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THE IMPORTANCE OF AGRICULTURAL
INSURANCE POOL IN ASIA AFRICA REGIONS
Prepared for
FAIR Case Study Competition
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Written by
Heddy Agus Pritasa
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Let’s Go Green ............
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THE IMPORTANCE OF AGRICULTURAL INSURANCE POOL IN ASIA AFRICA REGIONS
By Heddy Agus Pritasa
Abstract: This paper is aimed to observe the impacts of global warming, the climate change, the economic recessions and crowded populations towards agriculture factors in Asia Africa regions. This study comprehensively reviews the agricultural livelihoods and its risk management applications in some countries. Insurance as the risk transfer tool is aimed to save the low-income farmers thus maintain the food supply. The research methods use some successful examples of insurances and catastrophe pools in Asia Africa and Caribbean islands (CCRIF) and how this leads to the concept of the formation of the FAIR agricultural insurance pools in Asia Africa regions. The benefit of the pool is for the Asia and African countries to protect their farmers and food availability towards the risks due to climate changes, such as droughts, typhoons, floods, etc. The governments’ involvement in the formation of every pool is crucially needed.
Key words: agriculture insurance, climate changes, Asia Africa countries, agricultural pool, the governments.
I N T R O D U C T I O N
The Earth is getting older. As the third planet from the Sun, the Earth, the planet which we
live on, is already around 4.54 billion years. Since Adam and Eve period, the world has
changed and developed rapidly. Rapid developments are everywhere in every country in the
world. High-rise buildings, office towers, apartments, shopping malls have been built not
only in cities but now also spread to towns or rural areas. The recent study carried out by the
UN shows that population in the cities firstly outnumbered the population of rural areas in
1980 (UN Population Division, 1980). The World population is becoming crowded although
family planning program is carried out in highly-populated countries such as China, India,
Indonesia and the like. Such rapid developments occupy the fertile lands which are ideally
used for agriculture. It changes the nation’s policy of a country. For instance, Indonesia in
1980’s was focused to produce rice for their own domestic need but now Indonesia should
import rice from neighbouring countries. The property development in Indonesia use fertile
land ideally used for agriculture and the current Indonesia government’s policy does not put a
strong priority on agriculture like in the past decades. This makes Indonesia lack of rice and
should import it from other countries. These trends happen not only in Indonesia but in any
other parts of the world. Nowadays, there are 26 Megapolitan cities with more than 10
million people iving in each city. It increased from 8 Megapolitan cities in 1950. Along with
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that, the price of rice has increased steadily over the years. The table below shows the price
of rice that has steadily increased over the years.
Figure 1. The curve showing the gradual increase of price of rice
Apart from the above, every country suffers from the highly costs economic phenomenon.
Inflation is high in many countries. Economic recession not only impacts developing
countries but also modern countries such as European countries or even the USA. The table
below shows the inflation of big countries per June 2012.
Social unrest, political unrests and terrorism threats make the condition worse. The scarcity
of fuel oil also contributes to make it even worse. These may cause inflation ratio easily
increase causing the hiking prices of daily necessities.
Table 1. Table of inflation of big countries (per June 2012)
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There is a serious threat that not all people are realtively aware of. It is a global warming that
triggers the climate change gradually. The change of modern lifestyle also contributes to the
climate changes. In the future, the quality and quantity of hazardous risks may change as the
result of combination of two significant factors, i.e., developing cities and the climate change.
Although the cities only occupy 1.5% of land area in the world, they are the economic
generators of around half the world’s PDB (Product Domestic Bruto). Along with that, the
lifestyle also changes. The use of air conditioners in cities and other areas release CFC,
chlorofluorocarbons or well known as Freon, will deplete and damage the ozone layers
impacting the climate change. The layers contain relatively high concentration of ozone (O3)
and have the main function of the absorption of the Sun’s ultraviolet (UV) radiation that can
damage our skin. The release of carbonmonoxide resulting from the exhaust fumes of cars or
motorcycles contributes to the damage of this layer. The recent study shows the CO2 content
of the atmosphere increased by more than a third during the main phase of industrialization
era following year 1800. The earth temperature is now getting warmer and this make the
change of climate. The mean gobal temperature has risen by 0.7°C over the last 100 years
and by 0.3°C in the last 20 years. According to preliminary estimates by the World
Meteorological Organisation, year 2005 was, in global terms, the second warmest year ever
recorded. It resulted the melting of ice layers in Greenlands. As a consequence, it increases
the sea levels by 7 meters. The melting of ice layers in West Antartic could increase the sea
level by 5 meters resulting flood disasters in many coastal area. The most destructive flood
event recently occurred is in Thailand in October 2011. This flood disaster started from
extreme annual rainfall in northern regions of Thailand. The water inflow in Bhumibol dam
and Sirkit dam exceeded outflow resulted severe flood. It is the costliest natural disaster
occurred in South East Asia and most costly insured flood worldwide borne by commercial
insurance market. More than 20 provinces in Thailand were affected. S&P recently estimated
the final insured market gross losses of USD 16-18 billion. The flood in Bangkok city lasted
for months since October 20122. Many high-tech industries in seven industrial estates in
Thailand were flooded. Insured losses range from large commercial, SME (Small Medium
Enterprises) industries to residential exposures outside industrial areas. The reinsurance costs
are very expensive for Thailand risks. Some reinsurers may consider not to provide flood
insurance cover for Thailand risks.
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The global threats relating climate change result the average value of damage at $59 billion
per year (EMDAT, 2009) from 1990 to 2008, or around 0.1 % of the world’s GDP in 2008.
Tropical Typhoon contributes 44% of damage and 33% of flood.
