Module 2 - Forum for Agricultural Risk Management in Development

+ 

Module 2 

Book A: 

Local Risk Transfer 

Agriculture Risk Management Team 

Agricultural and Rural Development 

The World Bank

+ Module 2 Outline 

� A: Local Risk Transfer 

� Local Markets 

� National Risk Retention 

� Co-insurance Pool 

� Role of National Insurer 

� B: International Risk Transfer 

� Risk Transfer 

� The Weather Market 

� International Weather Market and Players 

� C: Risk Layering 

� Risk Layering Via Re-insurance 

� Role of Government

+ Local Markets 

Roles and benefits 

� Local (national ) insurance companies are critical to weather index 

insurance (WII) development and implementation. 

� Main roles of the insurer are 

� Developing products (policies), rates and wordings 

� Accepting risks, policy issuance, claims payment 

� Forming a distribution network and linkages to stakeholders 

� Benefits of weather index insurance for an insurer can include 

� Developing a profitable new line of business 

� Tapping into a new client base in rural areas 

� New product opportunities (e.g. Microinsurance) for rural clients 

� Social responsibility to an under-served market


Constraints and needs 

� Challenges for insurers often include 

� Limited knowledge about agricultural insurance (applies especially to WII 

products) 

� Crop and livestock insurance risks are complex and variable 

� Investment of time and resources 

� Potential for scaling up to critical mass 

� Needs of the insurers normally include 

� Capacity building for managers and staff 

� Training and assistance in designing appropriate weather index product 

� Legal and regulatory approval


Legal and regulatory requirements 

� Index insurance will require approval by the insurance regulator 

� Index insurance differs from indemnity insurance 

� Claims are paid based on an weather measurements, not by measuring actual 

loss in the field 

� Payouts will not exactly match the losses suffered, and sufficient correlation 

between weather events and losses need to be demonstrated 

� May be more difficult to demonstrate an “insurable interest” 

� For example, was the crop actually sown by the farmer ? 

� Generally insurance regulators are sympathetic to introduction of index 

insurance due to the importance of finding solutions to meet the needs of 

farmers and supply chain participants 

� Insurers need to establish dialogue with the regulator and present 

proposals, which may initially only be for pilot testing of the product

+ National Risk Retention 

The insurer will retain risk but transfer some risk to reinsurers (module 

2B)

+ Co-insurance pools 

Benefits from insurers working together 

� Operational collaboration 

� A “market initiative” for a new product 

� Bringing together key personnel from specific insurance companies 

� A joint insurance policy is issued, specifying the share of each company 

� Frequently a national Insurance Association may represent the industry 

� Shared learning and capacity building 

� Pool management: lead co-insurer or creation of specialist underwriting agency 

� Financial collaboration 

� Increasing the financial retention of the national market compared to individual 

insurers 

� Shared (pooled) administration and operating functions (cost savings) 

� Opportunity to purchase pooled reinsurance (cost savings) 

� Adoption of standard products, rates and loss assessment procedures by 

coinsurance pool members

+ Co-insurance pools 

� Co-insurance pools have some disadvantages 

� A clear leader must be specified, who is responsible for decisions on 

underwriting the risk. Other co-insurers agree to follow the leader 

� It may not be acceptable where one insurer has made major investments, 

but all other insurers participate in premium and claims pro-rata 

� A co-insurance pool can limit competition and market development. It 

may suit the first stage of developing a program 

� Different agricultural co-insurance models have developed. 

� Coinsurance agreements with appointed lead insurer: Malawi, Mongolia, 

China, Ukraine, South Korea 

� Specialist Agencies or Managing Underwriter’s: Agroseguro (Spain), 

TARSIM (Turkey).

+ Demand for Weather Index Insurance 

Risk management needs at different levels of aggregation 

Client needs from weather exposure can be: 

� Micro level 

� Insurance for farmers and rural households 

� Meso level 

� Insurance for processors, packers, banks, traders 

� Those at risk of supply shortfall, contractual defaults 

� Banks at risk of inability of clients to repay loans 

� Macro level 

� Governments, food security, major corporations, and those with 

financial need to respond to weather-induced disaster

+ Role of the national insurer(s) 

Summary 

� The national insurer(s) plays an central role in WII. 

� The main responsibilities of the national insurer include: 

� Designing and adapting the product to meet client needs 

� Forming stakeholder relationships, particularly for distribution 

� Issuing the insurance contract 

� Collaborating in the extension and monitoring of the product 

� Arranging reinsurance 

� Paying claims promptly 

� National insurers may benefit through opportunities for other rural 

insurance or microinsurance business, as a result of developing a 

rural clientele and distribution outlets.

