural production without insurance?
Agenda 1. Munich RE Agro Worldwide 2. Munich RE operational areas in Sub-Saharan Africa 3. Agricultural risk management 4. Crop insurance types 5. Risk assessment process 6. Crop loss assessment 7. Livestock Insurance 8. Operations of an Agricultural Insurer 9. Reinsurance 10. Conclusion 07.10.2016
Munich Re s competence in agricultural insurance: Agricultural experts in Munich and worldwide MR Am MR Munich SFR6 Agro MR China MRI Italy MR India MR Mexico MR do Brasil MR Buenos Aires Munich Re of Africa (MRoA) MRA Australia
MRoA Operations in Sub Sahara Africa Munich Re Munich MRoA Accra Nairobi Mauritius Johannesburg Cape Town 4
Sub-Saharan Africa Broad market overview A rapidly growing region Economic growth in Sub Sahara Africa set to continue at average 5% p.a of Gross Domestic Product (GDP) Main drivers are Resources, Consumer Spending, Telecommunications and other Services. Investment in infrastructure and energy seen as enablers. Strong above-average economic growth to continue in oil exporting countries (Angola, Ghana, Nigeria, Sudan) Concomitant growth noted in Life & Non-life insurance market from the rest of Sub-Saharan Africa Compared to the rest of the Continent, South African insurance market is mature and very competitive The South African insurance market continues to be by far the largest in Africa South African insurance market is tightly regulated, with an own version of Solvency II being implemented 5
Challenges facing the agricultural industry in Sub- Saharan Africa Increased frequency and intensity of climatic events Dual agricultural production (commercial and smallholder farmers) An ageing producer base with fewer younger farmers On farm and infrastructure challenges Not taking advantage of our comparative advantages. Competitiveness is undermined by Lack of skills and inadequate access to support services International competition in commodity markets (imported products) Cost/price squeeze (cost of insurance is one such factor of production affecting our competitiveness) Consolidation of farms to achieve economies of scale Changing land-use patterns as arable land is used for inter alia game ranching, residential property development and mining amongst others. 6
Strategy for Targeted Markets Market feasibility study SELECTION OF LOCATION & CROPS : Agro-climatic conditions and soil types. Frequency and severity of risks. Accessibility of farms for inspection and loss assessment. Develop suitable products Partner local players & assist with capacity building training /loss assessment etc. 07.10.2016
Role / Benefits of Crop Insurance Stabilisation of farmers income Risk management tool for financial institutions Collateral Adoption of innovative technology Loss prevention and minimisation Prerequisite of Insurability Particular- localised in source and effect Not fundamental- general and widespread Capable of financial measurement Sufficient number of insureds well spread Fortuitous and beyond management control 07.10.2016
Criteria : Requirements for a crop insurer Experience and Expertise Infrastructure & Systems Proven Assessment Procedures Financial Backing Adequate Reinsurance Good securities
Risks in Agriculture Strategic Enterprise selection Marketing channel selection Financial / Market Commodity price fluctuations Exchange rates Inputs cost fluctuations Finance charges Production Weather perils - drought Plant and animal diseases Insects and other pests 10
Risks in Agriculture (contd.) Political environment Markets open for trade Land tenure Regulatory environment Individuals / Producer Management Illness Accident Death Skills Investments decisions choice of enterprise Cultivation methods Livestock husbandry methods Risk management Legal liability General liability Environmental liability Products liability 11
Insurable risks Risk can be insured when: The cause of loss is accidental or fortuitous (i.e. happening by chance) There is an insurable interest The risk must be one of a number of similar risks The insuring of risk must not be against public policy Loss can be financially quantified Insurable interest is the legally recognised relationship between the insured and the financial loss that is suffered. You can only insure things that are legally yours. Risks that cannot be insured: Unquantifiable risks Speculative risks risks that are a gamble Fundamental risks Drought War unemployment
The role of crop insurance Producers face: Climate change Decreasing production margins Decreasing financial reserves to absorb losses Access to finance What agricultural insurance can do: Stabilise producers income Provide an incentive for investment Serve as collateral and allow access to finance What agricultural insurance cannot do: Compensate for poor management and cultivation practices Compensate for production on marginal areas Compensate for Inadequate agricultural policy of government (infrastructure, subsidies) 13
How does agricultural insurance differ from other insurance? Risk sensitivity, risk frequency Exposure to climate change Land as a production asset that cannot be relocated Political aspects of production National food security Transformation in the sector Importance of a stable rural economy 14
Examples of risk evaluation Before an agricultural risk can be accepted for insurance, the enterprise must be evaluated in detail. This include, evaluation of the soil, climate, husbandry practices as well as the management skills of the farmer. What are the criteria?
Location Are the crops to be insured planted in an area suitable for them?