Map 1.1. Global Catastrophe risks map
The map above shows the catastrophe risk area in the world. The risks range from the
typhoons, droughts and earthquakes. As we can see from the map above, the most hazardous
risks on earths are droughts then followed by earthquakes and storms/typhoons.
Figure 2. Return period curve of tropical storms with various intensitiy in America
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The above curve shows that the global warming phenomenon increases the frequency of
disasters – temperature is getting warmer. The curve also shows the reccurent period of
tropical storms with various intensity in the USA for one specific climate model. The storm
of US$ 100 billion occurs once in every 100 years in America based on the current climate
condition. However, the warmer temperature in the future will increase the recurrent period
to be once in around 56 years. (Source : Mendelsohn, Emmanuel and Chonabayashi, 2010)
Another research carried out by Munich Re in 2010 shows that the intensity of the natural
catastrophe events per continent increase gradually over period of years. We also notice that
the Australia and the Asia continents are the highest among other continents.
Graphic 1.1. The increase intensity of natural catastrophe events per continent (1980-2009)
THEORETICAL FRAMEWORK
Insurance is a vital industry. It will excellently support the business activity of the real
industry, such as manufacturers, factories or large companies. Imagine one large
multinational car manufacturer was not insured and severely damaged due to a destructive
event. Apart from the physical losses, the other losses after the physical damage will follow
like the snowball effects. For instance, the death or injury of surrounding people, business
inerruption and the local economic condition will be suffered or perhaps this will give
impacts on global economy, the unemployment, social unrest or political impacts, etc.
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In the risk management system in general, there are four steps to take from risk identification
phase to risk control phase. Risk identification phase is a step to gather all kind of risks
within an organization. These can be external or internal risks, controllable or non-
controllable risks and the like. All we have to do in this step is only gather all kind of risks.
The second step is risk analyses phase, i.e. to classify which one is a controllable risk, which
one is non-controllable risk. Which one is external or internal risk. At this stage, we know
each classification so that we can evaluate each risk in every classification.
The next step is risk evaluation phase. At this stage, we will evaluate each risk we previously
analysed. It includes the process of evaluating how the financial impacts of each risk when it
occurs.
Figure 3. The main risk management process
A Nation’s earthquake insurance scheme - JER’s Japan case study
The final step is the risk control, where the insurance could play as a risk control mechanism.
At this final step, we will decide, after knowing and deciding the financial impacts of each
risk, which risk we could retain or eliminate and which risk we could transfer to another
party. Coming back to example of the car manufacturer above, rather than self-insuring the
risk itself, the car manufacturer will transfer its financial risks to the insurer by insuring the
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whole car manufacturer plant and as a consequence, it only pays relatively small premium
amounts. It is substantially cheaper than self-insuring the car manufacturer itself.
In a wider complex, insurance as a risk transfer mechanism is also used by a nation to protect
itself from various kinds of risks such as natural risks, man-made risks, catastrophe risks,
terrorism threats, financial or non financial risks, etc. Many nations use insurance as part of
risk management to protect the nations from financial risks due to the occurrence of a risk.
For instance, Japan is a volatile country towards earthquake risks that use insurance as a risk
management process. Many severe earthquake events took place in Japan and some of them
changed the nation’s policy to anticipate the nation from the potency of financial risk due to
earthquake occurences. Some big earthquakes led Japan set up a nation’s insurance
instrument that protects its people from financial losses due to earthquakes. The Great Kanto
earthquake struck the Kanto plain on the Japanese main island of Honshu on Saturday,
September 1st 1923. The earthquake had a magnitude of 7.9 on the moment magnitude scale
(Mw) with the focus deep beneath Tzu Oshima Land in the Sagami Bay. The cause was a
massive rupture of the Sagami Trough due to exertion of huge energy from the Phillippine
Sea Plate subducting under the Okhotsk Plate. Because the quake occurred during the lunch
time, many people died due to many large fires that broke out. Some fires developed into
firestorm that swept across the cities. Many people died when their feet became struct in
melting tarmac. The tsunami following the earthquake struck the coast of Sagami Bay, Boso
Peninsula, Izu Islands and the east coast of Izu Peninsula within minutes. The tsunami
waves were up to 10 metres and it killed many, about more than 100 people died. Over
570,000 homes were destroyed leaving 1.9 million homeless. Altogether, the earthquake and
typhoon killed an estimated 99,300 people and another 43,500 people went missing.
Another big earthquake in Japan is the Niigata earthquake of June 16, 1964. It had a
magnitude of 7.5 and caused severe damage to many building and structures in Niigata.
Although around 2000 houses were totally destroyed, only 28 lives were lost. A following
Tsunami triggered by movement of the sea floor associated with the fault ruptured, totally
destroyed the Niigata port.
Those two big earthquakes in Japan led the government of Japan created “Japanese
Earthquake Reinsurance” (JER) scheme in 1966, which has been revised several times. In
this scheme, houseowners may buy earthquake insurance from an insurance company as an
optional rider to a fire insurance policy. The insurers enrolled in the JER scheme who have
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to pay earthquake claims to houseowners share the risk among themselves and also the
government, through the JER mechanism. The government pays a much larger proportion of
the claims if a single earthquake event causes aggregate damage of over about 1 trillion yen
(about USD 8.75 billion). Below are the main coverages of earthquake insurance in Japan.
Figure 4. Earthquake Insurance coverages in Japan
To protect the people and the nation’s interests, the government of Japan undertakes the
reinsurance for the earthquake insurance and necessary laws have been launched including
losses to be covered, claim settlement method, amounts insured, participation method, etc.
