Income Stabilisation In European Agriculture Design and economic impact of risk management tools Extreme Weather Risks Experiences & Food for thought Dr. Erich Kasten ARC - Agriculture Reinsurance Consultants, Switzerland AgroRisk Ukraine Ltd., Ukraine

Income Stabilisation In European Agriculture Content of Presentation Weather / Climate Weather / Climate Economic impact of weather Economic impact of weather Risk awareness Risk awareness Actuarial risk data Actuarial risk data Risk appetite of insurance industry Risk appetite of insurance industry Reinsurance Reinsurance Food for thought Food for thought

Income Stabilisation In European Agriculture Weather & Climate - Agriculture WeatherClimate Long-term impact Short-term impact

Income Stabilisation In European Agriculture Weather & Climate – Required actions WeatherClimate Long-term solution Policy adjustment & change Short-term solution Crisis Management

Income Stabilisation In European Agriculture Weather exposure and economic sectors Economic impact of weather perils Primary Agriculture Secondary Industrial Tertiary Services Agriculture the “open roof industry”!

Income Stabilisation In European Agriculture Importance of economic sectors

Income Stabilisation In European Agriculture Awareness – Extreme weather risks Low frequency - high severity risks Low frequency - high severity risks Perceived by farmer as low risks Perceived by farmer as low risks Limited willingness to buy risk transfer products Limited willingness to buy risk transfer products EU farmer used to rely on Government support EU farmer used to rely on Government support Decreasing margins reduce buying willingness Decreasing margins reduce buying willingness Farmers are – in general – risk taker Farmers are – in general – risk taker

Income Stabilisation In European Agriculture …Risk Awareness Improved farm management capabilities increase risk awareness and use of risk management mechanisms Improved farm management capabilities increase risk awareness and use of risk management mechanisms Strict risk management rules applied by finance institutions improve risk awareness, risk valuation and risk management Strict risk management rules applied by finance institutions improve risk awareness, risk valuation and risk management

Income Stabilisation In European Agriculture Risk data… Weather data Weather data Limitations Limitations Number of recording stations / Perils recorded Number of recording stations / Perils recorded Geographical distribution of recording stations Geographical distribution of recording stations Weather data / Farm yield correlations often weak Weather data / Farm yield correlations often weak Basis risk Basis risk Commercial success stories of a parametric crop insurance schemes are rare, if any Commercial success stories of a parametric crop insurance schemes are rare, if any

Income Stabilisation In European Agriculture …Risk data Crop Yield data Crop Yield data Limitations Limitations Historical farm data often not verifiable Historical farm data often not verifiable Low data quality Low data quality High cost of data acquisition High cost of data acquisition Important other risks influencing crop yields Important other risks influencing crop yields Farm management quality Farm management quality Soil type and quality, etc. Soil type and quality, etc. Actuarial use of soft risk data is questionable Actuarial use of soft risk data is questionable

Income Stabilisation In European Agriculture Actuarial pricing Data availability - Data reliability Data availability - Data reliability Actuarial capabilities have improved Actuarial capabilities have improved Actuarial risk pricing has become a top priority in the insurance and reinsurance industry Actuarial risk pricing has become a top priority in the insurance and reinsurance industry Consequences Consequences Risk transfer cost for low frequency high severity systemic agriculture risks have increased Risk transfer cost for low frequency high severity systemic agriculture risks have increased Higher opportunity cost for cat insurance capacity has further increased agriculture cat risk cost Higher opportunity cost for cat insurance capacity has further increased agriculture cat risk cost

Income Stabilisation In European Agriculture Insurance industry Limited risk appetite for agriculture production risks (Crops & Livestock) Limited risk appetite for agriculture production risks (Crops & Livestock) Historically relative low profitability Historically relative low profitability Relative complex, costly business processes Relative complex, costly business processes Focus on low transaction cost products Focus on low transaction cost products Capacity employed for higher ROE business Capacity employed for higher ROE business Relative low and declining economic importance of agriculture in developed economies Relative low and declining economic importance of agriculture in developed economies Competition through public sector Competition through public sector

Income Stabilisation In European Agriculture Crop insurance High cost for underwriting information High cost for underwriting information Anti selection & moral hazard Anti selection & moral hazard Actuarial crop risk pricing capabilities Actuarial crop risk pricing capabilities Complex underwriting processes Complex underwriting processes Specialized loss adjustment Specialized loss adjustment High transaction cost High transaction cost Unattractive, marginal results Unattractive, marginal results

Income Stabilisation In European Agriculture Reinsurance Weather risks contain systemic risk Drought (Lack of rainfall) Frost Hail Excessive moisture, Flood Windstorm Systemic risks require high insurance capacity Insurance companies depend on reinsurance Reinsurance capacity is limited for agriculture

Income Stabilisation In European Agriculture Summary – Weather risks (Crop insurance) Crop hail insurance is a traditional, successful underwritten non-subsidized, private insurance sector product Multi peril weather insurance products are expensive and difficult to underwrite Extreme weather risk schemes require high capacity Multi peril crop insurance products (MPCI) are not viable underwritten without public support

Income Stabilisation In European Agriculture Food for thought … Comprehensive farm management information systems are vital and must have priority for agriculture risk management and income stabilisation Improved information and knowledge is the basis for globally competitive precision farming operations Development of knowledge based precision farming is important for improved farm risk management techniques

Income Stabilisation In European Agriculture …Food for thought Increased use of modern production technology (Biotechnology, remote sensing, seasonal weather forecasts, etc.) will further improve farm productivity and net income Market risks are equal or even greater than production risks; market based financial instruments need to be further developed to manage price risks for European agriculture Marginal productive land/farms will continue to be abandoned; EU policy should not aim to undermine this natural process

Income Stabilisation In European Agriculture …Food for thought Insurance schemes do not improve farm productivity nor profitability Insurance schemes can; however, stabilise farm income in case of natural disaster Crop insurance, properly designed, is a viable risk management tool for weather risks Market based price hedging instruments should compliment crop insurance schemes

Income Stabilisation In European Agriculture Design and economic impact of risk management tools Thank you for your attention Dr. Erich Kasten Agriculture Reinsurance Consultants (ARC) Switzerland

Income Stabilisation In European Agriculture ….Food for thought Awareness (Long term aspect) Agriculture risk management and insurance should be compulsory part of any agriculture education Actuarial science