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

Governments in these emerging markets—where demand for agricultural raw materials is particularly high and agriculture is a key sector of the economy—have come to realize that agricultural insurance is an effective risk-management instrument to protect farm income and ultimately increase production. 

In fact, the majority of these governments already offer agricultural insurance programs to support the farmers.

DECADES-LONG PRODUCTION SPIKE

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

While the agricultural-production systems of different emerging markets vary greatly, a number of challenges for the insurance industry are common, including lack of adequate insurance-loss statistics, high exposure to systemic perils, and underdeveloped insurance infrastructure with little loss-adjustment resources. 

Despite these obstacles, current agricultural-insurance programs in emerging markets show the largest annual growth rates. 

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

CONTINUED GROWTH AHEAD

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

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

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

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

With affordable agricultural insurance being more consistently available, farmers are able to assume more risk and therefore increase productivity in the midterm—a key government goal in many emerging markets.

Reinsurers with dedicated and emerging-market agricultural experts can play an important role in structuring products, closely working with the local insurance industry and in providing significant reinsurance capacity.

BRIC BY BRIC 

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

• BRAZIL 

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

The catalyst for government-backed agricultural insurance in Brazil was a devastating drought in the south of the country in 2003-2004, when soybean yields dropped by 30 percent compared to previous year levels.

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

The reinsurance industry was instrumental in structuring a farm-based multi-peril crop-insurance cover and in transferring know-how to Aliança do Brasil, the insurance subsidiary of Bank of Brazil. The market premium is expected to be close to $200 million in 2010.

• RUSSIA

Russia has a large, but yet untapped agriculture-production potential. During the past years, an agricultural-policy framework has been developed and implemented to unlock the country's potential. In 2008, Russia launched the Program for Development of Agriculture 2008-2012.

The program aims at improving the competitiveness of Russian agriculture, as well as rural development and resource conservation. The result will be a major increase in public spending, as well as a solid step to improve social conditions in rural areas.

Agricultural insurance in Russia was introduced in the late 1990s. In 2007, total premium volume in agricultural insurance was about $400 million. Although Russia subsidizes multi-peril crop insurance, insurance penetration remains low. To provide investors and farmers with the risk-management framework they need, further innovative 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 crops in two seasons and strongly depend on the timely onset of monsoon rains.

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

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

These products brought some financial relief after the devastating droughts of 2002 and 2009 and for a number of flood events in between. 

• CHINA

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

In 2007, the Chinese government launched the “three rural issues” plan, which included establishing government-supported agricultural insurance. In 2010, seven licensed insurers provided peril-crop and livestock insurance to 120 million farmers generating an estimated premium volume of $2.5 billion.

To overcome the high costs of selling insurance to a large number of individual farmers, policies are sold at village level in collaboration with village heads.