Report no. 61963-LAC Agricultural Insurance in Latin America Developing the Market Agricultural Insurance in Latin America Developing the Market December 2010 TABLE OF CONTENTS Acknowledgments ....................................................................................................... ix Executive summary .................................................................................................... xiii Institutional challenges .............................................................................................. xx Financial challenges .................................................................................................. xx Technical challenges .................................................................................................. xx Operational challenges ............................................................................................. xxi Conclusions .............................................................................................................. xx 1. Introduction ............................................................................................................. 1 2. Overview of the agricultural sector ....................................................................... 5 Agribusiness segmentation ....................................................................................... 8 Risks affecting agricultural production ....................................................................12 Agricultural risk management in LAC ...................................................................... 21 Rural finance in Latin America ................................................................................. 23 3. Status of agricultural insurance ........................................................................... 27 Size of agricultural insurance markets and premium volumes in LAC ...................... 29 Availability of agricultural insurance products ........................................................ 32 Crop insurance products ....................................................................................... 33 Livestock insurance products ................................................................................. 38 Aquaculture insurance products ............................................................................ 40 Forestry insurance products .................................................................................. 40 Bloodstock insurance products .............................................................................. 41 Models and channels of delivery ............................................................................. 42 Cost of agricultural insurance provision in LAC ....................................................... 43 Agricultural reinsurance in LAC ................................................................................ 44 Public sector support to agricultural insurance in LAC ........................................... 46 Agricultural insurance penetration in LAC .............................................................. 56 Gaps in the provision of agricultural insurance in LAC ........................................... 58 Agricultural insurance product gaps ...................................................................... 59 Agricultural insurance penetration gaps ................................................................ 63 4. Opportunities and challenges for agricultural insurance ................................... 69 Opportunities for the development of agricultural insurance ................................. 70 Crop insurance ..................................................................................................... 70 Livestock insurance ............................................................................................... 74 Forestry insurance ................................................................................................. 75 Aquaculture insurance .......................................................................................... 76 iv ] Agricultural Insurance in Latin America Challenges for the development of agricultural insurance in LAC .......................... 77 Institutional challenges ......................................................................................... 77 Financial challenges .............................................................................................. 79 Technical challenges .................................................................................................. 80 Operational challenges .............................................................................................. 82 5. Final remarks .......................................................................................................... 85 Bibliography ............................................................................................................... 91 Annex. Agricultural insurance country fact sheets .................................................. 94 LIST OF BOXES Box 3.1 Crop insurance products: Indemnity-based and index-based covers ............ 34 Box 3.2 Types of livestock insurance products .......................................................... 39 Box 3.3 Models of government support to agricultural insurance ............................ 48 Box 3.4 Named-peril hail crop insurance program in Mendoza Province, Argentina .................................................................... 53 Box 3.5 SEAF crop-credit insurance guarantee program of the federal government of Brazil ................................................................................. 54 LIST OF FIGURES Figure 2.1 Economic and social importance of the agricultural sector in LAC ................. 7 Figure 2.2 Economic and social importance of agriculture in Mexico, by state ............... 8 Figure 2.3 Agricultural risk layering ............................................................................ 22 Figure 2.4 Ratio of agricultural sector GDP to total GDP and agricultural sector loans to total loans .................................................................................... 24 Figure 2.5 Development financial institution share of total agricultural credit .............. 25 Figure 2.6 MFI lending to the rural population in select countries of LAC, 2007 .......... 26 Figure 3.1 Insurance companies offering agricultural insurance in LAC ....................... 29 Figure 3.2 Agricultural insurance direct premiums written, 2005–09 .......................... 31 Figure 3.3 Distribution of agricultural insurance premiums per business subline in LAC, 2009 .................................................................... 32 Figure 3.4 Crop insurance acquisition expenses, A&O expenses, and LAE in LAC countries, 2007 ................................................................. 44 Figure 3.5 Premiums and fiscal expenditures on agricultural insurance in LAC, 2004–09 ....................................................................................... 55 Figure 3.6 Agricultural insurance penetration in LAC .................................................. 57 Figure 3.7 Agricultural insurance gaps in LAC, by type of insurance ............................ 63 Figure 4.1 Agribusiness value chain and insurable interest .......................................... 71 vi ] Agricultural Insurance in Latin America LIST OF MAPS Map 2.1 Drought hazards in LAC countries ...............................................................13 Map 2.2 Flood hazards in LAC countries .................................................................. 14 Map 2.3 Anomalies during El Niño events ................................................................ 15 Map 2.4 Anomalies during La Niña events ............................................................... 15 Map 2.5 Hailstorm hazards in LAC countries ............................................................ 16 Map 2.6 Tornado hazards in LAC countries .............................................................. 17 Map 2.7 Winter storm hazards in LAC countries ...................................................... 18 Map 2.8 Earthquake and tropical cyclone hazards in LAC countries .......................... 19 Map 3.1 Regional distribution of agricultural insurance direct premiums .................. 30 Map 3.2 Distribution of agricultural insurance direct premiums in LAC ..................... 33 Map 3.3 Agricultural insurance products in LAC ....................................................... 42 Map 3.4 Current status of government support for agricultural insurance in LAC ..... 49 Map 3.5 Agricultural insurance penetration in LAC .................................................. 60 Map 3.6 Degree of development of agricultural insurance in LAC ............................ 64 LIST OF TABLES Table 2.1 Major farming systems in LAC .....................................................................10 Table 2.2 Risk management strategies and mechanisms .............................................21 Table 3.1 Financial performance of public sector MPCI in select LAC countries ................28 Table A.1 Agricultural insurance country fact sheet: Argentina .................................. 94 Table A.2 Agricultural insurance country fact sheet: Bolivia ........................................ 96 Table A.3 Agricultural insurance country fact sheet: Brazil ......................................... 98 Table A.4 Agricultural insurance country fact sheet: Chile ..........................................100 Table A.5 Agricultural insurance country fact sheet: Colombia ..................................103 Table A.6 Agricultural insurance country fact sheet: Costa Rica .................................105 Table A.7 Agricultural insurance country fact sheet: Dominican Republic ...................107 Table A.8 Agricultural insurance country fact sheet: Ecuador .....................................109 Table A.9 Agricultural insurance country fact sheet: El Salvador .................................110 Table A.10 Agricultural insurance country fact sheet: Guatemala ................................112 Table A.11 Agricultural insurance country fact sheet: Honduras ..................................114 Table A.12 Agricultural insurance country fact sheet: Mexico ......................................116 Table A.13 Agricultural insurance country fact sheet: Nicaragua ..................................118 Table A.14 Agricultural insurance country fact sheet: Panama .....................................120 Table A.15 Agricultural insurance country fact sheet: Paraguay ...................................122 Table A.16 Agricultural insurance country fact sheet: Peru ..........................................123 Table A.17 Agricultural insurance country fact sheet: Uruguay ....................................124 Table A.18 Agricultural insurance country fact sheet: República Bolivariana de Venezuela ...........................................................................................127 Table A.19 Agricultural insurance country fact sheet: Windward Islands ......................128 ACKNOWLEDGMENTS This report was authored by Ramiro Iturrioz (senior agricultural insurance specialist, GCMNB, World Bank) and Diego Arias (senior agricultural economist, LCSAR, World Bank). The authors owe thanks to Antony Randle for his editorial contributions. The work has been partly financed by the Trust Fund for Environmentally and Socially Sustainable Development (TFESSD). The authors are grateful to the peer reviewers, John D. Nash (lead economist, LCSSD, World Bank), Panayiotis Varangis (lead advisory services, International Finance Corporation [IFC]), Charles Stutley (agricultural risk management international consultant, ARD, World Bank]), Martin Buehler (principal insurance officer, IFC), and Carlos Arce (senior agricultural economist, ARD, World Bank), The authors thank the many respondents who contributed to this study. They are listed below. • Agroasemex, S.A. (Mexico) • Mapfre Re (Spain) • Aon Re (Argentina) • Mclarens Toplis Peru Ajustadores y Peritos de • Aon Re (República Bolivariana de Venezuela) Seguros, S.A. (Peru) • Aseguradora Agropecuaria Dominicana • Ministerio da Agricultura, Pecuária e (Dominican Republic) Abastecimiento do Brasil (Brazil) • Aseguradora Magallanes (Chile) • Ministerio de Agricultura (MAGPyA, Uruguay) • Aseguradora Tajy Propiedad Cooperativa S.A. • Ministerio do Desenvolvimento Agrario do Seguros (Paraguay) Brasil (Brazil) • Asociación Latinoamericana de Empresas de • Munich Re (Argentina) Seguro Agropecuario (ALASA) • Novae Re (Switzerland) • Banco de Seguros del Estado del Uruguay • Oficina de Riesgo Agropecuario (Argentina) (Uruguay) • Partner Re (Chile) • Cámara Hondureña de Aseguradores • Protección Agropecuaria, Compañía de (Honduras) Seguros S.A. (Mexico) • Colonial Insurance Company (Ecuador) • Scor Re (Switzerland) • Comité de Seguro Agrícola (COMSA, Chile) • Seguradora Brasileira Rural (Brazil) • Compañía Cooperativa de Seguros Surco • Swiss Re (Brazil) (Uruguay) • UIB Colombia S.A. Corredores de Reaseguros • Hannover Re (Germany) (Colombia) • Instituto Nacional de Seguros (Costa Rica) • Willis Argentina S.A. (Argentina) • Instituto Nicaragüense de Seguros y • Windward Islands Crop Insurance (1988) Ltd. Reaseguros (Nicaragua) (Dominica) • La Segunda Cooperativa Limitada de Seguros Generales (Argentina) • Mapfre Colombia (Colombia) x ] Agricultural Insurance in Latin America ABBREVIATIONS ADACA Aseguradora Dominicana Agropecuaria, Dominican Republic AGDP agricultural gross domestic product AGRODOSA Aseguradora Agropecuaria Dominicana, Dominican Republic ANAGSA Aseguradora Nacional Agrícola y Ganadera, Mexico A&O administrative and operating APH actual production history BANADESA Banco Nacional de Desarrollo Agrícola, Honduras BGA Banana Growers Associations COMSA Comité de Seguro Agrícola, Chile CONASA Consejo Nacional de Salud (National Health Council), Ecuador CSF classical swine fever DFI development finance institution ENSO El Niño-La Niña-Southern Oscillation FCR Fundo de Catastrofe Rural, Brazil FOGASA Guarantee Fund for Crop Insurance, Peru GDP gross domestic product GNP gross national product INDAP Instituto de Desarrollo Agropecuario (Small Farmer Lending Bank), Chile INISER Instituto Nicaraguense de Seguros y Reaseguros, Nicaragua INS Instituto Nacional de Seguros, Costa Rica IRB Instituto Nacional de Resseguro do Brasil (Brazilian Reinsurance Institute) ISA Instituto de Seguro Agropecuario, Panama LAC Latin American and Caribbean countries LAE loss adjustment expenses MFI microfinance institution MPCI multiple-peril crop insurance NDVI normalized dry vegetative index PACC Program to Assist Climatologic Contingencies, Mexico PML probable maximum loss PPP public-private partnership PROAGRO Programa de Garantia da Actividade Agropequária (Brazilian Guarantee Program) PRONAF Programa Nacional de Fortalecimento da Agricultura Familiar (Brazilian Program to Strengthen Family Agriculture) REDD reducing emissions from deforestation and degradation SAGARPA Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Aliment- ación (Ministry of Agriculture), Mexico SEAF Seguro da Agricultura Familiar (Insurance for Family Agriculture) SENASA Servicio Nacional de Sanidad Animal (National Service of Animal Health), Argentina SICAF Integrated Agricultural Insurance System, Argentina TSU technical support unit WINCROP Windward Islands Crop Insurance Limited EXECUTIVE SUMMARY The agricultural sector plays a pivotal role in the economy and in the lives of people in the Latin American and Caribbean (LAC) countries. Agricultural producers in LAC face a myriad of risks that can threaten their output, their income, and, sometimes, their consumption. However, they have devised various strategies to deal with the risks affecting their production, using both active risk management and risk-coping strategies. While risk management strategies attempt to address the risk ex ante, risk-coping strategies address it ex post. The management of agricultural production risks relies on an optimal combination of technical and, when they are available, financial tools. Agricultural producers can retain small but recurrent risks through the use of appropriate on-farm risk mitigation techniques (such as irrigation, crop management, and pest prevention) and self-insurance tools such as savings and contingent credit. However, agricultural producers are not able to manage the less frequent but more severe losses affecting their agricultural activities; thus some farmers transfer them to other parties through financial mechanisms like insurance, when available and accessible. Agricultural insurance is typically one of many tools that farmers can use as part of their comprehensive strategy for managing agricultural production risks. The level of development of agricultural insurance is heterogeneous among the different countries and geographic areas in the LAC region. The study focuses on how agricultural insurance can complement and enhance agricultural risk management in LAC. The overall objective of this study is to provide the key elements for a strategy to increase the penetration of agricultural insurance in the region. The specific objectives are to (a) diagnose the current situation, (b) identify gaps in the provision of agricultural insurance, and (c) identify impediments to increasing penetration and recommend a series of actions to remove those impediments. There are some key aspects to consider when designing an adequate agricultural insurance strategy for LAC. These include (a) an understanding of the economic and social relevance of the agricultural sector, (b) the deconstruction of agricultural producers into agribusiness segments, (c) the assessment of the risks affecting agricultural production, (d) the identification of the risk management strategies implemented by agricultural producers and governments, and (e) the assessment of the rural finance sector. The LAC region has a wealth of natural resources, the world’s greatest agro-biodiversity, and immense economic, social, and environmental diversity. The region also benefits from a stock of natural resources suitable for agricultural production. Agricultural production can be classified into three sectors: traditional farming sector, semi-commercial farming sector, and commercial farming sector, but the predominance of each type of sector varies among geographic areas, so xiv ] Agricultural Insurance in Latin America the analysis of agricultural farming systems provides a good proxy for the segmentation of agricultural producers in the region. Agricultural production in LAC faces a myriad of production risks. Drought and floods are devastating perils that affect agricultural production in almost all LAC countries. Hailstorms are frequent in the Southern Cone countries and along the Andes Mountains, in Central America, and in western Mexico. Tornadoes affecting agricultural production are common in the Southern Cone countries, eastern Mexico, and Baja California peninsula. Winter storms are common in Uruguay and the southern coasts of Argentina and Chile. Tropical storms have devastating effects on agricultural production in Mexico, Central America, and the Caribbean. Earthquakes, although frequent in the region, do not cause severe direct losses to agriculture production. Agricultural production in the coastal areas of the Pacific and the Caribbean region face the risk of tidal waves caused by tsunamis. Volcanic activity is also a source of risk for agricultural production in LAC. Agricultural producers and governments in LAC have devised risk management strategies to deal with the production shocks faced by the agricultural sector. The types of agricultural risk management mechanisms implemented by agricultural producers and farmers vary by country. The management of agricultural production risks relies on an optimal combination of technical and financial tools. The risk-layering concept is useful for analyzing the optimal combination of technical and financial risk management tools in agriculture (see figure 1). Farmers and herders can retain small but recurrent losses through the use of appropriate on-farm risk mitigation techniques (for example, irrigation and pest prevention) and self-insurance tools (for example, savings and contingent credit). More severe but less frequent nonsystemic losses can be pooled into cooperative or mutual insurance schemes. However, the relatively severe and frequent systemic losses, which cannot be managed through either on-farm risk management mechanisms or a cooperative or mutual insurance scheme, need to be transferred to commercial insurers and reinsurers. Governments have a large role to play in major disasters, acting as reinsurers of last resort or providing post-disaster aid. Figure 1 Agricultural risk layering Size of the loss Government Risk Reinsurers transfer Insurance companies Cooperatives Risk ans mutuals pooling Agricultural Risk producers retentions Minor Small Medium Large Catastrophic Type of event: Source: Mahul and Stutley 2010. Assessing the access of the agricultural sector to rural finance is important in the design of an agricultural insurance strategy. Agricultural producers in LAC use different sources to finance investments in agricultural production, but the penetration of rural credit is very low. Development financial institutions1 are the main source of financing for the agricultural sector, and commercial credit is an important source of rural finance in the agriculture net-exporting countries in the region. However, microfinance institutions are still not an important source of finance for agriculture in LAC. Access to agricultural finance depends on the farmers’ characteristics. Commercial farmers are mostly financed through formal financial institutions and commercial credit. Semi-commercial or emerging commercial farmers integrated in supply chains satisfy their financial needs mainly through commercial credit provided by supermarkets, agro-industry, exporters, input suppliers, or other supply chain agents. The main source of financing for traditional smallholder farmers is informal credit. The traditional smallholder farmers who are living in extreme poverty have, for the most part, no access to formal credit and are reliant almost completely on public sector support and nonfarm sources of income. Agricultural insurance has a long history in some countries in the region. Agricultural insurance was provided in many LAC countries by public sector insurance companies from the 1950s up to the end of the 1980s. In this period, there was major growth in public sector multiple-peril crop insurance (MPCI) in Latin America, often linked to small farmer seasonal production credit programs offered by the public sector. Most of these public sector agricultural insurance programs performed very poorly, with high operating costs and very 1 Development financial institutions are institutions that carry on any activity, whether for profit or otherwise, with or with- out government funding, with the purpose of promoting development in the industrial, agricultural, commercial, or other economic sector, including the provision of capital or other credit facility. xvi ] Agricultural Insurance in Latin America high loss ratios, which were exacerbated by very low premium rates and poor management. Most public sector programs were terminated by 1990 on account of their poor results. The provision of agricultural insurance through the private sector and public-private partnerships is a new trend in the region. Agricultural insurance is currently available in most LAC countries. Agricultural insurance in LAC is relatively well developed in comparison with other regions such as Africa and many Asian countries. Agricultural insurance premiums in LAC have been growing exponentially in recent years; however, they are not distributed evenly among the different agricultural insurance business sublines or among countries. The supply of agricultural insurance products in the region is relatively evolved in comparison with other regions in terms of diversification and number of companies offering insurance. Crop insurance is the most developed business subline of agricultural insurance in LAC. Yield-based MPCI is the most common type of crop insurance marketed in the region. Individual-grower named-peril crop insurance (mainly hail) is the second most popular type of crop insurance after MPCI. Index-based crop insurance has been one of the most promising new products. Livestock insurance is a relatively small segment of the agricultural insurance market in LAC. Livestock insurance is offered by the private insurance industry in several countries. Aquaculture insurance, including off-shore marine and on-shore freshwater aquaculture insurance for fish stock, crustaceans, and shellfish, is an important agricultural insurance business subline in some countries. Finally, forestry insurance provides traditional named-peril indemnity insurance against fire and allied perils affecting standing timber production. The provision of agricultural insurance in LAC countries is expensive in comparison with other regions. According to a sample of 11 LAC countries extracted from the survey performed by Mahul and Stutley (2010), estimated average total expenses incurred by the insurance sector in the provision of agricultural insurance in 2007 were equal to 29 percent of total original gross agricultural insurance premiums. The estimated total expenses for the provision of agricultural insurance in LAC are 11 percent higher than average expenses of other regions in the same year—26 percent of original gross agricultural insurance premiums. Agricultural reinsurers have an active role in the LAC agricultural insurance market. Agricultural risks in the region are ceded to reinsurers using different types of reinsurance agreements and different forms of reinsurance cession. The magnitude of agricultural risk reinsurance cessions varies from country to country. Reinsurance capacity, as long as the insurance proposals are technically sound, is widely available. Agricultural reinsurers in the LAC region do not just provide reinsurance capacity for domestic insurance companies; they also assist domestic insurance companies by providing advisory services in agricultural risk assessment, risk modeling, pricing, and risk structuring as well as by designing loss adjustment and operational manuals, risk rating and risk accumulation control software, and the wording of insurance contracts. The public sector has an active role in supporting agricultural insurance in LAC countries. The reasons for public sector involvement in agricultural insurance markets are varied. The public sector often justifies its intervention in agricultural insurance markets by pointing to (a) the absence of insurance infrastructure in rural areas and the absence of private sector agricultural insurance services, (b) the prohibitively high start-up costs in developing agricultural insurance products; (c) constraints on the capacity of reinsurers to underwrite the systemic risks in agricultural production; (d) high administrative costs of underwriting agricultural insurance; and (e) affordability issues, which arise from the often high costs of agricultural insurance premiums. See figure 2 for the models of government support. Figure 2 Models of government support to agricultural insurance  Normally High Penetration (compulsory)  Well Diversified Portfolios  Social over Technical criteria  Monopoly. Issues with the service  Government assumes full liability  High Fiscal Cost LEVEL OF GOVERNMENT INTERVENTION Fully  High Penetration Intervened  Well Diversified Portfolios  Technical over commercial criteria System  Competition for service  Government adds stability to the system  Private Sector adds know how  Reasonable Fiscal Cost  Low to moderate penetration Public–Private  Low risk diversification Partnership  Commercial over technical criteria  Competition for price Pure  No fiscal cost Market Based NUMBER OF PLAYERS & PRODUCT DIVERSIFICATION Source: Iturrioz 2009. xviii ] Agricultural Insurance in Latin America A wide range of models for the provision of agricultural insurance are available in LAC countries. The public sector mechanisms to support the development of agricultural insurance vary among the LAC countries. Several countries have established public sector agricultural risk units that provide technical support to the public sector and agricultural insurance companies, and many countries subsidize agricultural insurance premiums in an effort to support development of the market. The public sector in many LAC countries has an active role in enabling the legal and regulatory framework to promote agricultural insurance. Direct intervention of the public sector in the provision of agricultural insurance or reinsurance is rare. The creation of PPPs for financing the catastrophic agricultural risk layers is a recent trend in the region. The public sector (at the national and subnational levels) in several LAC countries has recently begun to purchase private agricultural insurance coverage to transfer catastrophic agricultural risks to international markets and protect small traditional and semi-commercial farmers. Some countries in the region have developed special agricultural insurance programs targeting small and marginal farmers, which has driven the exponential growth of agricultural insurance premiums in LAC. The challenge for LAC countries is to maintain the fiscal capacity to sustain the current levels of government support for these types of agricultural insurance programs and premium subsidies. Agricultural insurance has reached reasonable penetration rates in parts of the region. However, LAC, on average, still lags behind other regions in terms of agricultural insurance development. The penetration of agricultural insurance is not homogeneous among LAC countries, and it is not homogeneous even across different geographic areas within the same country. The provision of agricultural insurance in LAC countries has several gaps. Gaps are evident in the products offered: (a) only 19 percent of the total cropped area is insured; (b) forestry insurance is only developed in Chile and Uruguay; (c) despite the importance of aquaculture in the region, the development of aquaculture insurance is limited to Chile and Mexico; and (d) the development of livestock insurance is minimal. Geographic gaps are also evident: agricultural insurance is only consolidated in the most dynamic areas in terms of agricultural production. The level of development of agricultural insurance in the areas where agricultural insurance is consolidated is comparable with the level of agricultural insurance development in high-income countries. Furthermore, the geographic areas where agricultural insurance is in the process of consolidation in the region comprise areas that were turned over to agricultural production in the 1990s, and these are the areas where demand for agricultural insurance products is rising quickly. However, there are many areas where agricultural insurance is still not available but has the potential for development. These areas are characterized by the coexistence of well-developed market-oriented agriculture firms with traditional or semi-commercial farming. Finally, the geographic areas where agricultural insurance is not yet available and has low potential for development are characterized by a vast population of small and marginal or semi-commercial farmers who produce for self- consumption and, eventually, for the market. The development of the agricultural insurance market is a long-term PPP effort. The opportunities for increasing the current levels of crop insurance in geographic areas where crop insurance is already consolidated will come, mainly, from the development of more complex and sophisticated types of products. In the areas where crop insurance is already consolidated, the insurance industry is enhancing its portfolio of crop insurance products to cover more perils and crop activities, and it is also adopting an agribusiness value chain approach in order to deliver products. The uptake of crop insurance is expected to keep growing in the geographic areas where agricultural insurance is in the process of consolidation. Large-scale agribusiness enterprises that operate in geographic areas where agricultural insurance is in a process of consolidation will continue to demand customized crop insurance solutions. It is also expected that small- and medium-size farmers and enterprises situated in geographic areas where crop insurance is in the process of consolidation will also increase their demand for crop insurance. Furthermore, the geographic areas where agricultural insurance is available but still not consolidated offer enormous potential for development. There are also many geographic areas in LAC where crop insurance is yet not available, but opportunities exist to provide crop insurance for commercial and semi-commercial farmers. However, in geographic areas where crop insurance is not yet available and the rates of rural poverty are high, the potential to provide crop insurance is very limited. There are opportunities to develop livestock insurance in the region. Livestock insurance has not yet reached significant levels of uptake among herders. The provision of better livestock insurance in the region will improve when better livestock insurance products are offered. An increase in the supply of comprehensive livestock insurance in some countries is expected in the short term. The strengthening of the animal health care and prevention systems in LAC countries represents a direct opportunity for livestock insurance. Poultry and swine insurance also offers an interesting opportunity for the development of livestock insurance. The LAC region offers opportunities to develop forestry insurance. The expected improvement of product design for standing timber forest plantations will enhance the uptake of forestry insurance. Developing suitable forestry insurance products to be used as collateral from reducing emissions from deforestation and degradation (REDD) credits constitutes an opportunity for forestry insurance in the region. xx ] Agricultural Insurance in Latin America There are several opportunities to develop aquaculture insurance in the region. Shrimp and tilapia production in LAC offers an opportunity to develop aquaculture insurance. In order to develop aquaculture insurance, efforts will have to be made to build local capacity. The process of promoting and enhancing agricultural insurance implies overcoming critical challenges. These can be classified into four categories: institutional challenges, financial challenges, technical challenges, and operational challenges. The challenges faced by the governments and the insurance industry, as well as the potential solutions to overcome them, are discussed below. INSTITUTIONAL CHALLENGES The development of agricultural insurance requires an appropriate institutional framework. In addition to an adequate legal and regulatory framework, the development of agricultural insurance requires the facilitation of access to technical and financial assistance for the development of products and the integration of agricultural insurance with other financial products and technical services received by the farmers. FINANCIAL CHALLENGES Risk-layering schemes should be seriously considered at the time of designing agricultural insurance programs for countries in the region. Also needed are efforts to (a) encourage domestic insurance companies to pool agricultural risks, (b) promote governments’ participation in risk financing on the top catastrophic risk layers to complement reinsurance markets, and (c) redefine the role of agricultural insurance premium subsidies. TECHNICAL CHALLENGES Proper assessment of agricultural production risks, linked to ongoing product development, is a precondition for the development of sustainable agricultural insurance programs. In addition, better agricultural and weather information services and data infrastructure are needed. Furthermore, support for research and development of innovative agricultural insurance products and services is necessary to reach small farmers and expand the market overall. In other words, agricultural insurance products should be tailored to the targeted clients. OPERATIONAL CHALLENGES LAC needs to build local capacity in operational procedures for designing and administering agricultural insurance, especially products based on simple operational models. The bundling of agricultural insurance products with existing services or networks operating in rural areas is important to increase coverage and reduce transaction costs. Complementary support for agricultural insurance operations could include the promotion of (a) cooperatives, producer associations, rural banks, and microfinance institutions as delivery channels for agricultural insurance and (b) technical support units for agricultural insurance in start-up situations. CONCLUSIONS Agricultural insurance has reached relatively good levels of development in several regions within LAC. Agricultural insurance is available in most countries in the region, and the industry offers a comprehensive range of products. The level of penetration, except for livestock insurance, is reasonably high in most countries. Total direct agricultural insurance premiums written in LAC during 2009 amounted to US$780 million, accounting for 3.5 percent of global agricultural insurance premiums. The degree of development of agricultural insurance, however, is not homogeneous across LAC countries. Several heterogeneities are observed in terms of the penetration of agricultural insurance both between and within countries as well as between different agricultural insurance products. While agricultural insurance in some geographic areas, such as the Southern Cone countries, shows levels of market penetration similar to high-income countries, other geographic areas, such as the English-speaking Caribbean countries, show a complete lack of agricultural insurance markets. Governments in LAC are already playing an important role in supporting the development of agricultural insurance markets. The main support roles assumed by governments in the region are the provision of subsidies for agricultural insurance premiums and the purchase of catastrophic agricultural insurance products to protect small vulnerable farmers. The total fiscal expenditures on support for agricultural insurance in 2009 amounted to US$326 million, accounting for 42 percent of total agricultural insurance premiums written that year. Brazil and Mexico account for 90 percent of the total regional government expenditures on support for agricultural insurance. The region shows several gaps in the provision of agricultural insurance. The reasons for these gaps are diverse and specific to the country and geographic area. Therefore, xxii ] Agricultural Insurance in Latin America the strategies for developing agricultural insurance markets are also diverse and have to be tailored to each specific situation. In other words, no one-size-fits-all strategy for the development of agricultural insurance is suitable for all countries in LAC. The existence of gaps in the provision of agricultural insurance creates opportunities for development of the market in the region. The private insurance industry has an opportunity to enhance the use of agricultural insurance in geographic areas where commercial farming is the main type of agricultural production. In such geographic areas, the private insurance industry can enhance the use of agricultural insurance in two ways: (a) by making products more affordable and (b) by shifting the insurance industry’s approach to clients from a focus on farmers to a broader focus on the agribusiness value chain. The enhancement of agricultural insurance in geographic areas where semi-commercial and traditional subsistence farmers predominate will be more challenging and will likely require government support. The development of agricultural insurance markets depends on the governments’ and the private insurance industry’s ability to overcome several challenges. In order to take advantage of the opportunities to develop agricultural insurance markets, the public and private sectors will need to overcome various institutional, operational, technical, and financial challenges. These challenges are different for different countries and geographic areas in the region. The private insurance industry in isolation is unable to overcome these challenges, and public-private partnerships are needed, along with direct government support. 