Date post: | 20-Dec-2015 |
Category: |
Documents |
View: | 215 times |
Download: | 1 times |
Insurance of Climate Riskin Agriculture
Martin Odening
Department of Agricultural Economics and Social Sciences, Humboldt-University Berlin, Germany
Presentation at the ICAR Forum 2008
October 14, 2008, Bucharest
2
Motivation
3
Mitigation
•Reduction of Greenhouse Gases
•Immission Certificates
Insurance
Adaptation
•Crop rotation•New seeds•Irrigation
•Crop insurance•Weather derivatives•CAT bonds
Strategies for Coping with Climate Risk
4
Insurance coverage
Premium subsidies
Catastrophe aid Participation Reinsurance
Germany hail, supplementary insurance
none only for uninsurable risks approx. 35% for hail< 1% for MPCI private insurance
France Multiple peril crop Insurance
60% government aid for natural disasters (drought, earthquake, flooding)
20%private insurance
Greece comprehensive insurance
50% n.a. n.a. n.a.
Italy hail, frost, drought
50% for hail80% for MPCI
only for uninsurable risks n.aprivate insurance
Canada Multiple peril crop insurance
50% for extreme and uninsurable disasters
50% private and public insurance
Luxembourg comprehensive insurance
up to 50% n.a 10% n.a.
Austria comprehensive insurance
50% for hail- and frost insurance
only for uninsurable risks 78% for hail56% for MPCI
private insurance exclusively
Spain comprehensive insurance
55% only for extreme disasters approx. 42% private and public insurance
USA Multiple peril crop insurance
35 up to 100% only for uninsurable disasters 80% private and public insurance
Agricultural Insurance Systems
5
Source: PricewaterhouseCoopers
mil
lion
US
DWeather derivatives: Market Development
6
• no moral hazard
• no adverse selection
• no assessment of damage required (low transaction costs)
• payoffs not only in case of extreme weather events
Advantages of index-based insurance
• high basis risk
• sometimes difficult to price
• lower familiarity by users
Disadvantages of index-based insurance
Index-based Insurance / Weather Derivatives
7
1. Rainfall sum
22
1 1 1
0
T s
t mint s
I min , y y
2. Rainfall deficit
11
1
T
tt
I r
= rainfall at day t
tr= reference level for minimum daily rainfall
minr
R2 = 0.22
R2 = 0.52
3. Rainfall and Temperature
R2 = 0.85 2 23 1
0 1 2 3
1 14 5
June April
April June
I T T I
I T I T
, : average monthly temperatures for April and JuneApril Junet tT T
: deviation of a weather variable from its long-term average
Weather Indexes for Wheat
8
0
0.2
0.4
0.6
0.8
1
0 50 100 150 200Distance (km)
Cor
rela
tion
Coe
ffic
ient
estimated observed
Rainfall deficit
321 exp edeed
De-correlation function for precipitation in Brandenburg, Germany
9
0
0.2
0.4
0.6
0.8
1
0 200 400 600 800 1000 1200Revenues
Cum
ulat
ive
Den
sity
Fun
ctio
n
without option; distance 40 kmwith option; distance 40 kmwith option; distance 140 km
Pro
babi
lity
(€/ha)
Revenue Distribution with and without Hedging
10
1 ENSO – El Nino Southern Oscillation is the index measuring the Pacific sea surface temperature
Country Index type Risk level Status Comments
USA Area based crop yield Farmer level Marketed Subsidized by the government
USA Area average crop revenue Farmer level Marketed Facilitated by commodity markets
Canada Area based crop yield Farmer level Marketed
India Area based crop yield Farmer level Marketed Subsidized Mandatory if linked to credit
India Cumulative rainfall Farmer level Piloted and marketed Linked with credit
Mongolia Area average livestock mortality rate
Farmer level Piloted Governmental intervention on the certain trigger of herd loss
Mexico Cumulative rainfall Public reinsurance program
Piloted and marketed
Mexico Vegetation National level Marketing stage Purchased by the government
Ethiopia Cumulative rainfall National level Piloted Financed by the World Food Program
Malawi Cumulative rainfall Farmer level Piloted Linked with credit
Uganda Cumulative rainfall Farmer level Contracts are actually designed
Kenya Cumulative rainfall Farmer level Contracts are actually designed
Tanzania Cumulative rainfall Farmer level Contracts are actually designed
Nicaragua, Honduras, Guatemala
Cumulative rainfall National level Contracts are actually designed Not adopted
Vietnam Cumulative temperature / Flood level
Farmer level Contracts are actually designed Not adopted
Ukraine Soil moisture / Air moisture
Farmer level Piloted and discontinued
Peru ENSO 1 based Farmer level Contracts are actually designed
Morocco Cumulative rainfall Farmer level Piloted Not adopted
Overview about Practical Experiences with IBI
11
• Factors determining the demand for IBI- Risk exposure of the farms- Hedging effectiveness of the instrument- Risk attitude of the decision maker- (Non) Existence of effective alternative risk reduction instruments- Transparency of insurance products- Cost of insurance- Policy environment
Preconditions and Success Factors of IBI in Agriculture
12
• Factors determining the supply for IBI- Cost of insurance product development- Cost of delivery- Cost to control adverse selection and moral hazard- Cost of loss adjustment- Market potential and volume- Risk premium- Political, legal and institutional factors
Preconditions and Success Factors of IBI in Agriculture
13
Indicators for the Potential of IBI in ECA Countries (1)
Aspect Indicator Rationale
Importance of agriculture Share of agriculture in GDP Value of agricultural production Share of agricultural labor
What is at stake?