The earthquake reinsurance program as of April 2002 is as follows:
Figure 5. A diagram of liability sharing of insurance companies and Japanese government
The above figure shows us that JER uses an Excess of Loss layer program for its earthquake
reinsurance protection. There are only two participating parties involved, ie the insurance
industry and of course the the government. No other parties, like the World Bank for
isntance, are involved.
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Parametric trigger method
The trigger of claim in JER uses parametric trigger method. It is a type of insurance claim
that does not indemnify the pure loss, but ex ante agrees to make a payment upon the
occurrence of a triggering event. The Parametric trigger is mostly used in catastrophe natural
risks, such as earthquake, flood, typhoon and the like. This can also be applied in agricultural
crop insurance. The Parametric insurance is therefore suitable for catastrophe risk insurance
having low frequency but high intensity losses, such as earthquake loss events. The diagram
below shows the difference of indemnity and non-indemnity basis.
Figure 6. Difference between Indemnity with Non-Indemnity basis
The Parametric method mostly starts working when one loss reaches specified criteria agreed
by parties involved in one insurance contract. The specified criteria can be a specified ratio,
earthquake magnitude or rainfall ratio. To make the parametric insurance work best, a long
and accurate historical data is needed to make the best probability scenario. The advantage of
using parametric method is the claim settlement is faster compared to indemnity claims
settlement. Other advantages are as follows:
• Clear and Transparent – It is clear what the kind of losses that are covered and
transparency on the how the losses are triggered.
• Relatively No disclosure on underwriting aspects – being contrary to the indemnity
events that required details of risks, there is relatively no need to gather underwriting
details in every risk.
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• Relatively Simple – The risks are reviewed simply in parametric method and therefore
no need to survey the risks.
• Less dispute - as the claim settlement is simple and quickly settled, there is relatively
less dispute of all parties involved
• Relatively objective – As everything is set in advance clearly, therefore the claim
settlement is objective. No grey area aspects are involved.
However; there are also disadvantages of parametric trigger methods although the list is little.
They are listed as follows:
• The Parametric trigger requires accurate and comprehensive data, especially when
establishing the parametric model.
• The Parametric trigger is not easy to understand. The parametric trigger involves high
technology tools and therefore it is not easy to understand.
• There may be a big amount difference between the loss calculated from the
parametric model and the actual loss on the ground.
The formation of TREIF (Taiwan Residential Earthquake Insurance Fund) in Taiwan
Another example of risk management system using insurance is taken by the Taiwan
government. As we all know, Taiwan is prone to earthquake risk since it is located in the
Circum-Pacific seismic zone, one of the most three major seismic regions. Some big
earthquakes led the Taiwan government to establish a residential earthquake insurance
system called TREIF (Taiwan Residential Earthquake Insurance Fund) in 2001. One of the
most influential earthquake occurrence is an earthquake called ‘Chi Chi earthquake’ or 921
earthquake. This quake occurred on September 21, 1999 with the magnitude of 7.3. It struck
Nantou County in Central Taiwan. 2,415 people were killed, 11,305 injured, 53.768 buildings
were severely damaged and NT$ 300 billion (US$ 10 billion) worth of damage was done.
The quake was recorded as the second-deadliest quake recorded history in Taiwan, after the
1935 Hsinchu Taichung earthquake.
This quake prompted the Taiwan government to set up an earthquake insurance pool system
and built a concensus to strengthen an earthquake insurance mechanism. At the end of 1999,
the competent authority also introduced amendments to Article 138-1 of the Insurance Law to
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include provisions on underwriting residential earthquake and establishment of a mechanism
for assuming earthquake risk. This amendment was approved on 9 July 2001 and the Taiwan
Residential Earthquake Insurance Fund came into existence. In accordance with Article 138-1
of the Insurance Law, the authorities announced the “Enforcement Rules for Residential
Earthquake Co-insurance and Risk Bearing Mechanism” on 30 November 2001. The rules
stipulate NT$ 50 billion in excess layering as the figure below.
Figure 7. TREIF excess of loss layering program
As we can see from the above figure, TREIF puts a NT$ 18 billion in the second layer after
the residential earthquake coinsurance pool of NT$ 2 billion in the working layer. The
government will step in at NT$ 10 billion when the earthquake losses exceeds NT$ 40
billion. Another risk management approach is more modern and complex since it involves
some regional countries having similar risk exposure. It is what we call as CCRIF
(Caribbean Catastrophe Risk Insurance Facility) which was established in 2007. This is also
the first insurance instrument to successfully develop parametric policies backed by both
traditional and capital markets. The formation CCRIF was prompted by Hurricane Ivan in
2004 which caused billion dollars of losses across the Caribbean. In both Grenada and the
Cayman islands, losses were close to 200% of the national annual GDP. After the Hurricane
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Ivan, the Caribbean Community (CARICOM) Heads of Government held an emergency
meeting to discuss critical issues surrounding the need for the provision of catastrophe risk
insurance for its members. As a result, CARICOM resolved to take an action and approached
the World Bank for assistance to design and implement a cost-effective risk transfer
programme for member governments. From this, the CCRIF came into an existence. It is a
regional catastrophe fund for Caribbean governments, designed to limit the financial impact
of devastating hurricanes and earthquakes by quickly providing liquidity when a policy is
triggerred. CCRIF operates as a PPP (Public Private Partnership) and is set up as a non-profit
‘mutual’insurance entitiy in Cayman islands. As other catastrophe insurance pools for
nations, the CCRIF also uses parametric trigger in a claim method.
RESEARCH METHODOLOGY
Several different methodologies have been applied in this study, including literature review
and other documents for desk study. Some examples of successsful methods are brought
forward into this writing to generate the idea of the formation of an important pool for the
multi benefits of Asia African countries.
