There is no doubt that agricultural insurance is big business. A recent report from Swiss Re estimates that global agricultural premiums in 2011 were USD 23.5 billion. To put this into perspective, airline premiums in the same year totalled around USD 1.9 billion.
The growth potential of the sector is huge. Premiums tripled over the period 2005-2011 and emerging market share increased from 13.4% to 22%. So what is driving this trend?
To put it simply, governments are waking up to the threat of food insecurity. A glimpse of the potential social impact of food shortages was seen in the waves of protests leading to the Arab Spring as well as wider civil, political and economic problems elsewhere. As a result, governments are increasingly aware of the social and economic benefits of supporting the agricultural sector by means of subsidised agri-insurance programmes; not to mention ensuring that food production can keep up with a rapidly increasing population.
Such subsidised crop insurance programmes are not new however: the present U.S. Federal crop insurance programme has its roots in the 1930s. More recently China has seen exponential growth in the volume of agricultural insurance since its government adopted this approach in the last decade.
From the point of view of public policy, subsidising agricultural insurance offers the benefit of encouraging farmers to access credit (seasonal loans) and invest in enhanced production and achieve increased yields. These include the adoption of improved crop types, technologies and risk mitigation infrastructures such as irrigation systems. But these investments can be risky, particularly for smaller growers, which is where agricultural insurance can have a really positive impact. A more stable farming sector is also more sustainable and resilient to the natural disasters which, it is widely believed, are likely to be more frequent in a changing global climate.
If farmers are able to operate more sustainably, their overall output will increase. At the top end of the scale, a government’s dependency on imports could lessen as a result.
The notion of subsidizing the crop insurance process is being reviewed and adopted across many new territories. Furthermore these initiatives are supported on a multi-lateral basis: agencies such as World Bank, the UN’s Food and Agriculture Organisation (FAO) and the World Food Programme (WFP) are active proponents of establishing crop insurance programmes in emerging economies with state support.
Few doubt that the highest growth in agricultural insurance will continue to come from developing markets, particularly Asia and Africa, where food insecurity is highest but insurance penetration lowest. The ancillary benefits of alleviating food insecurity pressures are many: not just the promotion of civil and social stability but also safeguarding food supply and distribution channels, and decreasing dependency on costly imports to name a few. Agricultural insurance is but one component in a complex and inter-dependent array of measures that can stimulate and support essential rural development; it is a compelling opportunity for public-private partnerships both to deliver a public good and achieve commercial success: the opportunities are ripe for the picking.
Guest blogger Julian Roberts is Executive Director of the Willis Agri-Business and Weather Risk division. He recently contributed to WillisWire’s special feature, What Risks Will Emerge in 2013?