Structure of agriculture and agricultural production
Number of farms Number of commercial farms Average farm size and distribution Acreage and value of the 3 or 4 most
important crops Number of 2-3 most important livestock
Size and fragmentation of demand side; Identification of most important products; Diversification potential
Yield risk Average, range and volatility of per hectare yields of the top 3 products based on time series (at least 10 years) of yield data at lowest regional level
Assessment of yield risk exposure
Weather risk Average, range and volatility of rainfall sum (annual or during main vegetation period) based on time series of at least 10 years
Assessment of weather risk
Spatial heterogeneity of weather
Number of (micro)climate zones Estimation of geographi-cal basis risk
14
Aspect Indicator Rationale
yield Products Regional level (country, state, region) Length of time series
Data
weather Type of weather data Length of time series Number of weather stations
Informational basis for construction of indexes
Financial sector Number of banks / branch banks Financial depth (money supply to GDP) Financial leverage in agriculture (debt /
total assets) Farm capital per hectare
Potential interest in IBI Vulnerability w.r.t. risk
Insurance sector Number of (re)insurance companies Insurance premia to GDP Agricultural insurance programs in
place
Penetration of insurance and infrastructure for supplying policies; Potential interest in IBI
Legal environment and agricultural policy
Existence of (agricultural) insurance law
Share of subsidies in farm income Existence of direct payments
Income stabilization by alternative measures
Indicators for the Potential of IBI in ECA Countries (2)
15
Country Importance of agriculture
Fragmentation of agriculture
Yield risk Weather risk Spatial hetero-geneity of weather
Availability of weather data
Development of financial & Insurance sector
Legal environ-ment
Albania High Highly fragmented Low Low High Good Medium Moderate
Armenia High Highly fragmented Moderate High Moderate Good Medium Moderate
Azerbaijan Medium Highly fragmented High High High Good Medium Moderate
Belarus Medium Collectivized Moderate Moderate Low Medium Medium Bad
Bulgaria Medium Sharply dual Moderate Moderate High Medium High/Medium Good/Moderate
Croatia Medium Highly fragmented Low/Moderate Moderate High Good High/Medium Good/Moderate
Georgia High Highly fragmented Moderate/High Low High Good Medium Moderate
Hungary Medium Sharply dual Moderate Moderate Low Good High/ Medium Good
Kazakhstan Medium Sharply dual High High High Bad Medium Moderate
Kosovo High Highly fragmented Moderate Moderate High n.a. Medium Moderate
Kyrgyzstan Very high Normal Moderate High Moderate Bad Medium Moderate
Macedonia High Highly fragmented Moderate Moderate High Medium Medium Moderate
Moldova High Sharply dual High High Moderate Good Medium Moderate
Romania Medium Normal Moderate Moderate High Good Medium Moderate
Russia Medium Sharply dual High High High Bad Medium Moderate
Serbia High Highly fragmented Moderate Moderate High n.a. Medium Moderate
Tajikistan High Sharply dual High High Low Medium Medium/Low Moderate
Turkey High Normal Moderate Moderate High Good High/Medium Moderate
Ukraine Medium Sharply dual High High High Medium Medium Moderate
Uzbekistan High Sharply dual High High Moderate Bad Medium Moderate
Factors Influencing the Potential of IBI in ECA Countries
17
good
poor
low high
Bulgaria
Hungary
Croatia
Uzbekistan
Azerbaijan
Tajikistan
ArmeniaFYR of
Macedonia
Belarus
RussiaTurkey
Albania
Georgia
Serbia
KosovoKyrgyzstan
Ukraine
Demand for IBI
Preconditions for establishment of IBI
2 4
31
Romania
Moldova
Kazakhstan
Portfolio Analysis for ECA Countries
18
Weather constitutes one of the most important risk exposures in agriculture; it may hamper the economic development of the agricultural sector
Farmers: awareness of risk and active risk management
Insurers: supply of tailored and affordable insurance products
Science: rigorous evaluation of existing pilot projects; design and rating of index-based weather insurance
Governments/donors:- Improvements in legal and regulatory environment- Improvement in data collections- Assistance in product development- Knowledge transfer and educational efforts- Financial support for the coverage of catastrophe losses
Conclusions & Recommendations
19
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
<=2% 2.1-5% 5.1-10% >10%percentage of revenue
perc
enta
ge o
f th
e po
lled
far
mer
multiple peril crop insurance index-based drought insurance
Willingness to pay for Weather Insurance in Germany
20
actuarially fair price (= expected payoff) = 13.5% of the insured revenue
Premium loading = 20-25% surcharge on the fair price depending on the type of insurance
Insurance premium = fair price + loading = 16.54% of the insured revenue
WTA exceeds WTP => emergence of insurance market is unlikely
Cost of Weather Insurance
21
4200
4400
4600
4800
5000
5200
0 1 2 3 4k
Pri
ce
Wheat producer in Brandenburg
Seller
SaxonyThuringia
Actuarially Fair Price Crop rotation in Brandenburg
Indifference Prices for a Put Option on a Weather Index in Different Regions in Germany (in €)
22
Profit
Short future
Weather index on expiration
Present index value
a) F
utur
esb)
Put
-Opt
ion
Profit
Weather index on expiration
Strike
Production revenue
Hedged position
Hedged position
Production revenue
Long put
Hedging Strategy Using Weather Derivatives
23
Success Factors / Preconditions for IBI
Indicators
Theoretical Analysis Experiences with IBI
Quantification
‘Portfolio Matrix’
Aggregation
Data on ECA
Pre-Assessment of Feasibility of IBI in ECA
Recommendations for Donors / Goverments
Methods and Data Sources
24
recoveries
insurancepremium
farm
insurance transaction
insurer investor
weather bond price
principal & coupons
compensation
payment when weather event occurs
unconditional payment
securitization
Securitization of Weather Risk