Agricultural Risk Transfer

Gain a holistic view of agricultural (re)insurance and capital market risk transfer

Increasing agricultural production and food security remain key challenges for mankind. In order to meet global food demand, the Food and Agriculture Organisation estimates that production has to increase by 50% by 2050 and requires large investments. Agricultural insurance and financial instruments have been an integral part to advancing productivity and are becoming more important in increasingly globalized and specialized agricultural supply chains in the wake of potentially more frequent and severe natural disasters in today’s key producing markets.

Underwriting, pricing and transferring agricultural risks is complex and requires a solid understanding of the production system, exposure, perils and the most suitable products, which vastly differ among developed and developing markets. In the last decade, new insurance schemes in emerging agricultural markets have greatly contributed to the large growth of the industry from a premium volume of US$10.1 billion (2006) to US$30.7 billion (2017). This growth is bound to continue as insurance penetration and exposure increase and new schemes are being developed. Agricultural (re)insurance has become a cornerstone of sovereign disaster risk financing frameworks.

Agricultural Risk Transfer introduces the main concepts of agricultural (re)insurance and capital market risk transfer that are discussed through industry case studies. It also discusses best industry practices for all main insurance products for crop, livestock, aquaculture and forestry risks including risk assessment, underwriting, pricing, modelling and loss adjustment.

• Describes agricultural production risks and risk management approaches
• Covers risk transfer of production and financial risks through insurance and financial instruments
• Introduces modelling concepts for the main perils and key data sources that support risk transfer through indemnity- and index-based products
• Describes risk pricing and underwriting approaches for crop, livestock, aquaculture and forestry exposure in developed and developing agricultural systems
• Become familiar with risk transfer concepts to reinsurance and capital markets
• Get to know the current market landscape and main risk transfer products for individual producers, agribusinesses and governments through theory and comprehensive industry case studies

Through Agricultural Risk Transfer, you’ll gain a holistic view of agricultural (re)insurance and capital market solutions which will support better underwriting, more structured product development and improved risk transfer.

Foreword ix

Introduction xi

Acknowledgements xiii

Special Thanks xv

CHAPTER 1 Agricultural Markets and Risk Management 1

CHAPTER 2 Concepts of Insurance 21

CHAPTER 3 Agricultural Perils and Risk Modelling Concepts 45

CHAPTER 4 Agricultural Data and Proxies 103

CHAPTER 5 Agricultural Insurance 149

CHAPTER 6 Crop Insurance 189

CHAPTER 7 Livestock Insurance 271

CHAPTER 8 Aquaculture Insurance 311

CHAPTER 9 Forest Insurance 333

CHAPTER 10 Risk Transfer to Reinsurance Markets 363

CHAPTER 11 Risk Transfer to Capital Markets 393

ACRONYMS AND ABBREVIATIONS 407

INDEX 409

DR. ROMAN MARCO HOHL is one of the best-known agricultural reinsurance underwriters in the industry. He has worked on most primary aspects of agricultural risk transfer, including work for reinsurance companies such as Partner Re, Converium and Swiss Re. With these companies, he built agricultural underwriting teams and developed new insurance schemes. He also led the development of agricultural risk models for India and China at the Asia Risk Centre, a leading agricultural risk modelling company which is now part of Risk Management Solutions.
Having worked in Singapore for 6 years and been at the forefront of the development of agricultural insurance in China, India and Southeast Asia Dr. Hohl has a deep understanding of the challenges of emerging markets. He has held various advisory appointments, including with the World Economic Forum (food security in Southeast Asia) and the Monetary Authority of Singapore (catastrophe risk assessment). He has also served as adjunct professor and deputy director at the Institute of Catastrophe Risk Management (ICRM) of the Nanyang Technological University in Singapore.
He currently supports the industry through advisory mandates including work for the International Finance Corporation (World Bank Group) in developing index- based risk transfer solutions. Dr. Hohl also collaborates with the University of Wisconsin-Madison (USA) and the National University of Singapore on modelling agricultural risks, food security and risk transfer.
Roman holds a PhD in Geoscience (Atmosphere) from the University of Fribourg (Switzerland). Research from his PhD thesis was used to develop the first probabilistic hail model for the European insurance industry. He has contributed numerous articles to research journals and the risk transfer media, including television interviews.