1. INTRODUCTION The agricultural sector plays a pivotal role in the economy and in the lives of people in the Latin American and Caribbean (LAC) countries. The agricultural sector contributed 5.5 percent of the GDP and 18 percent of total exports from the region in 2006 (FAO 2009). The region is more urbanized than the rest of the world, with 22.4 percent of the population residing in rural communities compared with the world average, 44 percent. As the level of urbanization rises, the need to modernize agriculture and attain higher levels of productivity becomes more acute. Agricultural producers in LAC face a myriad of risks that can threaten their output, their income, and sometimes their consumption. Throughout history, the LAC region has been among the most disaster-prone areas in the world: volcanoes, earthquakes, droughts, floods, and yearly cycles of major tropical storms all affect agricultural production. It is widely believed that these hazards will intensify through the effects of global warming. A comparison of two five-year periods, 1971–75 and 2002–05, shows that the incidence of droughts has increased 360 percent, hurricanes, 521 percent, and floods, 266 percent. Scarcely a country in the region, which has a population of approximately 550 million, has escaped serious damage from natural disasters within the past two to three years. Disasters affecting the region are relentless, frequent, and highly destructive in the areas affected. LAC agricultural producers have devised strategies to deal with the multiple risks affecting their production. Agricultural producers in the region use both active risk management and risk-coping strategies. While risk management strategies attempt to address the risk ex ante, risk-coping strategies address it ex post. Managing the risks to agricultural production relies on an optimal combination of management and, when they are available, financial tools. Agricultural producers can retain small but recurrent risks through appropriate on-farm risk mitigation techniques (such as irrigation, crop management, and pest prevention) and self-insurance tools (such as savings and contingent credit). However, agricultural producers often cannot manage the less frequent but more severe losses affecting their agricultural activities; thus some farmers transfer them to other parties through financial mechanisms like insurance, when available and accessible. Agricultural insurance is typically one of many tools that farmers can use as part of their comprehensive strategy for managing agricultural production risks. Agricultural insurance is used primarily to hedge against the risk of a loss of production. It 2 ] Agricultural Insurance in Latin America is defined as the equitable transfer of the risk of a loss, from an agricultural entity2 to an insurer, in exchange for a premiu. Agricultural insurance is a financial tool that provides a mechanism to transfer risks faced by crop, livestock, bloodstock, forestry, or aquaculture production. The level of development of agricultural insurance is heterogeneous among the different countries and geographic areas in the region. Agricultural insurance in LAC, compared with other regions in the developing world, is quite well developed in most countries. However, this development is concentrated in the most productive areas. Outside these areas, agricultural insurance, if available, is underdeveloped or not developed at all. In addition, agricultural insurance has been targeted at the commercial farming sector. Few initiatives have sought to tailor agricultural insurance to the vast semi-commercial and traditional farming sectors. As a result, although agricultural insurance has reached relatively significant levels of development in LAC, there is still a significant gap in the provision of this risk transfer tool for the semi-commercial and traditional farming sector. The study focuses on how agricultural insurance can complement and enhance agricultural risk management in LAC. The overall objective of this study is to provide the key elements for a strategy to increase the penetration of agricultural insurance in the region. The specific objectives are (a) to diagnose the current demand and supply of agricultural insurance in LAC; (b) to identify the gaps in the provision of agricultural insurance; (c) to identify impediments to increasing penetration; and (d) to recommend a series of actions for removing them. The study is based on a comprehensive approach to the development and analysis of agricultural insurance provision in the region. The study presents the operational, institutional, financial, and operational issues associated with the provision of agricultural insurance, and it conducts the first regional assessment of the current status of and opportunities for the provision of other types of agricultural insurance such as forestry and aquaculture insurance. The study assesses (a) the status of the development of traditional products as well as index-based insurance and opportunities for their further development; (b) the roles of governments in the region in supporting the development of agricultural insurance; and (c) the perspectives and attitudes toward risk of the various participants in the agribusiness value chain. The study follows the agricultural risk management framework developed by the World Bank. The framework is a tool that has been used to assess and develop agricultural insurance markets in several countries. It is based partly on corporate risk management but 2 Agricultural entity includes agricultural producers, cooperatives, associations, and agribusiness enterprises, among others. also considers economic and social factors such as a government’s fiscal profile and the living conditions of the farmers in each country. Such a framework should be implemented only after cost-effective risk mitigation techniques (for example, irrigation and pesticides) have been successfully implemented. This framework thus deals only with the residual risk that cannot be mitigated. The framework is based on four pillars: (a) agribusiness segmentation; (b) agricultural risk assessment; (c) agricultural risk financing; and (d) legal and institutional capacity. The study is organized into five chapters, including this introduction. Chapter 2 provides an overview of the agricultural sector in LAC, including a description of the main farming systems and an assessment of the main perils affecting production. Chapter 3 describes the current provision of agricultural insurance, describing the evolution of agricultural insurance, providing the current market figures, assessing the availability of agricultural insurance products, describing government support to agricultural insurance, and estimating the current levels of penetration. Chapter 4 focuses on the challenges in attempting to increase coverage and penetration. It assesses the current gaps in the provision of agricultural insurance, identifies opportunities for further development, and recommends some future actions that can be taken. Chapter 5 presents the conclusions of the study. The study is complemented by a detailed description of the agricultural insurance market in LAC countries where this financial product is currently available. This information is presented in the form of fact sheets for 19 countries. Each fact sheet contains information about the history of agricultural insurance in the country, the market structure, the main channels for delivering agricultural insurance, the degree of government support for agricultural insurance, the main agricultural insurance products marketed, the penetration rate of agricultural insurance, and the volume of market premiums. This information is presented in an annex to the main body of the study. 2 OVERVIEW OF THE AGRICULTURAL SECTOR An understanding of the economic and social relevance of the agricultural sector is a key first step in designing an adequate agricultural insurance strategy in Latin American and Caribbean (LAC) countries. The economic and social importance of the agricultural sector determines whether a national agricultural insurance strategy will have commercial and/or social goals. On the one hand, social insurance—safety net—aims to assure a minimal level of economic security for all farmers, particularly those involved in low-profit activities. These social objectives rely on (contingent) wealth transfer instruments. On the other hand, commercial insurance is oriented toward viable business activities that generate enough profit for farmers to afford the insurance premium. These instruments are based on sound actuarial principles and should apply only to viable farms whose survival may be jeopardized by the occurrence of an insurable event. Country and regional factors should also be considered in the design of a risk-financing strategy. The LAC region has a wealth of natural resources, the world’s greatest agro- biodiversity, and immense economic, social, and environmental diversity. The region covers approximately 205 million hectares and encompasses 32 countries with a total estimated population of 561 million. The size of the region and its wide range of favorable ecologies have led to an extremely high level of biodiversity. Population varies considerably throughout the region, from Brazil—the world’s fifth-largest country in both area and population—to numerous Caribbean island nations with fewer than 100,000 people. The region benefits from a stock of natural resources suitable for agricultural production. The region contains 36 percent of the main cultivated food and industrial species and 28 percent of the world’s forest area (UNEP 2000). It also contains some 168 million hectares of cultivated land, including 19 million hectares equipped for irrigation and a further 600 million hectares devoted to grazing and pastureland. It has 40 percent of the developing world’s humid areas and almost half of its total renewable water resources, but only 4 percent of its arid and semiarid lands. Some 90 percent of the region’s land area is humid and subhumid. The agricultural sector is an important economic sector in many LAC countries. The agricultural sector accounts for 5.5 percent of regional GDP and 15.6 percent of total exports of the region. However, the degree to which agriculture contributes to the economy varies widely from country to country. Whereas in Trinidad and Tobago agriculture accounts for just 0.1 percent of national GDP and 2 percent of total exports, in Paraguay it accounts 6 ] Agricultural Insurance in Latin America for 20 percent of national GDP and 88 percent of exports (World Bank 2007). Agriculture makes an even larger contribution to the regional economy when linkages with farm-input, food-processing, and distribution industries are taken into account. Although data are limited to certain countries and years, results of studies undertaken by the Inter-American Institute for Cooperation on Agriculture in 2005 indicate that the sector contributes a much higher share of GDP than is reflected in the official data. Data for Costa Rica and Uruguay in 2006, for instance, estimate the contribution of all agricultural industries to be between 30 and 35 percent of these countries’ national output compared with official figures of just 9 percent of GDP in each county (ECLAC 2008). Strong forward linkages to the agribusiness and food services sectors exist in all of the region’s countries; examples include soybean oil and derivatives in Argentina, Brazil, and Paraguay. The agricultural sector is also relevant from a social standpoint. With an average GNP per capita of US$6,544 in 2009, LAC is the wealthiest of the developing regions. However, it is characterized by striking inequality in the distribution of wealth: the poorest 20 percent of the population receives only 3 percent of all income, whereas the wealthiest 20 percent receives 60 percent. Although urban poverty rates in some countries are high, poverty is more widespread in rural areas. More than 50 percent of rural people live below the poverty line. Poverty data vary extensively, from fewer than 2 percent of the population with an income of under US$1 a day in Uruguay (1989 data) to 40 percent in Guatemala (FAO 2004). LAC countries can be classified into four groups according to the economic and social importance of their agricultural sector. The first group comprises those countries in which the agricultural sector has neither relevant economic nor social importance. The agricultural sector in these countries makes a small contribution to national GDP, total exports, or both; at the same time, a small portion of the population lives in rural areas, so the incidence of rural poverty is very low. The República Bolivariana de Venezuela is an example of countries in this group. In the second group of countries, the agricultural sector does not have economic relevance, but it does have social relevance, either because agriculture is the source of livelihood of a major part of its population or because rural poverty is a serious issue. Andean countries and Mexico are examples of countries in which the agricultural sector has low economic but high social relevance. The third group comprises countries in which the agricultural sector is economically as well as socially relevant. The agricultural sector in these countries makes a major contribution to national GDP, to total exports, or both; at the same time, a major part of the population has agricultural production as its main source of livelihood, and rural poverty is high. Caribbean and Central American countries are examples of countries in which the agricultural sector is highly relevant from the economic as well as the social standpoint. The fourth group comprises countries in which the agricultural sector constitutes an important economic activity and has a large role in total exports, but their populations are largely urban or there is a low incidence of poverty in rural areas. Argentina and Uruguay are examples of such countries. Figure 2.1 maps the LAC countries according to the economic and social importance of their agricultural sector. Figure 2.1 Economic and social importance of the agricultural sector in LAC (size of the balloons represent the level of agriculture GDP) Guatemala Honduras 60 Haiti 0.5 *Rural Population / Total Population + 0.5 *Rural St. kitts & Nevis Nicaragua Trinidad & Tobago Peru St. Lucia Guyana 50 Bolivia Grenada St. Vincent & Grenadines Social Importance Index Suriname Ecuador Belize Poverty / Rural Population Colombia Panama Dominican Republic 40 Mexico El Salvador Antigua & Barbuda Jamaica Barbados Costa Rica Paraguay 30 Dominica Venezuela Brazil 20 Argentina Chile Uruguay 10 0 10 20 30 40 50 Economic Importance Index 0.5 *Agriculture GDP / Total GDP + 0.5 *Agricultural Exports/Total Exports Source: Authors based on Giordano 2006; World Bank 2010. Several situations of economic and social relevance can be found within different geographic areas in a particular country. For instance, in Mexico the agricultural sector has low economic importance, but moderate-to-high social importance. The contribution of the agricultural sector to total growth was 6 percent during the period 1993–2004, whereas the share of rural poor in total poor was 25 percent during the same period. While this is true from a national perspective, there are regional differences within Mexico. The sector is economically and socially relevant in the states of Zacatecas and Sinaloa, with the agricultural sector contributing 31 percent to economic growth in Sinaloa and 27 percent in Zacatecas, but with a share of rural poor to total poor of 65 and 70 percent, respectively. Conversely, the economic and social relevance of the agricultural sector in states like Yucatán or Jalisco is very low. Agricultural production contributes only 3 and 9 percent of the total economic value added in Yucatán and Jalisco, respectively. At the same time, the rural poor constitute less than 20 percent of the total poor in these states. Figure 2.2 shows the economic and social importance of agriculture in different states in Mexico. 8 ] Agricultural Insurance in Latin America Figure 2.2 Economic and social importance of agriculture in Mexico, by state Mexico Agriculuture's contribution to growth, 1993-2004, % 50 40 Agriculture-based 30 Zacatecas Sinaloa 20 Chiapes Michoacán Guerrero Durango 10 Jalisco Hidalgo Oaxaca Mexico Puebla Baja Distrito Yucatan California Queretaro Federal 0 -10 Urbanized Transforming -20 0 0.2 0.4 0.6 0.8 1.0 Rural poor/total poor 2002 Source: World Bank 2007. AGRIBUSINESS SEGMENTATION The deconstruction of agricultural producers into agribusiness segments is key for defining the objectives of an agricultural insurance strategy. Obtaining a correct understanding of the characteristics of agricultural producers present in each of the geographic areas is a fundamental initial step in the design of an agricultural insurance strategy. An agricultural insurance strategy can have either commercial or social objectives. Agricultural insurance programs with social objectives, or safety nets, aim to assure a minimal level of economic security for all agricultural producers, particularly those involved in predominantly subsistence-based agricultural production activities. These social objectives rely on (contingent) wealth transfer instruments. Market-based agricultural insurance is oriented toward commercial agricultural activities that generate enough profit for the producer to afford to pay insurance premiums. Thus market-based agricultural insurance instruments are only meant for commercially viable farms that may be jeopardized by the occurrence of an insurable loss.3 3 An “insurable loss” is a loss that is accidental, unforeseen, definite in time and place, and measurable. Agricultural production can be classified into three general categories, namely traditional subsistence farming, semi-commercial farming, and commercial farming. The traditional subsistence farming sector is characterized by a large number of agricultural producers operating small holdings using mainly family labor and limited production technology. Farmers in this sector produce primarily for home consumption and in good seasons may sell their surplus in the market. These agricultural producers rarely borrow from the formal banking sector to invest in their agricultural business activity. Usually, nonfarm income represents a large fraction of the household’s total income. Since traditional subsistence farmers do not perform business-oriented activities, the basic precondition for developing commercial agricultural insurance is missing in this sector. The semi-commercial farming sector includes medium-size holdings that grow at least one commercial crop and derive a significant proportion of their household income from agriculture. Family labor is still predominant, although producers in this sector invest in production technology. The main challenge associated with the provision of agricultural insurance to the semi-commercial farming sector is the high transaction costs relative to the level of liability involved in the provision of relatively small insurance contracts. Standardized index-based insurance products (for example, area-yield insurance, rainfall insurance), offered through cooperatives or rural finance institutions, may be a potential solution to this problem. The commercial farming sector includes medium-size and large, specialized production units that are run on a purely commercial basis. The individual enterprises are commercially viable and have large asset bases. The enterprises use expensive technology that requires intensive capitalization, which is financed by funds borrowed from the formal financial sector. Traditional named- peril and multiple-peril agricultural insurance products are suited to meet the needs of the commercial farming sector for risk transfer. The predominance of each type of farming sector varies among geographic areas in the region. Traditional subsistence farming systems, although they are distributed throughout the region, are predominant in the high altitudes along the Andean mountains, in the maize-bean production systems in Mexico and in Central America, in northeastern Brazil, in the step valleys in the Andes region of Peru, and in the Amazon basin. Traditional subsistence agricultural producers, although mixed with commercial agricultural producers, can also be found along the northern coastal areas of South America and in Central America and the Caribbean countries. Semi-commercial farming systems are common in the llanos area of Brazil, Colombia, República Bolivariana de Venezuela, and Guyana. They are also present in the southern Andean region of Argentina and Chile, the southern area of Brazil, and the northern area of Uruguay. Other regions with this type of farming include the Chaco region in Argentina, Paraguay, and Bolivia, the coastal areas of Central America, northern South America, and the Caribbean countries. Commercial farming systems are predominant in the irrigated areas of northern and central Mexico, in the irrigated valleys of Peru, Chile, and western Argentina, southeastern and central Brazil, and the coastal zones of central 10 ] Agricultural Insurance in Latin America Chile. Uruguay and the Pampas area of Argentina also have commercial farming systems. Commercial farming is also present in combination with traditional subsistence and semi- commercial farming in the coastal areas of Central America, the northern coastal areas of South America, and in some Caribbean countries. The analysis of agricultural farming systems provides a good proxy for the segmentation of agricultural producers in the region. An agricultural production system is defined as a population of individual farms that have broadly similar resource bases, enterprise patterns, household livelihoods, and constraints, for which similar development strategies and interventions would be appropriate. Farming systems are strongly linked to particular types of agricultural producers. Within a certain agricultural farming system, it is usual to find similar types of agricultural producers or, at least, a consistent pattern in the mix of agricultural producers in a particular zone. Agricultural farming systems in LAC are extremely heterogeneous and complex. Owing to its enormous latitudinal range, varied topography, and rich biodiversity, the LAC region has one of the most diverse and complex ranges of farming systems of any region in the world. The sources of livelihood of the farmers, the type of farmers, and the prevalence of rural poverty vary across the different types of farming systems present in the region. According to the Food and Agriculture Organization and the World Bank (2001), it is possible to find 16 major farming systems in the region (see table 2.1). Table 2.1 Major farming systems in LAC % of region Land Rural Principal Prevalence of Farming system Location area population livelihoods poverty Irrigated 10 9 Northern and central Mexico Horticulture, Low to as well as coastal and inland fruit, cattle moderate valley areas of Peru, Chile, and Argentina Forest based 30 9 Amazon basin Subsistence Low to and cattle moderate ranching Coastal 9 17 Coastal areas of Central Export Low to plantation and America, Colombia, República crops and extensive and mixed Bolivariana de Venezuela, tree crops, severe (highly Guyana, and northeastern Brazil aquaculture, variable) fishing, tubers, tourism Intensive mixed 4 8 Eastern and central Brazil Coffee, Low (except horticulture, laborers) fruit, off- farm work Cereal and 5 6 Southern Brazil and northern Rice, Low to livestock Uruguay livestock moderate (campos) Land Rural Principal Prevalence of Farming system Location area population livelihoods poverty Moist temperate 1 1 Coastal zone of central Chile Dairy, beef, Low mixed forest cereals, forestry, aquaculture Maize-beans 3 10 Coastal zone of Mexico to Maize, Extensive and (Mesoamerican) Panama beans, severe coffee, horticulture, aquaculture Intensive 2 3 Andean region of Colombia, Vegetables, Low to highlands mixed Ecuador, and República maize, extensive (northern Andes) Bolivariana de Venezuela coffee, cattle (especially at and pigs, high altitudes) cereals, potatoes, off-farm work Extensive mixed 11 9 Central-western Brazil, eastern Livestock, Low to (cerrados and Colombia, República Bolivariana oilseeds, moderate llanos) de Venezuela, and Guyana grains, some (smallholders) coffee Temperate mixed 5 6 Central and eastern Argentina Livestock, Low (Pampas) and Uruguay wheat, soybean Dry-land mixed 6 9 Coast of northeastern Brazil and Livestock, Extensive, Yucatán peninsula of Mexico maize, especially cassava, drought wage labor, induced seasonal migration Extensive dry- 3 2 North-central Argentina, Livestock, Moderate land mixed through Paraguay and into cotton, (Gran Chaco) eastern Bolivia subsistence crops High-altitude 6 7 Step valleys in Peru, altiplano Tubers, Extensive and mixed (central region of southern Peru, sheep, severe Andes) western Bolivia, northern Chile, grains, and Argentina llamas, vegetables, off-farm work Pastoral 3 1 Patagonia region, Argentina Sheep, cattle Low to moderate Sparse (forest) 1 <1 Southern Andes of Argentina Sheep, cattle, Low and Chile forestry extraction, aquaculture Urban based <1 3 Periurban and intraurban Horticulture, Low to agricultural systems of major dairy, poultry moderate cities throughout the region Source: FAO and World Bank 2001. 12 ] Agricultural Insurance in Latin America RISkS AFFECTING AGRICULTURAL PRODUCTION Assessing the risks to agricultural production is a key step in developing an agricultural insurance strategy for the region. The proper identification of the risks affecting agricultural production, the assessment of their frequency and intensity, the accurate mapping of such risks for particular agricultural activities, and the use of proper risk-modeling tools to determine the potential probable maximum loss (PML) that these risks may cause to agricultural production are essential if the private insurance sector and governments in the region are to devise suitable agricultural risk management strategies. This section describes the main risks to agricultural production in the region. The types of risks faced by agricultural producers as well as their frequency and severity vary widely across countries. Agricultural production is exposed to droughts and floods in almost all LAC countries. Loss from hailstorm is an important risk facing producers in Argentina, Uruguay, and southeastern Brazil. Tropical cyclones are particularly damaging to agricultural production in Central America and the Caribbean countries. Tornadoes are frequent in Southern Cone countries. Winter storms are an important risk facing forestry plantations in Uruguay and Chile. Drought is a devastating peril that affects agricultural production in almost all LAC countries. Seasonal droughts are fairly common in climates that have well-defined annual rainy and dry seasons. The northeastern states of Brazil, the semiarid areas of the Pampas region in Argentina, the southern areas of Chile, and the northern areas of Mexico are likely to experience episodes of seasonal drought. The main trigger for droughts is the occurrence of El Niño-La Niña-Southern Oscillation (ENSO) events. During El Niño events, drier weather conditions are prevalent in northeastern Brazil, the Caribbean, Central America, Ecuador, Colombia, and the República Bolivariana de Venezuela. During La Niña events, drier weather conditions are prevalent in the Argentine Pampas, Uruguay, and southeastern Brazil. The spatial distribution of drought hazard in LAC countries is presented in map 2.1. Map 2.1 Drought hazards in LAC countries Drought Hazard Deciles 1st - 4th 5th - 7th 8th - 10th Source: World Bank 2005. Flood is a common peril affecting agricultural production in the region. The causes of floods are varied. Whereas in Central America and the Caribbean countries floods are mostly associated with hurricanes and tropical storms, in South America they are mostly associated with El Niño events, which result in higher rainfall in the southern countries. El Niño events occur every three to seven years. The 1997–98 El Niño events were particularly devastating in Peru and Ecuador. The hydrological system in the region also contributes to the risk of flooding. The major drainage divide is far to the west along the crest of the Andes. West of this divide, in the mountainous regions, the slopes of riverbeds are very steep, which, in the event of storms, increases the risk of flash floods, the most dangerous type of floods. In the lower parts of rivers flowing into the Atlantic Ocean, the risk of flooding is very high, especially when there is sedimentation or when river channels are poorly defined. The spatial distribution of flood hazards in LAC countries is presented in map 2.2. 14 ] Agricultural Insurance in Latin America Map 2.2 Flood hazards in LAC countries Flood Hazard Deciles 1st - 4th 5th - 7th 8th - 10th Source: World Bank 2005. The occurrence of floods, droughts, and tropical storms in the region is influenced by the El Niño-La Niña-Southern Oscillation events. The ENSO refers to periodic (two- to seven-year) anomalies in sea surface temperatures over a large area of the eastern equatorial Pacific Ocean that alter large-scale weather patterns. The warm (El Niño) and cool (La Niña) phases of the ENSO have different effects in different areas of LAC. El Niño events are caused by an anomalous warming of the central equatorial Pacific Ocean. The occurrence of El Niño events results in higher rainfall and above-normal temperatures in Peru, Ecuador, Argentina, Uruguay, the southern regions of Brazil, and the northern regions of Mexico. However, El Niño events also trigger unpredictable droughts in some areas of the region. The occurrence of El Niño events during the northern hemisphere winter causes drier conditions in the northeastern regions of Brazil. The occurrence of El Niño events during the southern hemisphere winter causes drier conditions in Central America, Colombia, and República Bolivariana de Venezuela. El Niño events also cause above-normal storm activity in the Pacific basin and below-normal storm activity in the Atlantic basin during the tropical storm season. La Niña events are caused by an anomalous cooling of the central equatorial Pacific Ocean. During La Niña events, wetter conditions are observed in the northeastern regions of Brazil, Guyana, Suriname, Colombia, and República Bolivariana de Venezuela, while drier and cooler conditions are observed in Argentina, Uruguay, and the southern regions of Brazil, Peru, and Ecuador. La Niña events are also characterized by high tropical storm activity in the Caribbean basin and lower than normal tropical storm activity in the Pacific basin. Maps 2.3 and 2.4 summarize the anomalies observed in the region during El Niño and La Niña events, respectively. Map 2.3 Anomalies during Map 2.4 Anomalies during El Niño events La Niña events Anomalies during El Niño Weather Tropical cyclone Anomalies during La Niña Weather Tropical cyclone conditions activity conditions activity wetter fewer storms wetter fewer storms drier more storms drier more storms cooler cooler warmer warmer Source: Munich Re Group 2009. Source: Munich Re Group 2009. Hailstorms are frequent in the Southern Cone countries, along the Andes Mountains of South America, Central America, and northwestern Mexico. Hail is particularly damaging for agricultural crop production. Almost all of the area devoted to crop production in Argentina (the main production area for cereals, oilseeds, and fruits), the whole territory of Uruguay, and southeastern Brazil (the production area for fruits and winter crops) are highly exposed to hailstorms. Hail is also a common phenomenon in the step valleys along the Andes Mountains and in Central America and Mexico. Also exposed to hailstorms, but less so, are southern Chile, northeastern Argentina, and southwestern and central Brazil. The distribution of hailstorms in the region is presented in map 2.5. 16 ] Agricultural Insurance in Latin America Map 2.5 Hailstorm hazards in LAC countries Hailstorms Frequency and Intensity of hailstorms Zone 1: low Zone 2: Zone 3: Zone 4: Zone 5: Zone 6: high Source: Munich Re Group 2009. Tornadoes affecting agricultural production are common in certain geographic areas in the region (for example, the Southern Cone countries, eastern Mexico, and Baja California peninsula in Mexico). Although the damage caused by tornadoes in agricultural production is localized, it can be significant. Multimillion-dollar losses in forestry production due to tornado damage have been claimed against the insurance industry in Argentina, Brazil, and Chile. In particular, northeastern Argentina, eastern Paraguay, Uruguay, and southern Brazil are heavily exposed to tornadoes. The distribution of tornadoes in LAC countries is shown in map 2.6. Map 2.6 Tornado hazards in LAC countries Tornadoes Hazard Zone 1: low Zone 2: Zone 3: Zone 4: high Source: Munich Re Group 2009. Winter storms are common in Uruguay and in the southern coasts of Argentina and Chile. Winter storms are a frequent cause of losses for aquaculture production in Chile. Winter storms cause the loss of cages and entire off-shore aquaculture farms and cause huge losses due to the escape of biomass (fish stock). Winter storms may also cause severe damage to forestry production. Damage due to winter storms is common in forestry production in Uruguay during the months of July and August. The distribution of winter storms in the LAC region is shown in map 2.7. 18 ] Agricultural Insurance in Latin America Map 2.7 Winter storm hazards in LAC countries Extratropical storms Peak wind speeds* Zone 0: ≤80 km/h Zone 1: 81-120 km/h Zone 2: 121-160 km/h Zone 3: 161-200 km/h Zone 4: >200 km/h Source: Munich Re Group 2009. Tropical cyclones have a devastating effect on agricultural production in Mexico, Central America, and the Caribbean countries. The Caribbean countries are in the pathway of the North Atlantic and Caribbean tropical cyclone system; every year they experience a high number of tropical storms and hurricanes. Mexico and Central America are in the pathway of both West Atlantic and East Pacific tropical cyclones. According to the U.S. National Hurricane Center database, 1,419 tropical storms originating in the Atlantic Ocean were recorded between 1851 and 2009, while 911 tropical storms originating in the Pacific Ocean were recorded between 1949 and 2009. Hurricane activity is influenced by El Niño and La Niña events. During El Niño events, hurricane activity is higher in the East Pacific than in the North Atlantic, and there is evidence that the formation of tropical depressions off the coast of West Africa is lower in El Niño years. Conversely, during La Niña years, hurricane activity tends to be enhanced in the Atlantic region, while tropical cyclone activity tends to be lower in the East Pacific. Hurricane Mitch—a category 5 hurricane according to the Saffir Simpson hurricane wind scale—was one of the most powerful and destructive of all Atlantic hurricanes for agricultural production. This hurricane mostly affected Nicaragua, Guatemala, Honduras, and Yucatán peninsula in Mexico between October and November 1998. The hurricane reached winds of 290 kilometers per hour and a minimum storm pressure of 906 barometric pressure. The longevity of the hurricane (14.5 days) explains why it was so destructive. The hazard map for tropical cyclones in LAC countries is presented in map 2.8. Map 2.8 Earthquake and tropical cyclone hazards in LAC countries Earthquakes Zone 0: MM V and balow Zone 1: MM VI Zone 2: MM VII Zone 3: MM VIII Zone 4: MM IX and above Probable maximun intensity (MM: Modified Mercalli scale) with an exceedance probability of 10% in 50 years (equivalent to a "return period" of 475 years) for medium subsoil conditions Tropical cyclones Peak wind speads* Zone 0: 78-141 km/h Zone 1: 142-184 km/h Zone 2: 185-212 km/h Zone 3: 213-251 km/h Zone 4: 252-299 km/h Zone 5: ≥ 300 km/h * Probable maximun intensity with an exceedance probability of 10% in 10 years (equivalent to a "return period" of 100 years). Typical track directions Change in tropical cyclone activity Threat of see level rise Increase in droughts Source: Munich Re Group 2009. Earthquakes, although frequent in the region, do not cause severe direct losses to agricultural production. Earthquakes cause damage to infrastructure, rather than direct losses to agricultural production. Nevertheless, damage to infrastructure might cause severe losses in agriculture. For instance, a broken dam as a result of an earthquake can flood an entire valley. The collapse of a drainage and irrigation system can cause losses to crops due to the lack of irrigation water or deficient drainage. The LAC region lies above five tectonic plates and is prone to intense seismic activity. Seismicity is concentrated along the South American Andes, the Caribbean islands, Central America, and western Mexico. According to historical catalogues, about 3,000 earthquakes with a magnitude greater than 5.0 were recorded in South America between 1900 and 1981, and 120 were recorded in Central America, the Caribbean, and Mexico between 1900 and 1979. The largest earthquake ever recorded in the Americas occurred in southern Chile in 1960, measuring 8.5 on the Richter scale. Several earthquakes with magnitudes greater than 8 were recorded during the last 100 years along the coasts of Ecuador (1906), Chile (1906, 1922, 1943, 1960, and 2010), and Peru (1940, 1942, 1966, 1974, and 2007). The January 2010 earthquake in Haiti produced relatively minimal losses in the agricultural sector (approximately 2 percent of total losses), although agriculture represents 30 percent of total GDP of the country. Map 2.8 shows the spatial distribution of earthquake hazards in LAC countries. Tidal waves caused by tsunamis threaten agricultural production in the coastal areas of the Pacific coast and the Caribbean region. Tsunamis, though infrequent, can cause severe losses to aquaculture, forestry, and crop production. The salmon industry 20 ] Agricultural Insurance in Latin America in Chile has a huge exposure to tsunamis. Chilean salmon production, which is the largest in the world, is located in an area that is highly exposed to tsunamis. The low-lying agricultural areas of the Caribbean region (for example, Guyana and Suriname) also face the risk of saline intrusion after a tsunami. Out of the 405 tsunamis recorded between 1900 and 1983, 61 originated on the Pacific coast of Latin America. Following the 1960 Chilean earthquake, a tsunami caused 200 fatalities in the coastal area. More recent episodes include tsunamis in Nicaragua (1992), Peru (1996), and Chile (2010). Volcanic activity is also a source of risk for agricultural production in LAC. Latin America has 250 historically active volcanoes and witnessed 1,300 volcanic eruptions in the last 10,000 years. Chile has the largest number of historically active volcanoes in the region, followed by Ecuador. In Central America and Mexico, 36 active volcanoes are produced by the subduction4 of the Pacific oceanic crust beneath the North American and Caribbean plates. Although the effect of volcanic eruption on agricultural production is not well studied, volcanic ashes can damage crops, aquaculture, and livestock production. For instance, in 1990, the eruption of the Hudson volcano located on the border of Argentina and Chile had devastating effects on livestock production in the Patagonia area of Argentina. In 1979 following the eruption of Mount Sufriere, banana production on the island of St. Vincent was badly affected by volcanic ash. AGRICULTURAL RISk MANAGEMENT IN LAC Identifying the risk management strategies implemented by agricultural producers and governments is a critical step in the design of a cost-effective agricultural insurance strategy. Agricultural insurance deals with the residual risks that cannot be mitigated with cost-effective risk management measures implemented by agricultural producers and governments. Recognizing the type and effectiveness of risk management measures implemented by these parties is a key to designing suitable agricultural insurance programs. Agricultural production is characterized by highly volatile production outcomes. Unlike most other entrepreneurs, agricultural producers cannot predict with certainty the amount of output that the productive process will yield due to the occurrence of perils such as weather, pests, and diseases. Adverse events occurring during harvesting or collecting the crop may result in lost production. 4 Subduction is the process that takes place at convergent boundaries when one tectonic plate moves under another tectonic plate, sinking into the earth's mantle as the plates converge. http://en.wikipedia.org/wiki/Subduction. Table 2.2 Risk management strategies and mechanisms Formal mechanisms Strategy Informal mechanisms Market based Publicly provided Ex ante strategies On farm Efforts to avoid exposure Agricultural extension, pest to risk, crop diversification, management, infrastructure income diversification, buffering of crop stocks, adoption of advanced cropping techniques Risk sharing Crop sharing, informal risk Contract farming, insurance, pool price hedging Ex post Sales of assets, relocation of Credit Social insurance, social strategies: risk labor, mutual aid funds, cash transfer coping Source: Anderson 2001; Townsend 2005. Agricultural producers and governments in LAC have devised risk management strategies to deal with the risks facing agricultural production. These strategies can be divided into two categories: informal and formal strategies. Informal strategies are identified as “arrangements that involve individuals or households or such groups as communities or villages,” while formal arrangements are “market-based activities and publicly provided mechanisms.” The formal and informal risk management strategies can be divided, in turn, into ex ante and ex post strategies. The ex ante or ex post classification focuses on the point in time in which the reaction to risk takes place: prior to the occurrence of the potentially harmful event (ex ante) or after the event has occurred (ex post). Among the ex ante reactions, it is also useful to highlight the differences between on-farm strategies and risk-sharing strategies (Anderson 2001). Table 2.2 summarizes the main types of risk management strategies that are present in the LAC region. The types of agricultural risk management mechanisms implemented by agricultural producers in LAC vary by country. Countries where financial markets are underdeveloped rely heavily on government post-disaster aid. For instance, in most of the Caribbean countries, Bolivia, and Nicaragua, producers rely almost exclusively on government post-disaster assistance and informal risk management mechanisms. In LAC countries with more sophisticated financial markets (such as Brazil and Mexico), agricultural insurance complements government post-disaster assistance. The management of agricultural production risks relies on an optimal combination of technical and financial tools. The risk-layering concept is useful for analyzing the optimal combination of technical and financial risk management tools in agriculture. Farmers and herders can retain small but recurrent losses through appropriate on-farm risk mitigation techniques (for example, irrigation and pest prevention) and self-insurance tools 22 ] Agricultural Insurance in Latin America (for example, savings and contingent credit). More severe but less frequent nonsystemic losses can be pooled into cooperative or mutual insurance schemes. Cooperative or mutual insurance schemes are popular in Mexico to insure various perils and in Argentina, Uruguay, and the state of Rio Grande do Sul in Brazil to insure fire and hail risks. However, the relatively severe and frequent systemic losses (drought, flood, windstorm, and freeze) that cannot be managed, either through on-farm risk management mechanisms or through a cooperative or mutual insurance scheme, need to be transferred to commercial insurers and reinsurers (including either local or, which is more common, international commercial reinsurers). Finally, governments may have a major role to play in the event of a major disaster, acting as a reinsurer of last resort or providing post-disaster aid. Figure 2.3 summarizes the agricultural risk-layering concept. Figure 2.3 Agricultural risk layering Size of the loss Government Risk Reinsurers transfer Insurance companies Cooperatives Risk ans mutuals pooling Agricultural Risk producers retentions Minor Small Medium Large Catastrophic Type of event: Source: Mahul and Stutley 2010. RURAL FINANCE IN LATIN AMERICA Assessing the access of the agricultural sector to rural finance is important in designing an agricultural insurance strategy. Agricultural insurance and rural finance are intrinsically linked. Experience shows that the demand for agricultural insurance is usually low or even nonexistent where formal credit is not available for agriculture. In contrast, agricultural producers who borrow from formal financial institutions have more incentives to purchase agricultural insurance, either because the banks require their loans to be protected against climatic risks or because these products allow them to access credit at better terms. Agricultural producers in LAC use different sources of finance for investments in agricultural production. The main source of formal credit for those farmers who can meet lending conditions are the commercial banks or national rural and agricultural development banks. In addition, input suppliers and grain traders provide crop production credit in many LAC countries. If the agricultural producers do not qualify for formal credit, some get finance from microfinance institutions (MFIs) or family remittances. Their decision about which source of financing to use depends on the availability of different sources, their ability to qualify for rural credit, and the terms and conditions of the credit. The penetration of rural credit in LAC is very low. On average, only 8 percent of the total credit lent by the financial system in the region during 2004–05 was to the agricultural sector (Trivelli and Venero 2007). With the exception of Paraguay and Nicaragua, the ratio of agricultural credit to total credit is always lower than the contribution of the agricultural sector to the economy. Figure 2.4 compares the ratio of agricultural sector GDP to total GDP and the ratio of agricultural sector loans to total loans. 