What Microfinance for Developing Countries´ Agriculture?
Workshop 3: Managing Agricultural Risk: What Innovative Tools and Procedures
December 4-6, 2007
Rural Microinsurance: A Parametric Approach
Overview
Farmer
Expected Income
• Basic Needs
• Personal Debts
• Agricultural Credit
• Cost of Inputs
realizes
for…
… Nevertheless, faces up RISKS!!
Investmentplans
Individual • Systemic
•Weather•Biological
… Nevertheless, faces up RISKS!!
•Illness•Death•Fire
• Deterioration ofproductive capacity
• Reduction of Assets
Ex-Ante
Reduction
MechanismsStrategies Levels
Individual
Community
Risk Management Strategies
• Investment to protect assets and infrastructure
• Rules and Regulations
• Adopt new technology • Stable macro-economy, policy regime and political system
• Income Diversification
• Permanent Migration
• Asset Accumulation • Credit
Ex-Post
Mitigation
Coping
Community
Government
• Asset Accumulation • Credit
• Income Diversification • Insurance
• Seasonal Migration • Disaster aid funds
• Market Development
• Sell assets • Credit
• Not pay school fees • Donor assistance
• Child labor • Market Development
• Transfer of public resources
Source: World Bank, 1999
Insurance
Challenges to make insurance affordable to low-income rural
population
• Product Design (Adapt to specific needs)
• Risk Valuation (Adapt methodologies, construct databases)
• Premiums´ Setting (Low costs to farmers)
• Insurance Operation (Mechanisms which generate scaleeconomies)
• Moral Risk and Adverse Selection Problems
• Very low-size of production units
• Major risk is associated to weather phenomena (systemicrisk)
• Farmers do not know the advantages to buy an insurance
Parametric Insurance
FEASIBLE ALTERNATIVEPARAMETRIC INSURANCE
CHARACTERISTICS
• Risk and vulnerability analysis is done in aregional basis
• It becomes possible to establish uniquesums insured, premiums and indemnities
• Indemnities are based on specific triggersrelated to weather variables
• Moral risk and adverse selection problemsare reduced
• Loss adjustment in an individual basis is notrequired • Operation costs are reduced
Mexico: Context
Characteristics of Agricultural Sector
• In 2006 represented 3.5% of Gross DomesticProduct
• Employs 9 million people (25 % of Labor Force)
• Exist approximately 3.3 million of farmers
• It has two main productive cycles: Spring –Summer and Autumn – Winter
• In average, there is seeded 16.1 million hectaresin both cycles
• 76% of production depends exclusively onweather
• The most representative crop is CORN
Characteristics of Farmers
• High technified producers
• Specialized Farms
• Commercial production
• Obtain profits
• Non technified producers
• Land tenure is less than 5 hectares
• Production for self consumption
• Obtain less than 200 dollars per month
1 2
Vicious circle of poverty and low profitability
Agricultural production is highly vulnerable to wea ther events, particularly the excess or lack of rai n:
Mexico: Context
1.31%
1.14%
0.49%
Frost
Hail
Flood
EVENT
• Federal Government haschanneled resources forapproximately 411 milliondollars from 1995 to 2006
• Drought effects are
Source: Treasury and Agricultural State Departments (1995-2006)
74.22%
20.04%
2.80%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Drougth
Hurricane
Rainfall
EVENT
(%) PARTICIPATION
• Drought effects areintensified when the ENSOphenomena is present
National Fund for NaturalDisasters - “FONDEN”(Treasury State Department/1995)
The Federal Government in order to attend low incom e rural population without access to formal insuran ce created:
1Fund to Assist the RuralPopulation Damaged byClimatologic Contingencies –“FAPRACC” (Agricultural StateDepartment /2003)
2
Mexico: Context
DISADVANTAGES
• The costs of catastrophes have been coveredexclusively by fiscal resources
• Generate impacts to national economy
• Do not exist any technical criteria in order todetermine the amount that has to be assignedto the Funds
• There might exist events which cause damageshigher than what was allocated to the Funds
• Difficulty to design risk transfermechanisms
• Budget reallocation of different federalprograms (Opportunity Costs)
Catastrophic Agricultural Insurance
To protect farmers against drought
To manage systemic risks efficiently
To optimize the resources budgeted to face catastrophes
AGROASEMEX, developed the CATASTROPHIC AGRICULTURAL INSURANCE with parametric characteristics
General Objectives Technical – Operative Objectives Financial Objectives
To protect financial deviations of federal and local
governments
To transfer risk to reinsurance international markets
To attain transparency and opportunity in the payment of
indemnities
To reduce operation costs
To reach a quick assessments of the damages
To grant transparency and certainty in budget allocation
Design
Biophysical Model that establishes the relation Soil – Plant - Weather
Seeding
Trigger 1
Flowering Harvest
1
2
Trigger 2 Trigger 3
Risk Valuation 3
PREMIUM
Catastrophic Agricultural Insurance
Operation
Trigger =Rainfall (mm)
FAPRACCIf Actual Rainfall < Trigger
INDEMNITY = Sum Insured = FAPRACC´s supports granted FARMERS
AGROASEMEX
International Reinsurance
Hectares Insured (´000 Has)
108248.5
1,200
1,400
2003 2004 2005 2006
1,500
2007
Sum Insured (´000 dollars)
3.616.9
59.6
84.7
2003 2004 2005 2006
90.0
2007
Premiums (´000 dollars)
0.3
2.1
9.1
9.5
2003 2004 2005 2006
9.7
2007
Catastrophic Agricultural Insurance
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Indemnities (´000 dollars)
0.0 0.0
10.5
2003 2004 2005 2006
2.1
Benefited farmers in 2007: 300,000
Crops: Corn, Sorghum, Beans and Barley
Cattle Raising Parametric Insurance
• It was constructed under similar concepts as theagricultural catastrophic insurance
• Oriented to cover property damages deriving from thereduction of grass availability for feeding the livestock o fsmall farmers due to the occurrence of certain extremeweather events
• It is based on the use of the satellite technology and
CHARACTERISTICS
• It is based on the use of the satellite technology andspecifically in the index generically known as NDVI(Normalized Difference Vegetation Index)
• The insured parties are federal and local governmentsthrough FAPRACC
• The operation of the insurance started in 2007, protecting13.5 million hectares of natural pastureland andbenefiting approximately 40 thousand small producers
Conclusions
Parametric insurance represent a low-cost feasible alternative for catastrophic events if there are considered the following issues:
The weather databases shall comply with the quality standar ds set forth by the risk taker1
The infrastructure used for its operation might guarantee t he availability and opportunity of theinformation
2
Identify agro-climatic areas of homogeneous response
The triggers or weather indexes should maintain a direct rel ationship with the agricultural productiveprocess observed
It is necessary to use models that can establish the appropri ate relation between Weather and Soilwith the agronomical requirements of the plants
3
4
5
In order to operate the parametric insurance in an individual basis among the poorest farmers, AGROASEMEX is still making the feasibility studies, which first results are:
Parametric insurance should focus on highly correlated ris ks with catastrophic characteristics
Conclusions
1 To maintain the collective coverage concept, insuring prod ucers at a community level
2
To promote the participation of organizations of the social sector in order to benefit from the
To strengthen the self-management process of the rural popu lation to provide themselves theadequate risk management instruments
To promote the participation of organizations of the social sector in order to benefit from the
synergies provided by their administrative structure3
4