+ 


Book B: 

International Risk Transfer 



The World Bank














+ Risk transfer 

Why transfer risk ? 

� Provides an effective access to a larger capital base for a national 

insurance company 

� Weather insurance risks are not “independent”, and large numbers of 

clients can be affected simultaneously (“covariant” risks). This demands 

relatively larger access to insurance capital compared to a portfolio of 

independent risks 

� Understanding financial impact of weather risk on an insured portfolio is 

the starting point for planning risk retention and risk transfer 

� There is a growing market which is willing to accept WII risks, and 

increasing understanding of opportunities and constraints of WII 

� Reinsurance should lead to financial solvency and sustainability of a WII 

scheme

+ The Weather Market 

A brief history (1) 

� Weather derivatives originated in the USA around 1997; energy 

utilities were exposed to high volatility of supply and demand due to 

weather 

� Increasing volumes of “over-the-counter” (OTC) transactions led to 

the development of present day derivative markets, where weather 

risks are traded (e.g. Chicago Mercantile Exchange, CME). 

� Weather derivatives are mainly used by large corporates, but 

increasingly by agribusiness, retail and construction firms 

� Larger reinsurers are involved in weather risk transfer, both as 

reinsurance contracts and as derivatives. 

� Examples of the diversity of weather risk transfer applications can be 

found on the WRMA website www.wrma.org

+ The Weather Market 

A brief history –(2) 

� Insurers have offered weather event cancellation insurance for many years 

� Example: Costs of cancellation of sporting events if rainfall exceeds a daily threshold 

� Innovative retail agencies and brokers have greatly developed the product range 

� Examples: Cumulative snow amounts in ski resorts: Number of days with low 

temperature affecting ice cream sales.... 

� A few agencies in high income countries have offered products for agriculture 

� For WII in developing countries, reinsurance (rather than derivatives) is the 

main contractual basis for risk transfer from insurers 

� Reinsurers: The international reinsurance market is dominated by the large, 

consolidated companies with global outreach : 

� Munich Re, Swiss Re, ACE, Partner Re (which recently acquired Paris Re) are the 

principal markets for reinsurance of agri WII 

� A very large global reinsurance market exists for traditional indemnity based 

agricultural insurance (estimated market insurance premium volume approx. $20 

billion)

+ 

2009 Global agricultural insurance 

premiums US$ 19.4 billion 

USA & Canada, US$ 10,700 Million (55,1%) 

Latin America, US$ 720 Million (3.7%) 

Source: Iturrioz 2010; Mahul & Stutley 2010 

Europe, US$ 3,900 Million (20.1%) 

Africa, US$ 100 Million (0,5%) 

Asia, US$ 3,800 Million (19,6%) 

Oceana, US$ 200 Million (1.0%)

+ Global agricultural insurance products 

(2009 share of global premium US$ 19.4 billion) 

2 

Aquaculture, 

1% 

Livestock, 12% 

Source: Iturrioz 2010 

Bloodstock 2% Forestry, 1% Greenhouses, 

1% 

Crop/Hail, 15% 

Crop/MPCI, 

68%

+ Demand is high in low and middle income countries 

AGRICULTURAL WEATHER INDEX INSURANCE MARKET DEVELOPMENT 

WII premium approx $100m (excluding Europe and N. America)

+ WII has been available since 2003: more that 20 

countries are implementing WII (mainly pilots) 

Source: IFAD-WFP, 2010 

19

+ International WII services 

� Other service providers supporting weather insurance include 

� Reinsurance brokers 

� Weather data cleaning, 

� Weather measurement equipment (e.g. automatic stations) 

� Analytical, crop prediction and related services 

� Consultancy 

� Development banks and agencies (international and national) have 

promoted many initiatives and stimulated growth of a service market 

� Academic institutions have taken a strong interest in index insurance, 

including in its evaluation

+ 


Book C: 

Risk Layering 



The World Bank














+ Risk layering via reinsurance 

� In designing an insurance scheme, the annual aggregate losses of the 

insurer can be divided into expected frequency and severity of losses

+ An example of risk layering 

Probability of 

occurrence 

per number of 

years 

Up to 100 years Government Reinsurance of last resort 

20-30 years Stop Loss Reinsurance layer(s) 

5-7 years 

National Insurance or coinsurance 

(pool of insurers) 