24 ] Agricultural Insurance in Latin America Figure 2.4 Ratio of agricultural sector GDP to total GDP and agricultural sector loans to total loans Agriculture Sector's to the Country GDP and Loans to the Agriculture Sector related to total Loans Paraguay Nicaragua Honduras Bolivia Guatemala Argentina Brazil Ecuador  Agriculture GDP / GDP Costa Rica Agricultural Credit / Total Credit  Chile Colombia Dominican Republic Panamá El Salvador Peru México 0% 5% 10% 15% 20% 25% 30% Source: Trivelli and Venero 2007. Development financial institutions (DFIs) are the main source of financing for the agricultural sector.5 Currently, 32 DFIs are managing US$23 billion of total credits to the agricultural sector in LAC (34 percent of total agricultural lending in the region). Several heterogeneities in the share of DFIs to total agricultural lending are evident, For instance, the DFI share of total agricultural lending is above 60 percent in Uruguay, but below 5 percent in Peru. Figure 2.5 shows the share of DFI lending to total agricultural credit. 5 Development financial institutions are institutions that carry on any activity, whether for profit or otherwise, with or with- out government funding, with the purpose of promoting development in the industrial, agricultural, commercial, or other economic sector, including the provision of capital or other credit facility. Figure 2.5 Development financial institution share of total agricultural credit Development Financial Institutions share on agriculturak credit Peru Honduras Venezuela, R.B Nicaragua Paraguay Guatemala Chile Panamá Ecuador México Bolivia El Salvador Argentina Dominican Republic Brazil Colombia Costa Rica Uruguay 0% 10% 20% 30% 40% 50% 60% 70% Source: Trivelli and Venero 2007. Commercial credit is an important source of rural finance in the commodity net- exporting countries in the region. Input suppliers and traders have an active role in financing the rural sector in Brazil, Argentina, Paraguay, and Bolivia. Brazilian farmers obtain up to 40 percent of their agricultural financing needs from the traders who purchase their harvest. Commodity trading companies like Archer Daniels Midland and Cargill are important players, financing commercial soybean farmers in Brazil, Paraguay, and Bolivia. Since the financial crisis in Argentina, bank credit has been substituted by innovative financial solutions such as the use of warrants, fiduciary funds, and equity funds. Microfinance institutions are still not a major source of finance for agriculture in the region. MFI activities have been growing rapidly in LAC during the last decade. The MFI credit portfolio in LAC grew from US$4.4 billion in 2006 to US$6.3 billion in 2007. However, only a few MFIs have been successful in lending to the rural sector. Despite the lower than expected expansion of their rural portfolios in the region, MFIs—in general—have been growing faster than other financial institutions, particularly in countries where the share of the rural population is high. In nine countries where the microfinance sector is highly developed, rural credit accounts for only 37 percent of the total credit portfolio; however, only 20.6 percent of the MFI total credit portfolio is agricultural credit. Figure 2.6 shows the volume in U.S. dollars of MFI lending to the rural population in select LAC countries in 2007. 26 ] Agricultural Insurance in Latin America Figure 2.6 MFI lending to the rural population in select countries of LAC, 2007 MFIs lending to rural population in select countries of LAC Peru Honduras Nicaragua Guatemala Panamá Ecuador Bolivia El Salvador Costa Rica 0 50 100 150 200 250 US$ millons Source: Soto Baquero 2009. Access to agricultural finance depends on the farmers’ characteristics. Commercial farmers are financed mostly through financial institutions and commercial credit. Commercial banks satisfy approximately 70 percent of commercial farmers’ credit needs. In addition to commercial banks, commercial farmers have arrangements in place to get finance from traders, industry, exporters, and private investors. Semi-commercial or emerging commercial farmers who are integrated into supply chains are financed mainly through commercial credit provided by supermarkets, agro-industry, exporters, input suppliers, or other supply chain agents. Cooperatives and MFIs also have an important role in financing these types of farmers in some countries. The main source of financing for traditional subsistence farmers is informal credit. Several studies document that only 15 to 20 percent of these farmers or households have access to formal credit; thus more than 80 percent of the farmers or households belonging to this group use informal channels in order to get finance (Soto Baquero 2009). Traditional subsistence farmers who are living in extreme poverty have, for the most part, no access to formal credit and rely almost exclusively on public sector support and sources of nonfarm income. 3. Status of agricultural insurance Agricultural insurance has a long history in some countries in the Latin American and Caribbean (LAC) region. The origins of agricultural insurance in Latin America can be traced back to the late nineteenth century in Argentina, where the first foray into agricultural insurance was undertaken by the Sociedad Cooperativa de Seguros Agrícolas y Anexos Ltda. (called El Progreso Agrícola). This cooperative was founded in 1898 by French settlers with the main objective of creating a mutual fund to protect their crops against hail. Cooperatives and mutuals providing crop insurance for hail spread over Argentina and Uruguay in the late nineteenth century and early twentieth century. Immigration from Europe to countries like Argentina, Uruguay, and southern Brazil helped to develop agricultural insurance in the Southern Cone region. European immigrants brought the cooperative and insurance culture with them from their homelands. Agricultural insurance was provided in many LAC countries by public sector insurance companies from the 1950s up to the end of the 1980s. In this period, public sector MPCI (multi-peril crop insurance; see box 3.1 for further information) proliferated in Latin America, often linked to small-farmer seasonal production credit programs (for example, Mexico, Costa Rica, República Bolivariana de Venezuela, Ecuador, and Brazil). Most of these public sector programs performed very poorly, with high operating costs and very high loss ratios, which were exacerbated by very low premium rates and poor management. Most public sector programs were terminated by 1990 on account of their poor results. Table 3.1 presents an analysis of the performance in the 1980s of major public sector MPCI programs in LAC, conducted by Hazell, Pomareda, and Valdes (1992). The results show “producer” combined ratios of between 2.80 for Costa Rica and 4.57 for Brazil. In other words, for every US$1 in premiums, net of subsidies, collected from the producer, the indemnity payouts and administrative costs in these programs amounted to between US$2.80 and US$4.57. A “producer” combined ratio greater than 1.0 indicates that a program, in the absence of any type of government support, would operate at an underwriting loss. 28 ] Agricultural Insurance in Latin America Table 3.1 Financial performance of public sector MPCI in select LAC countries (L+A)/P (ratio A/P (ratio of LP (ratio of losses of losses + administrative Country Period to gross net administrative cost to gross net premium income) cost to gross net premium income) premium income) Brazil (Proagro) 1975–81 4.29 0.28 4.57 Costa Rica 1970–89 2.26 0.54 2.80 Mexico (Anagsa) 1980–89 3.18 0.47 3.65 Source: Hazell, Pomareda, and Valdes 1992. The provision of agricultural insurance through the private sector and public- private partnerships is the current trend in the region. Since the 1990s, governments have promoted agricultural insurance through private commercial insurers, often backed by government financial support, commonly referred to as public-private partnerships (PPPs). In Latin America, new private commercial agricultural insurance was introduced in Ecuador, Brazil, Paraguay, Peru, and Chile during the last decade. Some governments, such as those in Mexico and Peru, are in the process of replacing ad hoc natural disaster compensation programs with ex ante formal crop and livestock insurance programs implemented by the private insurance sector and promoted and supported by government through the provision of premium subsidies or reinsurance protection. Others, however, continue to provide public sector disaster relief (particularly to small and medium enterprises) in addition to subsidized crop insurance (for example, Brazil and Mexico). Agricultural insurance is available in most LAC countries. Agricultural insurance is offered in 18 (72 percent) of 25 countries with an agricultural base within the region. Four groups of countries can be distinguished according to their experience with agricultural insurance. Argentina, Uruguay, and Mexico are the first group, owing to their extensive experience in agricultural insurance. The second group of countries—Chile, the Windward Islands, Brazil, Colombia, Panama, Ecuador, Cuba, and República Bolivariana de Venezuela— have some experience in agricultural insurance. A third group comprises countries that have started their agricultural insurance programs in recent years. This group includes the Dominican Republic, Peru, Paraguay, and most of the Central American countries. The last group consists of countries where agricultural insurance is not currently available, including Belize, Guyana, Suriname, Haiti, Jamaica, and most of the Caribbean Islands. The insurance industry is very active in marketing agricultural insurance products in LAC. Agricultural insurance products are being offered by more than 75 companies in the region (see figure 3.1). The number of insurance companies offering agricultural insurance products varies from country to country. Argentina, with more than 27 insurance companies offering agricultural insurance, is the market leader. A second group comprises Brazil and Mexico, with six and five insurance companies offering agricultural insurance, respectively. A third group comprises Uruguay, Paraguay, and Chile, each with four insurance companies offering agricultural insurance. The fourth group comprises the República Bolivariana de Venezuela, Panama, and Honduras, each with three insurance companies offering agricultural insurance. A fifth group consists of Peru, Nicaragua, El Salvador, Colombia, Ecuador, and Bolivia, each with two insurance companies offering agricultural insurance products. The last group of countries—Costa Rica, the Dominican Republic, Guatemala, and the West Indies—has a single insurance company offering agricultural insurance in each country. Figure 3.1 Insurance companies offering agricultural insurance in LAC Argentina Brazil Mexico Uruguay Paraguay Chile Venezuela Panama Honduras Peru Nicaragua El Salvador Bolivia Ecuador Colombia West Indies Guatemala Dominican Rep. Costa Rica 0 5 10 15 20 25 30 Number of insurance companies offering agricultural insurance Source: Authors. SIzE OF AGRICULTURAL INSURANCE MARkETS AND PREMIUM vOLUMES IN LAC Agricultural insurance in LAC is relatively well developed in comparison with other regions such as Africa and many Asian countries. Total direct agricultural insurance premiums written in LAC during 2009 amounted to US$780 million. The region accounts for 4.0 percent of the total agricultural insurance premiums written worldwide, behind the United States and Canada (accounting for 55.0 percent), Europe (20.1 percent), and Asia (19.5 percent). Map 3.1 shows the regional distribution of agricultural insurance premiums and the position of LAC countries in the global picture. 30 ] Agricultural Insurance in Latin America Map 3.1 Regional distribution of agricultural insurance direct premiums USA & Canada Europe US$ 10,700 Million (55.0%) US$ 3,900 Million (20.1%) Asia US$ 3,800 Million (19.5%) Africa US$ 90 Million (0.5%) Latin America US$ 780 Million (4.0%) Oceana US$ 170 Million (0.9%) Source: Authors’ compilation from data provided by Swiss Re, Hannover Re, Novae Re, and Mahul and Stutley 2010. Agricultural insurance premiums in the region have been growing exponentially in recent years. Direct premiums written for this type of insurance have grown rapidly— from US$311 million in 2003 to an estimated US$780 million in 2009—an increase of more than 250 percent. The increase in total direct premiums is consistent with the global trend. Global direct agricultural insurance premiums grew 220 percent, from US$8.9 billion in 2005 to an estimated US$19.4 billion in 2009. Three main factors have contributed to this growth. The first is the increase in the underlying value of agricultural production, which has been translated directly into higher sum insured values and larger volume of premiums. The second is the increase in the value of agricultural assets, which has also increased the sensitivity of participants in the agricultural value chain to loss and raised their demand for insurance. The third factor is the development of new markets for agricultural insurance and the increase of public sector support, both of which have contributed to an increase in demand and supply. Figure 3.2 shows the evolution of agricultural insurance direct premiums worldwide and in the LAC region for the period from 2005 up to and including 2009. Figure 3.2 Agricultural insurance direct premiums written, 2005–09 Agricultural Insurance Direct Premiums 800 25 Global Premiums (US$ billions) 700 Premiums LAC (US$ millions) 20 600 500 15 400 300 10 200 5 100 0 0 2005 2006 2007 2008 2009 LAC Global Source: Authors’ compilation from data provided by Swiss Re, Hannover Re, and Mahul and Stutley 2010. Agricultural insurance premiums are distributed unevenly among the different agricultural insurance business sublines in the region. Individual-farmer MPCI and named-peril insurance—accounting for almost 76 percent of total premiums written in 2009—are the most developed business sublines of agricultural insurance in the region. Crop and livestock catastrophic insurance—a special business subline of agricultural insurance, which is usually provided by governments—is next, accounting for 13.6 percent of the total agricultural insurance premiums. Livestock insurance accounts for 5 percent of the total volume of premiums; aquaculture and forestry insurance account for 2.9 and 2.6 percent, respectively. Bloodstock and greenhouse insurance are less well-developed business sublines. The distribution of agricultural insurance premiums per business subline is shown in figure 3.3 for 2009. 32 ] Agricultural Insurance in Latin America Figure 3.3 Distribution of agricultural insurance premiums per business subline in LAC, 2009 Agricultural Insurance premium distribution per subline of insurance (2009 figures) Livestock, Aquaculture Forestry catastrophic 2.9% 2.6% 2.0% Greenhouses 0.0% Livestock 5.0% Crop, MPCI 39.4% Crop, named-peril 36.4% Crop, MPCI, catastrophic 11.6% Source: Authors’ compilation from data provided by Swiss Re, Hannover Re, and Mahul and Stutley 2010. Agricultural insurance premiums are distributed unevenly among countries of the region. The three largest agricultural markets (Brazil, Argentina, and Mexico) are also the largest agricultural insurance markets, accounting for 85 percent of total premiums written in the region in 2009. Chile, Paraguay, and Uruguay together account for 10 percent of total premiums written. The remaining 5 percent is distributed among the Andean countries (3 percent), Central American countries (1.4 percent), and the Caribbean countries (0.6 percent). Map 3.2 shows the distribution of the volume of premiums among the LAC countries. In relative terms, agricultural crop, livestock, forestry, and aquaculture insurance were very poorly developed in the Caribbean Islands in 2009. AvAILABILITy OF AGRICULTURAL INSURANCE PRODUCTS The supply of agricultural insurance products in the LAC region is relatively evolved in comparison with other regions. The insurance market is very innovative in developing products to meet the demand. This section describes the main types of agricultural insurance products offered. For a detailed description of the main features of products in each LAC country where agricultural insurance is established, see the annex to this report. Map 3.2 Distribution of agricultural insurance direct premiums in LAC US$ 222 Million US$ 3.4 Million US$ 1 Million US$ 1.8 Million US$ 0.4 Million US$ 0.2 Million US$ 0.05 Million US$ 0.5 Million US$ 0.90 Million US$ 4.5 Million US$ 7.5 Million US$ 1.25 Million US$ 13.6 Million US$ 255 Million US$ 0.02 Million US$ 9.5 Million US$ 188 Million US$ 24.5 Million US$ 43.2 Million Source: Authors’ compilation from data provided by Swiss Re, Hannover Re, and Mahul and Stutley 2010. Crop insurance products Crop insurance is the most developed agricultural insurance business subline in LAC. Crop insurance accounted for 84 percent of the agricultural insurance premiums written in the region in 2009. Crop insurance products can be classified into three major groups: (a) traditional indemnity-based crop insurance products, (b) index-based crop insurance products, and (c) crop revenue insurance products. Key features of these three product lines are summarized in box 3.1. 34 ] Agricultural Insurance in Latin America Box 3.1 Crop insurance products: Indemnity-based and index-based covers Traditional indemnity-based crop insurance products Damage-based indemnity insurance (named-peril crop insurance). Damage-based indemnity insurance is crop insurance where the insurance claim is calculated by measuring the percentage damage in the field, soon after the damage occurs. The percentage damage measured in the field, less a deductible expressed as a percentage, is applied to the agreed sum insured. The sum insured may be based on production costs or on expected crop revenue. Where damage cannot be measured accurately immediately after the loss, the assessment may be deferred until later in the crop season. Damage-based indemnity insurance is best known for hail, but is also used for other named perils (such as frost, excessive rainfall, and wind). Yield-based crop insurance (MPCI). Yield-based crop insurance is insurance where an insured yield (such as tons per hectare) is established as a percentage of the historical average yield of the insured farmer. The insured yield is typically between 50 and 70 percent of the average yield on the farm. If the realized yield is less than the insured yield, an indemnity is paid equal to the difference between the actual yield and the insured yield, multiplied by an agreed value of sum insured per unit of yield. Yield-based crop insurance typically protects against multiple perils, meaning that it covers many different causes of yield loss. Index-based crop insurance Area-yield index insurance. With area-yield index insurance, the indemnity is based on the realized (harvested) average yield of an area such as a county or district. The insured yield is established as a percentage of the average yield for the area and typically ranges from 50 percent to a maximum of 90 percent of the average yield for the area. An indemnity is paid if the realized average yield for the area is less than the insured yield regardless of the actual yield on a policyholder’s farm. This type of index insurance requires historical data on area yield as a basis for establishing the normal average yield and the insured yield. Weather index insurance. Weather index insurance is insurance where the indemnity is based on realizations of a specific weather parameter measured over a specified period of time at a particular weather station. The insurance can be structured to protect against index realizations that are either so high or so low that they are expected to cause crop losses. For example, the insurance can be structured to protect against either too much or too little rainfall. An indemnity is paid whenever the realized value of the index exceeds a specified threshold (for example, when protecting against too much rainfall) or when the index is less than the threshold (for example, when protecting against too little rainfall). The indemnity is calculated based on an agreed sum insured per unit of the index (for example, U.S. dollars per millimeter of rainfall). Crop revenue insurance Under crop revenue insurance, the insurer guarantees the policyholder a certain level of revenue to be obtained from the insured crop. This insurance coverage protects the policyholder from eventual shortfalls in the yield of insured crops and also from adverse movements in their price. Under crop revenue insurance, the guaranteed yield can be determined, either as a percentage of the producer’s past production or as a percentage of the average yield of the region where the insured farm is located. The guaranteed price can be either the future market price for the crop for the month of harvest or the strike price of a base price option. If the actual revenue received by the producer, which is given by the product of the actual yield and the spot market price at the time of harvest, is less than the guaranteed amount, the insurer will pay the difference. Source: Authors. Indemnity-based crop insurance products The main feature of indemnity-based crop insurance products is that payouts are based on the actual loss incurred by the policyholder. Traditional indemnity-based insurance products include (a) damage-based indemnity policies, which include, in their simplest form, single-peril hail insurance and named-peril crop insurance, and (b) loss-of- yield indemnity policies, including MPCI cover for a yield shortfall. Yield-based MPCI is the most common type of crop insurance marketed in the LAC region. Yield-based MPCI products accounted for 39.4 percent of total agricultural insurance premiums written in the LAC region in 2009. With the exception of Nicaragua and the Windward Islands, yield-based MPCI products are offered in all countries in the region where agricultural insurance is available. Brazil and Mexico are among the countries where MPCI has reached the most advanced levels of development. The area insured under MPCI is approximately 6.4 million and 1.9 million hectares for Brazil and Mexico, respectively. Other countries with relatively high development of MPCI are Chile, República Bolivariana de Venezuela, Panama, and Paraguay. MPCI has yet to be adopted widely in many Central American countries. In Argentina and Uruguay yield-based MPCI is not popular among farmers, and this insurance product is purchased almost exclusively by big agribusiness firms, usually on an aggregate basis for all the crops and locations in which they have interests. Aggregate yield-shortfall MPCI is specifically designed to be tailored at the meso level or macro level. An interesting variation of yield-based MPCI policies that is quite popular in some LAC countries is the aggregate yield-shortfall MPCI policy known in Spanish as seguro catastrófico con ajuste de rendimientos. Aggregate yield-shortfall MPCI policies are purchased by state or local governments to get funding to assist farmers, in case one or more events severely affect crop production in the region where they occur. Aggregate yield-shortfall MPCI policies share a feature with area-yield index-based insurance in that the insured unit is a geographic area rather than the individual farm. However, aggregate yield-shortfall MPCI policies are not considered index insurance because they involve in-field loss adjustment (on a sampling basis) in order to determine the eventual yield shortfalls. Aggregate yield-shortfall MPCI policies are popular in Mexico, where approximately 8 million hectares of crops are insured under this modality. In Peru almost 100 percent of the total insured area in the country (approximately 500,000 hectares) is insured under aggregate yield-shortfall MPCI policies. Colombia has recently implemented an aggregate yield-shortfall MPCI scheme to protect banana production in the Department of Quindio. Global portfolio MPCI is designed specifically for well-diversified large-size agribusiness firms. Global portfolio MPCI has the same principles and operation as the traditional yield-based MPCI coverage. However, global MPCI coverage has several particular 36 ] Agricultural Insurance in Latin America features. First, the insured unit in a global MPCI portfolio, rather than being defined for crop and location, as traditional yield-based MPCI, covers all the crops and locations where the insured has an interest. Second, global portfolio MPCI, rather than insuring individual crop yields, insures a monetary amount usually linked to the investment cost incurred by the insured in the locations and crops in which it has an interest. Third, the indemnity condition is defined as the revenue obtained by the insured (value at agreed prices for each insured crop at the inception of the insurance policy) from all the crops and locations defined in the insured unit falling short of the insured monetary amount. Fourth, if the indemnity condition applies, the insured receives from the insurance company an indemnity equal to the amount by which the actual revenue obtained on the insured unit falls short of the insured monetary amount. The main advantage of the global portfolio MPCI is that it recognizes the risk diversification of agricultural producers. The main drawback is that it is resource intensive for insurers, which have to perform income appraisals in the insured units. The insured units in a global portfolio MPCI usually comprise several locations (in some cases more than 50 locations) distributed throughout a country. The producer’s income is determined by the aggregate yields of the insured crops in numerous locations. The insurer indemnifies the insured for the shortfall in aggregate income and must visit, if not all, a representative number of locations to estimate the yields. Owing to the resources that insurance companies have to deploy in order to manage global portfolio MPCI, the transaction costs involved in its operation are high. For this reason, insurance companies tend to offer global portfolio MPCI exclusively to large operations that involve large-scale and well-diversified agribusiness firms. Global portfolio MPCI is very popular among firms in Argentina, Uruguay, Paraguay, and Brazil. Individual-grower named-peril damage-based crop insurance is the second most popular type of crop insurance in the region. Named-peril crop insurance products accounted for 36.4 percent of total agricultural insurance premiums written in the region in 2009. This type of crop insurance policy adopts a percentage damage basis of insurance and indemnity and is marketed mainly in Argentina, Uruguay, and southern Brazil, where, owing to the temperate climate, agricultural production faces appreciable hail and frost exposures, which are suited to named-peril insurance. In these countries, the insurance industry has a long tradition of offering individual-grower named-peril crop insurance for annual crops (mainly wheat, barley, soybeans, maize, and sunflower) and fruit production. Hail insurance is the main type of agricultural insurance in Argentina and Uruguay, accounting for more than 95 percent of total written premiums; in southern Brazil, it is the main type of insurance for fruit production, where it accounts for approximately one-third of total premiums written in Rio Grande do Sul, Santa Catarina, Paraná, and São Paulo states. The basic and most popular coverage within individual-grower named-peril crop insurance is hail plus fire. In addition to basic coverage, other perils such as freeze, excess rain, and excess wind are also offered on a select basis, depending on the insured crop and the location of the farm. Index-based crop insurance products Index-based crop insurance products are promising for LAC. Rather than basing payouts on actual crop losses suffered by the insured as consequence of an event (or events) covered under the insurance contract, index-based crop insurance products base payouts on the measurements of an underlying variable selected as an index during a certain period of time under certain agreed preconditions. Crop index insurance includes three main types of product: area-yield index insurance, crop weather index insurance, and NDVI (normalized dry vegetative index)/satellite index insurance, which has been applied to pasture in a few countries. Index-based crop insurance is not a new product in LAC. The introduction of index- based crop insurance in Latin America dates back to the late 1990s. Area-yield index-based crop insurance for the main annual crops in the Pampas region and weather index crop insurance to cover frost in the production of apples and pears were introduced in Argentina in the late 1990s. Both programs were discontinued in the early 2000s due to lack of demand. Almost simultaneous with the introduction of index-based insurance in Argentina, area-yield index-based crop insurance was introduced in Brazil to protect maize farmers in the southern state of Rio Grande do Sul. This program was renewed until 2009 and subsequently discontinued. Since 2000, several attempts have been made to introduce weather index-based crop insurance products in the LAC region.6 Unfortunately, most of these attempts never came to fruition, and most of the policies written were discontinued after a few renewals. Currently there are few examples of index-based crop insurance in the region, and most of them have not reached sufficient volumes. The only example of successful implementation of weather index-based insurance is in Mexico, where it has been written to protect a government catastrophic fund to assist farmers affected by natural calamities (Program to Assist Climatologic Contingencies, PACC, formerly known as the Fund for Agricultural Calamities, FAPRAC) since 2003. In addition to the introduction of weather index-based crop insurance, an NDVI crop insurance scheme was introduced in 2006. As of 2009, approximately 2.3 million hectares were insured under the weather index-based crop insurance program, and 3.5 million livestock equivalent units were insured under the NDVI insurance program in Mexico. 6 Argentina (2003 and 2005), Chile (2003), Uruguay (2003), Bolivia (2006 and 2007), Peru (2005 and 2008), Nicaragua (2005), and Mexico (2003 and 2006). 38 ] Agricultural Insurance in Latin America Crop revenue insurance products Crop revenue insurance represents the most recent innovation in agricultural insurance. This insurance coverage protects the policyholder from shortfalls in yield of the insured crop (MPCI) and also from adverse movements in the price of the insured crop. Currently, no crop revenue insurance programs are in place in the region. However, the industry is undertaking several activities in the field of product research and development for this type of coverage in Argentina and Mexico. According to consultations with the insurance and reinsurance industry, the main challenge facing the implementation of crop revenue insurance in LAC is the lack of local commodity futures markets with enough open interest for the forward positions that would have to be taken by the insurance industry to implement this type of product. Livestock insurance products Livestock insurance is a very small segment of the market in LAC. Livestock insurance provides products to cover horses, mares, colts, fillies, and foals; bulls, cows, and heifers; swine; sheep; goats; dogs; and occasionally wild animals. The market accounted for 7 percent of total agricultural insurance premiums written in LAC during 2009. There are three basic types of livestock insurance products: (a) traditional animal accident and mortality cover; (b) epidemic disease cover; and (c) livestock index mortality products (see box 3.2). Box 3.2 Types of livestock insurance products Traditional livestock insurance Named-peril accident and mortality insurance for individual animals is the basic traditional product for insuring livestock. The cover includes death against natural perils such as fire, flood, lightning, and electrocution, but normally excludes diseases and specifically epidemic diseases. Premiums are set based on normal mortality rates within the permitted age range, plus risk and administrative margins, and are generally quite expensive. Furthermore, mortality is, to a considerable extent, influenced by management, and the product suffers from adverse selection by the highest-risk farmers. Herd insurance is a variation on individual animal mortality cover for larger herds. A deductible is introduced, where a certain number of animals, or a percentage of the total number of animals, must be lost before an indemnity is paid. All-risk mortality insurance including diseases is provided in some countries to large commercial farms that can demonstrate high levels of animal husbandry and control over animal diseases. Such covers are normally offered for high-value bloodstock or for herd insurance. Epidemic disease insurance is offered in only a few countries, notably Germany. Insurance of government-ordered slaughter or quarantine is normally excluded. Epidemic disease insurance carries major and infrequent exposure to catastrophic claims necessitating a high reliance on reinsurance for risk transfer. Due to the difficulties of modeling the spread of epidemic disease and financial exposures, it is difficult to develop this type of insurance and to obtain support from international reinsurers. Index livestock insurance Area-yield index insurance for livestock has been applied for mortality risk in Mongolia (under an area-mortality index scheme), where livestock losses are highly correlated with an extreme weather event (dzud) for which a weather index could not be built (combination of low temperature, dry conditions, snowfall, and so forth). NDVI and satellite insurance are constructed using time-series remote-sensing imagery—for example, applications of false color infrared waveband to pasture index insurance—where the payout is based on a normalized dry vegetative index that relates moisture deficit to pasture degradation. Source: Authors. Livestock insurance is offered by the private insurance industry in several countries of the region. Named-peril accident and mortality insurance is available in Argentina, Uruguay, Brazil, Peru, Ecuador, Colombia, República Bolivariana de Venezuela, Panama, Costa Rica, Honduras, El Salvador, Guatemala, and Mexico. In some of these countries, basic accident and mortality coverage is complemented with coverage for specific diseases, theft, inland transportation, and acts of terrorism on a very limited basis. The supply of insurance coverage for epidemic diseases is very limited. Epidemic disease insurance provides coverage only in excess of the livestock health prevention plans sold in the country. So far the regional experience with epidemic disease insurance is limited to Mexico and Argentina. Mexico used to have classical swine fever (CSF) livestock insurance coverage, which was purchased for 9.1 million head of swine. The CSF policy indemnified against mortality and compulsory slaughter ordered by the Ministry of Agriculture in the event of a CSF outbreak. The policy 40 ] Agricultural Insurance in Latin America was only offered in states that were declared free of CSF. In Argentina, the National Service of Animal Health (SENASA) used to have an insurance program that covered this institution against the cost it would have to assume as a result of ordering the compulsory slaughter of cattle due to the occurrence of an outbreak of foot and mouth disease. Aquaculture insurance products Aquaculture insurance, including off-shore marine and on-shore freshwater aquaculture insurance for fish stock, crustaceans, and shellfish, is an important business subline of agricultural insurance in some countries of the region. Aquaculture insurance premiums accounted for 2.9 percent of total agricultural insurance premiums written in the region in 2009. Aquaculture insurance is offered in Mexico, Chile, Brazil, Colombia, Peru, Ecuador, Panama, Costa Rica, and Honduras. The main markets for aquaculture insurance are Chile and Mexico. Aquaculture insurance has been offered in Chile since the mid-1990s, accompanying the boom of the salmon industry, which is dominated by medium to extremely large multinational companies with investments in fish farming worth hundreds of millions of U.S. dollars. Aquaculture insurance policies in Chile provide very broad named-peril cover against the loss of installations (fish cages and nets), equipment, and fish stock. Insured perils include storms, tidal waves, strong currents, red tides (algae), diseases, attacks by predators, and theft, among others. For several years Mexico has operated an integrated loss-of-investment-cost policy with final adjustment according to harvested yield for shrimp and tilapia production. The Mexican policy provides comprehensive protection against loss of biomass due to climatic risks, biological risks (diseases), and risks related to environmental contamination and chemical pollution. Forestry insurance products Forestry insurance provides traditional named-peril indemnity insurance against fire and allied perils affecting standing timber production. Forestry insurance products are targeted at commercial forestry plantations. The product is not available in the market for noncommercial forestry, and natural forestry is covered on a very restricted basis. Typical perils covered under forestry and standing timber policies are fire, civil commotion, riot, and allied perils including wind, flood, volcanic eruption, avalanche, frost, snow, and tsunami. In a few countries, such as Brazil, forestry insurance also covers drought, hail, and heat wave. The valuation of standing timber for insurance purposes is often based on the investment and maintenance costs up to the point where the trees can be harvested for timber, following which the valuation is based on the commercial value of the standing timber. Due to problems arising from moral hazard issues, coverage is subject to the application of insurance deductibles per event, which are normally equivalent to 10 percent of the loss subject to a minimum monetary amount on each and every loss. Owing to issues arising from risk accumulation, forestry insurance policies typically carry limits on first-loss annual aggregate indemnity.7 Forestry insurance is a well-developed agricultural insurance business subline in the Southern Cone countries. Forestry insurance, which accounts for 2.9 percent of the total agricultural insurance premiums in LAC, is available in Chile, Uruguay, Argentina, Brazil, Costa Rica, Mexico, Ecuador, and Colombia. In Chile and Uruguay more than 80 percent of the commercial forest area is insured. Brazil and Argentina have significant potential to develop this business subline. Bloodstock insurance products Bloodstock insurance is an agricultural insurance business subline that provides cover for high-value animals, mainly horses. Bloodstock insurance is a minor agricultural insurance business subline in the region, accounting for less than 1 percent of agricultural premiums written. The main markets for bloodstock insurance are Brazil and Mexico, but coverage is also offered in Argentina, Uruguay, Chile, Ecuador, Colombia, and República Bolivariana de Venezuela. Under a bloodstock insurance policy, the animals are insured either on an individual basis or collectively, such as a stable of horses. The insured events include mortality, disability, infertility, medical treatment, and surgery. The sum insured is based on the market value of the animal. The market value is determined by the prizes that the animal has won or the present value of the future prizes that it could potentially win. Any matter that adversely affects the animal’s capacity to win prizes will affect its market value and can result in excess insurance. To deal with the potential source of moral hazard, it is common practice among bloodstock insurers to insure high-value animals for only a portion of their market value. The geographic distribution of the availability of agricultural insurance products in each of the LAC countries is represented in the map 3.3. 7 Indemnity limit is a contract provision used in insurance to limit the amount that can be paid in the policy period. An ag- gregate limit is the maximum dollar amount an insurer will pay to settle claims. Often the limit is referred to as an annual aggregate limit, which is the total amount the insurer will pay in a single year. 42 ] Agricultural Insurance in Latin America Map 3.3 Agricultural insurance products in LAC Named-Peril Crop Insurance Multiple-Peril Crop Insurance (MPCI) Livestock Insurance Aquaculture Insurance Forestry Insurance Weather Index-based Crop Insurance NDvI Index-based Insurance Area-yield Index-based Crop Insurance Source: Authors. MODELS AND CHANNELS OF DELIvERy The most traditional channel for delivering agricultural insurance to farmers in the region consists of insurance brokers. Insurance companies rely on insurance brokers because they usually do not have a network in the countryside for marketing agricultural insurance. In some countries such as Argentina, Chile, Mexico, and Brazil insurance brokers have reached a high degree of specialization in delivering agricultural insurance. In countries like Argentina, a single specialized agricultural insurance broker can manage portfolios of up to US$15 million in premiums. In Chile, insurance brokers have reached high degrees of specialization in forestry and aquaculture insurance. Sales agents are also an important delivery channel, in particular, when agricultural insurance is provided by cooperatives or state-owned insurance companies, which usually have a well-established branch network of sales agents in the countryside. The delivery of agricultural insurance through financial institutions is also very important in some countries of the region. In Brazil, Alliança do Brasil—an insurance company linked to Banco do Brasil—has the single largest agricultural insurance portfolio in LAC (approximately US$150 million in premiums), which is linked to rural credit and is delivered to farmers solely through Banco do Brasil branches. COST OF AGRICULTURAL INSURANCE PROvISION IN LAC The provision of agricultural insurance in LAC countries is expensive in comparison with other regions. According to a sample of 11 LAC countries extracted from the survey performed by Mahul and Stutley (2010), average total expenses incurred by the insurance sector in the provision of agricultural insurance in LAC in 2007 accounted for approximately 29 percent of the total original gross agricultural insurance premiums. The total expenses for the provision of agricultural insurance in LAC are estimated to be 11 percent higher than average expenses in other regions for the same year: 26 percent of the original gross agricultural insurance premiums. Total expenses for the provision of agricultural insurance can be divided into three categories: marketing and acquisition costs (including commissions paid to agents and brokers); insurers’ administrative and operating (A&O) expenses; and, where appropriate, the expense load added to cover loss adjustment expenses (LAE). In LAC countries A&O expenses are divided as follows: 8.4 percent for marketing and acquisition costs; 12.4 percent for administration; and 8 percent for LAE. Average expenses of about 25 percent of the original gross premiums for agricultural insurance are not considered excessive, and these conform to the ceding commission levels that reinsurers are usually prepared to grant on quota share treaty business. Figure 3.4 summarizes the costs of providing agricultural insurance in 11 LAC countries in 2007. 