Agriculture is a core industry segment both in terms of GDP contribution and employment, particularly in low- and middle-income countries. However, growing crops, raising livestock, farming fish and cultivating timber is a risky business with high exposure to natural disasters and epidemic diseases that lead to catastrophic losses at regional and international scale. Agricultural Risk Transfer provides a wide range of solutions for producers, agribusinesses and governments to proactively transfer risk of agricultural production assets to the (re)insurance industry and to capital markets. Today, risk transfer solutions exist in over 100 countries and the agriculture insurance sector alone has grown to $30 billion while being promoted as an important climate change adaptation measure to increase resilience to production shocks.

With the global population expected to reach 9.1 billion by 2050, soaring demand for more protein-based foods and potentially more frequent adverse weather conditions from climate change, producing sufficient resources is one of the key challenges of the agricultural sector. Risk transfer solutions play a critical role in securing higher production through the provision of safety nets against production shocks. Underwriting, pricing and transferring agricultural risks is complex and requires a solid understanding of the production system, exposure, perils and the most suitable products, which vastly differ among developed and developing markets.

Agricultural Risk Transfer is the first comprehensive volume covering all aspects of agricultural (re)insurance, from fundamentals to specific products that are essential to understand and develop new (re)insurance and capital market solutions for crop, livestock, aquaculture and forest assets. Written by a well-known agricultural expert, it includes extensive industry case studies that illustrate the key concepts used in both, developed and developing agricultural markets.

Through Agricultural Risk Transfer, (re)insurance underwriters, actuaries, modellers, risk managers and assessors, government officials, bank and fund managers, agribusiness executives and students in agricultural economics and development will gain a deep understanding of methodologies to structure and transfer agricultural risks. This book closes the knowledge gap between developed and developing agricultural markets, insurers and reinsurers and capital markets as well as between the industry and academia.

Praise for Agricultural Risk Transfer

"Agricultural Risk Transfer is an outstanding source of technical information combined with real-world experience by a seasoned industry expert and should be in the bookshelf of every professional in the agricultural (re)insurance industry. References to numerous industry case studies and links to opensource data nicely facilitate the understanding of the key concepts." —Dr Lambert Muhr, Head (Agriculture North- and Latin-America), Munich Re (Germany)

"This volume is an important addition to the growing literature on agricultural risk management. It comprehensively synthesizes a host of relevant issues related to both mature and emerging agricultural markets. Agricultural Risk Transfer is a great resource for researchers and students seeking to gain deeper insight into how insurance and other financial instruments can stimulate investment in agriculture by transferring catastrophic risks out of local areas and into global markets." —Prof Barry Barnett, Chair, Department of Agricultural Economics, University of Kentucky (USA)

"Risk transfer is a crucial element of disaster risk finance and an important instrument for the sustainable rural development and financial inclusion. This book summarizes all key concepts of it and comes right in time as the implementation of more agricultural (re)insurance and capital market risk transfer solutions is needed more than ever in the wake of the increasing adverse impact of climate change." —Thomas Kessler, Principal Finance Specialist (Disaster Insurance), Asia Development Bank (Philippines)

"Through its holistic approach and case studies, Agricultural Risk Transfer forms the ideal basis for regulators and government agencies to approach and integrate agricultural risk transfer into national risk management frameworks." —Wang Qi, Director, Agriculture Division, Property & Casualty Department, China Banking and Insurance Regulatory Commission (China)

"Insurance-linked securities offer interesting opportunities for the agricultural sector – this book comprehensively analyses and illustrates how cat bonds, industry loss warranties and other capital market instruments can be applied to agricultural risks." —Dr Hervé Castella, Head of Third-Party Capital, Partner Re (Switzerland)

"A very large portion of people living in extreme poverty have their livelihoods tied to some form of farming and 93% of those living in extreme poverty are in countries that are politically fragile and/or environmentally vulnerable and ill-equipped to help their people when there is a natural disaster. Making matters worse, 94% of the economic losses from natural disasters over 1990–2016 in low- and middle-income countries were uninsured. This 'protection gap' is particularly acute for agricultural insurance. This book provides a comprehensive and thoughtful analysis for the challenges in risk transfer for agriculture and promises to contribute to efforts in closing the protection gap. The chapter on data is outstanding and very useful as we also identified data as a major constraint in providing risk transfer in low- and middle-income countries." —Prof Jerry Skees, Founder, Chief Strategy Officer and Director, Global Parametrics (USA)