Based on Munich-Re research of 2010 on the socio-economic effects of climate change in
East, Southeast, South, North and Central Asia, the climate change may result destructive
economic foundationof a nation. The essence on this report is that the changes in the physical
sphere determine the current status of the climate. The climate change has already modified
the physical sphere such as higher temperatures, increases or decreases of rainfall and
changes in the frequency and intensity of extreme weather events. The dominant weather
phenomenon in Asia is the moonson. The area being impacted by the climate changes are
water, coastal and marine systems, infrastructure, settlement, agriculture forestry, health,
tourism, energy and transport. These area can be of relevance to insurance and finance
sectors. Some brief explanations regarding such area are as follows:
- Water : there is a widespread dependency on water throughout the whole Asia. Rapid
development in urbanisation, industrialization and inefficient use of water use are the
main causes. In climate change terms, glaciers are melting quicker in the whole of
Asia due to Himalayan glaciers that fed the major river systems in northern, southern
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and south eastern Asia. In local use, the use of water for industrial purposes
outnumbers the use of water for domestic purposes.
- Coastal and Marine systems and fisheries : Coastlines, harbours and shipping face the
danger of more intense typhoons and storm tides. The sea level may rise to flood to
many coastal regions if no adaptation takes place. As the use of land changes,
mangrove forests of Southern and South East Asia are at threats. Deep sea fishing is
affected due to ocean temperature rise.
- Human health: The spread of infectious disease particularly in South and Southeast
Asia results from bad sanittary conditions and social factors The effects of climate
change will even also affect the spread of of insect-borne virus diseases such as
Malaria and Dengue fever.
- Agriculture and forestry – this is more important area to consider. The climate change
impacts the agriculture and forestry in the whole world. Agriculture is very prone to
the climate change. Every one percent in temperature rise will impact the agriculture
sectors. As the result the agriculture output may reduce and the price of food will
increase due to scarcity of the agriculture output. The rise of the temperature may
result the reduction in yields of rice, maize, wheat and other cultivars in most parts of
the world. The climate projections confirm this phenomenon. To anticipate this from
getting worse, some adaptations should be introduced, such as irrigation systems for
the purpose of maintaining sustainable yields. The rising demand of food by a rapidly
growing population will lead to the food scarcity and the increase price of food.
As explained, a conclusion can be drawn that some crucial adaptation to climate change are
very important. Based on the above list of area that may be affected by the climate change,
the agriculture is the vital area to focus. The intention is to secure the food supply leading to
avoid the price hike of the food. As the main aim of the writing is for the Afro African
countries purposes, therefore this writing is mainly focused on the agriculture aspects in Asia
Africa countries and how some risk management methods through insurance are carried out.
Most Asia and African people consume rice, wheat, corns or cassava. Rice is mostly
consumed by Asian people. One of the most prominent countries having a steady focus in
crops production is Thailand and Vietnam. Both countries export rice to other countries. For
this study, we discuss Vietnam in terms of agricultural livelihoods in the climate change
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context and the risk management efforts towards the food availability. However, we discuss
not only Vietnam case in this writing. We also present some other cases. The study cases
presented below are the experience cases from countries among Asia, Arab and African
countries. The experience can be a successful or unsuccessful story. However it can be
useful for us to gather experience of how they build the agriculture insurance concept from
zero ground.
Vietnam Study Case : Failure on agriculture insurance
Eighty percent of the population in Vietnam live in weather-dependant livelihoods such as
agriculture, aquaculture and forestry. Around 90% of the people live in rural areas.
Agriculture itself accounts for 22%of Gross Domestic Product (GDP), comprising of 30%
exports and 60% of employment. The majority of the rural population makes is living by
growing and selling crops, selling livestock and fish and from forest product. Rice accounts
for 45% of agricultural productions. However, Vietnam is also among the most disaster
prone countries in the World. According to the World Banks’ (WB) research, Vietnam will
be one of the five countries most affected by climate change. Shocks like typhoon, flood,
drought, epidemics, fire, sea level rise, can cause severe damage and loss for livelihood
means; thus dramatically reduce the households’ assets, eliminate their income resources and
force the poor deeper into poverty. To prevent this from getting worse, the Vietnam
government take some necessary actions as outlined in the following pharagraphs.
Agriculture insurance is an economically effective financial tool that strengthens Vietnam’s
resilience to extreme events, especially climate-related events. Agriculture insurance in
Vietnam not only promotes agricultural production, it also eliminates negative impacts of
disasters on agricultural activities and raises the awareness of self-protected spirit for
vulnerable community.
Insurance funds /budget generated by farmers, agricultural firms and the State could
contribute to decreasing the financial burden for the State budget in emergency response and
provides sufficient and timely supports for affected people in early recovery. As it covers the
nation’s interest, the government should step in by passing regulations. Existing legal
framework has laid a fundamental foundation for risk financing mechanism in general and for
agricultural insurance in particular. The most important document is the MoF’s Plan to pilot
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agricultural insurance for 2011 – 2015, which was submitted to the government in 2009 for
consideration.
In the past decades, agriculture insurance was piloted by some insurance companies (Bao
Viet, Bao Minh and Groupama) but few farmers paid for it. In total approximately US$ 1
million in fees were collected in 2008 mostly for livestocks and rubber trees but no crops. At
that time, the agriculture insurance failed due to many factors. According to MoF’s report,
these include insurance products not suitable to the need and the local context, high risks due
to high losses, small profit for insurance companies, limited financial capacity, undeveloped
insurance market, not an insurance culture, poverty, scatted production, moral hazard and
adverse selection, lack of strong legal framework, no central database, and weak PPP (Public
Private Partnership).