44 ] Agricultural Insurance in Latin America Figure 3.4 Crop insurance acquisition expenses, A&O expenses, and LAE in LAC countries, 2007 Total Expenses prior to Taxes as % of OGP Costa Rica Chile Ecuador Venezuela, RB Average Mexico Dominican Republic Nicaragua Argentina Honduras Brazil Windward Islands 0% 10% 20% 30% 40% 50% 60% Percentage of the original gross premiums Source: Mahul and Stutley 2010. AGRICULTURAL REINSURANCE IN LAC Agriculture reinsurers play an active role in LAC agricultural insurance markets. Approximately 65 percent of the total direct written premiums for agricultural insurance in the region are ceded to the reinsurance market. The agricultural reinsurance market is dominated by a small group of reinsurers, which have units that specialize in agricultural reinsurance. Munich Re, Swiss Re, Hannover Re, SCOR, Aspen Re, Mapfre Re, Partner Re, XL Re, and some Lloyd’s syndicates (among others, Catlin Re and Novae Re) participate actively in reinsuring agricultural business. Public sector reinsurers play a very important role in the provision of agricultural reinsurance in some LAC countries, such as in Brazil (Brazilian Reinsurance Institute) and Mexico (Agroasemex). Agricultural risks in the region are ceded to reinsurers using different types of reinsurance agreements and different forms of reinsurance cession. The most common agreement for agricultural reinsurance in the region, accounting for 85 percent of the ceded premium, is the automatic reinsurance treaties.8 Facultative agreements9— accounting for 15 percent of total premiums—are also popular, in particular, for start- 8 Automatic reinsurance is an automatic reinsurance treaty specifying that the ceding company is contractually obligated to cede risks to a reinsurer on specified blocks of policies where the risks meet the ceding company’s underwriting criteria and provisions of the reinsurance agreement. 9 Facultative reinsurance is optional (not a contractual obligation) and allows a reinsurer the opportunity to analyze and separately underwrite a risk before agreeing to accept it. up operations or in the reinsurance of aquaculture and forestry insurance. Quota share reinsurance cessions10 and stop-loss reinsurance protections,11 accounting for more than 95 percent of total agricultural reinsurance cessions, are the most common forms of reinsurance. For aquaculture and forestry reinsurance, surplus share cessions and catastrophic excess-of- loss protections are common. The magnitude of agricultural reinsurance cessions varies from country to country. The level of agricultural insurance cessions to the reinsurance market in any particular country depends on the type of agricultural risks written and the financial strength of the insurance market. The types of agricultural risks written by the insurance companies have a great influence on their reinsurance strategy. Agricultural insurance portfolios that are exposed to systemic risks show higher cession rates than those that are exposed to non systemic risk. For instance, in countries such as Brazil or Paraguay, where agricultural insurance portfolios are composed mainly of MPCI policies, reinsurance cessions for agricultural insurance can be as high as 80 percent. In other countries, such as Argentina and Uruguay, where the main agricultural peril written by the insurance companies is hail, levels of reinsurance cessions are below 50 percent. The market level of expertise in agricultural insurance also has a huge influence on the reinsurance strategies of insurance companies. The financial strength of the local insurance market has a significant influence on the level of agricultural insurance risk cessions to reinsurance. In countries where the insurance market is relatively weak, the use of insurance fronting is a common practice;12 however, agricultural reinsurers are reluctant to provide reinsurance capacity to fronting insurance companies and do so only for very particular cases and under facultative agreements where they can control the underwriting and loss adjustment process. Reinsurance capacity, as long as the insurance proposals are technically sound, is widely available in the LAC region. Crop hail and named-peril crop insurance programs have adequate reinsurance capacity because this business is not subject to catastrophic losses. On the contrary, since the reinsurers are trying hard to reinsure crop hail named-peril portfolios and insurance companies want to retain more of this type of business, the market enjoys overcapacity, which is reflected in the high commissions that reinsurers have to pay to get named-peril quota share treaties. Accessing reinsurance capacity is not as simple for MPCI business, although it is available, as it is for crop hail named-peril business. Many international reinsurers operating in LAC are averse to underwriting MPCI for individual growers because 10 Quota share reinsurance is an agreement whereby the ceding company is bound to cede and the reinsurer is bound to ac- cept a fixed proportion of every risk accepted by the ceding company. The reinsurer shares proportionally in all losses and receives the same proportion of all premiums as the insurer, less commission. 11 Stop-loss reinsurance protection is a non proportional type of reinsurance, where the reinsurer agrees to pay the reinsured for losses that exceed a specified limit, arising from any risk or any one event. 12 In insurance fronting, a local insurer typically insures the risk in its own name and then reinsures anything up to 100 percent of its liability with a reinsurance company. The contract remains with the local insurer, although, in practice, the settlement of claims is controlled by the reinsurers. 46 ] Agricultural Insurance in Latin America the exposure to systemic risks, such as drought and flood, can accumulate over wide regions, resulting in catastrophic losses. The reinsurers writing MPCI business in the region are deeply involved in defining the terms and conditions of coverage and the conditions for rating, underwriting procedures, loss adjustment, and risk accumulation controls. In order to access reinsurance capacity for MPCI, an insurance company must meet, at least, the following conditions: (a) have a minimum net retention, which is usually not less than 10 percent of total liability; (b) have an in-house agricultural insurance underwriter with a professional background in agriculture sciences and proven experience in agricultural insurance; and (c) have well-defined criteria for MPCI underwriting and loss adjustment, including the corresponding procedural manuals. Accessing basic animal mortality reinsurance capacity in LAC is not a serious issue for the insurance companies. However, if reinsurance capacity is needed for nontraditional livestock coverage such as diseases, theft, terrorism, or epidemic diseases, the lack of reinsurance capacity to cover such perils may be a serious issue. Access to reinsurance capacity for aquaculture and livestock, although available, is very limited and subject to strict terms and conditions. The role of agricultural reinsurers in the region is not limited to providing reinsurance capacity for insurance companies. In the context of the agricultural insurance market in Latin America, the reinsurance industry requires services that go beyond the provision of financial capacity. Reinsurers involved in agricultural reinsurance in the region usually assist insurance companies by providing advisory services in risk assessment, risk modeling, pricing, and risk structuring as well as in the design of loss adjustment and operational manuals, risk rating and risk accumulation control software, and the wording of insurance contracts. PUBLIC SECTOR SUPPORT TO AGRICULTURAL INSURANCE IN LAC The public sector has an active role in supporting agricultural insurance in the region. In most of the LAC countries in which agricultural insurance products are available, there is some form of public sector support for agricultural insurance. Out of the 18 countries where agricultural insurance is currently available, 16 (89 percent of the total) have some form of public sector support for agricultural insurance, including government-financed premium subsidies. In 2009 the fiscal cost of support—government premium subsidies and government purchase of catastrophic coverage—amounted to US$326 million, accounting for 42 percent of the total agricultural insurance premiums written that year. Brazil and Mexico have the highest levels of public sector support. Total government expenditures on support for agricultural insurance in these two countries amounted to US$294 million, accounting for 90 percent of total central government expenditures on support for agricultural insurance in LAC. The reasons for public sector involvement in agricultural insurance markets are varied. In this regard, the public sector often justifies its intervention in agricultural insurance by pointing to (a) the absence of insurance infrastructure in rural areas and the absence of private sector agricultural insurance services; (b) the prohibitively high start-up costs in developing agricultural insurance products; (c) the constraints on the capacity of reinsurance to underwrite the systemic risk in agricultural production; (d) the high administrative costs of underwriting agricultural insurance; and (e) farmers’ affordability issues, which arise out of the often high costs of agricultural insurance premiums. The range of institutional models for the provision of agricultural insurance is wide in LAC countries. The pure market-based model, under which private sector commercial insurers, normally backed by private reinsurers, compete for underwriting agricultural insurance with low or no assistance from government, is observed in Argentina, Uruguay, Paraguay, and República Bolivariana de Venezuela. Different forms of public- private partnership arrangements for the provision of agricultural insurance are observed in the LAC region. A comprehensive PPP model for agricultural insurance is an arrangement under which the private sector commercial insurers have to comply with strict criteria in the design of insurance policies and rating in order to qualify for public sector support. In most of the agricultural insurance PPPs implemented in the LAC region, the public sector supports agricultural insurance policies based on nonstandardized rating and loss adjustment criteria. In Chile a national entity, the Comité de Seguro Agrícola (COMSA), is in charge of approving the insurance policies and the rates eligible for government-subsidized agricultural insurance premiums. Fully intervened models, under which a national or parastatal insurance company has the monopoly or a special regulatory framework exists for the provision of agricultural insurance, have almost disappeared from the region. Notwithstanding, national or parastatal insurance companies provide agricultural insurance in several countries (Nicaragua, Uruguay, Costa Rica, Panama, and the Dominican Republic); these insurance companies are providing agricultural insurance under the same conditions as private insurance companies. The only fully intervened models in the region, although they are pseudo-insurance programs, are PROAGRO (Brazilian Guarantee Program) and SEAF (Insurance for Family Agriculture) in Brazil. Box 3.3 presents a simplified representation of the various models for the provision of agricultural insurance. 48 ] Agricultural Insurance in Latin America Box 3.3 Models of government support to agricultural insurance  Normally High Penetration (compulsory)  Well Diversified Portfolios  Social over Technical criteria  Monopoly. Issues with the service  Government assumes full liability LEVEL OF GOVERNMENT INTERVENTION  High Fiscal Cost Fully  High Penetration Intervened  Well Diversified Portfolios  Technical over commercial criteria System  Competition for service  Government adds stability to the system  Private Sector adds know how  Reasonable Fiscal Cost  Low to moderate penetration Public–Private  Low risk diversification Partnership  Commercial over technical criteria  Competition for price Pure  No fiscal cost Market Based NUMBER OF PLAYERS & PRODUCT DIVERSIFICATION Source: Iturrioz 2009. The public sector mechanisms to support the development of agricultural insurance vary among the LAC countries. The type of public sector support for agricultural insurance adopted across the region depends on the objectives for the agricultural sector, the type of risks faced in agricultural production, the type of farmers, the degree of development of the local insurance industry, and the fiscal constraints of the country. Basically, five main mechanisms of public sector support for agricultural insurance are present in LAC countries: (a) funding of premium subsidies, enabling the policy and regulatory framework for the development of agricultural insurance, (b) research and development of agricultural insurance products, (c) provision of agricultural insurance and reinsurance, (d) direct purchase of agricultural insurance by governments, and (e) the setup of specific agricultural insurance programs targeted to small and marginal farmers. These mechanisms are not mutually exclusive, and several countries have introduced a combination of them. Map 3.4 shows a synoptic representation of the current status of government support. Map 3.4 Current status of government support for agricultural insurance in LAC US$ 145 Million US$1.3 Million US$ 4 Million US$ 5.4 Million US$ 2.3 Million US$ 13.5 Million US$163 Million Research & Development Legal & Regulatory Framework Premium subsidies and insurance Public sector participation as reinsurer US$ 2 Million US$ 3.5 Million US$ 5 Million Note: Figures include Federal Government support and State/Provincia Government Support Source: Authors. Public sector agricultural insurance technical support units are present in several LAC countries. Technical support units promote and assist the development of agricultural insurance markets. They perform diverse activities, such as gathering the basic information needed to develop agricultural insurance, assessing the risks for different agricultural activities in different areas of the country, developing products to assist farmers and the industry in risk management, and developing agricultural insurance products (such as crop and/or weather risk maps). They are also involved in gathering and processing information, conducting agricultural risk assessments, developing agricultural insurance products, and creating farmer awareness education and training. Public sector technical support units are 50 ] Agricultural Insurance in Latin America established in Uruguay, Argentina, Chile, Brazil, Paraguay, Peru, Ecuador, Panama, Nicaragua, Honduras, Mexico, and the Dominican Republic. Premium subsidies are a common mechanism used by the public sector in the LAC region to support the development of agricultural insurance. Brazil, Mexico, Chile, Peru, Colombia, Costa Rica, Ecuador, and the Dominican Republic have agricultural insurance premium subsidies in place, albeit with different levels of support. Argentina and Uruguay provide premium subsidies for specific crop insurance programs. Several countries, including Brazil and Chile, cap the amount of premium subsidies that any one farmer can receive. This measure is designed to prevent large farmers from capturing a disproportionate share of the budget for premium subsidies available each year. Other countries, such as Costa Rica, offer higher premium subsidies to small and marginal farmers than to larger farmers. The total amount of agricultural insurance premium subsidies in LAC, including subsidies provided by local state governments, amounted to US$228 million in 2009, accounting for 29.4 percent of total direct premiums written. The premium subsidies are not distributed evenly across the various types of products. While crop insurance receives more than 92 percent of total premium subsidies in LAC, livestock insurance receives only 7 percent. The participation of other business sublines of agricultural insurance in total subsidies is minimal. Only a few countries (Brazil, Mexico, and Peru) subsidize livestock insurance, while only Brazil subsidizes forestry insurance. The public sector in many LAC countries has an active role in enabling the legal and regulatory framework to promote agricultural insurance. With the exception of Bolivia and the Windward Islands, none of the LAC countries has enacted a specific law for agricultural insurance. However, many LAC countries have enacted specific laws directed toward creating mechanisms and supporting agricultural insurance. These countries include Chile, Colombia, Panama, Mexico, Costa Rica, Nicaragua, and the Dominican Republic. Direct intervention of the public sector in the provision of agricultural insurance is rare in LAC. The provision of agricultural insurance through state-owned insurance companies is observed only in Uruguay, Panama, Costa Rica, Nicaragua, and the Dominican Republic (the latter is a joint venture with the private sector). With the exception of AGRODOSA (Aseguradora Agropecuaria Dominicana) in the Dominican Republic, an institution that was created exclusively for the provision of agricultural insurance, most of the public sector insurance companies in LAC do not exclusively provide agricultural insurance. The trend is that public sector direct interventions in agricultural insurance markets are disappearing. Currently, the state-owned insurance and reinsurance companies in the region compete on equal terms and are subject to the same legal framework as the privately owned insurance and reinsurance companies. Public sector participation in the reinsurance of agricultural insurance portfolios is rare in the region. Public sector participation in reinsuring agricultural insurance portfolios is observed in Mexico, Costa Rica, and Brazil. In Mexico the public sector provides agricultural reinsurance through Agroasemex, the state-owned insurance and reinsurance company. The role of Agroasemex has changed over time. Originally active in the provision of agricultural insurance, Agroasemex now provides reinsurance for private insurance companies, the small farmer mutual crop and livestock insurance schemes (fondos de aseguramiento rural), and the state governments under the PACC program, which involves a series of macro- or state- level parametric and nonparametric insurance schemes as well as the development of new agricultural insurance products. In Brazil, until 2007, the Brazilian Reinsurance Institute (IRB) had monopoly control over all reinsurance in Brazil; it provided quota share protection to local insurers and retroceded the greater share to specialist international reinsurers. Finally, in Costa Rica, INS (Instituto Nacional de Seguros, the public insurance company) used to have private reinsurance, but is currently not being reinsured, and thus the public sector acts as reinsurer of last resort. The creation of PPPs for the provision of risk financing for catastrophic agricultural risk is a new trend in the region. The Brazilian government has just enacted a law creating the Fundo de Catastrofe Rural (FCR). The FCR is a public-private partnership that includes the government of Brazil, the private insurance sector, local and international reinsurers, agro-industries, and cooperatives. Its objective is to create mechanisms to cap the potential losses faced by insurers due to their agricultural insurance portfolio. This measure aims to increase the confidence of the insurance and reinsurance industries and encourage them to write agricultural business in risky geographic areas and for risky crops not included in their agricultural insurance portfolios. The FCR’s budget is estimated initially at US$2.3 billion. The public sector has an important role in purchasing agricultural insurance to transfer catastrophic agricultural risks from traditional subsistence and semi- commercial agricultural producers to external markets. Several state governments in the region used to purchase macro- or state-level insurance coverage—catastrophic agricultural insurance (seguro agropecuario catastrófico)—in order to use the insurance payouts to assist small and marginal farmers affected by catastrophic events. Catastrophic agricultural insurance is offered as both a traditional and an indexed agricultural insurance product. Currently, more than 8.5 million hectares and 4.5 million animal units13 in the region are insured under catastrophic insurance policies purchased by governments. Total direct agricultural insurance premiums due to catastrophic insurance amount to US$111 million (14.2 percent of total direct agricultural insurance premiums in the region). 13 Animal units are as follows: 1 cattle unit = 1 equine unit, 5 ovine units, 6 goat units, 4 swine units, 100 poultry units, or 5 hive units. 52 ] Agricultural Insurance in Latin America Subnational governments have an active role in purchasing agricultural insurance in Mexico, Peru, Argentina, and Colombia. Mexico is leading the way in implementing macro-level market-based insurance in the region. Catastrophic insurance coverage has been offered to state governments since 2003. The federal and state governments assume the cost of catastrophic agricultural insurance. In risk-prone areas, the federal government bears 90 percent of the cost of the premium, while the state government bears 10 percent. In medium- or low-risk areas, the federal government bears 70 percent of the cost of the premium, while the state government bears the remaining 30 percent. In 2009 the government of Mexico, through the Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación (SAGARPA), spent US$96.9 million on purchasing catastrophic agricultural insurance to assist small and marginal farmers in the country. In Peru, macro-level catastrophic crop insurance products are implemented in five departments. The government of Peru is spending approximately S/.40 million (Peruvian nuevo soles, US$13.6 million) annually on catastrophic crop insurance products to assist small and semi-commercial farmers. Colombia is in the initial stages of developing catastrophic crop insurance products for banana producers in Quindio Department. The government of Mendoza Province in Argentina, which is situated in a hail risk-prone area, has been purchasing named-peril hail crop insurance since 2004 in an effort to substitute ex post ad hoc disaster relief assistance to fruit and vineyard farmers with an ex ante and objective financial mechanism to transfer hail risk. The main features of this program are summarized in box 3.4. Box 3.4 Named-peril hail crop insurance program in Mendoza Province, Argentina Type: Catastrophic named-peril crop insurance with nondeductible franchise of 50 percent of the loss Insured perils: Hail and late seasonal frost Insured crops: (a) hail: vineyards, olive, fruits, and vegetables; (b) frost: only vegetables in crop areas smaller than 10 hectares Sum insured: US$480 per hectare for farms up to 5 hectares and a decreasing sum insured per hectare after that, according to an area stratification scale Premiums: US$4.5 million paid in full by the provincial government Loss ratio: 70 percent Insurers: Coinsurance pool comprising six insurance companies Beneficiaries: 16,205 farmers Insured area: 240,000 hectares Other features of the program: Private insurers offer optional additional coverage to individual farmers on a voluntary basis. This additional coverage tops up the basic protection provided by the government. The insurance program complements risk management measures implemented by the government of Mendoza, such as the Active Hail Defense Program (hailstorm monitoring systems and hailstorm combat systems) and credit lines to finance the purchase of hail nets. Source: Authors’ compilation from Ochiuzzi 2010. Some countries in the region have developed special agricultural insurance programs targeting small and marginal farmers. Such is the case of Chile, Argentina, Brazil, and Mexico. In Chile, the Small Farmer Lending Bank (INDAP) has developed an online crop insurance system in conjunction with the insurance sector that permits any recipient of credit for seasonal crop production to be covered automatically under the small farmer insurance facility. In Peru, the government is supporting a program called Agro Protégé, which is targeted at small and marginal farmers. In Argentina, several agricultural insurance schemes, such as the hail insurance program implemented in Mendoza Province and the MPCI program for cotton farmers implemented by Chaco Province, were developed by state governments with assistance from the federal government in order to help small farmers to manage risk. In Mexico, Agroasemex has for nearly two decades been associated with the fondos (crop and livestock mutual insurance funds). In Brazil the federal government has two special pseudo-crop insurance programs for small and marginal farmers: PROAGRO and SEAF (see box 3.5). 54 ] Agricultural Insurance in Latin America Box 3.5 SEAF crop-credit insurance guarantee program of the federal government of Brazil SEAF is a compulsory crop-credit insurance program of the federal government for smallholder farmers who access seasonal production credit from PRONAF (the National Program for the Strengthening of Family Agriculture, Programa Nacional de Fortalecimento da Agricultura Familiar). Nature of cover: Automatic cover for beneficiaries of PRONAF seasonal credit Type of policy: Multi-peril yield-shortfall policy, which indemnifies growers by the amount that actual crop revenue falls short of the sum insured (see below for definition of sum insured) Insured crops: A wide range of crops identified under the agricultural zoning program (zoneamento agricola), including rain-fed and irrigated cereals, legumes, oilseeds, fiber crops, root crops (cassava), grapes, and tree fruits (40 crops) Insured perils: Drought, excess rain, frost, hail, excess variation in temperatures, strong winds, cold winds, crop pests, and diseases that cannot be controlled either technically or economically Basis of sum insured: The sum insured is based on the amount of seasonal production credit loaned to the farmer, plus the interest due on the principal, plus up to 65 percent of the estimated net revenue of the crop, subject to a maximum of US$3,000 per farmer per year. The estimated gross and net revenue is determined by the bank and the crop inspector at the time of policy issuance. Beneficiaries: 2.8 million farmers Premium rate: 2 percent fixed rate paid by the insured for each insured crop Premium subsidy: Government pays a 75 percent premium subsidy on the SEAF program. Basis of indemnity: Losses must exceed 30 percent of the expected gross revenue for the crop in order to qualify for indemnity. Estimated premiums: US$427 million (US$95 million paid by the farmers; US$332 million paid by SEAF) Reinsurance: The program is not reinsured. All the liabilities arising out of the program are retained by the government of Brazil. Source: Authors’ compilation from information provided by the Ministerio de Desenvolvimento Agrario do Brasil 2010; Mahul and Stutley 2010. The public sector has increased its support for agricultural insurance in the region during recent years. Total government expenditures toward supporting agricultural insurance in the region have increased from US$33 million in 2003 to US$326 million in 2009. Several governments have assumed an active role in supporting agricultural insurance. While in 2003, public sector expenditures in supporting agricultural insurance accounted for 12 percent of total agricultural insurance premiums, in 2009 they accounted for 44 percent. Brazil and Mexico have been leading this process. For instance, agricultural insurance premium subsidies were introduced in Brazil in 2005 and increased from US$1.7 million in 2005 to approximately US$163 million in 2009.14 The situation is similar in Mexico, where the government has increased its budget for the purchase of catastrophic agricultural insurance coverage from US$18.1 million in 2007 to US$96.9 million in 2009. 14 Including state agricultural insurance premium subsidies. The exponential growth of agricultural insurance premiums in the region is explained largely by the increase in public sector expenditures to support this type of risk transfer product. The coefficient of regression (R2) between total public sector expenditures in agricultural insurance and direct agricultural insurance at the regional level is 0.97, which is extremely high. While direct agricultural insurance premiums in the region grew 285 percent, from US$272 million in 2004 to US$780 million in 2009, during the same period public sector expenditures in agricultural insurance grew 991 percent, from US$33 million in 2004 to US$339 in 2009. Private sector expenditures in agricultural insurance grew only 185 percent during the same period, from US$239.5 million in 2004 to US$438 in 2009. The challenge for LAC countries is sustaining the current levels of government support for agricultural insurance. As noted, LAC agricultural insurance markets have been growing in recent years, fueled mainly by public sector support, both through agricultural insurance premium subsidies and also through the direct purchase of catastrophic agricultural insurance for small farmers. Governments in the region have been able, so far, to afford the current levels of financial support for agricultural insurance. However, the question is whether they will be able to sustain that level of support if the agricultural insurance market continues to grow at the current rate. Figure 3.5 shows the evolution of total agricultural insurance premiums and total government expenditures to support agricultural insurance in the region. Figure 3.5 Premiums and fiscal expenditures on agricultural insurance in LAC, 2004–09 LAC countries: Evolution of Agricultural Insurance Premiums and Fiscal expenditures in Agricultural Insurance (US$ millions) 800 50% Private Sector 45% 700 Premium Subsidies 40% Catastrophic Insurance Premiums 600 Public Sector/Premiums 35% 500 30% 400 25% 20% 300 15% 200 10% 100 5% 0 0% 2004 2005 2006 2007 2008 2009 Source: Authors. 56 ] Agricultural Insurance in Latin America AGRICULTURAL INSURANCE PENETRATION IN LAC Agricultural insurance has reached reasonable penetration rates in the region. Currently, approximately 29 million hectares of crops (17 percent of the total crop area) are insured under crop insurance policies, 2.3 million hectares of commercial forest (19 percent of the total commercially forested area) are insured under forestry insurance policies, and 350,000 tons of aquaculture biomass (28 percent of the total aquaculture biomass) are insured under aquaculture insurance. Livestock insurance lags behind, with only 4.5 million head of cattle insured out of a population of almost 400 million. The LAC region, however, still lags, on average, behind other regions in the development of agricultural insurance. In 2009 agricultural insurance premiums accounted for only 0.37 percent of agricultural GDP in LAC, which is considerably lower than in many other regions of the world. For instance, in the United States and Canada, agricultural insurance premiums account for almost 6 percent of total agricultural GDP. In European countries, they account for almost 1 percent of total agricultural GDP. In Asia, agricultural insurance premiums account for 0.47 percent of agricultural GDP. Africa, with 0.079 percent of agricultural GDP, is the only region where the penetration of agricultural insurance is lower than in the LAC region. The penetration of agricultural insurance is not homogeneous among LAC countries. Uruguay, where named-peril crop insurance is highly developed, has the highest agricultural insurance rate in the region. Agricultural insurance premiums account for 1.05 percent of agricultural GDP in Uruguay, followed by Chile and Mexico, with 0.60 percent. In Brazil, Panama, the Windward Islands, and Paraguay, penetration rates are around 0.35 percent. The remaining countries, mainly the Andean and Central American countries, have agricultural insurance penetration rates lower than 0.1 percent of agricultural GDP. Figure 3.6 compares penetration rates across LAC countries as well as between LAC and other regions in the world. Figure 3.6 Agricultural insurance penetration in LAC Agricultural Insurance Penetration in LAC (Agricultural insurance premiums / Agricultural GDP) Europe 1.0% 0.8% Australia & Nz 0.6% Asia 0.4% LAC 0.2% Africa 0.0% Uru A C M P W B Pa P N D H E C G C v E B gu rgent hile exico aragu indw razil nam eru icara om. R ondu cuado olom uatemosta enezu l Salv olivia ay ina ay ard a gu a ep ras . r bia ala Rica ela, ador Isla RB nd s Source: Authors’ compilation from Mahul and Stutley 2010. The penetration of agricultural insurance is not homogeneous even across different geographic areas within the same country. In a given country, the zones with the most dynamic agricultural production also have the most agricultural insurance, while the agricultural production zones that are less dynamic are left behind. For instance, while the Pampas region in Argentina—the main agricultural production area—has agricultural insurance penetration rates of above 50 percent of the cultivated area, other areas have very low penetration rates or no agricultural insurance at all. The same situation is observed in Brazil and Mexico. In Brazil, the southeastern and central-southern areas show much higher levels of agricultural insurance penetration than the northeastern states. In Mexico, the northern states show much more development (50 percent of the cultivated area is insured) than the southern states. A detailed analysis of the reasons for these differences is presented in chapter 4. Crop insurance, the most popular type of agricultural insurance in the region, shows uneven levels of penetration across countries. Uruguay and Argentina have high insurance penetration rates of above 60 and 50 percent of the total crop area, respectively. In Mexico and the Windward Islands, between 35 and 40 percent of the cropped areas is currently insured. Paraguay has a moderately high rate of agricultural insurance penetration: 23 percent of the cropped area. Brazil and Peru, with agricultural insurance programs that were implemented only a few years ago, have agricultural insurance penetration rates of 10 percent of the cropped area. In the remaining LAC countries, the penetration of crop insurance is still low. Chile, Colombia, Costa Rica, Honduras, the Dominican Republic, Ecuador, 58 ] Agricultural Insurance in Latin America and Panama have penetration rates between 1 and 5 percent of the total cropped area. In El Salvador, Guatemala, Nicaragua, and República Bolivariana de Venezuela penetration rates are very low, with less than 1 percent of the crop area insured. Forestry insurance has reached very high levels of penetration in Chile and Uruguay, but not in other countries in the region. Chile and Uruguay have very high rates of forestry insurance penetration, with more than 80 percent of the commercial forest area insured. Argentina has a moderate level of penetration, with approximately 10 percent of the commercial forest area insured. In Brazil, forestry insurance is very new and, in spite of its potential for development and the premium subsidies provided by the government, only covers an estimated 5 percent of the commercial forest area. The remaining countries in the region in which forestry insurance is available (Paraguay, Ecuador, Central American countries, and Mexico) have low penetration rates. Aquaculture insurance, with the exception of salmon farming insurance in Chile and shrimp farming insurance in Mexico, has not reached high levels of penetration in the region. Approximately 50 percent of the salmon farming centers in Chile are insured under aquaculture insurance policies. However, given the outbreak of infectious salmon anemia in 2008, both biomass and the number of aquaculture centers in production are expected to decline in the near future. In Mexico, approximately 10,000 out of 70,000 hectares under shrimp farming production are currently insured. Despite the importance of the livestock sector in the region, livestock insurance has minimal penetration levels outside Mexico. Livestock insurance lags behind other covers in terms of insurance penetration in the region, reaching an acceptable penetration rate only in Mexico, where approximately 17 percent of the cattle herd is insured. Colombia is believed to have approximately 250,000 head of cattle insured against terrorism and theft. Penetration rates for livestock insurance are minimal in important cattle-producing countries in the region, such as in Brazil and in Argentina. Map 3.5 shows the penetration rates for crop, livestock, aquaculture, and forestry insurance in LAC region. GAPS IN THE PROvISION OF AGRICULTURAL INSURANCE IN LAC There are several gaps in the provision of agricultural insurance in LAC countries. Although the region has made solid advances in the development of agricultural insurance, it still has a long way to go to develop this market. The development of agricultural insurance in LAC countries is heterogeneous, both spatially and among different business sublines. This section identifies the gaps in the provision of agricultural insurance in the region. Agricultural insurance product gaps Crop insurance in LAC still needs further development. Although the provision of crop insurance has reached good levels of development in some geographic areas (such as Argentina, Uruguay, southern Brazil, Paraguay, and Chile), levels are very low in other areas. Crop insurance penetration in the region is only 17 percent of the total cropped area: approximately 138 million hectares out of 167 million cropped hectares are not insured. The reasons for this gap are many and vary from country to country. First, in countries where the majority of agricultural producers are semi-commercial or traditional subsistence farmers, farmers are not familiar with risk management tools and crop insurance is not affordable, which are serious drawbacks to the development of crop insurance. This is observed in the Andean, Caribbean, and Central American countries. Second, in countries where agricultural production is exposed to the risk of catastrophic windstorms and excess rain or flood, as in some Central American and Caribbean countries, the insurance industry does not have the appetite to write agricultural risks and farmers do not demand coverage because they expect governments to intervene in an ex post fashion. Third, in countries producing specialty crops, such as Chile and Peru, the lack of appropriate insurance products to transfer the production and quality risks constrains the development of crop insurance. 