Amidst shortages on the supply side and rising concerns overfood security, demand is increasing for agricultural (re)insuranceproducts in fast-growing emerging markets.

Governments in these emerging markets—where demand foragricultural raw materials is particularly high and agriculture isa key sector of the economy—have come to realize that agriculturalinsurance is an effective risk-management instrument to protectfarm income and ultimately increase production. 

In fact, the majority of these governments already offeragricultural insurance programs tosupport the farmers.

DECADES-LONG PRODUCTION SPIKE

Agricultural production in the emerging markets has spiked overthe past two decades, contributing to a considerable exportturnover. Today, emerging markets account for 60 percent of theglobal cereal production (BRIC countries alone produce 37percent).

While the agricultural-production systems of different emergingmarkets vary greatly, a number of challenges for the insuranceindustry are common, including lack of adequate insurance-lossstatistics, high exposure to systemic perils, and underdevelopedinsurance infrastructure with little loss-adjustmentresources. 

Despite these obstacles, current agricultural-insurance programsin emerging markets show the largest annual growthrates. 

For instance, China is now in second position after the UnitedStates in terms of premium income—only three years afteragricultural insurance was introduced in that market.

CONTINUED GROWTH AHEAD

And growth in today's key emerging markets is bound to continuewith increasing insurance penetration and more areas and crop typesto be insured. 

(Innovative approaches to distribute insurance products in acost-efficient way—such as via mobile devices—are key successfactors in all these countries.) 

What initially started as small-scale in many markets has becomea fully operational private-public partnership with governments,which are clearly seeing the benefit to pre-disaster riskmanagement rather than post-disaster funding.

In addition to the BRIC nations, other emerging markets whereagriculture is an important contributor to GDP are Indonesia,Thailand, some Eastern European countries and Ukraine, as well assome African countries. 

With affordable agricultural insurance being more consistentlyavailable, farmers are able to assume more risk and thereforeincrease productivity in the midterm—a key government goal in manyemerging markets.

Reinsurers with dedicated and emerging-market agriculturalexperts can play an important role in structuring products, closelyworking with the local insurance industry and in providingsignificant reinsurance capacity.

BRIC BYBRIC 

Here's a look at the agricultural-insurance situation in theBRIC countries.

• BRAZIL 

In Brazil, most insurance is sold jointly with a farm loan fromthe state-owned Bank of Brazil, the key supplier of ruralfinance. 

The catalyst for government-backed agricultural insurance inBrazil was a devastating drought in the south of the country in2003-2004, when soybean yields dropped by 30 percent compared toprevious year levels.

With record spending in ad-hoc disaster aid, the governmentrealized that only a few farmers were insured and decided tosupport crop insurance through premium subsidies. 

The reinsurance industry was instrumental in structuring afarm-based multi-peril crop-insurance cover and in transferringknow-how to Aliança do Brasil, the insurance subsidiary of Bank ofBrazil. The market premium is expected to be close to $200 millionin 2010.

• RUSSIA

Russia has a large, but yet untapped agriculture-productionpotential. During the past years, an agricultural-policy frameworkhas been developed and implemented to unlock the country'spotential. In 2008, Russia launched the Program for Development ofAgriculture 2008-2012.

The program aims at improving the competitiveness of Russianagriculture, as well as rural development and resourceconservation. The result will be a major increase in publicspending, as well as a solid step to improve social conditions inrural areas.

Agricultural insurance in Russia was introduced in the late1990s. In 2007, total premium volume in agricultural insurance wasabout $400 million. Although Russia subsidizes multi-peril cropinsurance, insurance penetration remains low. To provide investorsand farmers with the risk-management framework they need, furtherinnovative insurance products are needed. 

• INDIA 

Most crop insurance in India is also sold via banking channels.The subcontinent has small farms that grow a large variety of cropsin two seasons and strongly depend on the timely onset of monsoonrains.

For farmers who borrow from government banks, crop insurance iscompulsory in the form of yield or weather index, with covers soldby bank agents and managed by the state-owned Agriculture InsuranceCo. of India, as well as some private-sector companies.

Non-borrowing farmers have the choice to purchase the same cropinsurance as borrowing farmers. The government supports premiumsthrough subsidies for more than 60 crop types with some 20 millionfarmers benefiting from the cover and generating a premium of $250million in 2010. 

These products brought some financial relief after thedevastating droughts of 2002 and 2009 and for a number of floodevents in between. 

• CHINA

China's agricultural system is similar to that of India in thatit is composed of small-scale farming and has up to 30 percent ofthe population working in the agricultural sector.

In 2007, the Chinese government launched the “three ruralissues” plan, which included establishing government-supportedagricultural insurance. In 2010, seven licensed insurers providedperil-crop and livestock insurance to 120 million farmersgenerating an estimated premium volume of $2.5 billion.

To overcome the high costs of selling insurance to a largenumber of individual farmers, policies are sold at village level incollaboration with village heads.