The FINANCIAL — In October, Typhoon Nari tore into the Philippines, cutting a westward path through the farming regions of Luzon. Thirteen people were killed by the storm and the government’s initial estimate is that 15,000 hectares of rice paddy may have been damaged or destroyed, according to Lloyd's.
Liberty Syndicates is currently involved in reinsuring a microinsurance scheme for farmers in the Philippines, which is underwritten by a local insurance company. The scheme, which has so far been rolled out to around 5,000 farmers, is a typhoon-based product for crop growers.
The World Bank has been actively encouraging schemes that are weather-based instead of yield-based, as is the case with traditional crop insurance, explains Salah Dhouib, agriculture class underwriter for Liberty Syndicates at Lloyd’s.
“Weather-based products do not need a lot of manpower. You just need weather station data so it’s much less expensive in terms of loss cost adjustment and it’s also easier for the insurance company to place their programme in the international markets with a reinsurance company like us,” he explained.
The downside is concerns surrounding basis risk. This is the risk that a farmer experiences a poor crop yield, but the data provided by the weather station does not trigger a claims payout.
A lot of work is being carried out to correlate better the findings from weather stations with the reality of what is happening in the field. The biggest difficulties usually occur during the winter growing season where crop yield is dependent on both rainfall and temperature (as opposed to just rainfall during the summer growing season).
The challenge for the Liberty-backed microinsurance programme, as with similar schemes in other countries, is finding a way to distribute the product to policyholders, according to Lloyd's.
The way of resolving the distribution dilemma in this instance was to get a local seed supplier involved. “When you go and buy seeds they ask you to buy insurance in case you have a bad yield so they have more assurance you will pay them for the seeds you bought from them,” explains Dhouib.
This method of distributing weather index products is also being trialled in Zambia and Kenya. Because the seed input companies are such big distributors of agricultural product in Africa and Asia they are an appropriate microinsurance partner, thinks Richard Leftley, chief executive of insurer MicroEnsure & MicroEnsure Asia.
He is hoping these companies will go a step further and subsidise the cost of the premium. “If we can use insurance as a loyalty tool with these companies there will then be a financial business case for why a seed input company or contract farming group would be willing to subsidise the cost of insurance for their farmers. If it does work we solve the distribution issue, will have a big volume of business and will need underwriters. But at the moment this is still a niche business.”
“It’s great to see some of the syndicates at Lloyd’s doing weather index insurance, this is the natural place for a reinsurer to focus their attention,” he added.
India currently boasts the largest weather index insurance market for agriculture. Around 50% of the total population covered by microinsurance worldwide (estimated at around 500 million currently according to insurer MicroEnsure) lives in India, according to Lloyd's.
Agriculture is an important part of India’s economy, accounting for around 13% of GDP. Over 80% of the country’s agriculture is highly rainfall dependent, a factor that lends it to weather index products.
One of the reasons India has had success relative to schemes elsewhere is the government’s willingness to subsidise crop insurance. Dhouib thinks this is essential for the success of any microinsurance scheme for farmers.
“Whether its microinsurance or not, agricultural insurance schemes often need to be subsidised to exist. There are many countries like Australia, which are very big agricultural countries, but they have an almost non-existent agricultural insurance market because of lack of subsidies,” he said.
“The real issue is that farmers are willing to pay somewhere between 3% and 5% of the sum insured as a premium. But if you’re paying out for a one-in-ten-year event, plus admin costs, you don’t need to be an actuary to work out that’s somewhere between 12% and 15%. Therefore there’s a mismatch. Where there have been significant volumes of weather insurance, like in India, that’s because the government has subsidised premiums,” added Leftley.
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