A case study in India : A successful agriculture insurance
India has similar conditions to Vietnam to start up weather index insurance. The agriculture
insurance in India was initiated by a private insurance company with the technical report
from the World Bank. The key success of the program is the linkage between insurance and
financial services at the grassroots level. The following lessons should carefully be studied t
ensure successful applicability.
• Strong partnership among government sector, private companies and financial
institutions.
• The delivery channel must be trusted and comprehensive. It is necessary to include
feedbacks from farmers to the design.
• The product delivery channels to farmers should be linked to finance, inputs and other
service that allows pre-financing of premiums.
• Investment in raising awareness for farmers and marketing is the key factor to scale
up the program.
• Finally, favourable legal framework and infrastructure investment is they pre-
condition to implement the weather index insurance program.
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Mongolia Case Study – A mixture of social and commercial insurance
Mongolia represents one of the strongest cases in mixing social and commercial insurance
with a carefully constructed project. The index-Based livestock Insurance (IBLI) pilot
program has a unique financing structure that was designed to account for the lack of
access to commercial reinsurance, the large financial exposure associated with correlated
losses and the insurers and the regulator’s lack of experience with this class of insurance.
The structure follows best practices by structuring layers of risk financing. Insurance
companies retain some portion of the risk, pool risk with other companies, pay
reinsurance premiums to the government and are protected from the most extreme losses
by a combination of (1) the Base Insurance Product (BIP) reinsurance reserve and (2) a
contingent loan from the World Bank for the most severe losses.
Philippine Case Study : small and marginalized farmers
Agriculture insurance in the Philippines is a government’s program targeting small and
marginal income farmers. The Phillippine Cross Insurance Corporation (PCIC) was
authorized to operate the program. PCIC has various offices from control to local levels
and a network of authorized underwriting agents (UA) such as Lending Institutions (1.1.),
Lending Conduits (LC), etc. The LI’s include commercial, development, rural banks,
NGOs, Coops, and even government entities. LIs share premium rate with borrowing
farmers about 17%-22% of the premium rate, government subsidies 50%-60%, the rest is
paid by insured farmers.
To apply the model, two pre-conditions must be presented e.g. strong legal framework and
commitment from the government and the presence of LI as grassroots level. In Vietnam,
the LIs are operating business at local level, especially the banks (e.g. Agribank, ABC).
For the former condition, currently the Government of Vietnam is going to enact an
agriculture insurance program. A feasibility study is needed to investigate the marketing,
technical, management and financial aspects of the program. A clear subsidy mechanism
must be presented before operating this model.
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Indonesia Study Case : A failure due to shift of the economy focus
During the past three decades, Indonesia was among countries that had a strong focus on
agriculture. As the nation’s policy, the focus on agriculture sector was stated in the five year
development planning several (called REPELITA in Bahasa Indonesia abbreviation). At
least, it was stated in two REPELITAs that the nation’s development will include the main
focus in agriculture. However at end of the four REPELITA, the nation’s economy focus
changed. The government shifted the economy focus from the agriculture to industry. Two
main industrial focuses were national car brand plus its manufacturer and the aircraft
manufacturer. Timor was the national brand car and IPTN Nurtanio was the national aircraft
manufacturer. It was good at the beginning. However; when President Soeharto’s regime
ended, then the change of the nation’s leader changed the economy focuses overall. The next
presidents after Soeharto did not have sustainable focuses in their national development
program. Mostly they were busied to secure their political positions and their political parties’
interests which supported the presidents’ positions. As a result of gradual shift of economy
focus, Indonesia changed from agricultural country to industrial country. When Indonesia
and other neighboring countries were hit hardes by the global economic recession in 1998,
Indonesia was among countries that was very slow in economic recovery. The prices of daily
necessities hike and the price of food were very expensive due to the rapid increases on
prices. Thailand, as Indonesia’s neighboring country had a relatively faster economic
recovery. One of the successful factors was that Thailand could fulfill domestic needs on
food supply and demand.
Near the end of July 2012, one of the famous Indonesia’s newspapers, Kompas, put a
headline story mentioning Indonesia was volatile on Food Crises. The impact of current
drought in the USA resulted hiking price on some commodities globally and it impacts
Indonesia to become volatile on Food crises. The strong dependency on the food import
gives the unpleasant shocks on food supply and food prices in domestic markets.
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Figure 8. Kompas’ headline news showing Indonesia is prone to food crises
In terms of agriculture insurance in Indonesia, it seems no progress at all. There is one
general insurance company in Indonesia, i.e., PT Asuransi Jasa Tania, that seems closely
connected to crop insurance business. However the main focus is only on forestry owned by
the government.
Kenya Study Case : Agriculture Insurance model using cell phones
One of the many problems on agriculture insurance development in developing country is
smallholders’ unwillingness to invest in better seed and fertilizer. Those farmers do not see
this as a kind of investment but merely costs only. In Kenya, for instance, only half of the
farmers buy improved seeds or other inputs. Many farmers use poor-quality seed from
previous harvest. The reluctance of the farmers are somehow reasonable. Droughts or flood
can easily destroy their crops and wipe out the benefits of the purchased inputs. The result of
not using the best inputs is that yields remain far below their potential.