Soil It is important that the grid data of soil depth, clay content and chemical properties are available
Soil physical criteria 1. Soil depth: 1.5m to 2m deep highest score <0.9m negative score 2. Clay content: Top layer <15% and lower layer 15-20% with impenetrable layer 3. Shallow water table: More than 1 in 3 years = highest score 4. Water logging: Negative score for frequent problems 5. Compaction: Negative score
Soil chemical criteria 1. Nutritional status: General status must be within acceptable limits 2. Soil acidity (ph) : Must not restrict crop growth and yields 3. Soil correction : Is it completed?
Agronomical criteria 1. Direct preceding crop Sunflower = negative score 12 month fallow = highest score 2. Cultivar Long, medium or Ultra short varieties? 3. Cultivation Best cultivation practices for the area and soil type 4. Planting dates
Agronomical criteria (continue) 5. Planting density Normal to 20% below normal = highest score 6. Weed and insect control Negative score if not up to standard 7. Grain quality 8. Timing of cultivation Does the farmer have a good record and are implements sufficient to ensure that harvest, etc are in time? 9.External factors Theft, frost, damage due to birds, animals, etc.
Rainfall Annual average rainfall Carries a high load for rain-fed farming
Financial management 1. Availability of input cost figures positive score 2. Area input figures in line with area 3. Use external expertise positive score
Evaluation 1. Location = 10% 2.Soil and environment = 50% 2. Management = 40% 2.1 Agronomical management = 32% 2.2 Financial management = 8%
Insurance Period Insurance attaches: - At time of seeding - When plants have emerged. - at a certain date. - earliest e.g 3 days after insurance contract. Insurance ends: - at harvest - at final loss adjustment - at a certain date Important : Sales closing date 07.10.2016
Perils in crop production Adverse weather conditions: - Hail - Storm, Wind, Sandstorm - Floods, Excessive rainfall. - Drought, Heatwave Fire & Lightning Uncontrollable disease and pets Transit Risks (Accidents & Overturning) 07.10.2016
Basis of sum insured 1. BASED ON YIELD x PRICE x AREA - average yield of a /farm/region x ha x price - Ind. 5 years average yield x price - Ind. expected yield x expected or market price 2. AMOUNT INDEPENDENT OF YIELD - Production cost - Production credit - Market value 07/10/2016 27
Underwriting consideration Type of crop Perils to be insured Susceptibility of crop to insured peril Location Spread ( Distribution) Loss experience Growth cycle Planting and harvesting dates Evaluation of horticultural practices (management) Risk management High producer participation 07.10.2016
Types of insurance covers 1. Loss or nominated peril insurance e.g. hail 2. Yield insurance MPCI 3. Index insurance 07.10.2016
Loss Insurance Nominated Peril Cover Product alternatives: - Fixed sum insured Application : - Named perils (e.g hail, frost, inundation) Advantages : - Simple product design - Loss adjustment based on % loss - Reliable, scientifically based loss adjustment procedure used. Disadvantages : - Only applicable to few risks (e.g. hail, fire, frost) 07.10.2016
Yield Guarantee Insurance (MPCI) Product alternatives: - Individual historic yield (farm level) - Regional average yield Application : Advantages : - Applicable for all climate risks - Comprehensive cover, all climate risks - Easy to understand - Very good correlation between yield and indemnification Disadvantages : - Determination of yield guarantee is a challenge. - All climate risks have to be insured. - Indemnification of non-insured perils (e.g. pest and diseases. 07.10.2016
Index Insurance Product alternatives: - Meteorological trigger (e.g rainfall deficit, excessive rainfall & temperature) - Area risk trigger (e.g Group risk plan) - Vegetation index Application : - For selected risks only (meteorological trigger) - Applicable for all climate risks (area yield trigger, vegetation index) Advantages : - No loss adjustment necessary - Lower operational costs than for yield guarantee products because no loss assessment in the field necessary) 07.10.2016
Index Insurance - continued Disadvantages : - Considerable base risk remains with the farmer - Development and marketing costs are high. - Limited suitability to serve as collateral. - Quality losses not insurable. - Product based on meteorological trigger or vegetation indices for farmers is often difficult to understand. Therefore low acceptance, especially amongst smaller and less skilled farmers. Key application areas: Suitable for non-intensive agriculture and in developing countries where infrastructure is less developed and serves as a substitute for Government disaster relief programmes. 07.10.2016
Insurance Period Insurance attaches: - At time of seeding - When plants have emerged. - at a certain date. - earliest e.g 3 days after insurance contract. Insurance ends: - at harvest - at final loss adjustment - at a certain date Important : Sales closing date 07.10.2016
Pricing the insurance premium Sum Insured Rate and Premium Deductible Loss & Loss Adjustment 35
