BY SARA JEROME
Will insurers find fertile ground in the dire issue of food security?
Some industry leaders say "yes," citing dark statistics about food availability and access in emerging markets. The United Nations estimated that about 850 million people are undernourished worldwide, and said agriculture is one of the most important mechanisms for reducing hunger in those regions.
Extreme weather conditions in major wheat producing regions have triggered significant increases in the price of wheat globally, contributing to social unrest and political instability in certain regions, according to Aon Benfield, the global reinsurance intermediary and capital adviser of Aon plc.
But in spite of its critical role in economic development, agriculture remains a largely uninsured industry across the developing world.
In the United States, crop insurance is a thriving market subsidized by the taxpayers. But farmers in the developing world often lack a security net (and a way to repay their creditors) when an act of God kills a season of crops.
"Agricultural insurance penetration in emerging markets is currently very low," according to a study released this year by Swiss Re, a top global reinsurer.Though global agricultural insurance premiums were estimated at $23.5 billion in 2011, only about $5 billion came from emerging markets, the study said.
But this all may change.The Swiss Re study predicted the agricultural insurance marketin developing countries will grow three or four times larger before reaching its full potential. Premiums for such insurance could reach around $20 billion by 2025, the research said.
Rade Musulin is among those who see potential. He is chief operating officer of Aon Benfield Analytics Asia Pacific.
"I don't know if, globally, our industry has really discussed the full range of products and their possibilities all over the world," he said in an interview with Risk & Insurance®.
The possibilities include multi-peril crop insurance, which offers protection when annual crop yields fall below a percentage of what is normally grown, and index products, which offers protection when an index measuring various parameters falls below a normal percentage of rainfall or heat, for example.
Musulin pointed to untapped opportunities for insurers in China, where larger-scale agriculture is, in many places, taking the place of small farms.
"Right now, there is a demand for the coverage. There are a number of countries in the developing world where there is significant agricultural potential," he said.
The insurance industry should approach the issue on two levels, Musulin advised. It should offer agricultural insurance to a wider swath of the world, and it should investigate emerging risks to the food supply that are not yet covered by insurance.
For instance, Musulin raised the hypothetical of a pesticide that causesharm to honeybee colonies and thereby hurts agricultural production. An insurance product could be created to help mitigate that risk.
He noted that agricultural insurance helps create stability in farm incomes in times of adverse weather. With that stability, there are more incentives for loans to farmers, and farmers are better able to invest in mechanization or irrigation.
Unlike the developing world, cropinsurance is a fact of life in the United States, where taxpayers shelled out $14 billion last year to subsidize these programs. David Graves, the manager of the American Association of Crop Insurers, said such policies insure everything from oysters to livestock to corn.
Unexpected costs can be devastating for a farm, creating a ripple effect across the economy, Graves said.
"In 2012, farmers collected $17 billion in indemnity payments. That wasn't the total loss because insurance policies carry deductibles. In this case, farmers suffered an additional $12 billion of loss which they got no payment from anyone for," he said. "Because of insurance, those farms will be able to pay their bills this year and get right back on track, so the nation can go to bed and rest easy about food security."
But comparisons to the U.S. market are not applicable for the developing world, according to some humanitarian advocates who have raised concerns about the insurance industry getting more involved in food supply issues.
One of the skeptics is Simon Levine, a food security researcher and humanitarian policy expert with the influential British think tank Overseas Development Institute.
"Food insecurity is not caused by too little food production, but because many people are too poor to buy the food, and have too little land to grow enough," he said. "These people cannot afford to pay premiums, and since, over time, insurance premiums must always cost more than what is paid out for losses, insurance is not a solution to the extreme and chronic poverty of hundreds of millions of food insecure people."
But insurers frame the possibility as a win-win.
Amit Kalra, head of economic research and consulting India for Swiss Re, noted that insurance helps stabilize farm incomes and promotes investment in the agricultural sector while facilitating the availability of credit.
"The insurance industry can be an enabling partner in ensuring food security, he said, citing its potential "to support the leap from subsistence farming to sustainable farming in the developing world."
Sara Jerome is a freelance reporter living in Doylestown, Pa.Previously, she covered business, technology and regulation for the Financial Times Group, theNational Journal, and
October 1, 2013
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