Risk transfer needed to protect emerging economy agriculture

The increased severity and frequency of extreme weather and climate-related disasters presents a grave threat to the important agricultural sectors of emerging economies, a trend that is likely to continue without adequate risk transfer solutions and improved disaster resilience efforts.

During the ten years spanning 2003 to 2013, 78 natural disasters occurred in developing regions of Africa, Asia-Pacific, the Caribbean, and Latin America, causing damages of roughly $30 billion to the regions agricultural sectors, according to a report released by the FAO around the United Nations Climate Change Conference (COP21) in Paris.

The report highlights that while the agricultural sector experienced roughly 14% of the physical damage from these events, in respect to all other sectors, agriculture and its subsectors account for nearly 30% of losses, which includes a decline in the output of crop, livestock, fisheries, and others.

In fact, the FOA states that the 78 events used for its research, which includes drought episodes, flooding, severe storms, tsunamis and earthquakes and more, cost some $30 billion in damage and losses to the agriculture sector in the regions noted above.

With the expectation of more frequent and severe adverse weather events in the future, it’s likely that the number of events and the level of damages incurred will increase over the next ten years, a worrying trend that could be mitigated and controlled somewhat by the expertise, capacity, and willingness of the insurance, reinsurance and insurance-linked securities (ILS) markets.

For emerging economies it’s often the case that the agricultural sector is vital for the livelihoods of many of its citizens and, owing to their location, region’s like Asia-Pacific are extremely vulnerable to natural disaster events like flooding, and severe storms, while parts of Africa experience some of the worst droughts anywhere in the world.

Add to this a severe, and dangerous lack of insurance or reinsurance in some regions, which results in the emerging economies discussed in the FAO report as having some of the lowest insurance penetration levels globally, the need for risk transfer solutions becomes clear.

Insurers, reinsurers, and increasingly insurance-linked securities (ILS) investors are constantly looking for opportunities to expand and enter new markets, particularly at a time of continued market turmoil, underlined by competition and intense pressure on rates.

With agricultural production so tied to weather and climate, the use of alternative risk transfer tools, such as index insurance, weather derivatives, satellite sensing to create indices based on crop growth, or even structures such as parametric triggers and even catastrophe bonds, could all help to channel more capital to protect agricultural outputs.

And it’s in the development of innovative solutions to help increase disaster awareness and understanding pre-event, to mitigating the social, economic and financial impact on individual farmers, and governments as a whole, post-event, where the risk transfer landscape can really make a difference.

The FOA report highlights that there is a need for insurance and reinsurance schemes to address this issue, but notes that improved data and information on the events is required.

“Furthermore, disaggregated subsectoral data on disaster impact is needed to support the implementation of innovative risk management tools, such as weather risk insurance schemes for agriculture and rural livelihoods. Systematic and coherent data availability will facilitate the design of insurance schemes which would help to further diversify risk mitigation strategies,” says the FOA.

The task is clearly not an easy one, owing to the sheer magnitude of the losses over the last ten years, and exacerbated by the understanding of more severe and frequent events moving forward.

But the reality is that in order for these regions and its agricultural sectors to become sustainable in the face of natural disasters, which will occur again and again, the entire risk transfer landscape, and the support of the wider public and private sector arena will be required.

Weather risk insurance, based on indices or parametric triggers, can provide the immediate insurance need to farmers and agricultural producers, derivatives could also play a role. Meanwhile risk pooling at the national or regional level could help to provide the capacity to back the lower level microinsurance type products, while international reinsurance and capital markets (or ILS investors) can support the ultimate risk transfer of whole programs.

Initiatives such as the African Risk Capacity (ARC) are already finding innovative ways to protect food security, which ultimately requires agricultural protection as well. Perhaps specific products for agricultural producers are required, with models similar to ARC in order to encourage the adaptation elements to increase resilience.

The full report from the FOA can be accessed here (PDF), which provides a comprehensive overview of the impacts natural disasters have on emerging regions’ agricultural sectors.

Read our series of articles focused on the insurance protection gap – under-insurance in emerging and developing economies, the gap between economic and insurance losses, and transferring risk from public sector to private – the opportunity that is on every reinsurance CEO’s lips and which presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.