Agricultural Risk Financing Ramiro Iturrioz Senior Agricultural Insurance Specialist Insurance for the Poor Program The World Bank Agricultural Insurance Symposium Antigua, June

Country Agricultural Risk Management Framework 2 Country Agricultural Risk Management Agricultural Risk Assessment Risk identification Risk Quantification Probabilistic agricultural risk model Agricultural Risk Financing Risk layering Product development Institutional framework (public vs. private) Insurance and Reinsurance Agri-Business Segmentation Social vs. commercial insurance Traditional farming sector Emerging farming sector Commercial farming sector Institutional Capacity Building Data management Regulatory/supervisory framework Information and education Technical expertise

Risk Financing Strategy 3 The outputs of the risk assessment are used to define Risk Financing Strategy Objectives: To identify the players and their potential value added. To identify which player can bear with which share of the risk To identify the agricultural insurance products that are most suitable to transfer the risks

Roles in Agricultural Risk Financing 4 Farmers ’ Insurers’ Governments Reinsurers Donors Credit/Input Suppliers

Risk Layering is a key for a successful risk financing strategy 5

Why government support is needed? 6  Market failure: non-availability of private-sector agricultural crop & livestock insurance.  Capacity constraints: of private commercial insurers, particularly for systemic risk (hurricanes, drought, flood, epidemic diseases, etc).  High costs insurance administration: for small farmers.  Affordability: Inability of farmers to afford agricultural crop & livestock insurance premiums. Constraints most applicable to Developing Countries? BUT…. The highest levels of Government Financial support to Agricultural Insurance are found in High Income Countries (N. America / Europe)

What role does government play in risk financing? 7  To stabilize their financial cash flows  To Stabilize Income in Rural Areas  To Avoid Ad-Hoc Disaster Relief Payments  To Budget Stability  To use agricultural insurance as a development tool  Provide legal and regulatory framework  Enhancing data and information  Education and Capacity building  Research and Development (Products)  Public Premium Subsidies  Catastrophic Risk Sharing / Risk Financing Objective Roles  Potential Fiscal Constraints Issues  Through enabling an appropriate framework for the development of agricultural insurance Mechanism

Examples of Government Support 8 Mahul & Stutley,2009

Agricultural Risk Financing: Product Development 9 Assessment of suitability of any product also has to consider crop type, key peril exposures and localisation, data availability, farmer size, distribution channels, and delivery and loss adjustment needs There is no agricultural insurance product better than other; they are different. Need to develop a balanced range of products including: ▫Named peril damage-based products; ▫Explore opportunities for Area-based Yield Index Insurance (GRP) ▫Continue to conduct R&D and pilot projects into crop weather index products ▫Seek ways of scaling-up these products to reach small farmers ▫Seek options for aggregated index products as a means to reach small farmers Caution against over-reliance on costly Individual Grower MPCI

Models of Governments Support to Agriculture Insurance 10 Pure Market Based Pure Market Based Public–Private Partnership Public–Private Partnership Fully Intervened System Fully Intervened System LEVEL OF GOVERNMENT INTERVENITON NUMBER OF PLAYERS & PRODUCT DIVERSIFICATION Normally High Penetration (compulsory) Well Diversified Portfolios Social over Technical criteria Monopoly. Issues with the service.. Government assumes full liability High Fiscal Cost High Penetration Well Diversified Portfolios Technical over commercial criteria Competition for service. Government adds stability to the system Private Sector adds know how. Reasonable Fiscal Cost Low to moderate penetration. Low risk diversification. Commercial over technical criteria. Competition for price No fiscal cost

Agricultural Insurance Pool 11 Advantages: Economies of scale Reduce default risk; System Stability Center of technical excellence Provides incentives to collaborate on the integrity of the program; Ensure efficient local retention by pooling non-retainable risks; Get optimal pricing from international reinsurers Limit government fiscal exposure

Conclusions 12 Underwrite agricultural insurance through Private Commercial Insurers wherever possible Promote Private-Public Partnerships (PPPs) Promote agricultural reinsurance through local and global international reinsurance markets Important areas of government support: ▫Creation of enabling legal & regulatory framework ▫Education and training ▫Data & information enhancement and dissemination ▫Product design & rating (technical support) Exercise extreme caution with agricultural insurance premium subsidies In some circumstances, government support as a reinsurer of last resort may be justified