To overcome the problem, the Syngenta Foundation – A foundation for sustainable
agriculture to improve the livelihood of smallholder farmers - launched the Agriculture index
insurance initiative in 2008. The aim is to explore and develop the potential of
microinsurance for smallholders. The insurance is branded “Kilimo Salama”, which means
“safe farming”. The main features of such insurance should be simple, affordable and
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relevant to small farmers. With Killio Salama, the farmers can insure selected farm inputs at
ther local retailer and pay half the premium. Mobile phone technology is very widely used in
rural Kenya. The stockist registers the farmers using a camera phone to scan a bar code on
each input sold. A text message confirming the policy instantly goes to the farmer’s cell
phone. To make the agriculture insurance affordable to smallholders, Killimo Salama
agribusiness partners pay the other half of the premium. In the 2009 pilot phase, the
agribusiness partners were Syngenta East Africa Limited and a fertilizer company called
MEA. Their involvement made the program successful quickly, in time for the next growing
season. The Syngenta Foundation is adding more agribusiness partners and insured products
as the initiative moves forward.
To monitor insurance progress, the Foundation has set up the automated weather stations. If
a station reports at the end of the season that local rainfall has been insufficient, farmers in
the affected area receive a payout. Using weather station data rather than the field assessment
visits further contributes to keeping the cost of insurance low and thus within farmers’ reach.
Payout via phones avoids problems with intermediaries, cash transport to remote areas, etc.
Bostwana Study case – Agriculture Insurance finnaly launched
In January 2010, Agriculture Insurance had finally been launched for the first time in
Bostwana. In the long run this agriculture insurance tried to move forwards full
commercialization. Soonest after it was launched, Agrinsure Bostwana a joint venture effort
between South Africa’s Farmers Technical Insurance Service Company (FTISC) and
Alexandra Forbes Bostwana, was officially unveiled to stakeholders in the industry. The
establishment of agriculture insurance in Bostwana is a major milestone in the sector as the
idea for such a product has been in the pipeline for many years and it will now strengthen the
country’s effort to attain food sustainability.
Iran Study Case : Bad loss ratio of agriculture Insurance
Agriculture Insurance is exclusively available and provided though Agriculture Products
Insurance Fund. The fund covers crops, livestock, poultry, bees, fish, silkworms, forestry and
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pasture, orchards and others under an area-yield programme. Up to 69% of total premiums
are subsidized by the Iran government.
The perils covered for this agriculture insurance are flood, hail, storm, windstorm, heavy
rainfall, frost-bite and earthquake. Drought is so far included only in those the insurance
programme which has been launched by the Fund for the protection of wheat (irrigated and
dry), barley, tea, rice and cotton, as well as forestry and pasture. The fund covers all 29
provinces of the country and nearly six million hectares of land.
The loss ratio for agriculture insurance is bad, which exceeds 100% while the penetration
ratio stands at 0.8% of agriculture GDP.
Sudan Case Study : Shariah-compliant agriculture insurance
Sudan is the country of the birthplace of takaful – i.e., the shariah-compliant business system
in Islam and adapted in the conventional business practice. Sudan is probably the only
MENA (Middle East and North African) country offering shariah-compliant agriculture
insurance. Crop insurance premiums are subsidized by 50%, and the loss ratio is 34%.
However, there is only 10% of the cropped area in the country is insured. A law was passed
in 2003, aimed at controlling agricultural risks and supporting agricultural insurance
providers. The 2003 law also set up a national fund to alleviate the impacts of natural
hazards. The fund provides for premium subsidies, reinsurance cover for all areas of the
sector, and the training of the personnel, among other plans.
RESEARCH ANALYSES
As explained earlier, insurance could acts as a disaster mitigation tool for agricultural sector.
Insurance plays a vital role in the risk management issues. There are some countries
successful to establish a regional insurance pool as part of risk management program like a
CCRIF which was formed to protect the countries in the Caribbean islands towards natural
catastrophes such as hurricanes or storms and the like. As the global warming issue is a
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problem of every country, therefore a close cooperation activity is needed either bilateral,
regional or multinational countries
In this part, we build a conceptual ground of risk management programme. Based on the
facts on the previous chapter, we can conclude that agriculture area should be protected
through risk management mechanism in Asia and African countries. We already know the
experience of the agriculture insurance, either it is a successful experience or unsuccessful
experience. To limit the approach, we choose insurance as a risk transfer tool via regional
agricultural insurance pool. FAIR could be an institution to facilitate this pool. The concept
of the formation of such pool should have the following criteria:
1. Selected Perils - The risks chosen should be the similar risks throughout Asia and
African Countries. For the benefits of the FAIR members, we put the risks that could
affect the agricultural products. Of course, we cannot accommodate to include all
kinds of perils from all FAIR country members. The risks selected are to protect the
agriculture products due to droughts, typhoons, storms, hurricanes and flood. The
selection of perils may change in the future depending of the claim experience of this
Pool.
2. Form of the Pool - The agriculture insurance pool for Afro Asian countries should
adapt the CCRIF Pool. It is because CCRIF is successful to protect Caribbean
countries toward catastrophe risk such as hurricane. There are 16 country members of
CCRIF.
Figure 9. CCRIF Insurance Protection Program
The above figure shows us that the protection format of CCRIF is on excess of loss
layers programme. The country islands will put specified funds to the CCRI Captive.
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The funds will be utilized to pay premium for reinsurance and CAT SWAP from the
World Bank.
3. The FAIR appointment - The organization to facilitate this agriculture insurance pool
is through FAIR – Federation of Afro Asian Insurers and Reinsurers. FAIR has
extensive knowledge and experience from its members. A similar Pool, ie the FAIR
Catastrophe Pool was successfully launched but not operational yet at the moment.
4. Government Involvement - Remember also the successful factor of this conceptual
Pool is the involvement of the government of each FAIR member country to take part
in the FAIR Agriculture Pool. In the previous part of the writing, the governments
always take part in agricultural insurances. This is logical since the government has
nation’s interests to protect the nations from the food scarcity and hiking prices of the
food. Therefore, the government involvement in this pool is a must and unegotiable.