3-5 years Risk Retention by Client 

Quota share 

reinsurance

+ Reinsurance strategy 

� Several factors will determine the amount of risk which the national 

insurer(s) retain, and the amount transferred to reinsurance 

� The risk profile: expected frequency and severity of annual result 

� The aggregate values at risk (e.g. pilot versus full scale operation) 

� Appetite of the insurer for risk 

� The availability and access to international reinsurance capacity 

� Regulatory considerations 

� Reinsurers also have their own perspective 

� They will be interested if there is future growth potential 

� In pilot phases, transactions may be too small to be economic 

� The insurer may be seeking technical guidance from the reinsurer as much 

as financial capacity, which is an additional cost to the reinsurer 

� Client relationships on WII may open opportunities to other business lines

+ Quota share reinsurance 

� Quota share reinsurance is the simplest form 

of reinsurance 

� Proportional sharing of risk (premium and 

claims) 

� Reinsurer allows the insurer a ceding 

commission, to recognise the costs of 

administration and commission paid by 

the insurer to distribution channels 

� The reinsurer “follows the fortunes” of 

the insurer, which is often fairest at the 

start-up phase, when there are many 

uncertainties 

� The reinsurer may require that the 

insurer does retain a percentage of the 

risk – typically at least 10% - to ensure an 

incentive remains for sound underwriting 

� Frequently there is both quota share and 

stop loss reinsurance in place for 

agricultural risks.

+ Stop-Loss reinsurance 

� Stop Loss reinsurance is also a common form of 

agricultural reinsurance 

� Non-Proportional sharing of risk. 

� Excess point (“priority”) and “limit” of 

payments under the reinsurance contract are 

expressed in terms of Loss Ratio (aggregate 

claims divided by aggregate premiums): 

example, a layer of 100%, excess of 120%, of 

gross premium income 

� The priority will be set so that the insurer is 

in deficit at that point, and may also be 

required to retain some risk in the layer 

� Premiums are set according to the expected 

claims costs falling to the layer, with a margin 

to reinsurers for profit and uncertainty 

� High layers of stop loss are more difficult to 

price, as there is less certainty about 

infrequent but large events. Higher profit 

margins are required by reinsurers for high 

layers

+ 

3 Examples of Crop Insurance and 

Reinsurance Programs

+ Malawi – Private Sector Quota Share Reinsurance 

Malawi Micro-Level Crop 

Weather Index Insurance 

Scheme since 2005: 

� Rainfall deficit Index for 

Groundnuts, Maize and most 

recently tobacco 

� Coinsurance Pool of 8 local 

insurers (Insurance 

Association of Malawi) 

� Program was not reinsured in 

2005-06 and 2006-07 on 

account of small scale and low 

liability 

� Reinsurance since 2007-08 

� 80% Quote Share cession to 

SwissRe and MunichRe 

29

+ India – Public Sector Crop Stop Loss Reinsurance 

National Agricultural Insurance 

Scheme (NAIS) is reinsured by 

GOI/State Governments: 

� Food Crops for losses >100% 

Loss Ratio 

� Commercial & Horticultural 

Crops, for losses >150% Loss 

Ratio 

� Government protection is open 

ended (no Loss Limit) 

� Stop Loss protection is “free of 

charge” to AICI (Agricultural 

Insurance Company India) 

� GOI / State governments share 

claims on Stop Loss on 50 : 50 

basis 

� Cost to Government for 

reinsured claims in 2005, US$ 

166 million 

30

South Korea: Coinsurance Pool Quota Share plus 

Stop Loss with Catastrophe Government protection 

� National Agricultural Cooperative 

Federation (NACF) led Pool Crop 

Insurance since 2000 

� International Reinsurers 

withdrew after major typhoon 

losses in 2002 and 2003 

� Government has capped losses > 

180% LR since 2005 

� Since 2005 international 

reinsurers have re-entered with 

Quota Share and Stop Loss 

Reinsurance capacity up to 180% 

LR 

31

+ Role of government 

� Governments are interested in supporting agricultural insurance as a 

policy instrument. This may take the form of premium subsidy, 

support for loss assessment, weather infrastructure, or 

administrative costs, reinsurance, research or development costs 

� Public private partnerships are recognised as necessary to harness 

market-based insurance discipline, involve stakeholders, and to allow 

government interventions to be structured 

� Extremely high stop loss layers carry high reinsurance premiums in 

relation to expected losses at that level. Top layer(s) reinsurance 

may better be provided by governments, or may form part of 

financial instruments, such as triggered contingent loans, negotiated 

between government and international development institutions

Module 2 - Forum for Agricultural Risk Management in Development

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