A white paper on agricultural insurance
Twenty-three contributions, in French and English, which shed light on the challenges of agricultural insurance and offer the testimonies of its various stakeholders in almost all regions of the world: the white paper published by the CICA (International Confederation of Agricultural Credit) on the occasion of the 6th World Congress on Agricultural and Rural Finance, held on November 12 and 13 in New Delhi, is intended to be "A contribution to the Sustainable Development Goals. For a more resilient agriculture that is better protected against climatic hazards."[1]FARM collaborated closely in its implementation, convinced that risk management is a key condition for improving the economic, social and environmental performance of agriculture, in the North as well as in the South.
Several lessons emerge from the document.
First, agricultural insurance is a powerful economic development tool : it increases farmers' investment capacity, either directly, by reducing the financial impact of climatic hazards on producers' incomes, or indirectly, by facilitating their access to credit. This beneficial effect extends well beyond the agricultural sector; it affects all industries and services linked to it and, beyond that, the entire community. The latter benefits from the consequences of better productivity in the sectors, in terms of cost and quality of food, but also from a smaller extension of cultivated areas, which limits deforestation and the erosion of biodiversity. In low-income countries, insurance allows small farmers to escape the vicious circle of poverty, a source of underinvestment and vice versa, and to go beyond subsistence farming to integrate into the market.
Yet, despite these advantages, agricultural insurance is still relatively uncommon. Three-quarters of premiums are collected in three countries: the United States, China, and India. In countries where its penetration is high (United States, China, Spain, Quebec), and which have made it a pillar of their agricultural policy, its adoption results from the conjunction of several factors. First, a keen awareness among farmers and governments of the need to manage risks, linked to the scale of climatic hazards and the long history of insurance systems in the countries concerned. Second, an insurance offer that meets farmers' demand, thanks to a wide variety of solutions offered, which cover most of the risks faced by crops and livestock and which do not exclude any farmer, regardless of their degree of exposure to risk. Finally, an incentive-based public policy, thanks to strong premium subsidies, possibly accompanied by public reinsurance, and the limitation of ex-post compensation for natural disasters by the State, so as not to discourage farmers from taking out insurance. These systems are generally based on partnerships between public authorities and private insurance companies, but the government can also, as in Quebec, control the entire insurance chain, including the marketing of policies.
Subsidizing insurance premiums appears to be the condition sine qua non of a large-scale transition of agricultural insurance systems. In China and Brazil, it has made a decisive contribution to the launch of multi-risk insurance, by encouraging the creation of a sufficiently large portfolio of policyholders to be able to pool risks. Conversely, where premium subsidies are low or absent, only hail insurance is viable, because hail risk is less systemic and can be managed through purely private contracts. This is partly why, in many African countries in particular, agricultural insurance has not yet found its economic model. Moreover, according to some points of view, microinsurance is struggling to expand beyond successful but local experiments, because it cannot, on its own, unlock farmers' access to credit.
However, a high rate of public support does not always guarantee a wide diffusion of insurance. Low levels of bank access among farmers, distrust of insurers, inadequacies in compensation, and low yield guarantee rates, among other reasons, can be significant obstacles to its adoption. For example, agricultural insurance covers only about a third of eligible areas in India, compared to more than three-quarters in China, while premium subsidy rates are comparable (around 80 %). The Indian government launched a major reform of the system in 2016 to make it more transparent and efficient. In Senegal and Morocco, where the state also supports insurance premiums, linking insurance to credit, with the integration of the insurance premium into the cost of the loan, has helped remove a major constraint. In France, as in other member states of the European Union where the culture of risk management is still deficient, the weight of direct aid in farmers' income may have discouraged insurance subscription, despite substantial subsidy rates.
The agricultural insurance landscape has changed significantly in most countries over the past ten years.A major phenomenon has been the introduction of index-based insurance, which, among other advantages, does not require individual claims expertise. In the future, increasing the resilience of farms will be a major imperative, as they face multiple constraints and uncertainties: increasingly intense and frequent climatic hazards, whose traditionally upward effect on agricultural prices, in a closed economy, is reduced by trade liberalization; the need to adapt production systems to make them less dependent on fossil fuels and minimize their impact on the environment; and finally, increased consumer demands for food quality and safety. In this context, farmers' ability to absorb shocks of all kinds is becoming a fundamental element of their competitiveness. They must therefore be able to carry out a complete and precise analysis of their risks, in order to put in place appropriate prevention and protection measures.
Agricultural insurance is therefore part of a global risk management strategy., covering natural hazards, environmental damage and market instability. This global strategy applies at different scales and mobilizes a whole range of instruments:
– at different scales, because the States themselves can insure themselves against natural disasters through index insurance, as eight African countries do, wishing to pool their drought risk by joining the African Risk Capacity or, in another context, the federated States of Mexico, anxious to protect their budgets to compensate farmers against natural disasters;
– by mobilizing a whole range of instruments, because risk management begins with farmers' good practices in choosing and managing their production system, and then expands to a whole range of tools and strategies adapted to the management of hazards of increasing intensity. In this perspective, agricultural climate insurance protects against hard knocks that cannot be absorbed by the farmer's savings alone. It is intended to be supplemented by other measures, aimed in particular at protecting farmers against market risks, including price volatility. The development of a comprehensive and coherent risk management system, such as that in force in North America in particular, is a major challenge in the reform of the common agricultural policy in Europe.
The medium-term outlook for agricultural insurance is based on the following observation: Climate change will simultaneously increase farmers' protection needs and the cost of insuranceFarmers' demand for new insurance solutions requires an expansion of coverage offerings in terms of production and the nature of risks. In Asia, as well as in Latin America and Europe, we are seeing a growing interest in turnover insurance, which is already widely adopted in the United States. The challenge for insurers is to meet these needs and expand their business into new territories, while controlling the rise in premiums. Their main levers for action lie in:
– the ongoing technological revolution, based on the combination of increasingly sophisticated earth observation tools, the diffusion of ground sensors enabling the practice of precision agriculture and an enormous capacity for processing information through big data. These innovations will affect the operation of the entire insurance chain, from the identification of risks to the payment of compensation;
– improving insurance distribution channels, which will be increasingly coupled with the provision of credit and inputs, probably within the framework of contractual agriculture, and will mobilize the various links in the agrifood sectors, in particular producer organizations;
– the offer of new services to insured producers (weather information, agricultural advice, etc.), thanks in particular to mobile telephony;
– awareness raising and training of all stakeholders, including farmers and public decision-makers, in risk management.
Finally, the State is called upon to play a major role in the transformation of the insurance system with a view to increasing the resilience of agriculture. This role is multifaceted: premium subsidies, support for the production of statistical data, investment in weather stations and satellites, establishment of a regulatory framework favorable to the development of insurance, etc. However, care must be taken to ensure that support for insurance does not hinder the adaptation of agriculture to climate change, i.e. does not hinder the diversification of production, which leads to consideration of global coverage for the farm, in addition to guarantees per crop.
The cost of public intervention may be high, but it must be compared with the cost of not being insured. As experience shows, this translates both into ex-post compensation for farmers, which is potentially more expensive, and into the provision of exceptional credit lines to farmers by banks to deal with natural disasters. This credit is granted to the detriment of productive investments. Society bears the consequences in terms of loss of productivity and competitiveness of agri-food sectors, a phenomenon that is particularly serious in low-income countries where a large proportion of the working population depends on agriculture and where rural areas are most affected by extreme poverty.
Risk management through agricultural insurance is therefore not a simple technical issue, serving specific interests. It is at the heart of the challenges of sustainable development of human activities.
[1] Document downloadable on www.cica.ws/conferences
