Climate Change, Food Security and the Need for Robust Risk Management Solutions
Juerg Trueb, Managing Director, Environmental and Commodity Markets, Swiss Re
Presentation at the FARMD Annual Conference: Price Volatility and Climate Change, Implications for the Ag-Risk Management Agenda. Zurich, June 9-10, 2011.
FARMD (September 2011) | After presenting a string of charts and graphs showing significant increases in temperature variability going back as far as the 1700s, Juerg Trueb stressed “this is likely to continue.” This climate variability costs the agriculture sector significant amounts of money. Trueb translated these losses into considerable increasing demands for risk management solutions.
In his presentation at the FARMD Annual Conference, Juerg Trueb, Managing Director at Swiss Re, laid out a series of projects that Swiss Re has been implementing in several developing countries. These cases exemplify how risk management can contribute to tackle climate change-related challenges and its effects on agriculture.
One of the most important challenges for insurance companies is to acknowledge that farming is a risky business: agriculture takes place under an open roof and it is exposed to price fluctuations. Therefore, companies cannot afford to only offer a narrowed coverage. “To add value, we need to find ways to broaden the coverage in a sustainable way and be consistently profitable,” said Trueb.
Trueb presented the example of Vietnam to illustrate the vulnerability of countries to future climate change scenarios and the potential of insurance schemes to be part of the set of solutions. Vietnam is among the five most severely impacted countries by future climate change, with a large population in narrow land strips and the low lying Red River Basin and Mekong Delta. Agriculture contributes 22 percent to GDP and rice is the key crop. The losses from natural perils reach 5 percent of annual GDP, including high default rates for farming loans. Swiss Re and Agribank have designed a loan portfolio protection product that protects against loan default of rice farmers following poor harvests.
While insurance companies have traditionally focused on the production aspect of the value chain, in fact, it is possible to insure throughout the entire value chain through bundling, because price risk propagates within the value chain, Trueb stressed. The projects Swiss RE has in Vietnam, China and India are examples of this approach.
North East China and the Beijing province are exposed to natural perils such as drought, flood, rainstorm, flood and hail. In 2007, the Chinese government implemented a subsidized crop and livestock insurance program to support the sector and foster production. The Beijing Government offers the agriculture insurers in the province loss protection to additionally promote agriculture insurance. With the help of Swiss RE, there is now a reinsurance solution in place for the Beijing Government with China Re –the domestic reinsurer- that provides additional capacity.
Partnering with lead firms and companies to leverage food security outcomes
According to data presented by Trueb, most of the population increase will take place in emerging markets. Added to this, there is a positive correlation between GDP per capita and consumption: the wealthier the country is, the higher the consumption, said Trueb. For instance, while the population of China doubled between 1961 and 2007, the consumption quadrupled.
Another trend, Trueb stressed, is the increased commodity price volatility (graph 8). This signifies a great deal to the poor, of course, but it also means tremendous challenges for large food companies in the industry, who have the power to transfer these costs of price risk to the consumer. Trueb sees a great potential in partnering with these large food companies to create products that manage risk, thus, large players can still be comfortable investing in the agriculture sector to address price risk and food security.