Climate Change and Agriculture Insurance: Industry Vulnerability and Implications for Scaling-up Innovations. A Reinsurer’s Perspective
Dr. Joachim Herbold, Senior Underwriter, Munich Re
Presentation at the FARMD Annual Conference: Price Volatility and Climate Change, Implications for the Ag-Risk Management Agenda. Zurich, June 9-10, 2011.
Agricultural insurance and climate change: challenges
FARMD (September 2011) | “Special endeavors are necessary to finance and cover investments in agriculture in developing countries.” This was the opening remark of Joachim Herbold, during his presentation at the 2011 FARMD Annual Conference.
Herbold, a senior underwriter of Munich RE, exposed the challenges that agriculture is facing around the world, its link to climate change, and the solutions that Munich RE has outlined to manage them.
Herbold said that according to the Food and Agriculture Organization (FAO), a total net average of US$ 83 billion should be invested in developing countries annually in order to achieve the required increase of 70% in food production by 2050. Adding to this challenge, there is the impact of climate change, which aggravates the exposure of agriculture to natural perils.
In his presentation, Herbold identified quite a range of challenges, exemplified with the following data:
- Total average annual net investments in developing countries: US$ 83 billion in order to achieve the required increase of 70% in food production by 2050.
- Based on losses per peril in the U.S.A. and in Canada, Munich RE estimates that for developing countries there will be a 70% to 80% loss attributable either to lack or excess of rain, including floods.
- The exposure of livestock is underestimated. For instance, in a recent foot and mouth disease outbreak in South Korea, 3.3 million pigs and more than 150,000 cattle were culled. Herbold said that international traffic increases the risk of these outbreaks.
- In 2003, the avian influenza in Asia, 62 countries around the world reported H5N1 in birds. More than 250 million birds were killed or died, which was a direct cost of €8.8 billion.
When assessing risk in developing countries, Herbold said “we cannot generalize.” There is a variety of production and social structures – which were classified in this presentation according to farm size - and must be acknowledged to be able to transfer risk in a customized way.
Overall, the panorama for insurance products in developing economies is promising, but demands some changes that can be seen as opportunities for insurance companies. Agricultural insurance is still limited to only a few countries (China, Brazil, India and Mexico), and the market penetration is not satisfactory, and specialized agriculture insurance or local expertise is scarce. The other challenge to consider is that often the legal and institutional framework is insufficient.
A road map for the development of agricultural insurance systems
Herbold offered a roadmap for development of agricultural insurance systems that also scales up innovations. In this roadmap, Herbold proposed to have a system approach before a product approach. He said “a system approach has to be pursued first for determining which insurance product is appropriate.”
Another proposed idea was to pursue a national approach instead of a pilot approach. He said that pilots have a limited effect in agriculture and they are difficult to scale up. Also, at a national level should be the development of risk assessments and underwriting expertise. This, said Herbold, should be combined with the integration of all stakeholders, in other words, a cooperative instead of a competitive approach is needed. Also, it is necessary to keep in mind the production and social structures mentioned to develop accurate insurance solutions.
Technological advances offer promising solutions
Technological advances enhance crop insurance, said Herbold. Technological solutions, such as geographical information systems (GIS) and other remote-sensing technologies, can lead, said Herbold, to new processes and applications in underwriting, loss adjustment, accumulation control, portfolio management, rate calculation, etc.
For example, GIS can be used for plot identification, yield estimations and monitor losses and crop vegetative status. However, all new technologies bring challenges such as to accurately determine yields. The future application of this technology could go as far as determining yields of individual plots, or even individual yield-based covers; said Herbold.