Sum Insured Example: 1 ha Maize is insured for e.g. R 2.000/ha = equivalent to production costs. The Sum Insured depends on the grain prices and input costs. The farmer might choose lower sums insured, because the S.I. Triggers the premium payable and the indemnity to be received. Example with a premium rate of 4 %: S.I. of R 2.000/Ha x 4 % = Premium 80 R/Ha S.I. of R 1.000/Ha x 4 % = Premium 40 R/Ha Indemnity with total loss: R 2.000/Ha versus R 1.000/Ha les deductible 36
Rate & Premium The rate is determined by the Insurer according to: - Crop Type History - Area Exposure History - Farmer s Loss History - No-Claim-Bonus - Market/Competition - Perils to be insured - Susceptibility of crop to insured peril - Location - Spread ( Distribution) - Loss experience - Growth cycle (see next slide) - Planting and harvesting dates - Evaluation of horticultural practices (management) - Risk management - High producer participation - Technically sound terms The price (called premium ) of an insurance contract is determined by the rate: e.g.: S.I. of R 1.000/Ha x 4 % rate = R 40 /Ha premium/ha. The premium must be paid to the Insurer before the insurance period starts. 37
Rate & Premium Business Model: The total premium of all farmers insured should be higher than the expected total loss, in order for the insurer to cover his expenses and necessary profit margin. Example: Total average historical Loss Costs = 3% of Sum Insured On this basis, the Rate plus loadings = 5% of S.I. This will allow an average payment to the insureds of 80 % of the premium and will provide 20 % of the premium to cover agent- and admin-costs (commissions). 38
Deductible A Deductible is a given part of a loss to be retained by the farmer Example: S.I. = Deductible = Loss = R 1.000 / Ha R 100 / Ha R 250 / Ha Indemnity = R 150 / Ha (250 100) Reasons for a Deductible: - Increase farmer s interest in the protection of his crop (reduce moral hazard). - Avoid paying very small losses with associated high admin costs - Avoid paying insignificant losses, which will not affect the farmer substantially - Reduce the cost / the premium rate for all farmers 39
Claims management process - Notification of loss - Initial (pre-harvest) assessment - Post harvest assessment. - Determination of quantum. - Claim settlement. 07.10.2016
Loss & Loss Assessment Occurrence of a Loss: Destruction of plants by hail, drought, Material damage of crop => Reduction of yield => Reduction of farmer s revenue Insurer s Loss Assessment procedure: - A Loss Adjuster determines the amount of loss between 0 and 100%. - The insured farmers signs the Loss Report. - The Insurer pays the corresponding indemnity less the agreed deductible.
Loss & Loss Assessment Procedure in the field: Contact the farmer (and the local insurance agent). Identify the insured piece of land. Check several points of the field (centre, corners,...): Take fotos of the damaged crops Take samples (counting, weighing) Fill in the documents, get farmer s signature.
Loss & Loss Assessment Hail Loss Assessment: Count on 1/4 square meter: - No. of plants lost - No. of leaves or leaf area lost - No. of seeds lost Use tables to calculate the expected loss of yield in percent: e.g. 35 % of expected crop lost = 35 % of Sum Insured to be paid (less deductible). 43
Loss & Loss Assessment MPCI Loss Assessment: Agreed average yield is 4 tons/ha Yield insured is 70% = 2.8 tons/ha Actual Yield is 2.0 tons/ha (measured by sample weighing) Indemnity is 0.8 tons/ha 44
Livestock Insurance Insurance of cattle, sheep, goats, as well as game Scope of Cover All-risks of Mortality Death / emergency slaughter due to accident Death / emergency slaughter due to fire, explosion, lighting, storm Loss due to proven theft Sum Insured Agreed upfront inception of policy Not to exceed market value Purchase price Declared value i.e. high value animals 07.10.2016
Rating Considerations Type of animal Susceptibility Location Age (Growth cycle ) Overall Management and production system Spread Loss Experience Normal Mortality The excess structure 07.10.2016
Claims Loss and Assessment Insured to report loss immediately Responsible for loss prevention 07.10.2016
Claims Loss and Assessment The animal is the property of the insurer following a loss 07.10.2016
Claims Loss and Assessment Post- mortem, cause of death determined, and quantum agreed 07.10.2016
Agricultural Insurers Operations Marketing Distribution Insurance product development & Underwriting Administration Claims Payment Portfolio management Cost efficiency Capital optimization & solvency requirements Profitability & growth targets 50
Documentation required for Insurance Proposal forms Policy schedules Policy wordings Loss assessment procedures 07/10/2016 51
The role of agriculture reinsurers Reinsurers carry exposure to relieve agriculture insurers Reinsurers support in accumulation management, PML calculation and book diversification Help developing public private partnership for ag insurance system to make all agricultural risks insurable 52
jdrewes@munichre.com +27 11 242 2001 2013 Münchener Rückversicherungs-Gesellschaft 2013 Munich Reinsurance Company