60 ] Agricultural Insurance in Latin America Map 3.5 Agricultural insurance penetration in LAC Penetration ratio > 80% 70% - 79.9% 60% - 69.9% 50% - 59.9% 40% - 49.9% 30% - 39.9% 20% - 29.9% 10% - 19.9% 1% - 9.9% 0.1% - 0.9% Crop Insurance (% crop area) Forestry Insurance (% commercial forest area) Livestock Insurance (% heads) Aquaculture Insurance (% biomass) Source: Authors. Forestry insurance is only developed in Chile and Uruguay. Currently, only 2.3 million hectares out of 12 million hectares of standing timber forestry plantations are insured in the region. Out of the 2.3 million hectares insured, 2.1 million hectares (90 percent) are situated in Chile and Uruguay. However, in other countries with considerable standing timber stocks, such as Brazil and Argentina, the penetration of forestry insurance is minimal. There are two possible reasons for these gaps in forestry insurance. The first is the existence of different risk perceptions across the countries. For instance, in Chile, one of the countries in the world most prone to forest fires, forestry producers are willing to purchase forestry insurance because they perceive that their plantations are at risk. Conversely, in Brazil, where fire risk is relatively low, the willingness of producers to purchase forestry insurance is low. A second possible reason for the existence of gaps in forestry insurance outside Chile and Uruguay is the forestry producers’ lack of awareness of forestry insurance and the potential advantages of this risk transfer tool. Chile and Uruguay have a long tradition of forestry insurance. Forestry producers in these countries are aware of the existence of forestry insurance and understand the advantages and limitations of this product. In other countries, forestry insurance is a relatively new product, many forestry farmers (particularly small farmers) are not aware of its existence, and, when they are aware, they have no clear understanding of its potential uses. A third possible reason for these gaps is that many forestry farmers do not comply with the minimum risk management practices that are required to be eligible for forestry insurance, such as the existence of resource plans and protocols for fire prevention and fire suppression. In many forestry plantations in the region, mainly small plantations, the minimum risk management preconditions for forestry insurance are not being met. Despite the importance of aquaculture in the region, the development of aquaculture insurance is limited to Chile and Mexico. Currently, only 350,000 tons out of a total fish stock of 1.75 million tons in the LAC region are insured. From the 350,000 tons of insured fish stock, 100 percent is located in two countries—Chile and Mexico. Aquaculture insurance, including off-shore marine and on-shore freshwater aquaculture insurance for fish stock and equipment, is widely offered to the salmon industry in Chile, where almost 50 percent of the salmon production centers are insured. On-shore aquaculture insurance is offered in Mexico for shrimp production, where 10 percent of the shrimp farming area is insured. However, aquaculture insurance has almost no penetration in most of the shrimp and tilapia production areas of the Central American countries, Peru, Ecuador, Colombia, República Bolivariana de Venezuela, Guyana, and northeastern Brazil. The main reason for the underdevelopment of aquaculture insurance in these important production areas is the lack of expertise and technical capacity of the insurance sector to underwrite this type of complex risk. One of the preconditions for underwriting aquaculture is the existence of qualified risk surveyors and loss adjusters, who are usually designated by the reinsurers. The technical capacity to underwrite and to perform the surveys, follow-up, and loss assessment needed in aquaculture insurance has been developed only in Chile and Mexico. In other LAC countries, insurance companies that want to write aquaculture insurance need to bring in expertise from overseas. This makes the transaction costs of aquaculture insurance too high for small and medium-size businesses and only marginally attractive for large-size farms. Livestock insurance is very underdeveloped in most of the LAC region. Livestock insurance products are available in most countries. However, the demand for and uptake of this product are extremely low. Currently, in spite of the importance of the livestock sector in LAC, only 4.7 million head of cattle out of an estimated total of 395 million are insured. From the 4.7 million head of cattle insured in the region, 4.4 million are located in Mexico. The main drawback to the expansion of livestock insurance is the existence of market failures in 62 ] Agricultural Insurance in Latin America the provision of this insurance product. Livestock producers are not willing to purchase basic livestock accident and mortality insurance at current market prices because they perceive the product as too expensive given the restricted coverage provided. The insurance industry is not willing to offer comprehensive (all risks including diseases) livestock insurance owing to (a) the potential moral hazard associated with comprehensive policies and (b) animal mortality due to health issues, which has a large management component. Factors under human control are as important as, if not more important than, natural factors in determining mortality rates in livestock production, which depend heavily on herd management, fodder management, and animal husbandry practices. For the insurance sector to follow up and control herd management practices implemented by the insured is key to avoiding moral hazard in livestock insurance programs. The asymmetries of information in livestock production are the main cause of market failures in livestock insurance. The insurance companies in the region do not have the infrastructure or the human resources to implement the monitoring of insured animals or the loss adjustment procedures needed to provide comprehensive coverage. In addition, other factors also contribute to market failures. The first factor consists of deficient systems for tagging and tracing animals. The existence of proper animal-tagging systems is a precondition for the development of comprehensive livestock insurance, as an efficient system allows the industry to perform close follow-up of the insured herds. The second factor is the existence of gaps in the systems for preventing animal disease in some countries. The provision of comprehensive livestock insurance involves the industry covering animal diseases and, in some cases, epizootic (epidemic) diseases. Given the potential catastrophic exposure that insurance companies would face from epidemic diseases, the industry is not willing to offer cover unless proper policies are in place to prevent disease and control animal health. As livestock insurance coverage becomes more comprehensive, the sophistication of management factors becomes more important. Unless the insurance industry in the region feels confident in its ability to monitor and control the potential sources of moral hazard in livestock insurance, it will continue to provide only basic accidental mortality coverage. Figure 3.7 summarizes the current level of agricultural insurance penetration as well as the gaps in the provision of agricultural insurance in the region. Figure 3.7 Agricultural insurance gaps in LAC, by type of insurance Latin America: Agricultural Insurance gaps pero type of insurance 350,000 tons. Aquaculture 930,000 tons. 4.5 million cattle heads Livestock 395 million cattle heads 2.3 million hes. Forestry 9.7 million hes. 29 million hes. Crops 138 million hes. 0% 20% 40% 60% 80% 100% Percentage of the crop area, cattle heads, forestry area, biomass  Insured  Not insured Source: Authors from own agricultural insurance survey and FAO 2009. Agricultural insurance penetration gaps The development of agricultural insurance is uneven among different geographic areas in the region. The development of agricultural insurance follows the boundaries of the agroecological areas with different agricultural production systems, not national boundaries. The general pattern is that agricultural insurance is more developed in geographic areas where agricultural production is more dynamic. In this regard, it is possible to distinguish among five geographic areas in terms of agricultural insurance development: (a) where agricultural insurance is consolidated; (b) where agricultural insurance is in the process of consolidation; (c) where agricultural insurance is not consolidated; (d) where agricultural insurance is not available yet, but has the potential for development; and (e) where agricultural insurance is not available yet and has low potential for development. Map 3.6 presents the geographic distribution of agricultural insurance development in the region. The geographic areas where agricultural insurance is consolidated are also the most dynamic in terms of agricultural production in the region. These areas comprise the Pampas region and Mesopotamia region in Argentina, the whole territory of Uruguay, eastern departments of Paraguay, southeastern and central-southern states in Brazil, southern regions in Chile, and northern states in Mexico. These geographic areas are among the areas with the most dynamic agricultural production in the LAC region. Agricultural production in these areas is dominated by medium-size and large market-oriented professional agricultural enterprises. The agribusiness value chain in these geographic areas is highly developed, and farmers have full access to agricultural services. Access to finance, which is available from 64 ] Agricultural Insurance in Latin America rural development banks, commercial banks, input suppliers, and trading companies, is not a constraint for most farmers. Map 3.6 Degree of development of agricultural insurance in LAC Agricultural Insurance consolidated areas Agricultural Insurance areas in consolidation Agricultural Insurance not consolidates areas Agricultural Insurance not available but with potencial fot development Agricultural Insurance not available and with low potencial for development Areas not considered for analysis Source: Authors. The level of development of agricultural insurance in the areas where agricultural insurance is consolidated is comparable to the levels of agricultural insurance development in high-income countries. Total agricultural insurance premiums written in consolidated geographic areas amount to US$600 million (77 percent of total agricultural insurance premiums written in the region). Approximately 24.5 million hectares of crops are insured across consolidated areas, accounting for 80 percent of total insured area in the region. The level of crop insurance penetration in these areas is between 40 and 50 percent of the total cropped area. Crop insurance is well developed in Argentina, Uruguay, Brazil, and Paraguay; however, it is not as well developed in Chile. Named-peril hail insurance policies for annual crops and fruits are the main type of crop insurance written in Argentina, Uruguay, and the southern areas of Brazil. MCPI policies are the main type of crop insurance written in Paraguay, Brazil, Chile, and the northern states of Mexico. Forestry insurance, with 36 percent of the forested area insured, shows acceptable levels of penetration in geographic areas where agricultural insurance is consolidated. In Chile and Uruguay, forestry insurance is well developed in geographic areas where agricultural insurance is consolidated, but in Brazil, Argentina, and Paraguay, it is not, as approximately 6 million hectares of forestry are not yet insured. Aquaculture insurance is well developed in areas of Chile and reasonably developed in northern states of Mexico where agricultural insurance is consolidated. Livestock insurance, with the exception of Mexico where approximately 15 percent of the national herd is insured, is not developed either in the areas with consolidated agricultural insurance or at the regional level. The geographic areas where agricultural insurance is in the process of consolidation in the region comprise areas that were turned over to agricultural production in the 1990s. These areas include Mato Grosso, Minas Gerais, Goias, Tocantins, Maranhao, and Bahia federative states in Brazil; the western departments in Paraguay; the Department of Santa Cruz de la Sierra in Bolivia; and the geographic area comprising the provinces of Salta (eastern areas), Tucumán, San Luis, Santiago del Estero, Córdoba (western and northern areas), La Pampa (western counties), and Formosa in Argentina. Owing to improvements in crop production technology and the low cost of land, these geographic areas underwent an extraordinary transformation during the 1990s, when investors, attracted by promising returns, purchased large tracts of arable land. Currently, these geographic areas are among the most dynamic for agricultural production in the region. The main feature of agricultural production in these areas is the coexistence of large-scale commercial agricultural enterprises with small- and medium-size semi-commercial and commercial farms. Although the agribusiness value chain in these geographic areas is not well developed, the large agricultural enterprises, with economies of scale associated with their size, have developed their own infrastructure to receive services and commercialize their production. The largest agricultural businesses satisfy their financial needs by negotiating loans directly with local or international bank headquarters and multinational input suppliers or, in some cases, by issuing shares on the stock markets. The demand from large-scale agriculture for agricultural insurance products in the areas that are consolidating is rising quickly. The total agricultural insurance premiums written in these areas amounts to US$79 million (12 percent of the total agricultural insurance premiums written in the region). Currently, more than 4 million 66 ] Agricultural Insurance in Latin America hectares are insured (8 percent of the crop area) in these areas. Crop insurance, which was introduced in the early 2000s, has accompanied the development of large-scale agricultural enterprises. The demand for crop insurance is exclusively for MPCI, mainly for soybeans, maize, and oilseed crops. However, the demand for crop insurance from medium- and small- size agricultural enterprises in these areas is minimal. The causes of the low demand include (a) the existence of a large universe of small subsistence agricultural enterprises that cannot afford to pay the high premiums of traditional MPCI and (b) the low profits obtained by the medium- and small-scale farmers due to the high transport costs (these regions are located a significant distance away from markets). Crop insurance products are expensive in these areas for two reasons. First, farmers face high pure risk premiums because these geographic areas are situated in the crop production frontier, and thus data uncertainties and perceptions of catastrophic risks increase loadings on premiums. Second, transaction costs (including acquisition costs, inspections, and loss adjustment costs) are high. Thus crop insurance is only offered to large-scale agricultural enterprises for which the transaction costs involved in the insurance operation can be spread over a large volume of premiums. The level of development of forestry insurance in the geographic areas where agricultural insurance is in the process of consolidation is still minimal. Forestry insurance penetration is limited to a few forestry insurance policies sold in the states of Bahia and Minas Gerais in Brazil and in the province of Córdoba in Argentina. Insurance companies operating in these areas are reluctant to offer forestry insurance given the climatic characteristics (semiarid zones) and the low implementation of risk management practices in forestry production. The provision of livestock insurance is nonexistent. Owing to the extensive livestock production, the lack of efficient animal-tagging mechanisms, and the lack of livestock veterinary and health services for livestock insurance certification purposes, this type of agricultural insurance product is unlikely to be developed significantly in the short term in these areas. There are several geographic areas in the region where agricultural insurance, although available for many years, is not yet consolidated. These areas include the coastal areas of Chile, Peru, Ecuador, and Colombia; the llanos region in República Bolivariana de Venezuela and Colombia; Central American countries; southwestern departments of Mexico; and the Dominican Republic and Jamaica. Agricultural production in these areas is characterized by the coexistence of large-scale commercial farming export-oriented ventures with small-scale semi-commercial or familial farming. The level of development of agricultural insurance in the geographic areas where agricultural insurance is not consolidated is low. Currently, approximately 4 million hectares of crops are insured, accounting for less than 4 percent of the total crop area. However, it is important to consider that, of the 4 million hectares insured, 2.7 million are insured with catastrophic agricultural insurance purchased by the governments. Agricultural insurance direct premiums written in geographic areas where agricultural insurance is not consolidated amount to US$100 million, from which US$39 million is paid for catastrophic agricultural insurance cover purchased by governments. In summary, considering only the voluntary uptake of private agricultural insurance in these areas, total agricultural insurance premiums are US$61 million, and the total insured area of 1.3 million hectares is equivalent to only 2 percent of the cropped area. There are several possible reasons why agricultural insurance has not been consolidated in these areas. The main factor is the existence of a huge population of sparsely distributed traditional subsistence and semi-commercial farmers who have no access to rural services and no financial capacity to afford premiums. The second is the high cost of providing agricultural insurance. These geographic areas are important areas for forestry production; however, the penetration of forestry insurance is minimal. Although more than 2 million hectares of forestry plantations are located in these areas, less than 30,000 hectares are insured. Aquaculture production is an important agricultural activity in the northern areas of Peru, Ecuador, Colombia, and all Central American countries; nevertheless, the provision of aquaculture insurance in these countries is, currently, nonexistent. Livestock insurance has reached some level of development in Colombia and Panama, where 200,000 and 70,000 head of cattle, respectively, are insured, but penetration of this insurance product is still very low. There are many agricultural production areas in LAC where agricultural insurance is still not available. The total cultivated area in the geographic zone in which crop insurance is not yet available is approximately 50 million hectares (27 percent of total cropped area in the LAC region). While in some of these geographic areas crop insurance can be developed in the relatively short term, in others it will be very difficult to develop crop insurance without government intervention. The geographic areas where agricultural insurance is not yet available but has the potential for development are characterized by the coexistence of well-developed market-oriented agriculture firms with traditional subsistence or semi-commercial farming. These geographic areas include (a) the high-altitude valleys of the Andean region of Colombia, República Bolivariana de Venezuela, and Ecuador, (b) the coastal areas of northeastern South America, and (c) most of the countries of the Caribbean region. In the intermountain valleys and lower slopes of the northern Andean mountains—the heartland of Andean coffee and horticultural production—farmers are mostly commercial and market oriented; thus there is potential to introduce suitable crop insurance products. However, in the highlands and upper valleys where temperate crops, maize, and pigs predominate, traditional indigenous subsistence farming systems are strongly established, and insurance products would be very difficult to develop. In the coastal areas of northeastern South America and most of the countries of the Caribbean region, large-scale plantations of 68 ] Agricultural Insurance in Latin America tropical fruits, typically export oriented and often internationally owned, coexist with small- scale family farms with mixed agriculture. The insurance industry has been making efforts to develop agricultural insurance products for large-scale agribusiness firms; however, so far, it has not been successful. Large agribusiness producers of specialty crops, most of them multinationals, have very well diversified crop portfolios and are only marginally interested in insuring their crops. The geographic areas where agricultural insurance is not yet available and that have low potential for development are characterized by the predominance of a vast population of small and marginal or semi-commercial farmers who produce for self-consumption and, eventually, for the market. These farmers are not the subject of commercial agricultural insurance, and their need for agricultural risk transfer should be met by social or safety net programs. These geographic areas include (a) the high-altitude mixed-farming systems of the central Andes (step valleys of the Andean mountains along Peru and the altiplano in Peru, Bolivia, Chile, and Argentina); (b) the dry-land mixed-farming systems in northeastern Brazil and the Yucatán peninsula in Mexico; and (c) the staple crop, small-scale farming systems in Central America and the Caribbean. The segment of small- scale farmers has not been targeted to date by the insurance industry. 4. OPPORTUNITIES AND CHALLENGES FOR AGRICULTURAL INSURANCE Agricultural insurance has enormous room for growth in Latin American and Caribbean (LAC) countries. Not currently insured in the region are 138 million hectares of crops (83 percent of cropped land), 9.7 million of standing timber plantations (79 percent of the total area of standing timber plantations), 395 million head of cattle (98 percent of total head of cattle), and 930,000 metric tons of annual fish stocks (80 percent of annual fish stocks). The gap in penetration of agricultural insurance represents a tremendous opportunity for the insurance industry. Assuming the current terms and conditions of insurance policies, the total agricultural insurance premiums in the region would increase US$65.3 million for each percentage point increase in insurance penetration across all types of agricultural insurance. Although agricultural insurance is relatively well developed in the region, it still faces several challenges. As noted in the previous chapter, the level of development of agricultural insurance in the region is uneven, both in terms of product development as well as in terms of penetration between countries and within the same country. The reasons for such discrepancies are diverse; therefore, the strategies to address future development are also diverse. The development of agricultural insurance requires a long-term public-private partnership (PPP) effort. International experience shows that it takes a long time to develop sustainable agricultural insurance products that are attractive to farmers. The process of promoting and enhancing agricultural insurance in LAC countries will require significant efforts both from the insurance industry and from governments. It is not realistic to expect to reach high levels of penetration in the short term, although the growth rate to date has been promising. 70 ] Agricultural Insurance in Latin America OPPORTUNITIES FOR THE DEvELOPMENT OF AGRICULTURAL INSURANCE Crop insurance Crop insurance has a great potential for development in the region. Approximately 138 million hectares of crops (83 percent of cultivated land) are currently not insured. The possible strategies for expanding the use of crop insurance will depend on the social and economic importance of the agricultural sector, the degree of development of crop insurance, the type of risks faced by crop producers, the dominant type of farmer, and the local capacity for offering agricultural insurance. In order to analyze the opportunities for development in LAC, it is relevant to split the region into the same five geographic areas used in chapter 3 to explain the current development of agricultural insurance in LAC based on the level of consolidation and the potential for development in the area.  Geographic areas where agricultural insurance is consolidated Opportunities to increase the current levels of crop insurance in these geographic areas will come, mainly, from the development of more complex and sophisticated types of products. The insurance industry in these geographic areas is enhancing its current portfolio of crop insurance products to cover more perils and activities. For instance, the insurance industry is analyzing the feasibility of introducing revenue crop insurance for soybeans and corn in Brazil, Mexico, and Argentina. In Brazil, the insurance industry is starting to provide coverage for diseases affecting crop production, such as citrus canker and greening in orange production. In Chile, the industry is starting to offer insurance for high-value crops (table grapes, avocado, and berries) that, until now, were not included in the portfolio of insurable crops due to their high values at risk and the insurance industry’s inability to manage risk accumulations. The insurance industry is also adopting an agribusiness value chain approach in order to deliver crop insurance products. The insurance industry in these consolidated markets is shifting its focus from providing individual farmers with simple named-peril insurance and multiple-peril crop insurance (MPCI) policies to providing other players in the broader agribusiness value chain with financial transfer solutions. The players in the agribusiness value chain have varied insured interests. For instance, an input supplier or a financial institution may be interested in protecting its sales revenues or the reimbursement of its sales credits due to the occurrence of a weather event affecting crop production. A grain elevator or a fruit exporter may be interested in protecting the procurement of enough grains or fruits in the respective catchment areas to reach the break-even volumes needed to cover fixed operating costs or to comply with a forward contract. Figure 4.1 shows a simplified representation of the insured interests of different players in the agribusiness value chain. Figure 4.1 Agribusiness value chain and insurable interest Insurable Interest Governments  Sales guarantee Input Supplier  Credit repayment  Product added value  Sales guarantee  Credit repayment Distributor  Product add value Finantial Institution  Production guarantee  Quality guarantee Farmer  Income guarantee  Volume guarantee  Quality guarantee Storage/Traders  Business interruption  Minimum supply of raw materials Food Processor/Exporter  Export agreement guarantee  Business interruption Governments: Finantial Institutions:  Fiscal Balance  Credit risk protection  Social Balance Source: Iturrioz 2009.  Geographic areas where agricultural insurance is in process of consolidation The uptake of crop insurance is expected to continue growing in these areas. This expectation is based on two reasons: (a) the increase in the demand for crop insurance by large-scale agribusiness firms and (b) the expected improvement in the profit margins obtained by small- and medium-scale farmers. Large-scale agribusiness firms operating in these areas will continue to demand customized insurance solutions. Production in these areas is usually marginal and faces several production risks. The business model implemented by these firms is characterized by low land prices and technology-intensive production. The firms manage their production risks by diversifying their activities in terms of both product and location and by purchasing crop insurance to transfer the risk that they are unable to manage. These firms include crop insurance as a cost of production in their business model. In order to meet the demand of enterprises for risk transfer, the industry should be ready to tailor solutions to the enterprises’ capacity to diversify risks. In that regard, insurance products, such as global MPCI portfolio coverage, probably in combination with crop revenue insurance, could meet the need for risk transfer. In addition to the expected increase in demand from agribusiness firms, it is also expected that the small- and medium- scale farmers will increase their demand for crop insurance as their profitability rises as a 72 ] Agricultural Insurance in Latin America result of improvements in the technical and financial services provided to them. The advent of large-scale agribusiness firms to these geographic areas has been accompanied by the development of services and infrastructure for crop production originally targeted to meet the needs of big farmers.  Geographic areas where agricultural insurance is not consolidated The geographic areas where agricultural insurance is available, but still not consolidated, offer an enormous potential for development of crop insurance. Although crop insurance has been available for many years in most countries in these areas, it has never been consolidated, as evidenced by an average penetration rate of 2 percent. The main opportunity for expansion is through tailoring products to meet the risk transfer needs of export-oriented large-scale agribusiness enterprises. There is a well-developed export- oriented specialty-crop industry along the Pacific coast of South and Central America. Chile has a well-positioned commercial farming sector producing table grapes, avocados, and berries for the Asian and U.S. markets. Peru, which has a booming asparagus production sector, is becoming an important player in this specialty crop. Multinational large-scale agribusiness firms specializing in tropical fruit are found throughout the region from Ecuador to Mexico. The large-scale agribusiness enterprises that produce specialty crops for export operate in a very competitive market characterized by rigorous standards, in terms of both volume and quality, and demand highly sophisticated insurance products. Their risk transfer needs encompass not only production risks, but also the quality of their production and business interruption; in some cases, they also require coverage for inland, marine, cargo, and product recall embedded in a single insurance policy. The provision of such comprehensive insurance coverage is very challenging for the insurance sector, for several reasons: (a) the existence of complex production systems makes the monitoring and the loss adjustment process very difficult and onerous; (b) the accumulation of significant risk in relatively small areas is problematic, as the production of specialty crops is restricted to specific valleys or microclimates; and (c) the insurance industry lacks expertise in underwriting these complex risks and performing the complex loss adjustment involved in insuring specialty crops.  Geographic areas where agricultural insurance is not available yet, but has potential for development In many of the geographic areas where crop insurance is not yet available, there are opportunities to develop agricultural insurance for commercial and semi- commercial farmers. Some commercial farms situated in the high-altitude valleys of the Andean region of Colombia, República Bolivariana de Venezuela, and Ecuador, in the coastal areas of northeastern South America, and in the countries of the Caribbean region present opportunities. The common feature of crop production in these geographic areas is the coexistence of well-developed market-oriented agriculture firms with traditional subsistence or semi-commercial farms. While the risk transfer needs of market-oriented commercial agriculture firms can be met by the private insurance industry, the risk transfer needs of semi-commercial and traditional subsistence farmers should be met by market-based risk transfer mechanisms promoted by the public sector through public-private partnerships. In that regard, government catastrophic coverage is one option for providing crop insurance to these segments of farmers. Additionally, in the case of semi-commercial farmers and certain types of idiosyncratic risks, governments could promote the establishment of insurance mutuals in order to pool risks among a group of farmers.  Geographic areas where agricultural insurance is not available yet and has low potential for development In other geographic areas where crop insurance is not yet available and rural poverty is high, the potential for crop insurance is likely to be very limited. These geographic areas comprise the high-altitude mixed-farming systems of central Andes (step valleys of the Andean mountains in Peru and the altiplano in Peru, Bolivia, Chile, and Argentina), the dry-land mixed-farming systems in northeastern Brazil and Yucatán peninsula in Mexico, and the maize-beans farming system in Central America. These areas share common features that pose serious difficulties for the development of crop insurance. First, the environment for the provision of crop insurance is too complex. Second, these areas are characterized by a large population of traditional subsistence and semi-commercial farmers whose farms are distributed on a scattered basis. Third, there is a lack of information, including crop production statistics, historical weather records, and records of events that have affected production in the past. Under these circumstances, developing a reliable crop insurance program becomes very challenging, and the private insurance industry may not be willing to do so on its own. The government provision of catastrophic insurance products, either index based or traditional, has been shown to provide suitable cover for small farmers in LAC. Catastrophic crop insurance provides macro-level coverage to governments at the state or federal level. Under catastrophic crop coverage, the government is the policyholder. The government pays the insurance premium and receives the payouts from the insurance company in case of a claim. The government sets out the payment rules for farmers who are benefiting from the catastrophic fund. Crop insurance funds have been successfully running for almost a decade in Mexico. In 2008, the government of Peru implemented crop catastrophic insurance in five departments of the country. As of 2010, more than 8.5 million hectares of crops are insured under crop catastrophic insurance in Mexico and Peru. 74 ] Agricultural Insurance in Latin America Livestock insurance There are opportunities to develop livestock insurance in the region. LAC is an important region for the production of cattle, poultry, pigs, and sheep. Cattle stocks in LAC amount to 392 million head, which is almost one-third of global cattle stocks. Poultry production is also very important, and poultry stocks in the region amount to 2.55 billion head, 15 percent of global stocks. The region also has important pig and sheep stocks. Pig stocks amount to 76 million head, 8.4 percent of global stocks. Sheep stocks amount to 84 million head, 7.6 percent of global stocks. Growth in the provision of livestock insurance will be accompanied by the design of better products. The supply of comprehensive livestock insurance in some countries is expected to grow in the short term, as the factors responsible for the failure of livestock insurance markets are expected to be resolved. Many governments are introducing policies to enforce compliance with the requirements of their export markets that aim to enhance the development of livestock insurance. In that regard, governments are implementing animal- tracing policies and strengthening their animal health and control systems to maintain their share of and access to beef export markets. It is expected that the adoption of these policies will boost the demand for livestock insurance. The implementation of animal-tracing policies will solve part of the market failures in livestock insurance markets. Microchip technology is expected to overcome many animal identification problems, to detect preexisting problems with animals, and to ease the monitoring of some livestock management practices. The strengthening of animal health care and prevention policies will result in better mandatory control of animal husbandry practices implemented by herders, including vaccination programs. Therefore, the insurance industry should feel more confident of the animal health and husbandry practices implemented by farmers and be willing to offer comprehensive livestock coverage. By implementing such mechanisms, governments are assuming liability in connection with the forced slaughter of animals in case of an outbreak of epizootic disease. In addition to the cost of forced slaughter, governments are facing a huge exposure due to the eventual business interruption caused by the closing of markets (ban on exports) following an outbreak of epizootic disease. In countries where proven animal health care and prevention protocols are in place, both situations represent an opportunity for the insurance sector. Several countries are implementing animal health care and prevention protocols to control epizootic diseases. Chile, Argentina, Mexico, Uruguay, and Brazil are ahead in the implementation of these protocols. Poultry and swine insurance also offer a promising opportunity in LAC. Insurance products for these classes of animals are not developed. There are a few exceptions, including tailored swine insurance in Mexico to cover classical swine fever. Poultry production is generally not covered, although there is some evidence that some property insurance policies are covering poultry production as contents of insured buildings. The development of tailored insurance coverage for intensive poultry production is challenging. However, given the potential opportunities, it would be worthwhile for the industry to explore the possibilities of developing an insurance product for poultry production at least. Forestry insurance LAC region offers several opportunities to develop forestry insurance. The region has a significant potential for forestry insurance, targeting both standing timber plantations and natural forest. Traditionally, forestry insurance has been offered exclusively for commercial plantations of standing timber. Forestry insurance for commercial plantations of standing timber has reached significant levels of penetration in the region. Almost 19 percent of plantations are currently insured, but, out of the 12 million hectares of commercial forestry in the region, 9.7 million hectares (or 80 percent of total commercial forest area) are not insured. The expected improvement in product design for plantations of standing timber will enhance the uptake of forestry insurance. Forestry insurance is mostly well developed for covering fire and wind perils in pines and eucalyptus commercial plantations in temperate climate areas. Although the level of coverage is good, these areas provide opportunities for further development. For instance, in Brazil and Argentina more than 5 million hectares of commercial forestry plantations are not currently insured. In contrast to the significant penetration of forestry insurance in temperate climate areas, forestry insurance is almost nonexistent in tropical areas. To date, the insurance industry has been unable to develop suitable forestry insurance products to cover the risks faced in tropical areas, such as tropical storms, floods, and diseases. More than 4 million hectares of commercial plantations in tropical areas are not insured in LAC. The development of suitable forestry insurance coverage for these plantations will certainly expand the uptake. The development of suitable forestry insurance products to be used as collateral for reducing carbon dioxide emissions from deforestation and degradation (REDD) credits is an opportunity for forestry insurance. REDD credits are being considered as a way for countries, companies, and individuals to offset their emissions by preventing deforestation and the release of stored carbon dioxide. Brazil, Peru, and Mexico are leading the development of REDD projects in the region. In order to offer risk transfer solutions for REDD projects, the insurance industry still has to address the following issues related to product development: (a) how to value the sum insured and (b) how to match the period of insurance with the maturity of the bond. 76 ] Agricultural Insurance in Latin America Aquaculture insurance There are several opportunities to develop aquaculture insurance in the region. Many LAC countries have developed professional aquaculture sectors that produce for very demanding markets using international best practices. Aquaculture production is a significant economic activity in Chile (one of the main salmon-exporting markets in the world), northeastern Brazil, northern Peru, Ecuador, Colombia, República Bolivariana de Venezuela, Central American countries, and Mexico. However, so far, aquaculture insurance has been scaled up only in Chile and Mexico. Currently, more than 930,000 tons of fish stocks are not insured in the region. Shrimp and tilapia production offers an opportunity to develop aquaculture insurance. Shrimp production amounts to 450,000 tons a year, concentrated in Mexico, Ecuador, and Brazil. Aquaculture insurance, however, has been scaled up only in Mexico, where approximately 10,000 hectares of the 70,000 hectares of shrimp farms are insured. Tilapia production amounts to approximately 170,000 tons a year, concentrated mainly in northeastern Brazil, Honduras, Colombia, and Ecuador. Currently, the provision of aquaculture insurance for tilapia production is limited to isolated facultative insurance policies. The low penetration of aquaculture insurance for shrimp and tilapia production indicates that there is huge potential for the development of insurance products for these species. There are still opportunities for enhancing aquaculture insurance in Chile. Aquaculture insurance in Chile focuses mainly on providing risk transfer solutions for medium- and large-scale salmon aquaculture firms. However, some niches in the Chilean aquaculture industry have not yet been fully serviced, including small-scale fish farms. In addition, the development of aquaculture insurance products for mussels and other mollusks offers considerable potential. The development of aquaculture insurance must be accompanied by capacity building. Aquaculture insurance is a very specialized and technical agricultural insurance subline. The insurance industry in most of the countries lacks specialized underwriters and loss adjusters. Therefore, surveyors and loss adjusters have to be hired from overseas, increasing the costs of providing aquaculture insurance and limiting uptake to large-scale aquaculture firms. This situation could be reversed if the industry would invest in developing local capacity to write aquaculture risks and to perform loss adjustments. CHALLENGES FOR THE DEvELOPMENT OF AGRICULTURAL INSURANCE IN LAC The process of promoting and enhancing agricultural insurance in the region implies overcoming critical challenges, from both the government and the industry perspectives. These challenges, according to the World Bank agricultural risk management framework, can be classified into four categories: institutional challenges, financial challenges, technical challenges, and operational challenges. Each of the challenges facing governments and the insurance industry as well as the potential solutions to overcome them are discussed below. Institutional challenges The development of agricultural insurance requires an appropriate institutional framework. An appropriate institutional framework helps to correct market imperfections that could hamper the emergence of a competitive private insurance market. A wide spectrum of institutional frameworks for agricultural insurance exists in the region, from the weakest institutional frameworks in some countries in Central America and the Caribbean to the most evolved ones, such as in Brazil and Mexico. The expansion of agricultural insurance cannot rely exclusively on market mechanisms. Pure market-based agricultural insurance, as expected, focuses on the most profitable segments of agricultural production. The previous section identified a number of opportunities to develop the market. However, in order to take advantage of those opportunities, significant investments will have to be made in information, infrastructure, training, and capacity building. Investment in these activities is not affordable for the private insurance industry alone, and the support of governments will be needed. In such cases, the existence of an appropriate institutional framework in which the government provides stability and financial capacity to the system and the private sector provides know-how is a key for the development of agricultural insurance. The development of agricultural insurance requires the promotion of an adequate legal and regulatory framework. The general principles governing the regulation and supervision of general insurance and insurance contracts apply, mutatis mutandis, to agricultural insurance. In most LAC countries, the framework regulating agricultural insurance contributes to fostering agricultural insurance. However, in a few countries, particularly those where agricultural insurance is not well developed, such as in most of the Caribbean countries, regulatory issues still hamper development. When there is a reasonable correlation between an index and a particular commercial loss, the legal and regulatory framework should allow index-based products to be classified as insurance products. Index-based insurance has been demonstrated to be a suitable tool for transferring risk, in particular, the production risks facing traditional subsistence and semi-commercial farmers, which are the dominant types of farmers in many areas where agricultural insurance is still not developed. 