Canadian territory looks at catastrophe & weather risk transfer options

by Artemis on January 15, 2016

Canadian province Manitoba has established a task force to explore the use of catastrophe insurance solutions in light of a rise in adverse weather events negatively impacting its agricultural sector, according to a recently published report.

“Manitoba’s agricultural producers have faced serious challenges in recent years, brought on by the changing climate. There have been more frequent periods of excess moisture that have taken previously fertile land out of production, as well as flooding disasters, which brought an increased magnitude of disruption to agricultural production,” explains the Agriculture Risk Management Review Task Force Report.

In light of the rising threat of natural catastrophe events to the region, and the warning from climate change experts that Manitoba will most likely experience greater episodes of drought and flooding in the future, the task force has called on the municipal and broader government to seriously explore the use of catastrophe insurance solutions.

This should include insurance, reinsurance, weather derivatives, insurance-linked securities (ILS) structures such as catastrophe bonds, and the establishment of a catastrophe risk financing pool for the agriculture sector.

The task force explains that as well as wanting producers and governments to innovate re/insurance products to better manage the risks, it is also “calling on governments to examine the potential role that catastrophe insurance can play in managing the long-term risks for government budgets.”

Like any municipal, or broader area that’s agricultural sector and financing is impacted following a natural disaster event, whether man-made, climate change related or simply a severe weather event, after any agricultural risk management agreements or any existing private property insurance has been exhausted, any remaining costs are typically fronted by the government.

And, as climate change threatens to bring a greater volume of drought and flooding episodes to the Canadian province, coupled with a general rise in asset values and overall economic growth, the disruption to agricultural production and resulting costs to the government is expected to rise also, underlining the need for catastrophe insurance products.

According to reinsurance broker Aon Benfield, notes the report, weather disasters have caused economic losses of roughly $3.6 trillion in the last 35 years, with total losses increasing for every decade since the 1980’s.

The report notes that seven of the ten costliest weather event years have taken place since 2000, which again is in part due to economic growth and rising asset values, plus migration to concentrated risk zones, such as coastal areas susceptible to water stress.

Continuing to explain that a flooding episode in Manitoba during 2011 cost the province roughly $1.2 billion, likely because of a lack of relative insurance penetration, something that can be greatly increased with the use of catastrophe insurance products.

“Had the Manitoba government carried catastrophe insurance against flooding in 2011 and 2012, it is possible that the treasury could have coped with the aftermath of massive business risk management payouts, infrastructure rebuilding, flood proofing, emergency channel building and disaster financial assistance,” says the report.

Adding; “Reinsurance could be a useful risk management tool as governments look for ways to reduce their potential financial exposure to weather disasters.”

The use of reinsurance, or an ILS structure to help mitigate the negative impact to the region’s agricultural sector, such as a parametric trigger structured catastrophe bond, would help to ensure rapid, and needed refinancing to farmers that have seen their production levels dented, or even diminished owing to drought or flooding conditions.

Similarly, a catastrophe risk financing pool, as seen with the Africa Risk Capacity (ARC) in Africa, and the Turkish Catastrophe Insurance Pool (TCIP) in Turkey, among others, which utilise a parametric structure to ensure fast, efficient, and adequate payouts following a weather-related catastrophe event, could be replicated to protect Manitoba’s vulnerable agricultural industry.

The report also highlights the potential use of weather derivatives as a financial product that could enable those in the Manitoba agricultural business to mitigate the impacts of unexpected, or adverse weather events.

Noting that weather derivatives “could help hedge risk, provide less volatility in farm income over the long term, and promote better understanding of how weather impacts individual farms as well as agricultural regions.”

The admission from the task force that the region and its government should seriously consider using catastrophe insurance solutions to protect its agricultural sector, and its participants, presents an opportunity to the insurance, reinsurance and ILS sector.

At times of stiff competition and with continuous pressure on rates, insurers, reinsurers and ILS market participants are on the look out for risk and location diversification opportunities, perhaps now so more than ever.

So it’s very likely that should Manitoba heed the advice of its dedicated Agriculture Risk Management Review Task Force, sponsors, producers, and investors in the ILS, reinsurance and insurance space would welcome the opportunity to create relative products.

While this provides firms with a new avenue to deploy capital in a region and sector that is currently underserved, it would provide the farmers and the area’s agricultural sector as a whole with greater mitigation power pre-event, and ease the recovery process post-event, while ultimately reducing the burden on the government.

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