Over the next decade, as countries such as China, India and Brazil focus on feeding their massive populations, crop insurance is expected to play an increasingly important role.
It is estimated that global agricultural production will need to increase as much as 60% by 2050 in order to meet people’s growing need for food. Over the next decade, as countries such as China, India and Brazil focus on feeding their massive populations, crop insurance is expected to play an increasingly important role. It is estimated that global agricultural production will need to increase as much as 60% by 2050 in order to meet people’s growing need for food.
“There’s an increasing demand for getting a lot of crop production in China to feed the animals that are being demanded by the consumers in China,” says AIR’s assistant vice president Jack Seaquist.
Agricultural insurance premiums nearly tripled between 2005 and 2011 to an estimated $23.5bn. North America remains the largest buyer of crop insurance, but China is quickly catching up.
“China is already the second largest agriculture market in the world, behind the US,” says James Few, chief executive of Aspen Re. “It overtook Europe recently which is a sign of really dramatic growth in that marketplace. Agriculture is already a very sophisticated and significant market in China and it’s expected to get bigger.”
For global re/insurers looking to grow their presence in these markets there are numerous challenges to overcome.
Dearth of data
Underwriting agricultural risks is highly technical, a process that is increasingly aided by the use of crop insurance models. But it is difficult for experts to come up with models in markets that lack the necessary data that would aid their development.
“The challenge is always data… simply, do you know enough about the risk?” explains Julian Roberts, executive director of agribusiness and weather risks at Willis. “If you’re used to underwriting in North America then you will be accustomed to a fabulous wealth and depth of data on which you can crunch numbers; equally there are some mature models upon which you can rely.”
“By contrast, the Chinese and Indian agricultural markets are relatively young markets in this context and hitherto reinsurers have not really benefited from either the same depth of data or the scope of modelling that they would otherwise merit,” he continues.
“It’s been a real challenge for underwriters to extend their reach into some of these emerging agricultural insurance markets and really understand what they’re seeing, he adds. “However, risk modelling packages are now emerging for the Chinese market. We are currently evaluating these as they are released and are impressed with what we have seen so far, so the tools of the trade are now slipping into place.”
In recent months the Chinese insurance regulator CIRC has approved more local insurers to underwrite agricultural insurance in the country. More than ten insurers, including PICC and China Life insurance Company have been granted licences to operate crop insurance businesses in provinces such as Sichuan and Shandong.
In March, the Chinese government implemented a new agricultural policy to encourage the development of agriculture insurance. The government heavily subsidises agricultural insurance premiums in an effort to encourage take-up. Data shows that insurance premiums jumped to $3.9bn in 2012, up by 28.2% year-on-year.
Chinese crop model
Cat modeller AIR Worldwide recently developed a cat loss model for China which provides a probabilistic approach for determining the likelihood of losses to the country’s major crops: corn, cotton, rapeseed, rice, soybeans and wheat. Drought, floods and typhoons are the leading cause of loss in China.
The model captures the severity, frequency and location of adverse weather events, taking into account weather variables (such as rainfall and temperature), soil conditions and crop-specific parameters.
“It was quite a bit different in China and quite a bit more complex than in the US,” explained Seaquist in an interview with BestDay. “It also has an issue of there not being a lot of data about the crop insurance programme.”
“So our model is a physical model of the crop damage caused by drought, flood and typhoons,” he continued. “This is all based on our Agricultural Weather Index which looks at the relationship between these weather events over time. It allows us to assess what losses will be paid at a very local level and to assess the different aspects of the programmes.”
He explained how the timing of events affected the level of damage to the crop depending on where it was in the growing season. “Payments are based on the damage to the fields as opposed to the ultimate yield, as we have in the US,” he added. “In China it’s all based on damage to plants so we have a very large country and we model at the county resolution.”