The government should put the money in the excess of loss layer program of FAIR
Agriculture Pool. The amounts put by the governments into this pool depend on the
extents of the excess of loss protection programme.
5. JER Excess of Loss format - The FAIR Agriculture Insurance Pool should adapt the
excess working layer like the one in JER – Japan Earthquake Reinsurance. The layer
like the one in JER is more appropriate than other kinds of layer, such as TREIF
excess of loss layer. The JER excess layer has a better involvement of all parties
from the working layer. From the working layer ground up, the industry and the
government are involved. This kind of layer is considered suitable for the newly
formed pool, like FAIR Agriculture Pool.
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Figure 10. JER excess of loss layer for earthquake risk insurance
From the above figure, we see that in the retention layer, the industry is firstly
involved when the claim arises. However, when the claim is bigger, the government
will step in at the middle layer. This is a good form to balance the involvement of the
government and the insurance. Depending on the claim result and the agreement,
who involve in the working layer will change the other way around.
6. Benefits for multi-parties - The agriculture insurance is good to a) protect farmers
from financial losses due to catastrophe events b) bank loans for protecting its credits
ratio and c) food security for the nation’s interests.
7. The Public Private Partnership (PPP) approach should be taken. In other words, the
involvement between the government and the private insurance industry is a must.
We see from the previous examples that PPP mechanism is a key successful factor
either for the conceptual FAIR Agricultural Insurance Pool or Microinsurance.
Details of the conceptual FAIR Agricultural Insurance Pool
The conceptual form of the layer of FAIR Agriculture Insurance is as per the following
figure. The form is adapted from JER Excess of Loss layer since it gives a good balance
from the participation of the government and other parties. This form should last for specified
years depending on the annual results of this Pool. At least, in the first year of the formation
of the FAIR Agriculture Insurance Pool as follows:
Figure 11. Conceptual Excess of Loss Form of the FAIR Agricultural Crop Insurance in the first year
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As seen on the above figure, the governments and the insurance companies of the FAIR
members are distributed in balance in the first working layer of the FAIR Agriculture excess
of layer program. The total protection amount is unknown at the moment and this should be
measured and decided by using a modelling calculation method. As the result in the first year
of the Pool relatively cannot be predicted, the participation of financial institution, like the
World Bank in this case, should be at the top layer. Of course, it can change depending of the
claim result and claim experience of the Pool itself.
When the results and experiences of the FAIR Agriculture Crop develop, then the form of the
layer may change. Perhaps the excess of loss form of TREIF can be used to substitute the
excess of loss layer form of JER. The decision of who will be in the working layer, i.e.,
whether the government or the insurance industry should be done after analyzing the
financial result annually. The figure of such excess of loss pool in the future (at least after
the first year) may be as follows:
Figure 12. The conceptual Excess Layer Form of the FAIR Agricultural Pool using TREIF’s Excess of Layer format
Having seen the above figure, we see that in this case the insurance company members are
put in the retention layer. In pratice, it may change depending the financial results of the pool
in specified year. However, it is suggested that this form is done after reviewing the previous
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form using JER’s Excess Layer Form. Since Capital Market is relatively more expensive
than insurance program, the capital market is put in the top layer after the protection layer of
overseas reinsurance.
Having discussed the operator of the Pool, it is strongly suggested that the operator of FAIR
agricultural Pool members should be a company having extensive catastrophe risk
experience, highly skilled resources and full commitment to manage the pool.
MICROINSURANCE Approach to support The FAIR Agriculture Insurance Pool
Apart from the conceptual form of the FAIR Agriculture Pool, there should be another
mechanism to support the successful of the conceptual FAIR agricultural pool. It is through
microinsurance mechanism.
Microinsurance is the protection of low-income people against specific perils in exchange for
regular premium payment proportionate to the likelihood and cost the risks involved. The
definition is exactly the same as one might use for regular insurance except for the clearly
prescribed target market: low-income people. Like regular insurance, microinsurance can be
for a variety of risk. These include both health risks (illness, injury, or death) and property
(damage or loss) risks. A wide variety of microinsurance products exist to address these risks
including crop insurance, livestocks/cattle insurance, insurance for theft or fire, heakth
insurance, term life insurance, death insurance, disability insurance, insurance for natural
disasters, etc. In this context, each insurance company member of FAIR should sell
microinsurance product to farmers. The Perils should be the same perils as those in the FAIR
Agriculture Pool, i.e. droughts, flood, hurricane, typhoon, storms. The intention of the same
perils is to make one mechanism will support the other mechanism. In other words, the FAIR
Agriculture Pool mechanism will support the microinsurance and the other way around.
To make the selling activity of microinsurance product effective and efficient, the agriculture
product should be sold via the national insurance association. Apart from the effective and
efficient points, the other intention is to avoid unnecessary competition among the insurance
members of the association and thus it maintain the costs down. One of the obstacles of
using the national insurance association as the central selling agency is that in many parts of
the world, such association is prohibited from doing selling activity. The reason is that this
national insurance association has the main tasks of supervising the activity of the insurance
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company members and it has role as the focal point of the insurance industry to the
government. If this happens, a dilemmatic situation arises and a preferable solution should be
reached such as passing a regulation to enable the association to do selling activity.
CONCLUSIONS AND RECOMMENDATIONS
We have already discussed extensively from the first chapter to the last chapter. Some
conceptual strategic approaches have been made including the formation of the FAIR
Agriculture Pool. Still, there are many jobs to do to make this a reality. However, we should
do this sooner or later to save the regions from the food scarcity which make the social and
economic situation get worse. The food scarcity will lead to inflation and hiking prices. This
may lead also to social problems such as riots, criminal activity, social unrest, etc.