78 ] Agricultural Insurance in Latin America In several countries, such as Argentina, the regulatory authorities do not recognize index- based products as insurance products. Recognizing index-based risk transfer products as insurance products would benefit traditional subsistence and semi-commercial farmers. Delivering agricultural insurance through channels that deliver other services to farmers has been demonstrated to reduce transaction costs. The insurance law could also allow, subject to proper supervision, cooperatives or financial institutions such as microfinance institutions to act as insurance agents. The role of coinsurance pools in agricultural insurance may offer an opportunity for insurance companies to share the very high start-up costs of new programs. The development of agricultural insurance is complex and costly; thus access to technical and financial assistance for development is desirable. Although many countries have expanded their technical capacity, others have just started. The experience of countries that have been developing agricultural insurance is that this process is long and costly. A critical minimum mass of potential insured and economies of scale are needed for the private sector to make the necessary investments. In addition, the adaptation of any agricultural insurance scheme is, in most cases, subject to costly financial losses that can jeopardize the continuity of such programs. The insurance sector alone does not have sufficient resources to make all the investments needed for a sustainable agricultural insurance scheme. The establishment of agricultural insurance pools is often justified in such circumstances. Agricultural insurance pools, jointly with government assistance, allow the industry to share the start-up and adaptation costs and to reach the economies of scale needed to implement sustainable agricultural insurance schemes. Agricultural insurance needs to be integrated with other products and services received by the farmers. International experience shows that it is very difficult to scale up agricultural insurance in isolation from other services the farmers are receiving. Crop producers first want to ensure that they have timely access to inputs and, often, credit with which to buy these inputs; only then will they consider purchasing crop insurance. For instance, in Brazil, in spite of the existence of premium subsidies, agricultural insurance did not scale up until the Banco do Brasil started to require commercial farmers to purchase crop insurance as a prerequisite for accessing rural credit. In Chile, a major proportion of the crop insurance sold in the country is linked to loans given either by development rural banks (for example, Banco de Chile) or by integrated agribusiness firms (for example, IANSA). Similarly, livestock mortality insurance schemes can be successfully scaled up where insurance is complemented by vaccination programs and intensive support and training in improved livestock husbandry and management, such as coverage for classical swine fever in Mexico. The integration of agricultural insurance with other products and services received by the farmers becomes critical when the objective is to provide insurance to traditional subsistence and semi-commercial farmers. Financial challenges The promotion of a cost-effective layering of agricultural production risks is needed. Risk layering should be seriously considered in the design of schemes. In risk layering, small and recurrent risks are often retained by farmers or groups of farmers, less frequent but more severe losses are transferred to the domestic insurance industry, and catastrophic losses are transferred to the international reinsurance market, possibly backed by governments. There are several examples in the region where groups of farmers have organized themselves to pool agricultural risks, for example, the fondos de aseguramiento in Mexico and the hail mutual funds in Uruguay, Argentina, and southern Brazil. The insurance industry also has an active role in pooling risk of the sector. In LAC, the liabilities arising out of agricultural business that are retained by the insurance industry average approximately 30 percent of total liabilities. However, these levels of retention vary from 50 percent in Argentina to less than 2 percent in some Caribbean countries. The remaining liabilities (approximately 70 percent of the total) are ceded to the reinsurance industry. Recently, in 2010, the government of Brazil enacted a law creating the Fundo de Catastrofe Rural in which the government is the reinsurer of last resort for liabilities arising out of agricultural insurance. Despite the achievements in this regard, further efforts should be made by governments and the insurance industry to spread the implementation of these practices to all LAC countries. Domestic insurance companies should be encouraged to pool agricultural risks. Agricultural insurance coinsurance pools have many advantages. The first advantage is that they allow insurance companies to pool their individual agricultural insurance into a more diversified and better structured portfolio and to approach international reinsurance markets in a better negotiating position. A second advantage is that they could play a risk aggregator function, insulating agricultural risks from other lines of business, particularly in low-income countries where the domestic insurance industry may have limited risk capital to sustain catastrophic agricultural losses. A third advantage is that they allow insurance companies to dilute the huge cost of developing new products. In spite of the advantages and the attempts that have been made to create them in several countries of the region, such as in Chile and Colombia, few pools are currently operating in the region (Argentina). If governments and the insurance industry are interested in expanding agricultural insurance in the region, the promotion of coinsurance pools has to be considered seriously when designing agricultural insurance schemes. Governments’ participation in risk financing on the top layers of catastrophic risk is needed to complement reinsurance markets. Governments can act as reinsurers or lenders of last resort through contingent loans. Governments can play an important role in supporting reinsurance programs. As reinsurers of last resort, governments can play a role 80 ] Agricultural Insurance in Latin America in (a) providing reinsurance capacity when this capacity is not available or is too expensive, (b) reducing the cost of reinsurance by putting a ceiling on the liabilities to be assumed by the reinsurer, and (c) lowering the agricultural insurance premium rates to be paid by the farmers. In Brazil, the government recently enacted a law creating the Fundo de Catastrofe Rural, which aims to provide government-funded catastrophic stop-loss protection for local insurers writing agricultural insurance business. The participation of the government as reinsurer of last resort is potentially very important for countries exposed to catastrophic risk in their agricultural sectors, such as the Caribbean, Central American, and Andean countries, if such catastrophic risk is well managed and financed. The role of agricultural insurance premium subsidies needs to be redefined. In several countries, these subsidy schemes, as they currently operate, are not financially sustainable either in the short term or in the medium to long term. Most of the agricultural premium subsidy schemes were designed based on “low” uptake ratios in the initial phases of development. In the initial phases of development, the fiscal budgets deployed for agricultural insurance premium subsidies were overestimated and not consumed in full. Because of this fact, several countries relaxed the conditions for accessing premium subsidies by (a) increasing the level of premium subsidies, (b) raising the ceiling on the total amount of subsidy that each individual insured (farmer) is allowed to receive, or (c) incorporating new agricultural activities as eligible for subsidies. Additionally, in some countries the subnational governments have started to complement the federal government’s agricultural insurance premium subsidies. As a result, agricultural insurance has become much more attractive to farmers, and the demand for agricultural insurance has been much higher than anticipated. Governments are realizing that the fiscal resources available for premium subsidies—at the current levels of agricultural insurance—are not sufficient to satisfy the demand and, at the same time, they are unable to cover the market at the current growth rates. Another factor is that, in many countries, the levels of premium subsidies are defined based on a single premium subsidy level. A single premium subsidy level is, however, a very blunt policy instrument if the government is trying to promote agricultural insurance to specific target groups (such as small farmers), specific crops (such as export cash crops, which small farmers can switch into to increase farm incomes), and specific geographic areas (such as disadvantaged or poor regions where farmers are in much greater need of financial support). However, in some countries such as Costa Rica, governments have developed variable premium rates for different types of farmers, crops, and regions, and it is suggested that other countries should consider modifying their premium subsidy programs along similar lines. Technical challenges Proper assessment of production risks, linked to ongoing product development, is a precondition for development of a sustainable agricultural insurance market. Risk assessment that analyzes and quantifies production risks is a critical first step in trying to improve agricultural risk management. Catastrophe modeling offers new tools to assess the economic impact of extreme events affecting agricultural production. Very often, production risks and their financial impacts are underestimated or misdiagnosed, leading to insurance programs that are inappropriate and ineffective for market players. The assessment of risk exposures arising out of the agricultural sector and the development of proper agricultural risk models to determine the probable maximum loss (PML) curves for the main sectors of agricultural production is a key to enabling governments to develop adequate agricultural risk management policies and agricultural insurance. To date, the development of catastrophic risk models for agricultural activities has been somewhat weak. Many of the programs currently in place are based on good rating procedures; however, few of them have a proper way to assess PML. The implementation of proper measures to control the accumulation of risk is still a challenge for the industry and should be addressed if the objective is to expand agricultural insurance coverage. Better agricultural and weather information services and infrastructure are needed. Proper assessment of agricultural production risks and the design of actuarially sound agricultural insurance products rely on the availability of agricultural production and weather data. In addition, the availability of reliable and timely weather and production data is essential for the development of weather and area-yield index-based products, respectively. National statistics offices have an essential role in collecting agricultural data, not only for policy purposes, but also for insurance purposes. The national weather service also plays a central role in providing weather data to the industry. A relatively dense network of tamper- proof weather stations is essential for the development of weather index insurance products. If the objective is to promote agricultural insurance in the region, governments should play an active role in providing proper agro-meteorological information to the insurance industry. Additional support for research and development of innovative agricultural insurance products and services is needed. In most countries, there is still a severe overreliance on the use of standard MPCI cover for all crops, farmers, and regions; alternative named-peril and index-based products are needed. MPCI programs have been implemented in several developing countries with limited success. MPCI products are complex and require heavy monitoring in order to mitigate moral hazard and adverse selection. Therefore, they are not geared toward small and marginal farmers. Innovative products, such as index-based insurance, as well as alternative channels of delivery, such as rural banks and farmers groups, should be promoted. Governments in the region can assist private sector crop insurers by financing research and development into new products and programs suitable to meet the demand for risk transfer solutions that are not being met by the products available in the market today. Mexico is a good example: both Agroasemex and private insurers have made 82 ] Agricultural Insurance in Latin America major investments in developing a wide range of crop (and livestock) insurance products to fit different circumstances. Agricultural insurance products should be tailored to the targeted clients. Universal programs have proven to be inefficient: there is no “one size fits all” solution. Insurance policies should be designed with regard to the types of perils, farmers, and agricultural activities, the existing delivery channels, the availability of trained loss adjusters, and fiscal resources available to support agricultural insurance. No one product is better than the others, and different types of products are most suitable in different contexts. MPCI is efficient when the insurer can closely monitor (in a cost-effective fashion) the farming practices and when the risks to agricultural production can be minimized. These criteria are met mainly by large commercial farms that control their risk exposure. Named-peril crop insurance (such as for hail and frost) has proven to be commercially viable for sudden and unforeseen losses that are relatively easy to assess through simplified and objective systems of damage-based loss adjustment. Area-yield index crop insurance is most suited to combinations of crops and hazards in which a series of more complex perils simultaneously affect a crop in a particular region. Area-yield index crop insurance requires, however, an efficient crop-yield sampling and loss adjustment system. Weather index crop insurance offers some promise, but only for certain hazards, such as drought, wind, or frost, that have a direct and simple impact on crop-yield losses. Effective weather-based crop insurance products are difficult to design if losses are caused by a complex interaction of weather variables. Livestock insurance faces the same challenges as crop insurance. Livestock accident and mortality insurance is effective when combined with veterinary services. Epidemic diseases are more difficult to cover, as they can cause catastrophic losses. Operational challenges Capacity building is needed in operational procedures for designing and administering agricultural insurance. The development of operational procedures in agricultural insurance is complex and requires specific expertise. Although in many countries this expertise has been developed, in others it is lacking. The countries that lack local expertise have to rely on costly services that are sourced from overseas, so if agricultural insurance is to be promoted, governments should facilitate access to international good practice on underwriting, policy terms and conditions, and loss adjustment procedures. In countries with developed agricultural insurance markets, such as Argentina, private insurers that are concerned with the future of agricultural insurance have signed agreements with universities in order to include courses related to agricultural risk and agricultural insurance in agricultural sciences curricula. The development of the agricultural insurance market should focus on standard products that are simple to administer. Indemnity-based insurance is viable when insurance companies can discriminate between policyholders (to avoid adverse selection) and monitor them (to avoid moral hazard). In addition, this type of insurance product pays out based on the actual loss suffered by the insured and therefore requires on-site loss assessments. In agriculture, loss assessment procedures can be complex and often crop specific. Loss adjustment procedures can be expensive and require close supervision. Indemnity-based products are suitable for well-defined perils (such as hail) and for large farms so that monitoring costs are acceptable in relation to the overall commercial premium. Index-based insurance can partly avoid informational asymmetries and does not require individual loss adjustment, but it exposes the policyholder to basis risk. Standard agricultural insurance products are needed when the objective is to provide insurance to small and semi- commercial farmers. Agricultural insurance should be bundled with existing services or networks operating in the rural sector. Delivering and servicing agricultural insurance in rural areas, particularly to scattered small and marginal farmers, can be very expensive and can significantly affect the commercial premium. These costs can be high whatever the type of insurance offered (for example, indemnity based or index based). Governments should promote the role of intermediaries (for example, marketing groups, cooperatives, banks, and mutual groups) that can aggregate clients and risks and service the products at low costs. Cooperatives, producer associations, rural banks, and microfinance institutions should be promoted as delivery channels for agricultural insurance. These institutions can play an important and low-cost role in delivering agricultural crop and livestock insurance products to small farmers, in particular. They operate at very low overhead costs compared with private commercial insurance companies and could form the basis for future development and scaling-up of agricultural insurance provision in these and other developing countries. In the region, a leading example of the use of partnerships for delivering agricultural insurance is the partnership in Brazil between the insurance company Alliança do Brasil and Banco do Brasil. Promoting the use of agricultural risk management technical support units (TSU) in start-up situations is needed. In start-up situations where market infrastructure is not yet developed, a TSU could be established to provide specialized services to agricultural insurance companies and other risk-pooling vehicles. This unit should have the support of the government, the insurers, and the reinsurers. The TSU could be either a stand-alone entity or hosted by an insurance provider (such as an agricultural insurance pool or a monopoly insurer). The TSU would aim to (a) create a center of expertise able to support the development and scaling up of agricultural insurance; (b) establish a core team of agricultural insurance experts to provide technical support to agricultural insurers in underwriting, product 84 ] Agricultural Insurance in Latin America development, pricing, product delivery, loss adjustment, and catastrophic risk financing; (c) create and manage a centralized database of agricultural statistics (crop, livestock, forestry, aquaculture) and weather statistics, with the purpose of making this database available to agricultural insurance practitioners; and (d) promote the exchange of expertise among insurance companies and access to international best practice through training courses, operating manuals, and other means. 5. FINAL REMARKS Agriculture is an important sector in many LAC countries, from both an economic and a social point of view. The agricultural sector contributes 5.5 percent of GDP of the economies of the region and 15.6 percent of total exports in the region. However, its contribution is much higher when considering linkages to the agribusiness and food services sectors. The agricultural sector in Latin America and the Caribbean (LAC) is also relevant from the social point of view. Agricultural production faces a myriad of risks in the region. Owing to the occurrence of weather events, pests, and diseases, agricultural producers cannot predict with any certainty the amount of output that the production process will yield. Agricultural producers can also be hindered by adverse events during harvesting or collecting that may result in production losses. The perils faced by agricultural production in the region vary among geographic areas. Certainly, all the geographic areas in LAC face risks that can be catastrophic for agricultural production. Agricultural insurance is just one risk management financial tool that is used by agricultural producers in the region to transfer the risks they face. Farmers and governments have devised risk management strategies to deal with agricultural production risks. These strategies can be divided into informal and formal risk management strategies. The management of agricultural production risks in the region relies on a combination of technical and, when they are available, financial tools. Overall, agricultural insurance has reached fairly good levels of development in many LAC countries. Agricultural insurance is available in most countries in the region, and the industry offers a comprehensive range of agricultural insurance products. The level of penetration of agricultural insurance, except for livestock insurance, is reasonably high. Total direct agricultural insurance premiums written in LAC during 2009 amounted to US$780 million, accounting for 4 percent of global agricultural insurance premiums. Governments in the LAC region are already playing an important role in supporting agricultural insurance. The main roles assumed by governments in supporting agricultural insurance is the provision of premium subsidies and the purchase of catastrophic agricultural insurance products. The total fiscal expenditures in supporting agricultural insurance in 2009 amounted to US$326 million or 42 percent of total agricultural insurance premiums written that year. Brazil and Mexico account for 90 percent of total regional government expenditures to support agricultural insurance. 86 ] Agricultural Insurance in Latin America The region, however, still has several gaps in the provision of agricultural insurance. Although the region has made good advances in the development of agricultural insurance, it still has a long way to go to develop fully its agricultural insurance market. The size of the gap in the provision of agricultural insurance varies by geography. Where the agricultural sector is more developed, the gap in the provision of agricultural insurance is smaller. Agricultural insurance has enormous room for growth in LAC region. The gap in penetration in agricultural insurance represents an opportunity for the insurance industry. Assuming the current terms and conditions of insurance policies, it is estimated that the total agricultural insurance premiums in the region will increase US$65.3 million for each percentage point of increase in insurance penetration rates across all types of agricultural insurance. The region still presents several opportunities for the development of crop insurance. Several agricultural activities and geographic areas in the region are still not served by agricultural insurance. In this regard, opportunities exist to enhance the current portfolio of crop insurance products and meet the demand for agricultural insurance, to tailor products to the risk transfer needs of different participants in the agribusiness value chain, and to develop macro-level crop insurance products to meet the government’s need to transfer risk related to the implementation of disaster relief assistance programs for farmers. For instance, the insurance industry has not yet designed crop insurance products to transfer the high-risk exposures faced by producers of specialty crops in the region. Additionally, the industry (besides the provision of catastrophic insurance for governments) has not yet designed crop insurance products suited to transfer the risk faced by the vast majority of semi-commercial or traditional subsistence farmers in LAC. The introduction of policies to enforce livestock production compliance with the requirements of export markets will enhance the development of livestock insurance in the region. This will occur for two reasons. First, as a result of the strengthening of animal health care and prevention policies in LAC countries, the insurance industry will be willing to offer comprehensive livestock coverage. Second, the LAC governments that implement such policies will assume liabilities in connection with the forced slaughter of animals in case of an outbreak of epizootic disease. In addition to the cost of forced slaughter, governments will also face a huge exposure due to the business interruption caused by the closing of markets (ban on exports) following an outbreak of epizootic disease. Both situations, in countries where proven animal health care and prevention protocols are in place, represent an opportunity for the insurance sector in the region. LAC region offers several opportunities to develop forestry insurance. An opportunity exists to develop suitable forestry insurance products to transfer the risk faced by forestry plantations situated in tropical climates. To date, forestry insurance in LAC has focused almost exclusively on transferring the risks (mainly, fire and wind) faced by commercial plantations of standing timber in Chile, Argentina, Uruguay, and Brazil. However, the insurance industry has been having relatively limited success in developing suitable forestry insurance products to transfer the risk faced in tropical areas by plantations of standing timber, such as tropical storms, floods, and diseases. The development of suitable forestry insurance products to be used as collateral for reducing carbon dioxide emissions from deforestation and degradation (REDD) credits is another promising area for forestry insurance. Opportunities exist to develop aquaculture insurance in the region. Many LAC countries have developed professional aquaculture sectors that produce for demanding markets using international best practices. Aquaculture production is a significant economic activity in northeastern Brazil, northern Peru, Ecuador, Colombia, República Bolivariana de Venezuela, Central American countries, and Mexico. However, so far, aquaculture insurance has been scaled up only in Chile and Mexico. The development of agricultural insurance in LAC will require governments and the insurance industry to overcome several challenges. In order to explore the opportunities for the development of agricultural insurance in the region, institutional, operational, technical, and financial challenges will need to be overcome. The types of challenges will be different in different countries and geographic areas in the region. There is no one-size-fit-all strategy for overcoming the challenges facing the development of agricultural insurance in LAC. The development of agricultural insurance in LAC requires a long-term public- private partnership (PPP) effort. International experience shows that it takes a long time to develop a comprehensive series of sustainable agricultural insurance products that are attractive to farmers. The process of promoting and enhancing agricultural insurance in LAC countries will demand significant efforts both from the insurance industry and from governments. PPPs are needed, along with direct government support, to foster agricultural insurance. The private insurance industry in isolation will not be able to overcome all of the challenges facing the development of agricultural insurance in the region. This is particularly true in countries with poorly developed infrastructure for the development of agricultural insurance and agricultural insurance markets. The institutional framework for agricultural insurance in the region should be strengthened. Fostering agricultural insurance will require the promotion of an adequate legal and regulatory framework. Although in most LAC countries, the existing regulatory framework helps to foster agricultural insurance, regulatory issues in a few countries (such as some Caribbean countries) are still hampering development of the industry. The promotion 88 ] Agricultural Insurance in Latin America of coinsurance pools that allow the industry to share the start-up and adaptation costs and to reach economies of scale will help to foster the development of agricultural insurance. The integration of agricultural insurance with other products and services received by the farmers becomes critical when the objective is to provide insurance to traditional subsistence and semi-commercial farmers. The implementation of appropriate risk financing strategies is critical for the development of agricultural insurance in the region. Farmers groups and insurance companies should be encouraged to pool agricultural risks. There are several examples in the region where farmers groups and insurance companies have organized themselves to pool agricultural risks. Further efforts should be made to spread the implementation of such practices to all LAC countries. Government participation in risk financing on the top layers of catastrophic risk should also be promoted to complement reinsurance markets, particularly in countries where agricultural production faces catastrophic risks. Governments and the private insurance industry need to overcome technical challenges for the sustainable development of agricultural insurance markets in LAC. The assessment of risk exposures arising out of the agricultural sector and the development of proper agricultural risk models to determine the probable maximum loss curves for the main sectors of agricultural production are keys to enabling governments to develop adequate agricultural risk management policies and to promote the development of agricultural insurance. The implementation of proper measures for controlling the accumulation of agricultural risks is still a challenge for the industry in the region. This challenge should be addressed if the objective is to expand agricultural insurance in the region, in particular, to those agricultural activities with high risk exposures such as high- value crops, aquaculture, and forestry. The proper assessment of agricultural production risks and the design of actuarially sound agricultural insurance products rely on the availability of agricultural production and weather data. Governments should invest in better agricultural and weather information services and infrastructure. Support for research and development of innovative agricultural insurance products targeting traditional subsistence and semi- commercial farmers is needed in the region. Governments can play an important role in assisting private sector crop insurers by financing research and development into new products and programs that are suitable to meet the demands for risk transfer that are not being met by the products available in the market. Operational challenges are still limiting the development of the agricultural insurance market in the region. The development of operational procedures in agricultural insurance is complex and requires specific expertise. Although many countries have developed this expertise, others have not. In these countries, if agricultural insurance is to be promoted, governments should facilitate access to international good practice on underwriting, policy terms and conditions, and loss adjustment procedures. The focus should be on standard agricultural insurance products, which are simple to operate. Such products are needed if the objective is to provide insurance to small and semi-commercial farmers. Agricultural insurance should be bundled with existing services or networks operating in the rural sector in order to dilute the transaction costs involved in its provision. The creation of technical support units for agricultural insurance should be promoted. An additional challenge for the development of agricultural insurance in the region is the fiscal capacity to sustain the current levels of government support to agricultural insurance. LAC agricultural insurance markets have been growing rapidly in recent years, fueled mainly by public sector support, both through agricultural insurance premium subsidies and through direct participation in purchasing catastrophic agricultural insurance for small farmers. Governments in the region have been able, so far, to afford the current levels of financial support. However, it is uncertain whether they will be able to maintain those levels of support if the market continues to grow at the current rates. BIBLIOGRAPHY Agroasemex. 2009. Programa del seguro para contingencias climatoliógicas: Informe de avance al cierre del ejercicio fiscal 2009. Querétaro, Mexico: Agroasemex. ———. 2010. Programa del subsidio a la prima del seguro agropecuario: Informe de avance al cierre del ejercicio fiscal 2009. Querétaro, Mexico: Agroasemex. Anderson, J. 2001. “Risk Management in Rural Development: A Review.” Rural Strategy Background Paper 7, World Bank, Washington, DC. Arias, D., and K. Kobarrubias. 2006. Seguros agropecuarios en Meso America: Una oportunidad para desarrollar el mercado financiero rural. Washington, DC: Inter-American Development Bank. Cabrales, M. 2010. “Desafíos técnicos y estructurales para el desarrollo del seguro agropecuario en Brasil.” Paper presented at the eleventh meeting of the Asociación Latinoamericana para el Desarrollo del Seguro Agropecuario (ALASA), “El seguro agrícola en América: Logros y desafío,” Cartagena de Indias, Colombia. Celaya del Toro, V. 2010. “El uso de los seguros catastróficos para atender daños por contingencias climatológicas en el sector agropecuario de México.” Paper presented at the eleventh meeting of ALASA, “El seguro agrícola en América: Logros y desafíos,” Cartagena de Indias, Colombia. Cullen, J., M. Tüller, and J. Trueb. 2009. “Betting the Farm? Agricultural Risk in Brazil.” Swiss Re Company. ECLAC (Economic Commission for Latin America and the Caribbean). 2008. Anuario estadístico de América Latina y el Caribe, 2007. Santiago: ECLAC. ———. 2010. “El potencial acuicultor de América Latina.” Industrias Pesqueras, May 15. http://www.industriaspesqueras.com/noticias/informes/388/el_potencial_acuicultor_de_ america_latina.html. FAO (Food and Agriculture Organization). 2009. FAOSTAT: FAO Statistical Database 2009. Rome: FAO. http://faostat.fao.org/. 92 ] Agricultural Insurance in Latin America FAO and World Bank. 2001. Farming Systems and Poverty: Improving Farmers’ Livelihoods in a Changing World. Rome: FAO; Washington, DC: World Bank. Giordano, P. 2006. “La importancia de la Ronda de Doha para la agricultura en América Latina.” Paper presented at the workshop “Negociaciones comerciales internacionales en agricultura,” Organisation for Economic Co-operation and Development, World Trade Organization, and the World Bank, Buenos Aires. Guzmán-García, A. 2010. “El seguro agrario en el Perú.” Paper presented at the eleventh meeting of ALASA, “El seguro agrícola en América: Logros y desafío,” Cartagena de Indias, Colombia. Hazell, P., C. Pomareda, and A. Valdes. 1992. “The Appropriate Role of Agricultural Insurance in Lower-Income Countries.” Journal of International Development 4 (6): 567–81. ———. 1986. Crop Insurance for Agricultural Development. Baltimore, MD: Johns Hopkins University Press. Iturrioz, R. 2009. Agricultural Insurance. Primer Series on Insurance 12. Washington, DC: World Bank. ———. 2010. “Seguro agropecuario en América Latina: Situación actual, desafíos y oportunidades.” Paper presented at the eleventh meeting of ALASA, “El seguro agrícola en América: Logros y desafíos,” Cartagena de Indias, Colombia. Mahul, O., and C. Stutley. 2010. Government Support to Agricultural Insurance: Challenges and Options for Developing Countries. Washington, DC: World Bank. Martínez-Córdova, L. R., and M. C.–J. Martínez Porchas. 2009. “Mexican and World Shrimp Aquaculture: Sustainable Activity or Contaminant Industry?” Revista Internacional de Contaminación Ambiental 25 (3, August): 181–96. Mesquita de Sant’Ana, E. 2010. “Seguro rural en Brasil.” Paper presented at the eleventh meeting of ALASA, “El seguro agrícola en América: Logros y desafíos,” Cartagena de Indias, Colombia: ALASA. Methol Petit, M. 2010. “El seguro agrícola en Uruguay: Logros y desafíos.” Paper presented at the eleventh meeting of ALASA, “El seguro agrícola en América: Logros y desafíos,” Cartagena de Indias, Colombia Ministerio de Desenvolvimento Agrario do Brasil. 2010. “Challenges and Opportunities: Brazilian Experience in the Field of Agricultural Insurance.” Paper presented at the ninth meeting of the GFDRR (Global Facility for Disaster Reduction and Recovery) Consultative Group, “Agricultural Insurance in Developing Countries,” Washington, DC, October 6. Munich Re Group. 2009. World Map of Natural Hazards. Munich: Münchener Rückversicherungs-Gesellschaft. Ochiuzzi, S. 2010. “Gestión de riesgos agropecuarios en la Argentina: Experiencia y desafíos.” Paper presented at the eleventh meeting of ALASA, “El seguro agrícola en América: Logros y desafíos,” Cartagena de Indias, Colombia. OIE (World Organisation for Animal Health). 2007. Pre-feasibility Study: Supporting Insurance of Disease Losses; Final Report, Part III. Paris: OIE. Soto Baquero, F. 2009. “Crisis financiera y financiamiento agropecuario y rural en América Latina: Una mirada más allá del corto plazo.” Paper presented at the “Seminario Institucionalidad Agropecuaria y Rural,” FAO, Santiago de Chile. Townsend, R. 2005. “Weather Insurance in Semi-Arid India.” Paper prepared for the Commodity Risk Management Group, Agricultural and Rural Development Department, ESW, World Bank, Washington, DC. Trivelli, C., and H. Venero. 2007. Banca de Desarrollo para el Agro: Experiencias en curso en Latinoamérica. Lima: Instituto de Estudios Peruanos. UNEP (United Nations Environment Programme). 2000. Global Environment Outlook 2000. New York: Oxford University Press. Wenner, M. 2005. Agricultural Insurance Revisited: New Developments and Perspectives in Latin America and the Caribbean. Washington, DC: Inter-American Development Bank. ———. 2005. Natural Disaster Hotspots: A Global Risk Analysis. Disaster Risk Management Series 5. Washington, DC: World Bank. ———. 2007. World Development Report 2008: Agriculture for Development. Washington, DC: World Bank. ———. 2010. World Development Indicators. Washington, DC: World Bank. Annex. Agricultural insurance country fact sheets Table A.1 Agricultural insurance country fact sheet: Argentina Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities The agricultural There are 26 For hail crop Currently, federal The traditional named-peril coverage 1. Crop insurance: 187,000,000 5,443,000,000 insurance market insurance insurance, the government support to is basic hail plus fire insurance. In High penetration. is well developed companies that are most important agricultural insurance is addition to hail the farmer can elect to 137,000 hail and has a long approved by the delivery channel limited to the provision cover wind, freeze, excess moisture at insurance policies history. The use insurance regulator is agent brokers of technical assistance to harvest, and excess rain. Standard hail were issued (45% 94 ] Agricultural Insurance in Latin America of agricultural to offer agricultural who belong to the provinces and insurance coverage has a 6% total sum insured of farms) spread insurance is insurance products insurance company companies for the franchise, but several alternatives in over 19 million consolidated in in this market. Out network (mainly development of agricultural terms of franchises and deductibles hectares (50% of Buenos Aires, Santa of them, 23 are cooperatives). insurance. The assistance are available in the market. Original the total cultivated Fe, Córdoba, Entre private insurance provided by the federal gross rates for hail standard coverage area). Ríos, and La Pampa companies, six are Private insurance government consists of varies from 2% in low-risk areas up provinces. However, cooperatives, and companies do not information and capacity to 8% in risk-prone areas. Almost 2. Livestock in the remaining one is a public have a developed building, product research all crops can be insured under this insurance: provinces insurance company. network in the and development, and risk product The rates vary according to Insignificant agricultural However, out of countryside and mapping. the insured crop, the region, and the penetration. Named-peril insurance is far the 23 companies have to rely on selected deductible or franchise level. Approximately 300 from consolidated. authorized to retail brokers in Government support to Additional coverage is only available insurance policies offer agricultural order to reach agricultural insurance for wheat, soybeans, corn, barley, cover about 2,000 Hail insurance was insurance, only 10 farmers. is channeled through and sunflower. Original rates vary head of cattle out introduced in 1898 offer agricultural the Agriculture Risk depending on the crop, location, and of an estimated and has 95% of insurance. MPCI and forestry Office (Oficina de Riesgo type of additional peril. For example, stock of 50 million. the total insured business are placed Agropecuario) of the original gross rates vary from 1 to 3% area and 97% of The two biggest mostly through Ministry of Agriculture, for freeze and from 1.5 to 2.5% for 3. Forestry Crop the total agriculture insurers offering retail brokers and Livestock, and Fisheries, wind. Deductibles applied for this kind insurance: premiums written agricultural cooperatives. which is the agricultural of additional cover can reach 20% of Approximately in Argentina. insurance, both insurance technical support the total sum insured. 