As a conclusion of all above discussion, we could summarize this writing into the following
conclusion sand recommendations:
1. The global warming will lead to the climate changes by raising the mean global
temperature by 1.1° - 6.4° percent by end of 21st century. The impact could be
gradually disastrous. The agriculture products are the first things to get the impacts.
2. As a risk transfer management step, an Agricultural Insurance Pool in Asia Africa
countries should be established. FAIR should be used as the vehicle to carry out the
project.
3. The agricultural Pool could use CCRIF excess of loss model in the first year of its
formation. The reason behind this is that the CCRIF excess of loss model gives a good
balance of participation between the government, the insurance industry and the other
financial institution.
4. The operator should be appointed among the insurance members of the FAIR. If
necessary, a committee member should be formed. It should consists of the FAIR
members having great skills and experience dealing with this kind of Pool.
5. The parametric index should be used. The index used by the CCRIF could be used
and copied for the FAIR Agriculture Insurance Pool purpose. We can see how this
index is used when there was a claim settlement for Grenada due to the Hurrcane
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Figure 13. An illustrated map showing the hurricane Ivan struct Grenada
Based on the above damage ilustration and a bit complex calculation, the insurace
clim payout for Grenada due to hurricane Ivan is US$ 179,317,000.
Figure 14. Claim payment calculation method for Grenada due to hurricane Ivan
6. As one the recommendations, the government should do a balancing approach on the
nation’s development planning. It means that every step of development plan should
consider the effects to the environment, climate and socio-economic aspects. Every
utilization of the land should consider the effects in the long run.
7. As personal recommendation, we ourself should change our daily lifestyles to care
our world and environment. We should use airconditions with environment-friendly
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substance, limit the use of plastic in our everyday life, plant as many as possible trees
in our garden. When shopping for any sort of products in the shooping malls – take a
moment to weight up the options to use the plastic bag or not. If yes, make sure the
plastic bag is easily-recyclable. If not, better leave it. To make this practice spread
among others, share your ideas to your colleagues, your subordinates, your freinds or
your family. Other ways to support environment friendly are to reduce eletricity
compsumption and reduce meat consumption. Turn off the electricity when we are
not using this, use energy saving light bulbs. In terms of reducing meat consumption,
livestock annualy belch an astonishing 80 millions tonnes of methane, a dangerous
greenhouse gas, into the atmosphere. Accoding some scientific survey, intense
breeding of livestocks and poultry leads to deforestration, land degardation and
contamination of water resources and other natural resources and use 40 percent of
the world’s total grain production as animal feed. If not us doing all of this to save
our environment, who else?
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R E F E R E N C E S
IDR/MAS/WHY/MAR (2012), Indonesia Rentan Krisis Pangan, Kompas, Gramedia
Publishers
Prasad, Neeraj and Frederica Ranghieri and Fatimah Shah and Zoe Troha and Earl Kessler
and Ravi Sinha (2010), Kota Berketahanan Iklim, Pedoman Dasar Pengurangan Kerentanan
terhadap Bencana, The World Bank and ISDR, Penerbit Salemba Empat
Non Life Insurance Rating Organization of Japan (2003), Earthquake Insurance in Japan,
Ikuta Shokai K.K.
Munich Re (2010), Munich Re Day Indonesia, Munich Re Publication
TREIF (2008), Annual Report 2008 Taiwan Residential Earthquake Insurance Fund, TREIF
Publications
Nations, The United and The World Bank (2010), Natural Hazards, UnNatural Disasters:
The Economics of Effective Prevention, Penerbit Salemba Empat
Centre, Corporate Climate (2010), Impacts Of Climate Change On Different Economic
Sectors – An insurance-based perspective from Munich Re Asia, Munich Re Publications
Coe, Christopher (2012), Crop Insurance Schemes in Asia, AON Benfield Presentation
Chinh, Ngo Cong (2011), Study On Resilient Financing Mechanism For Agricultural
Livelihoods In The Climate Change Context, Asian Management and Development Institute
www.syngentafoundation.com
www.menainsurance.com
www.ccrif.org
www.treif.com
www.jer.com
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CURRICULLUM VITAE
Personal Details
Full Name : Heddy Agus Pritasa, SS, MM, Cert CII, AAAIK, QIP
Place/Date of Birth : Jakarta, 2 November 1969
G e n d e r : Male
Email : [email protected], [email protected]
Current Academic Background
• Graduate of PostGraduate study on Financial Management, Association of Banking
and Finance Institute PERBANAS Jakarta
Professional Qualification Background
• Graduate of Certificate Insurance, Chartered Insurance Institute
• Graduate of Associateship of Indonesian Insurance Management Association
• Member of Indonesian Qualified Insurance Practitioners
Working Experience
1. (1992 – 1998) Agency Controller at PT. Sun Alliance Insurance Indonesia
2. (1999 – 2001) Broker Manager at PT. Royal Sun Alliance Indrapura Insurance
3. (2002 – 2004) Corporate Business Manager at PT Zurich Insurance Indonesia
4. (2004 – 2005) Broker Manager Corporate Division at PT Jardine Lloyd
Thompson Indonesia
5. (2005 – 2008) Broker Division Head at PT Asuransi QBE Pool Indonesia
6. (2008 – Current) Vice President at Technical Administration and Statistics
Division at PT Asuransi MAIPARK Indonesia
7. (2008 – 2011) Treasury at National Platform of Disaster Risk Management