40 insurance MPCI started to cooperatives, unit in the country. policies are issued be offered during account for 39% of MPCI is offered only to soybeans, in the country. the late 1990s, written premiums Subnational governments corn, sunflower, wheat, and barley The total insured but due to the and liabilities. participate actively in crops. Guaranteed yields under this area amounts to relatively high cost Almost all of managing agricultural coverage vary from 40 to 65% of 130,000 hectares and low guarantees the agricultural insurance schemes. The either the actual production history of of standing timber, offered, this insurance business is provinces of Mendoza, Río the zone or the expected yield as it is accounting for 5% product has not currently reinsured Negro, Neuquén, Chubut, determined by the insurance company of the total man- reached significant in the international and Chaco have their own surveyor. The product is offered on made forested area penetration among reinsurance market programs in place. In 2009 an individual basis or on a global in Argentina. farmers in the under quota share provincial governments MPCI portfolio basis (all crops in all MPCI country. and stop-loss spent US$5.5 million, both locations). Original gross rates for 4. Remaining lines treaties. in subsidizing agricultural individual MPCI vary from 4 to 7% of of business: No Forestry insurance insurance premiums and the total sum insured, depending on penetration. Each started to be in purchasing catastrophic the crop, region, and coverage level. line has less than offered in recent insurance coverage for the Original gross rates vary from 1 to 50 issued policies. years. However, the subnational (provincial) 5%, depending on the crop, region, supply of forestry governments. portfolio distribution, and coverage insurance is mostly level. to big Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities forestry enterprises, At the time of writing, Despite experiences with both and the product the federal government area-yield index and weather index has not reached has presented a bill insurance products in the past, no significant levels of to parliament for the weather index insurance policies are in Crop penetration in the creation of the Integrated place in this market. Area-yield index country. Agricultural Insurance insurance is limited to one facultative Index-based System (SICAF). The SICAF policy issued to a large-scale Despite the promotes the creation of agribusiness firm. importance of public-private partnerships cattle production for agricultural insurance, Livestock insurance covers animal in Argentina, the including (a) the provision mortality plus some endemic diseases penetration of of subsidies for agricultural but excludes pandemics and theft. cattle insurance is insurance premiums; Original gross rates are around 4 to insignificant. (b) the participation 6%. of government in the Livestock catastrophic risk layers; and Animal mortality (c) information and capacity building in agricultural risk management. SICAF’s budget amounts to US$75 Forestry insurance covers the standing million. timber value of commercial forestry plantations against fire, wind, hail, and freeze. Additional risk like debris removal and fire-fighting expenses are covered. Valuation criteria in case of indemnities could be formation cost or commercial value, depending on the age of plantation. Coverage is subject to deductibles of 10% of the Forestry loss on each and every loss and annual aggregate indemnity limits. Original gross rates vary from 0.3% up to 1% of the total sum insured, depending on the region, type of plantation, protection measures, contingency plans implemented by the insured, and deductibles and indemnity limits. Greenhouse insurance covers losses on greenhouse structures and contents (crops) due to fire, windstorm, hail, and flood. Deductibles of 10% of the loss apply. Original gross rates vary, depending of the type of structure Greenhouse and the region where the risk is located, but vary from 2 to 6 per mile. Bloodstock insurance policies cover high-value animals against accidental mortality, mortality during transportation, loss of function, and veterinary and surgical expenses. Deductible and annual aggregate Bloodstock indemnity limits apply, depending on the type of animal, age, and use. Table A.2 Agricultural insurance country fact sheet: Bolivia Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Agricultural Two insurance The delivery Bolivia may be the only Not offered Information is not 200,000 4,000,000 insurance was companies offer channels for country that addresses available. introduced to the agricultural agricultural agricultural insurance in its country in 2008. insurance products insurance are constitution (Article 407.4). Bolivian companies in Bolivia. insurance brokers The government of Bolivia Named-peril have made and a network has enacted an ambitious strategic alliances The agricultural of crop input law to promote crop with Argentine insurance business suppliers. insurance in the country. Initially MPCI policies are offered insurance in Bolivia is mainly This law promotes a basically to cover soybean production companies and reinsured by comprehensive agricultural (summer and winter crops). Eventually, brokers in order to Argentine insurance insurance scheme, aimed 96 ] Agricultural Insurance in Latin America the product will be offered to other develop agricultural companies that act to provide MPCI coverage crops. The guaranteed yields under insurance for the as a reinsurer for for up to 80 percent of this policy vary from 40 to 60% APH, market. their counterparts in the actual production depending on the crop, region, and Crop Bolivia. history (APH) in each of the guaranteed yield. These products are Few agricultural departments. offered on an individual basis and insurance mutual are linked mainly to input suppliers’ MPCI schemes promoted The law also contemplates loans. The policy covers all types of by the international the creation of an insurance weather risks and fire, but excludes donor community fund that will be financed uncontrollable biological perils. are currently in by the government, the place in Bolivia. sectors concerned with Original gross rates for individual agricultural production, and MPCI vary from 4 to 8% of the total the international community. sum insured, depending on the level However, the law does of coverage, the insured crop, and the not mention the amount region. established for such a fund. The law considers the provision of crop insurance Weather index-based insurance premium subsidies, but does was offered in the country in 2006. not set the amount of such However, not a single policy was sold, subsidy. and the product was discontinued. Index-based Although the agricultural insurance scheme in Bolivia Not offered aims to provide insurance coverage for all crops and all regions in the country, crop insurance will initially be offered for potato, rice, Livestock corn, wheat, quinoa, and soybean crops. Animal mortality Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities The government of Bolivia Forestry insurance covers the standing is advocating the regulation timber value of commercial forestry of this law, and none plantations against fire and wind of its benefits has been damage. Additional risks like debris implemented yet. removal and fire-fighting expenses are covered. Valuation criteria in case of indemnities could be formation cost or commercial value, depending on the age of plantation. Coverage is Forestry subject to deductibles of 10% of the loss on each and every loss and annual aggregate indemnity limits. Despite several attempts to introduce forestry insurance in the country, so far, no forestry insurance policies have been issued in Bolivia. Not offered Greenhouse Not offered Bloodstock Table A.3 Agricultural insurance country fact sheet: Brazil Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Agricultural Nine insurance The delivery Since 2005 the federal Named-peril policies are offered for 1. Crop insurance: 255,900,000 5,806,000,000 insurance was companies offer channels depend government has been crops, vineyards, fruit plantations, and Low penetration, introduced in agricultural on the line of subsidizing agricultural vegetable crops in Rio Grande do Sul, but the adoption Brazil in 1955 by insurance products business. insurance premiums. Santa Catarina, Paraná, and São Paulo rate is growing the Companhia in Brazil. All of Some subnational states. Hail is the basic covered peril, rapidly. In 2009, Nacional do them are private For MPCI the main governments, like São Paulo, but for some crops and plantations, 6.7 million Seguro, a public companies. delivery channels have started to complement freeze or excess rain can also be hectares (10% of insurance company are banks, financial federal government selected. Original gross rates vary from cultivated area) that operated until The main insurance institutions, subsidies. 6 to 9% of the total sum insured, were insured. Named-peril the mid-1990s. company is closely cooperatives, and depending on the deductible level, the According to In 1998, private related with the input suppliers. Federal government type of crop, and the region. For this information 98 ] Agricultural Insurance in Latin America insurance national bank and subsidies range from 30 coverage, a minimum deductible of collected for the companies started accounts with 51% In the case of to 60% of the premium, 20% applies. study, 72,000 to offer hail crop of total market hail insurance depending on the crop and insurance policies insurance for fruitspremiums. and forestry, state of the federation. MPCI policies are offered for soybean, were issued in in southern Brazil. bloodstock, and The federal budget for corn, corn double cropped, peanut, 2009. The other four livestock insurance, agricultural insurance sugarcane, and wheat crops in the Then in 2003 companies compete retail brokers are subsidization in 2009 was states of São Paulo, Mato Grosso, 2. Livestock the companies for the remaining the main channel. US$149 million, which, in Mato Groso do Sul, Goias, Bahia, insurance: Low expanded their market. addition, is complemented Minas Gerais, Tocantins, Maranhao, penetration. Only line of business to The federal by approximately US$15 Paraná, Santa Catarina, and Federal 51,000 head of multi-peril crop Two companies government million financed by state District. cattle are insured, insurance (MPCI). offer livestock also supports governments. which represents and bloodstock agricultural Guaranteed yields covered vary from less than 1% of the This market is insurance. insurance by Federal government 50 to 70% of the actual production national herd. growing rapidly, sharing part of manages this subsidy history (APH), depending on the crop, Crop thanks to financial Five companies offer the catastrophic scheme through the Ministry region, and guaranteed yield. These 3. Forestry support from the forestry insurance. risk faced by of Agriculture but does not products are linked to bank or input insurance: Low federal government Two of these work agricultural establish the criteria for supplier loans. penetration. Only as well as many exclusively with production in a granting subsidies. 68,000 hectares state governments. this product on a special PPP fund Covered risks are fire, lighting, out of 5 million facultative basis. created with this The federal government drought, floods, excess rain, freeze, forested hectares Although far to objective, the also supports agricultural excessive heat, and wind. Pests and (less than 2%) are MPCI reach maturity, 100% of the Rural Catastrophe insurance by sharing part of diseases are totally excluded. insured. this market is the agricultural Fund (Fundo de the catastrophic risk faced third agricultural insurance business Catastrofe Rural). by agricultural production in Original gross rates for individual MPCI insurance market in Brazil is reinsured This fund provides a special PPP fund created vary from 2 to 8% of the total sum in Latin America with international stop-loss coverage with this objective, the Rural insured for coverage levels of 50% of and has enormous reinsurers and the to private insurance Catastrophe Fund (Fundo de APH and from 4 to 10% for coverage growth potential. local reinsurer, companies offering Catastrofe Rural). This fund levels of 70% of APH. Original gross the Brazilian agricultural provides stop-loss coverage rates vary, depending on the crop and Crop insurance Reinsurance insurance. The to private insurance the region. is the main Institute (IRB). fund is financed companies offering agricultural with contributions agricultural insurance. insurance product from the insurance The fund is financed with and accounts with industry, the contributions from the 92% of premiums. government, insurance industry, the the IRB, and government, the IRB, and international international reinsurers. reinsurers. Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Livestock and Area-yield index-based insurance bloodstock was introduced in the state of Rio insurance is the Grande do Sul in 1998. This insurance second most indemnifies insured farmers when important product, the average yield as determined by with 3% of total the Instituto Brasileiro de Estadisticas market premiums. for the municipality where the insured farm is located falls short of Forestry insurance, a guaranteed yield equivalent to 80% Crop which started in of APH in each municipality. So far, Index-based 2004, is the third the only crop insured is corn in Rio most important Grande do Sul. The minimum original product, with 2% gross rate for area-yield index-based of total market MPCI is 3.54%. In 2010 a large-scale premiums. agribusiness firms bought area-yield index insurance to protect its portfolio In addition to of crops and farms. the commercial farmers’ Cattle, goats, sheep, horses, and pork agricultural can be insured. insurance public- private partnership Basic livestock insurance covers death (PPP), the federal arising from accident, diseases, government has asphyxia, electrocution, fire, lightning, implemented poisoning, animal bites, abortion, PROAGRO (Brazilian vaccine inoculations, and slaughter Guarantee due to public order or medical Program) and SEAF stipulation. For cattle, insurance also (Insurance for covers deaths due to anaplasmosis Family Agriculture). and babesiosis, for animals born in endemic zones. Additionally the insured can choose to cover transportation, predation, clinical, Livestock and bloodstock surgery, and autopsy, fertility, penile hematoma, pregnancy, extension of international territory, and herd cover. Original gross rates vary depending on the type of animal, age, and zone. Forestry insurance covers the standing timber value of commercial forestry plantations against fire, wind, freeze, cold wind, hail, and flood. Fire-fighting expenses are also covered. Valuation criteria in case of indemnities could be formation cost or commercial value, depending on the age of the plantation. The insurance coverage is subject to a Forestry deductible of 10% of the loss on each and every loss and annual aggregate indemnity limits. Original gross rates vary from 3 per mile up to 1% of the total sum insured, depending on the region, plantation, protection, contingency plans, deductible, and indemnity limits. Table A.4 Agricultural insurance country fact sheet: Chile Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Chilean agricultural Five private The delivery Government support for The standard policy wording insures 1. Crop insurance: 46,000,000 3,900,000,000 insurance, although insurance channels depend agricultural insurance is crops against droughts, floods, frost, Low penetration. a relatively new companies offer on the line of limited to supporting crop wind, snow, and hail for almost all 11,900 policies market, is well agricultural business. insurance, mainly for small- of the annual crops sown in Chile were written, developed. insurance products and medium-size farmers. (POL 1 03 062 and POL 1 03 050). totaling 62,000 in the Chilean For example, for Insurance for forestry and Although these policies expressly hectares The main line of market. crop insurance aquaculture does not receive name the covered perils, the breadth (approximately business is forestry the main delivery any type of support from the of the perils covered and the fact 3% of the total insurance, which Out of the five, channels are banks government. that the loss appraisals are based on cropped area in was introduced in two offer crop, and microfinancial yield mean that this cover behaves in the country). 1990. aquaculture, and institutions (the The government supports practice as MPCI cover. 100 ] Agricultural Insurance in Latin America forestry insurance. Small Farmer crop insurance in two ways: 2. Forestry Aquaculture The remaining three Lending Bank and (a) crop insurance premium Almost all annual crops, table grape insurance: High insurance (basically offer exclusively Banco de Fomento) subsidies and (b) support plantations, and vineyards can be penetration. 600 for the salmon forestry insurance. and agricultural for product research and insured under this policy. Insurance policies have been industry) started industries (such as development and capacity companies, jointly with COMSA, have issued, covering in 1999, and most All of the insurance IANSA for sugar building. launched a crop insurance product around 85% of the of the industry is companies beets). for apples, avocados, and berries. planted forested Crop MPCI insured locally or participating in Government actively The trend is to incorporate specialty area. under international the crop insurance Forestry and supports crop insurance products into the crop insurance programs. program are aquaculture in Chile through the scheme. 3. Aquaculture reinsured in the business is placed implementation of crop insurance: High Crop insurance international market through insurance insurance premium Under Chilean MPCI policies, if the penetration. 50% in Chile dates to under quota share brokers. subsidies. The Chilean actual yield obtained by the insured on of aquaculture 1981, when the and stop-loss scheme targets small- and a farm is below 66.66% of the actual centers are Consorcio Nacional reinsurance treaties. The Chilean market medium-size farmers. It production history corresponding to insured. de Seguros is a broker’s is based on a single fixed the area where the farm is located, introduced an One single-crop market. In other subsidy of approximately the insurer has the right to receive individual-grower insurance business words, regardless 50% of the premium, with an indemnity equivalent to the multi-peril crop is placed on a of the delivery a baseline subsidy per policy percentage of the yield shortfall in insurance (MPCI) facultative basis in channel used to of approximately U$96 respect of the guaranteed yield. yield-shortfall the market. approach the and a maximum subsidy policy. The program farmers, retail per person per year of Original gross rates vary from 3% was discontinued in All of the forestry brokers manage approximately U$2,340. up to 9% of the total sum insured, 1998 due to lack of risks written by the relation depending on the region, and type of demand. the local insurance with the bank, The government bureau in crop or plantation. industry are agro industry, charge of implementation In 2000 a pool reinsured on a or government is COMSA, which is Currently there are no livestock of three local quota share basis. institution used a subsidiary of the insurance products in the market, and commercial to deliver the Corporación Nacional de the provision of livestock insurance is insurance The insurance insurance product. Fomento. very limited for horses. companies companies launched the reinsure all of Federal government nationally their aquaculture expenditures to support subsidized MPCI business with the crop insurance amounted to scheme. The pool international market US$3.1 million in 2009. only operated for under quota share two years before and catastrophic the insurers elected excess-of-loss Livestock and bloodstock to underwrite their facultative and business separately. semiautomatic treaties. Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities The Chilean Forestry insurance covers the standing government, timber value of commercial forestry through COMSA plantations against fire, wind, (Comisión Nacional weight of ice and snow, volcanic de Seguro Agrícola, eruption, and riots and popular the Agricultural disorder. Fire-fighting expenses are Insurance National covered. Valuation criteria in case of Commission), indemnities could be formation cost assumes an or commercial value, depending on active role in the the age of the plantation. Coverage enhancement of is subject to a deductible of 10% of crop insurance the loss on each and every loss, with in the country. minimum deductibles and annual COMSA manages aggregate indemnity limits. For Forestry the crop insurance forestry plantations original gross rates premium subsidies vary from 3 per mile up to 1% of the and authorizes total sum insured, depending on the the terms and region, type of plantation, protection conditions of the measures, contingency plans insurance policies implemented by the insured, and that will receive this deductibles and indemnity limits. In benefit. the case of large forestry plantations, these rates fall to 0.5 per mile, with deductibles higher than US$1 million on each and every loss. Named-peril policies (POL 1 04 004 and POL 1 04 005) cover fish farming business, including the rearing of coho salmon, salar salmon, trout, scallops, and other species of fish, in fresh or saltwater as well fish farming installations on land or in water. The perils covered under these insurance policies are mortality due to disease, algae blooms and phytoplankton, predation and theft, perils of nature, deoxygenating and failure of water or energy supplies, pollution and contamination, collision and impact by vessels, legal strikes, and fire. Deductibles are defined per covered peril as all individual losses caused by a single cause during a certain Aquaculture (salmon fish farms) period of time: (a) 90 and 60 consecutive days for known and unknown diseases, respectively; (b) 30 consecutive days for algae bloom; (c) 74 consecutive hours for the remaining covered perils. Deductibles also vary depending on the covered peril: (a) 20% of the value at risk per Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities site for diseases; (b) 17.5% of the value at risk per site for algae bloom; (c) 30% of the value at risk per cage for theft and predators; (d) 15% of the value at risk per site for natural perils. Market average original gross rates are 2.7% for biomass and 1.5% for equipment. Aquaculture (salmon fish farms) 102 ] Agricultural Insurance in Latin America Table A.5 Agricultural insurance country fact sheet: Colombia Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Crop insurance was Agricultural crop Crop and livestock Federal government support Named-peril policies are offered to 1. Crop insurance: 7,100,000 143,000,000 initiated in 1993, and livestock insurance are to agricultural insurance insure banana and plantain crops Low penetration. with government insurance is offered delivered through takes two forms: against flood, excess moisture, 9,000 policies enactment of exclusively by the insurance brokers and wind. Coverage is based on have been crop insurance private commercial and insurance (a) Insurance legislation the number of plants dead due to written, covering legislation (Law insurance sector. companies’ own as contained in the any covered peril. The geographic 49,600 hectares no. 69 of 1993). network. agricultural insurance scope of the program is limited to (approximately This law provided Mapfre Colombia law no. 69 of 1993 and the departments of Magdalena and 1% of the total a public-private is the only (b) Crop insurance premium Uraba. cropped area in framework for company offering subsidies, which vary the country). Named-peril crop insurance a combination of from 30% of premium Deductibles for this coverage are and authorized crop and livestock for individual policies variable and depend on the size 2. Forestry the provision insurance. to 60% for collective of the farm. Deductibles vary from insurance: Low of premium policies. 10% for farms smaller than 20 penetration. subsidies. A pilot An additional hectares to 5% for farms larger than Limited to a few wind and flood company, Compañía Livestock insurance does not 150 hectares. policies. insurance scheme Suramericana de attract any form of premium for bananas was Seguros, is about subsidies or other form of Since 2007 Mapfre Colombia 3. Aquaculture implemented by to launch a crop support from government. has underwritten a multi-peril insurance: the public-sector- insurance program. In 2010, the government of “loss-of-investment-costs” policy Nonexistent. owned Caja Agraria Colombia budget to provide (seguro a la inversión), which can in 1998, which Two other crop insurance premium be written either as a loss-of-yield 4. Livestock has quota share companies, subsidies amounted to indemnity policy (yield guarantee insurance: Low MPCI treaty reinsurance Liberty and QBE, approximately US$10 cover) or as a damage-based penetration. provided by various underwrite livestock. million. Out of this budget, indemnity policy (direct damage to 250,000 head of European crop only US$4.2 million is plant cover). This product is being cattle are insured, reinsurers. The All the agricultural effectively used. offered for a wide range of annual accounting for Crop banana treaty was insurance programs crops, including rice, maize, cotton, 2% of the cattle then transferred currently in place Several subnational sorghum, and tobacco. population in the to La Previsora in Colombia are governments are analyzing This product gives small-size country. (national reinsurer) reinsured, through the option to purchase plantain farmers access to in 1999/2000 quota share insurance to provide insurance-backed disaster relief and operated up semiautomatic and catastrophic protection assistance from the government. to 2002, when facultative treaties, to small and marginal premium subsidies in the international farmers. Such is the case The insured perils under this were withdrawn. market. of the government of coverage are drought, excess In 2007, subsidized Quindio Department, which moisture, hail, wind, landslide, crop insurance purchases catastrophic avalanche, freeze, and flood. was relaunched by coverage for small banana Mapfre Seguros farmers. The sum insured, rather than being Colombia, with defined as a function of the value government of the crops, is defined as a sum subsidies of agreed between the insured and premiums. the insurance company. This agreed Livestock insurance value for the sum insured is, usually, in Colombia started equivalent to the estimated budget in 2000. for government disaster relief assistance. Aggregate MPCI crop insurance at the departmental level “catastrophic product” The coverage triggers when the average yield of plantain production in the department falls below 40 percent of the actual production Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities history (APH) for the department. In such case, the insurance policy indemnifies the departmental government for the amount equivalent to the proportion of the yield shortfall times the sum insured. The cost of coverage is fully assumed by the departmental government. The federal “catastrophic product” government only intervenes by at the departmental level providing subsidies for the premium Crop Aggregate MPCI crop insurance up to 60%. A product based on a double 104 ] Agricultural Insurance in Latin America trigger between rainfalls used to be measured at a basket of weather stations used as reference for the cover and the actual yield obtained by the farmers; this was in place in the Colombian market Index based for cotton and rice crops during 2006 and 2007. The product was discontinued in 2007. This coverage was designed for bond securitization for titles backed by livestock production traded on the Bolsa Agropecuaria in Bogotá. The covered peril is theft, including theft caused by terrorist groups. Several conditions with regard to prevention measures are necessary to be eligible for the insurance. Deductibles are 10% on each and every loss with a minimum of four Livestock and bloodstock head of cattle. Original gross rate is 0.74% of the total sum insured. Forestry insurance covers the standing timber value of commercial forestry plantations against fire, wind, and other perils. The valuation criteria could be the formation cost or the commercial value, depending on the age of Forestry the plantation. Coverage is subject to a deductible of 10% of the loss on each and every loss and annual aggregate indemnity limits. Table A.6 Agricultural insurance country fact sheet: Costa Rica Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Crop insurance was Costa Rica had an The most Crop insurance in Costa MPCI is offered for rice, banana, corn, 1. Crop insurance: 480,000 7,000,000 first introduced in insurance monopoly important delivery Rica is regulated by the black beans, sugarcane, peppers, As of 2008, the Costa Rica in 1970. until 2008. channels are the Integral Law of the Insurance melons, palm, potato, passion fruit, crop insurance Two years later, in cooperatives, of Crops, which was pineapples, watermelon, tobacco, and penetration was 1972, a livestock Although the farmers promulgated in 1969. carrots against perils such as excess very low, and only insurance product market is open associations, moisture, volcanic eruption, water- 2.2% of the total was released on the to competition, and financial The government of Costa logging of the soil during harvest cultivated area is market. only the INS is institutions. Rica, through the INS, (prevention of harvest), hail, fire, insured (12,000 offering agricultural supported crop insurance floods, weeds, drought, earthquakes, hectares). Costa Rica’s insurance. The Ministry of through premium subsidies and winds. insurance market Agriculture used for rice, bean, onion, potato, 2. Livestock was controlled All agricultural to deliver crop plantain, and corn crops. The policy wording protects the insurance: No data by a state- insurance programs insurance products The average crop insurance insured from incurring direct costs are available. owned insurance operated by the INS to farmers. Retail premium subsidy is 49% on its insured unit. Therefore, the monopoly, Instituto are 100% retained brokers now play for crops involved in the guaranteed yield is equal to the direct 3. Forestry Nacional de by the insurance an important role scheme. The premium investment made by the insured, insurance: No data Seguros (INS) until company. in the delivery of subsidies received by the divided by the agreed price for the are available. Crop MPCI 2008, when the livestock insurance. farmers depend on the crop insured crop at the beginning of insurance market and size of farm. Bean crops the policy period. The maximum 4. Aquaculture was opened up to receive a 50% premium guaranteed yield is 70% of the insurance: No data competition. subsidy, and corn crops expected yield (based on average are available. receive a 65% premium yield in the canton in which the This market offers subsidy. For rice, premium farm is located); this implies a 30% a diverse mix subsidies depend on the deductible. If the actual yield is less of agricultural farm size: small farmers than the guaranteed yield, then insurance products. receive a subsidy of 65%; the insured receives an indemnity Products like medium farmers, 55%; and equal to the yield shortfall below the multi-peril crop big farmers, 40%. guaranteed yield times the agreed insurance (MPCI), price at the beginning of the policy livestock insurance, The government has period. Original gross rates vary from and aquaculture enacted a law creating a 3 to 8%, depending on the crop and insurance are fund to provide agricultural location. Original gross rates are also offered. Despite insurance premium differentiated by the size of farm. the high degree subsidies. This fund will of product be financed initially by Since 2007 Mapfre Colombia has diversification, a contribution from the underwritten a multi-peril “loss-of- penetration is very INS of US$7.8 million. investment-costs” policy (seguro a low. In addition to this initial la inversión), which can be written contribution, the fund will either as a loss-of-yield indemnity also be financed through policy (yield guarantee cover) or as a contributions from the damage-based indemnity policy (direct insurance companies damage to plant cover). This product offering agricultural is being offered for a wide range of insurance, agribusiness annual crops, including rice, maize, Livestock and bloodstock corporations, financial cotton, sorghum, and tobacco. institutions, and donors. Forestry insurance covers the standing timber value of commercial forestry plantations exclusively against fire. Valuation criteria in case of indemnities could be the initial costs Forestry or the commercial value, depending on the age of the plantation. Coverage is subject to a deductible of 15% of Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities the loss on each and every loss. For normal forestry plantations, original gross rates vary from 2.0 to 3.5% of the total sum insured depending on the region, type of plantation, Forestry protection measures, contingency plans implemented by the insured, deductibles, and indemnity limits. Basic coverage is against biomass mortality and natural perils. Coverage also includes the following perils: extreme temperatures, excessive rain, uncontrollable pests and diseases, volcanic eruptions, floods, and 106 ] Agricultural Insurance in Latin America Aquaculture earthquakes. For both covers, the deductible is between 15 and 20% of the total sum insured. Table A.7 Agricultural insurance country fact sheet: Dominican Republic Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Agricultural AGRODOSA is the The most The government had an MPCI yield-shortfall polices cover 1. Crop insurance: 3,000,000 49,000,000 insurance was first only insurance important delivery active role in formulating drought, floods, excess rain, wind and Low penetration. introduced in 1984 company offering channel is the the agricultural insurance cyclone (including tropical storms and As of 2010, by Aseguradora agricultural crop Banco Agrícola, law and in the AGRODOSA hurricanes), hail, and unknown pests 23,000 hectares of Dominicana insurance to which is the main start-up. and diseases. Rice crops are covered crops were insured, Agropecuaria, farmers in the finance institution against floods, excess rain, wind, accounting for 2% CA (ADACA), a Dominican Republic. for the rural sector. The government supports hail, cyclone, and unknown pests and of the total crop majority state- The company is Recently other agricultural insurance diseases. The coverage is triggered area in the country. owned entity, in a private-public channels like through the provision of once the actual yield obtained by order to provide partnership, but agents and farmers crop insurance premium the insured on its insured unit falls crop and livestock it is managed on associations and subsidies. below the guaranteed yield (which is insurance as strictly commercial cooperatives usually set at a maximum of 70% of MPCI collateral for the insurance principles have grown in Crop insurance premium the normal average yield) determined loans given by and is subject to importance. The subsidies range from 33 for each county and crop season. Banco Agrícola private insurance specialized delivery to 50% of crop insurance The indemnities are subject to the de la República regulations. channel for small premiums. application of deductibles equivalent Dominicana and marginal to 10% of the total sum insured for to subsistence More recently, other farmers is Banco In 2009 the government drought and 5% for the remaining farmers; most companies have Agrícola. spent approximately covered perils. The indemnity formula policies were issued expressed interest in US$1.25 million on in the case of loss is the percentage on a collective offering agricultural subsidies for crop insurance of yield shortfall with respect to the Crop basis, linked to insurance in the premiums. guaranteed yield, times the sum group loans. Dominican Republic, insured, less the deductibles. ADACA ceased but so far none of Currently, a draft agricultural operating in 1997 them has done so. insurance act is in the Named-peril crop insurance covering mainly due to the The crop Dominican Parliament, but flood and wind perils due to tropical withdrawal of insurance program at the time of writing, it has storms and hurricanes is offered to support from the implemented by not been enacted. banana and plantain plantations Banco Agrícola. AGRODOSA is (tropical storms and hurricanes). The reinsured in the coverage is based on damage to the In 2002 international market banana plants, including snapping, Aseguradora through a quota toppling, and uprooting caused by Agropecuaria share reinsurance wind and rotting of the plants due to Dominicana treaty. flood. In case of losses, the insured receives an indemnity proportional to Named-peril (AGRODOSA) relaunched crop the percentage damage to the plant insurance in population on the insured unit, times the Dominican the sum insured, less 20% of the Republic, starting total sum insured as a deductible. No with rice. livestock insurance product is available AGRODOSA offers on the Dominican market. a multiple-peril AGRODOSA offers insurance coverage crop insurance for greenhouses against windstorm. (MPCI) loss-of-yield policy for rice, bananas, and other crops. No livestock insurance product Greenhouse is being offered at this time. Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities The federal government supports agricultural insurance mainly by subsidizing premiums and by financing the start-up costs for AGRODOSA, in which it owns a share of 50%. 108 ] Agricultural Insurance in Latin America Table A.8 Agricultural insurance country fact sheet: Ecuador Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Crop and livestock In 2010 there was For crops, the most Since May 2010, the Multiple-peril crop insurance (MPCI) is 1. Crop insurance: 1,264,000 36,000,000 insurance was first only one private important delivery government of Ecuador offered only to rice, bean, sugarcane, Low penetration. introduced in 1980 commercial crop channel is the through the Agricultural onion, soybean, corn, potato, In underwriting under CONASA and livestock insurer banks. Colonial de Insurance Unit of the tomato, oil palm, banana, wheat, and year 2009/10, (Consejo Nacional in Ecuador, Colonial Seguros is offering Ministry of Agriculture is barley crops. Guaranteed yields under about 4,200 de Salud), a federal de Seguros. a crop-credit supporting crop insurance this coverage vary from 30 to 70% of insurance policies government public insurance product. through a premium subsidy the actual production history (APH) were issued, Crop MPCI sector insurance However, an scheme. Initially, the scheme depending on the crop, region, and totaling 22,300 company. The additional insurance For livestock, financed 60% of the cost of selected guaranteed yield. The product hectares of annual public sector company is about most policies are crop insurance premiums is offered on an individual basis crops (1% of total program was to start offering sold through the for maize, potato, rice, and through Banco de Fomento branches. national cropped discontinued at agricultural company’s own wheat crops. The market MPCI average original area). the end of the insurance in the sales agents. gross rate is approximately 3.8% 1980s. Crop and country. As of August 2010, the 2.- Livestock livestock insurance Colonial de subsidies were benefiting Individual animal mortality insurance insurance: As of was reintroduced Seguros works 850 farmers who were and epidemic disease insurance are 2010, only 250 in 1997/98 by closely with cropping a total area of offered for beef cattle, goats, sheep, head of cattle and Colonial de Ecuador’s small 4,713 hectares. horses, and pigs. Original gross rates 250 horses were Seguros, the farmer agricultural vary, depending on the type of animal, insured in the age, and zone. The average original bloodstock leading private development The crop insurance subsidy country. Livestock and commercial bank to provide scheme is financed by a gross rate for the market is 3.8% of insurance company. crop-credit linked government contribution the total sum insured. 3.- Forestry insurance. of US$2.7 million. As of Forestry insurance covers the standing insurance: As The government August 2010, government timber value of commercial forestry of 2010, 8,400 of Ecuador has All of the expenditures due to the plantations against fire and wind hectares of forestry created a technical agricultural subsidization of crop perils. Valuation criteria in case of plantations were support unit at insurance programs insurance premiums indemnities could be the initial costs insured in the the Ministry of in the country amounted to US$145,000 or the commercial value, depending country. Agriculture and are reinsured in (approximately 5% of the on the age of the plantation. implemented the international total budget). Coverage is subject to a deductible Forestry crop insurance market through of 10% of the loss on each and every premium subsidies quota share loss. Original gross rates vary from and a catastrophic reinsurance 0.5 to 1% of the total sum insured, protection treaties. depending on the region, type of insurance scheme plantation, and risk management for small farmers. measures implemented by the insured. Table A.9 Agricultural insurance country fact sheet: El Salvador Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Crop insurance was Two insurance Insurance agents Agricultural insurance Guaranteed-yield, multiple-peril 1. Crop insurance: 200,000 2,700,000 first introduced in companies, Seguros are the main premiums are not subsidized crop insurance (MPCI) protects a Low penetration. the country in 2001 e Inversiones S.A. delivery channel by the government. percentage of the expected individual In underwriting after the severe and Aseguradora for agricultural crop yield at the farm level. Covered year 2006, about losses caused by Pacífico S.A., are insurance. perils are weather, biological, and 4,700 hectares Hurricane Mitch offering crop and crop pre-emergence perils. Farmers of annual crops and El Niño event. livestock insurance can choose among three levels of (0.5% of total products in the guaranteed yield: 70, 60, or 50% of cropped area) were country. the expected crop yield. The insured insured. has to retain 30% of losses due to Crop insurance drought and 25% due to biological 2.- Livestock 110 ] Agricultural Insurance in Latin America programs in El perils. insurance: Low Salvador have penetration. In been supported Crop investment insurance (seguro a underwriting year by international la inversión) bases loss adjustment on 2006, about 4,000 reinsurers on a insured crop yield performance. This head of cattle quota share basis insurance product protects the direct (less than 1% of (10% retained, investment made by the insured in the national herd) 90% ceded), the insured crop against weather and were insured. MPCI mainly through a biological perils and also against crop facility provided germination or pre-emergence failure by PROAGRO, a (due to perils such as soil capping Mexican agricultural associated with excess rain). The insurer. sum insured is defined as the direct investments made by the insured on the insured crop up to the time of the claim. Under this coverage the insured has to bear part of the risk by Crop sharing 5, 30, and 25% of the claim for losses in regard to weather perils and drought, pests, and diseases, respectively. In the case of a claim, the policy indemnifies the amount of the investment made by the insured up to the date of the loss, deducting the revenue obtained on the insured unit and the insured loss participation. Individual plant insurance (a named- peril, damage-based policy) protects against damage to individual plants caused by adverse weather conditions and biological perils. The sum insured is defined by the value of each individual plant that compounds the insured plantation. A deducible from 5 to 10% over the sum insured applies. This crop insurance product is targeted at high-value crops, including Named-peril banana plantations. In case of losses due to any of the covered perils, the insured will be indemnified with the agreed value established for the plant times the number of affected plants, above an aggregate deductible. Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Crop investment insurance (seguro a la inversión) bases loss adjustment on crop damage. It protects the direct investment (production costs, including input costs, land preparation, sowing costs, and so forth) in the insured crop against losses due to frost, flood, hail, fire, hurricane, tornado, wind, and Crop windstorm. The sum insured is defined by the direct investments in growing Named-peril the insured crop. In case of a claim, the policy indemnifies the amount of the investment made by the insured up to the date of the loss. Deductibles vary from 5 to 15% of the sum insured. Such policies cover animal mortality due to accidents, disease, or slaughter ordered by the authorities for cattle, and hogs, sheep, goats, and poultry under Livestock bloodstock individual, group, and herd modalities. Table A.10 Agricultural insurance country fact sheet: Guatemala Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Agricultural crop Three insurance Insurance agents The government of Guaranteed-yield, multi-peril 1. Crop insurance: 1,700,000 27,000,000 insurance was companies offer are the main Guatemala does not provide crop insurance (MPCI) protects a Low penetration. first introduced crop and livestock delivery channel any type of support for percentage of the expected individual In underwriting in the country in insurance products. for agricultural agricultural insurance at this crop yield at the farm level. Covered year 2007, about 1998. One private insurance. time. perils are weather, biological, and 20,000 hectares insurance company, Crop insurance crop pre-emergence perils. Farmers of annual crops with the support programs have In the recent past, the can choose among three levels of (0.9% of total of the Ministry of been supported government subsidized guaranteed yield: 70, 60, or 50% of cropped area) were Agriculture and by international cotton crop insurance the expected crop yield. The insured insured. Livestock, piloted reinsurers on a premiums through the has to retain 30% of losses due to crop insurance quota share basis Guate-invierte Program. drought and 25% of losses due to 2. Livestock 112 ] Agricultural Insurance in Latin America for corn against (10% retained, biological perils. insurance: Low drought, rain, 90% ceded), penetration. In wind, and flood mainly through a Crop investment insurance (seguro a underwriting year perils on the facility provided la inversión) bases loss adjustment on 2007, about 1,400 southern coast. by PROAGRO, a insured crop yield performance. This head of cattle This product was Mexican agricultural insurance product protects the direct (less than 1% of discontinued due insurer. investment made by the insured in the national herd) to lack of demand the insured crop against weather and were insured. MPCI from farmers. biological perils and also against crop germination or pre-emergence failure In late 1998, (due to perils such as soil capping after Hurricane associated with excess rain). The Mitch, agricultural sum insured is defined by the direct insurance was investments made by the insured on offered again and the insured crop up to the time of expanded to crops the claim. Under this coverage, the insured has to bear part of the risk by Crop other than corn. Several insurance sharing 5, 30, and 25% of the claim companies for losses in regard to weather perils provided and drought, pests, and diseases, agricultural respectively. In case of a claim, the insurance with policy indemnifies the amount of the technical support investment made by the insured up from Mexican to the date of the loss, deducting the insurance revenue obtained on the insured unit companies. and the insured loss participation. Individual plant insurance (a named- Currently there are peril, damage-based policy) protects plans to implement against damage to individual plants agricultural caused by adverse weather conditions weather index and biological perils. The sum insurance in the insured is defined by the value of country. each individual plant that makes up the insured plantation. A deducible from 5 to 10% of the sum insured applies. This crop insurance product is targeted at high-value crops, including Named-peril banana plantations. In case of losses due to any of the covered perils, the insured will be indemnified with the agreed value established for the plant times the number of affected plants, above an aggregate deductible. Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Crop investment insurance (seguro a la inversión) bases loss adjustment on crop damage. This product protects the direct investment (production costs, including input costs, land preparation, and sowing costs) in the insured crop against losses due to frost, flooding, hail, fire, hurricane, Crop tornado, wind, and windstorm. The sum insured is defined by the Named-peril direct investments in growing the insured crop. In case of a claim, the policy indemnifies the amount of the investment made by the insured up to the date of the loss. Deductibles vary from 5 to 15% of the sum insured. This product covers animal mortality due to accidents, disease, or slaughter ordered by the authorities for cattle, and hogs, sheep, goats, and poultry under Livestock individual, group, and herd modalities. bloodstock Table A.11 Agricultural insurance country fact sheet: Honduras Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Agricultural Three private Insurance agents There are no forms of Guaranteed-yield MPCI protects a 1. Crop insurance: 1,000,000 14,000,000 insurance has a insurance are the main government financial percentage of the expected individual Low penetration. 10-year history in companies provide delivery channel. support for agricultural crop crop yield at the farm level. Covered In underwriting Honduras. Crop agricultural and livestock insurance. perils are weather, biological, and crop year 2009, about insurance was insurance in Some financial pre-emergence. Farmers can choose 20,000 hectares of first introduced in Honduras, namely, institutions (for Other forms of government among three levels of guaranteed annual crops (3% 2000 and livestock Interamericana, example, rural support are finance for yield: 70, 60, or 50% of the expected of total cropped insurance in 2004. Equidad, and banks) also deliver workshops or training crop yield. The insured has to retain area) were insured. Atlantida. agricultural programs that build 30% of losses due to drought and Although insurance. capacity with regard to 25% due to biological perils. 2. Livestock agricultural All of these agricultural insurance and insurance: Low Crop investment insurance (seguro 114 ] Agricultural Insurance in Latin America insurance is companies offer the instrumentation of tax penetration. In relatively new, crop insurance, but exemptions for agricultural a la inversión), which is loss underwriting year several insurance only two underwrite insurance premiums. adjustment based on insured crop 2009, about 600 products for small livestock yield performance, protects the direct head of cattle crops, livestock, portfolios. investment made by the insured in (less than 1% of greenhouses, the insured crop against weather and the national herd) and aquaculture The agricultural biological perils and also against crop were insured. MPCI are available on insurance programs germination or pre-emergence failure the market. Crop currently in place (due to perils such as soil capping insurance products in Honduras have associated with excess rain). The include traditional support from sum insured is defined as the direct named-peril the international investment made by the insured on crop insurance, reinsurance market. the insured crop up to the time of multi-peril crop Capacity is available the claim. Under this coverage, the insurance (MPCI), for MPCI and insured has to bear part of the risk by and weather may be slightly sharing 5, 30, and 25% of the claim Crop index insurance. more difficult to for losses in regard to weather perils Livestock insurance secure for livestock and drought, pests, and diseases, is undeveloped in insurance and respectively. In case of a claim, the Honduras. Less index-based crop policy indemnifies the amount of than 1% of the insurance. investment made by the insured up national herd is to the date of the loss, deducting the insured. revenue obtained on the insured unit and the insured loss participation. Federal government Individual plant insurance (a named- support for peril, damage-based policy) protects agricultural against damage to individual plants insurance caused by adverse weather conditions is restricted and biological perils. The sum to technical insured is defined by the value of assistance, capacity each individual plant that makes up building (such as the insured plantation. A deducible workshops and of 5 to 10% over the sum insured training programs), applies. This crop insurance product is and tax exemptions targeted at high-value crops, including Named-peril on agricultural banana plantations. In case of losses insurance due to any of the covered perils, the premiums. The insured will be indemnified with the government agreed value established for the plant does not finance times the number of affected plants, premium subsidies above an aggregate deductible. at this time. Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Agricultural Crop investment insurance (seguro a insurance is mainly la inversión), which is loss adjustment voluntary. However, based on crop damage, protects the state-owned the direct investment (production bank, BANADESA costs, including input costs, land (Banco Nacional preparation, and sowing costs) in the de Desarrollo insured crop against losses due to Agrícola), requires frost, flooding, hail, fire, hurricane, farmers to insure tornado, wind, and windstorm. their agricultural The sum insured is defined as the Crop loans. This is the direct investments in growing the Named-peril main reason for insured crop. In case of a claim, the the expansion policy indemnifies the amount of the of agricultural investment made by the insured up to insurance in the date of the loss. Deductibles vary Honduras. from 5 to 15% of the sum insured. However, BANADESA recently reduced its agricultural Insurance covers animal mortality due lending, which to accidents, disease, or slaughter has contributed ordered by the authorities for cattle, and to the stagnation hogs, sheep, goats, and poultry under Livestock of agricultural individual, group, and herd modalities. bloodstock insurance. Insurance covers biomass mortality due to storm, disease, water supply fluctuation, exposure to debris intake, and theft on tilapia and shrimp fish farms. Aquaculture Table A.12 Agricultural insurance country fact sheet: Mexico Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Main Features Penetration rate channels Premiums Liabilities Crop insurance in Mexico has a well- The private Government support to A wide range of agricultural (crop and livestock) 1. Crop insurance: 222,000,000 10,740,000,000 Mexico dates back defined public- insurance agricultural insurance takes insurance products is available on the Mexican In underwriting to 1926. private partnership companies market the following forms: market. These are classified into two major year 2009, about In 1961 the for agricultural their crop and 1. Premium subsidy support categories. 1.8 million government, insurance, the livestock insurance 2. Agricultural reinsurance hectares (36.5% of through National System for products through 3. Subsidies for training First, traditional or commercial crop and total cropped area) Aseguradora Insurance of the their own agent and education for the livestock insurance products, which are offered were insured. Nacional Agricola Rural Sector, which networks. fondos, such as (a) by private commercial insurance companies, y Ganadera S.A. involves three key assistance in product mutual societies, and fondos, are conventional 2. Livestock (ANAGSA), started insurance entities: The fondos and design, rating, and the indemnity-based insurance products that can be insurance: In to underwrite a Agroasemex, the mutual companies design of loss adjustment contracted individually or on a collective basis. underwriting 116 ] Agricultural Insurance in Latin America multi-peril crop national agricultural market directly to and (b) catastrophic year 2009, about insurance (MPCI) reinsurer; private their members. insurance protection For crops, a wide range of product types is 4.4 million head policy supported by commercial for small farmers under available through private companies and of cattle (less federal government insurance Catastrophic crop the PACC (Program the fondos, including (a) single-peril hail than 15% of the premium subsidies. companies; and and livestock to Assist Climatologic and named-peril damage-based insurance national herd) The ANAGSA mutual insurance insurance Contingencies), which and indemnity policies (termed “individual were insured. program was crop- companies, products are are 100% subsidized by plant insurance”), (b) loss-of-investment-cost credit compulsory including the marketed through government. insurance (seguro a la inversión), multiple-peril 3. Aquaculture insurance. ANAGSA fondos, federal and state salvage-based loss-of-yield insurance policies, insurance: In experienced very Up to six private governments. A group of basic or priority which indemnify growers against loss of their underwriting poor underwriting insurance crops carries premium production costs invested in growing the year 2009, about results. Therefore, companies are Very little subsidy levels of between crop up to the time of loss, and (c) traditional 10,000 hectares in 1990 the federal authorized to agricultural 35% and a maximum MPCI yield-based indemnity insurance policies, of shrimp ponds government offer agricultural insurance is sold of 60%, according to whereby farmers are provided a yield guarantee (approximately terminated the insurance in Mexico. through retail geographic region and (which typically ranges from 50 to 70% of the 14% of the program. In addition, there brokers. exposure to loss; for all other maximum expected yield) against a wide range national area) were are one mutual crops a flat-rate premium of climatic, biological (pests and diseases), and insured. In 1990 insurance society subsidy of 35% applies. For pre-emergence perils (including germination Agroasemex and about 270 livestock, premium subsidy failure and soil capping). Greenhouse material 4. Forestry replaced ANAGSA fondos. levels range between 20% damage insurance and forestry insurance are insurance: In as the national for aquaculture and a also available. underwriting public sector crop The agricultural maximum of 50% for exotic year 2009, about and livestock reinsurance market diseases, flood, and high- Mexico has the largest and most developed 10,000 hectares insurance company, in Mexico is well mortality insurance. livestock insurance market in Latin America. of shrimp ponds operating along developed. A Livestock insurance is available for a wide range (approximately strictly commercial group of seven For catastrophic index of livestock, including dairy and beef cattle, 14% of the insurance international insurance, the costs of pigs (swine), sheep and goats, horses, deer, national area) were principles and with reinsurers provides premiums are 100% poultry, and bees. In addition, aquaculture insured. greatly improved a combination of subsidized by government insurance is available for shrimp and fish management proportional and on the following basis: species. For livestock, there are two main covers: 5. Catastrophic systems and nonproportional 70–90% by federal (a) accident and mortality insurance and (b) insurance: During procedures. reinsurance government and 10–30% by livestock epidemic disease cover. Traditionally, underwriting year Agroasemex also support to private state governments. the most popular form of cover was individual 2009, 8 million acted as a stop- commercial animal insurance, but in 2005 premium subsidy hectares of crops loss reinsurer of reinsurers. The government support was switched from individual animal and 4.16 million the small farmer expenditures in both covers to a new livestock insurance policy for animal units were mutual insurance agricultural insurance high-mortality events, which is a herd-based insured under funds (fondos). In premium subsidies and the policy carrying a number of animals per catastrophic the early 1990s provision of catastrophic event deductible. This policy insures against insurance; 30 several private insurance for small and accidents, diseases, and forced slaughter of states adhere to commercial marginal farmers amounted injured animals. The policy specifically excludes this program. insurers also started to approximately US$145 government-ordered slaughter, preexisting offering crop and million in 2009.The volume diseases, or diseases for which vaccines are livestock insurance. of premium subsidies for the available. The policy charges very low premium Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Main Features Penetration rate channels Premiums Liabilities In 2001, whole market (traditional or rates. The second and most important type of the Mexican commercial insurance and policy is epidemic disease cover against classical government catastrophic index insurance) swine fever (CSF). The CSF policy indemnifies redefined the role amounted to US$51.7 against mortality and compulsory slaughter of Agroasemex million in 2009. Total ordered by the Ministry of Agriculture in the in order to focus government expenditures event of a CSF outbreak. The policy is only on its new role for catastrophic insurance offered in states that are declared free of CSF. as a national amounted to US$93 million agricultural in the same year. Second, catastrophic insurance products are reinsurer, provider the second major category. First introduced in of research and 2002, they include parametric (index) products development, and protecting against catastrophic climatic events, manager of the which are aimed at small-scale producers who federal agricultural cannot access commercial crop or livestock insurance premium insurance. The catastrophic insurance schemes subsidy scheme. operate under the regulations of the Program to Assist Climatologic Contingencies (PACC). These large-scale insurance programs operate at a macro level (as opposed to providing cover to individual farmers) and are purchased by the federal or state governments through (a) the private commercial insurers (area-yield index insurance) and through Agroasemex (rainfall deficit insurance and normalized dry vegetative index, NDVI, insurance). The catastrophic insurance programs are 100% subsidized by federal and state governments. Private commercial insurers have been involved for several years in offering area-yield index insurance and catastrophic livestock insurance covers on a massive scale to the state governments. Since 2003 Agroasemex has insured a macro- level rainfall deficit index insurance cover for the federal government under the PACC. The PACC is administered by the Ministry of Agriculture (SAGARPA) and implemented either in conjunction with the state governments or directly with low-income farmers, defined as those owning less than 5 hectares. If a rainfall deficit is triggered at an insured weather station, Agroasemex indemnifies the state government, which is responsible for distributing the indemnity to the insured farmers (beneficiaries). In 2007 Agroasemex also launched a pilot pasture satellite insurance program, which uses NDVI to measure the amount of biomass available as cattle fodder. Table A.13 Agricultural insurance country fact sheet: Nicaragua Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities A first attempt to Three private The most The public sector supports Weather index-based insurance covers According to 80,000 1,000,000 introduce crop insurance important the development of excess or lack of rainfall in select 2008 data, the insurance on an companies provide delivery channel agricultural insurance weather stations. The insured crop is penetration rate indemnity basis agricultural for agricultural products in several ways. peanuts, but insurance companies are for crop insurance was made in insurance in insurance is First, government had an analyzing the feasibility of expanding is still very low. 2004, but due to Honduras, namely, the insurance active role in formulating their portfolio to soybeans, sorghum, Only 16 policies commercial and Interamericana, company’s the regulatory framework rice, beans, sesame, and corn. were issued on an legal reasons, this Equidad, and network of agents. for agricultural insurance. insured area of endeavor failed. Atlantida. However, recently Second, government The total sum insured under this policy 1,737 hectares, other channels indirectly subsidizes is based on the investment made by representing Afterward, All of these such as banks agricultural insurance the insured on the insured crop in the around 1% of total 118 ] Agricultural Insurance in Latin America government and companies offer and farmers development by financing insured location. national cropped the Instituto crop insurance, but associations and research and development area. Nicaraguense only two underwrite cooperatives have and start-up costs of The insured’s economic loss is defined de Seguros y small livestock become more pilot programs (such as as the insured crop yield shortfall Reaseguros (INISER) portfolios. prominent in those of the Ministry for due to the occurrence of an adverse have been working marketing crop Agriculture) in order to weather event as measured by an to develop a The agricultural insurance products. develop a weather index index on the agreed weather station weather index insurance programs insurance scheme for corn, used as reference for the area where insurance scheme currently in place rice, and beans targeted the insured unit is located. for Nicaragua. in Honduras have to small farmers. Third, In 2006 support from government, through the Therefore, if the underlying weather Nicaragua’s the international National Weather Service, index measured at the agreed weather Insurance Authority reinsurance market. invests in efforts to improve station is below (cover for lack of rain) approved a Capacity is available the national weather station or above (cover for excess rain) the regulation for for MPCI and network and data collection. agreed strike, the insured will receive weather index may be slightly Finally, government an indemnity according to the policy Crop insurance, and more difficult to supports the development terms and conditions. in 2007 INISER secure for livestock of agricultural insurance started to market insurance and products by establishing tax and underwrite index-based crop exemptions for agricultural a weather index insurance. insurance premiums. product for Weather index-based insurance peanuts. The government does not subsidize premiums. The federal government supports the development of agricultural insurance by promoting a legal framework, by financing the start- up, administrative, and operational costs and research and development for new products, and by providing tax exemptions for agricultural insurance. Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities No livestock insurance product is being offered. Table A.14 Agricultural insurance country fact sheet: Panama Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Crop insurance was Currently, three For crops and Currently, there are no forms ISA’s MPCI yield-loss policies protect 1. Crop insurance: 4,400,000 98,000,000 first introduced insurance livestock insurance, of government financial a wide range of annual and perennial Low penetration. in 1975 under companies offer the most important support to agricultural crop crops against excess rain, floods, In underwriting Law no. 68, crop, livestock, delivery channels and livestock insurance. ISA drought, wind, fire or lighting, and year 2009, about which led to the aquaculture, and are, first, insurance has underwritten agriculture exotic pests and diseases. Maize and 29,000 hectares of creation of the forestry insurance brokers second, for 31 years. Traditionally, sorghum are the main insured crops in annual crops (4% Instituto de Seguro products in Panama. the insurance the government of Panama the country. The ISA MPCI policy is a of total cropped Agropecuario companies’ own did not provide any salvage-based loss-of-investment-cost area) were insured. (ISA), a public The traditional agents. premium subsidy support, cover that insures against loss of the sector company, to agricultural insurer but since 2008 government direct costs of production invested in 2. Livestock provide agricultural is ISA, which has Currently there reportedly has been studying growing the crop; in the event of loss insurance: Low 120 ] Agricultural Insurance in Latin America insurance. underwritten is no formal proposals to introduce a only the direct costs incurred by the penetration. In Subsequently, individual-grower provision for flat 50% premium subsidy insured on its insured unit up to the underwriting in 1996, the multi-peril crop special channels to on agricultural insurance moment of the loss are indemnified. year 2009, about government insurance (MPCI) deliver agricultural policies. In the case of partial loss, the value of 53,000 head of enacted Law no. 39 since 1977 and insurance to small the remaining production and yield cattle (less than Crop and MPCI updating the crop livestock insurance and marginal (salvage) is deducted from the loss. 1% of the national insurance scheme since 1978; farmers in Panama. A deductible (coinsurance) of 10% of herd) were insured. and incorporating the other two the loss is applicable for maize and livestock and companies are rice crops, while a deductible of 20% forestry insurance. privately owned of the loss is applicable for sorghum, The federal insurers. and a deductible of between 25 and government 30% of the loss is applicable for melon does not provide One of the crops. Original gross rates vary from financial support private insurance (a) rice, 4.5%–7% depending on the for agricultural companies operates location, (b) maize, 6%, (c) sorghum, insurance. a crop insurance 7%, and (d) melons, 8%. program backed from Mexico, and ISA offers livestock insurance for the other acts as cattle, goats, sheep, horses, buffaloes, a front company, and swine for grassland production, issuing the policy for expositions, and inland transportation. a large facultative Basic livestock insurance covers death contract for an arising from accidents, asphyxia, agribusiness firm. electrocution, fire, lightning, attack by wild animals, fractures, abortion, death due to birth-related complications, and slaughter of an injured animal if stipulated by a certified veterinarian. All diseases are excluded from cover. Deductibles vary according to the class of insured animal, breed, and production system. In the event of loss, the insured is responsible for a coinsurance Livestock and bloodstock (retention) of between 10% (cattle and pigs) and 20% (horses and goats) of the value of the claim. ISA’s original gross rates also vary, depending on the type of animal and age of the animal. For cattle, rates vary for calves (7%), extensive fattening cows (3%), and dairy cattle (2.5%); for swine, Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Agricultural rates vary for boars (4.75–5.50%), insurance is mainly hogs (3%), and sows (4–6%); for voluntary. However, sheep and goats, rates vary from 2 to and the state-owned 3.5%, depending on the production Livestock bloodstock bank, BANADESA system. (Banco Nacional de Desarrollo Insurance covers biomass mortality Agrícola), requires due to storm, disease, water supply farmers to insure fluctuation, debris exposure intake, their agricultural and theft on tilapia and shrimp fish farms. Aquaculture loans. This is the main reason for the expansion Forestry insurance covers the standing of agricultural timber value of commercial forestry insurance in plantations against fire exclusively. Honduras. The sum insured for standing timber However, insurance is typically based on BANADESA (a) the establishment and annual recently reduced maintenance costs of the forest its agricultural plantation up to the age when the lending, which trees have a commercial timber has contributed volume or value and (b) for older to the stagnation plantation stands, the commercial of agricultural value of the standing timber (volume of timber valued at the market price Forestry insurance. for in-field standing timber). Coverage is subject to coinsurance on the claim of 20% of the loss on each and every loss. For normal forestry plantations original gross rates vary from 1 to 2% of the total sum insured, depending on the region, type of plantation, protection measures, contingency plans implemented by the insured, and deductibles and indemnity limits. Table A.15 Agricultural insurance country fact sheet: Paraguay Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Paraguay’s market Nine insurance The agricultural There is no public sector MPCI is offered only for soybeans, 1. Crop insurance: 9,500,000 190,000,000 for agricultural companies have insurance financial or other support corn, sunflower, wheat, and barley 950,000 hectares insurance is in the agricultural delivery channels for agricultural insurance in crops. Guaranteed yields under this (10% of the total initial stage of insurance products rely heavily on Paraguay. coverage vary from 50 to 70% of cultivated area) are development but is approved by the insurance brokers, either the actual production history insured. growing rapidly. regulator, but who have contacts (APH) of the zone or the expected Crop insurance is only four of them with the network yield, as determined by the insurance 2. Forestry provided by private were actively of agricultural company surveyor. The product is insurance: Poor local insurance underwriting crop input suppliers. offered on an individual basis or on a penetration. companies that insurance products global MPCI portfolio basis (all crops offer multi-peril in 2009. Currently there in all locations). 122 ] Agricultural Insurance in Latin America crop insurance are no special (MPCI) in All of the crop channels to Original gross rates for individual Crop and MPCI partnership with insurance risks deliver agricultural MPCI vary from 5 to 8% of the total agricultural input written in Paraguay insurance to small sum insured, depending on the crop, suppliers. Currently, are reinsured in and marginal region, and coverage level. Original no insurance the international farmers in the gross rates for MPCI portfolio cover company is offering reinsurance market country. However, vary from 1 to 5%, depending on the livestock insurance. under quota share reinsurers are crop, region, portfolio distribution, treaties. cautious in writing and coverage level. The country does agricultural not have any business in Forestry insurance covers the standing form of special Paraguay. timber value of commercial forestry agricultural plantations against fire, wind, hail, insurance and freeze. Additional risks like debris legislation, and removal and fire-fighting expenses there is no public are covered. Valuation criteria in case sector intervention. of indemnities could be formation cost or commercial value, depending on the age of plantation. Coverage is subject to deductibles of 10% of the Forestry loss on each and every loss and annual aggregate indemnity limits. Original gross rates vary from 3 per mile up to 1% of the sum insured, depending on the region, type of plantation, protection measures, contingency plan implemented by the insured, and deductible and indemnity limit. Table A.16 Agricultural insurance country fact sheet: Peru Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Multiple-peril crop Currently, two The crop insurance The Peruvian government (a) Catastrophic aggregate yield- Catastrophic 13,800,000 77,000,000 insurance (MPCI) private commercial scheme is new, and enacted a law (28,939) shortfall cover for rural communities aggregate yield- was formally insurance the commercial creating the Guarantee is designed to provide insurance shortfall cover introduced in Peru companies are channels of delivery Fund for Crop Insurance for small- and medium-size farmers is purchased in in 1996/97 by five underwriting are not yet fully (FOGASA), with US$14 through an associative frame. Under seven subnational private insurers, agricultural defined. million for the development this coverage, insured farmers regions in Peru, several of which insurance products. of crop insurance. organized into rural communities benefiting were subsidiaries of However, due to are offered insurance for rice, corn, 400,000 small- financial banking All of the the characteristics FOGASA funds will be potato, and cotton crops against and medium-size groups lending to agricultural of the insurance applied to agricultural drought, excess moisture, hail, farmers covering 5 agriculture. The insurance business products, provincial insurance premium wind, frost, and flood perils. Rural million hectares of product had high in Peru is reinsured governments and subsidies. community for the purposes of this cropland. demand during in the international municipalities cover is defined as a group of farmers The penetration of the first year of market. probably will have The government’s objective who decide to associate in order to traditional MPCI introduction due to an important role is to help farmers to access be insured, and this definition is used individual yield- the existence of El to play in delivering agricultural insurance. The to define the insured unit. Therefore, shortfall Niño phenomena. agricultural priority is to support small- the actual yield obtained by the However, in insurance to and medium-size farmers. insured at the end of the policy period 1997/98, few of farmers. Subsidy levels will vary from would be the whole area sown by the the insurers or their 30% up to 100% of original community with the insured crop. banks were willing Bank lending to gross premiums, depending The indemnity will proceed when the to link credit and agriculture may on the insurance product. actual aggregate yield obtained by the crop insurance also be important community is below the guaranteed once the El Niño for distributing this aggregate yield established on the conditions had product to farmers. policy, which is standardized at 40% dissipated. The Agro Protégé of the actual production history. The program is original gross rates are not known, Crop In 2008, aiming specifically targeted but the cost of this coverage for the to protect at small and farmer shall not exceed US$25 per farmers’ income marginal farmers. hectare. The federal government can against natural subsidize premiums up to 100% of catastrophes, the premium cost. the government of Peru enacted (b) Area-yield index crop insurance a law (28,939), is being implemented on a pilot creating a fund basis in 2008 for cotton producers of S/.40 million in the Ica valley. Under this coverage, (US$14 million) insured farmers located within one Group risk plan (area-yield index) “catastrophic product” to develop crop municipality or district considered as insurance in the an insured unit protect their crops country. This fund against the adverse effects of drought, is used to subsidize excess rain, hail, wind, frost, and flood agricultural perils. Under this insurance, indemnity insurance is paid when the actual average yield premiums. for the insured crop over the whole insured unit (the municipality or district where the insured is located) is below the agreed guaranteed yield. In such cases, the insured farmers all receive an indemnity equal to the proportion of shortfall below the guaranteed yield times the sum insured. Original gross rates are not Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities known, but the cost of this coverage for the farmer shall not exceed US$25 per hectare. The federal government can subsidize premiums up to 100% of its cost. Group risk plan (area-yield index) “catastrophic product” A conventional MPCI loss-of-yield product is offered to commercial farmers on an individual basis covering drought, excess rain, hail, wind, 124 ] Agricultural Insurance in Latin America frost, and flood perils in rice, corn, potato, and cotton crops. In case of Crop a claim, this insurance considers the whole area sown with the insured crop within the insured farm as one insured unit. Indemnity proceeds only if the actual yield obtained by the farmer on its insured unit is below the guaranteed yield established on the policy. In such cases, the farmer MPCI (traditional) receives an indemnity equivalent to the proportion of its actual yield shortfall below the guaranteed yield times the sum insured. Government subsidies for this kind of product are capped at 30% of original gross premiums. Cattle, goats, sheep, horses, and pork are insured. Basic livestock insurance covers death arising from accident, disease, slaughter due to public order or medical stipulation, and loss Livestock of function. Due to its nature, no deductibles apply for the basic cover. Original gross rates vary, depending on the type of animal, age, and zone. Table A.17 Agricultural insurance country fact sheet: Uruguay Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities The Uruguayan Four insurance The delivery Federal government support The traditional named-peril coverage 1. Crop insurance: 24,500,000 1,364,000,000 agricultural companies offer channel depends for agricultural insurance is is the standard hail plus fire insurance. High penetration. insurance market agricultural on the product. very active in Uruguay. The In addition to hail, the farmer can 850,000 hectares is highly developed insurance products. For standard hail main government efforts are elect to cover wind, freeze, and excess (above 60% of the and has a long crop insurance, through (a) value added tax moisture at harvest. The standard hail total cultivated history. Crop Two of the four are agent brokers exemption for agricultural coverage has a 6% total sum insured area) are insured. insurance was private insurance who belong to the insurance premiums; (b) the franchise, but several alternatives in introduced in 1912. companies, one insurance company development of information terms of franchises and deductibles 2. Livestock is a cooperative, network are the systems, capacity building, are available in the market. Almost insurance: The most and one is a public most common and insurance schemes; all crops, fruits, and vegetables Insignificant demanded and company. delivery channel. and (c) premium subsidies growing in Uruguay are eligible for penetration. marketed crop MPCI and forestry for horticulture and fruit this product. Original gross rates for insurance products Agricultural mutual insurance are more production. In 2002 standard coverage for hail vary from 3. Forestry are hail insurance insurance is well often delivered Congress enacted a bill 2% in low-risk areas up to 4.5% insurance: High and hail plus developed in through insurance creating the Fondo de in risk-prone areas. The rates vary penetration. additional named Uruguay. Although brokers. There is Reconstrucción y Fomento according to the crop insured, region, Total insured perils (wind, freeze, mutuals are no provision for de la Granja (Fund for and deductible or franchise level. area amounts to excess moisture). In not considered special channels to the Development and 500,000 hectares Named-peril recent years, new insurance, they are deliver agricultural Reconstruction of Farms). Additional coverage for wind, freeze, of standing timber, insurance products active and have an insurance to small Under this program, the and excess moisture at harvest are accounting for like multi-peril crop important share and marginal Ministry of Livestock, only offered for wheat, soybeans, more than 80% of insurance (MPCI) of premiums and farmers. Agriculture, and Fisheries corn, barley, and sunflower. Original the total forested have become insured area as manages a fund of up to rates vary, depending on the crop and plantations area in popular, particularly well. For example, US$2 million that it uses to type of additional peril. Deductibles Uruguay. among large Maltería Uruguay subsidize up to 50% of hail apply for these additional perils and farmers. Mutual covers insurance premiums and can reach up to 20% of the total sum 4. Greenhouse around 100,000 fund a Climatic Emergency insured. Another named-peril product insurance: Low Crop Forestry insurance hectares of barley, Fund for the horticulture and offered in Uruguay is the vineyard penetration is also very popular and the mutual fruit sector. freeze damage insurance, covering in Uruguay. created by the Rice yield shortfall in vineyards due to Introduced in the Farmer Association freeze perils. 1990s, this line covers another of business has 30,000 hectares. MPCI is offered on a very restricted expanded over basis only for soybeans, corn, time. At least for sunflower, wheat, and barley. the commonly Guaranteed yields under this coverage Livestock insurance marketed insurance vary from 50 to 65% of the actual is marginal products, insurance production history depending on the companies do crop, region, guaranteed yield, and not face specific recommendations of the inspection constraints on report. The product is offered on an access to private individual or portfolio basis (all crops reinsurance. Six in all locations). Original gross rates MPCI international for individual MPCI vary from 3.5 reinsurers are to 5.5% of the total sum insured, supporting crops depending on the crop, region, and and forestry coverage level. Original gross rates programs in the vary from 1 to 4%, depending on the country. crop, region, portfolio distribution, and coverage level. Global MPCI portfolio coverage is offered to large-scale farmers. Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Forestry insurance covers the standing timber value of commercial forestry plantations against fire, wind, and, in very specific cases, hail and freeze. Optional additional coverage includes debris removal and fire-fighting expenses. This type of insurance is subject to the application of a deductible per event and an annual aggregate indemnity limit. Forestry Original gross rates vary from 0.3 to 1% of the total sum insured, depending on the region, type of plantation, protection measures, contingency plans implemented by the insured in case of fire, level of deductible, and indemnity limit. 126 ] Agricultural Insurance in Latin America Greenhouse insurance covers losses on greenhouse structures with an option to cover content (crops) due to fire, windstorm, hail, and flood. A 10% deductible applies. Original gross rates vary, depending on the type of structure Greenhouse and the region in which the risk is located, but range from 0.2 to 0.6%. Accidental animal mortality coverage is offered for beef cattle and dairy cows. This coverage includes additional coverage for inland transportation. Livestock Table A.18 Agricultural insurance country fact sheet: República Bolivariana de venezuela Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities Agricultural The Venezuelan The most The government does not MPCI is offered to protect a wide 1. Crop insurance: 1,000,000 16,000,000 insurance was agricultural common channels provide any support for spectrum of annual and perennial Very low first introduced insurance market for delivering agricultural insurance. crops (corn and sorghum are the penetration. Only in República has unique features. agricultural main crops) against excess rain, 20,000 hectares Bolivariana de insurance are floods, drought, wind, fire or lighting, (less than 1% of Venezuela in 1998. The market is financial agents social risks, and pests and diseases. the total cultivated The product was controlled by (for example, rural Guaranteed yields under this coverage area) are insured. named-peril crop an international banks) or farmers vary from 50 to 65% of the farmers’ Crop MPCI insurance covering reinsurance broker, associations. actual production history, depending 2. Livestock production costs which acts, in Agent brokers on the crop and the region. The insurance: made on the practice, as an participate actively insured unit is the field sown. The Insignificant insured crop up underwriting agency in delivering coverage indemnifies production penetration. to the time of the for local insurance the product to costs. Original gross rates vary from claim. companies. individual farmers 6.5 to 12.4%, depending on the crop, and brokering location, and coverage level. In 2003 the Six private insurance with farmers product was companies offer associations. There Livestock and bloodstock insurance modified to agricultural are no specialized covers “all risk”: accidental mortality become traditional insurance in the delivery channels and nominated diseases are covered, multi-peril crop country. Two offer for small and but epidemic diseases are excluded. insurance (MPCI) to crop and livestock marginal farmers. In the case of bloodstock insurance, respond to farmers’ insurance; the coverage has an annual aggregate demand. others only offer limit of US$25,000 per animal. There crop insurance. are two options for the deductible: Livestock insurance 10 and 20% of the total sum insured. was introduced Until 2007 the Medical and surgical expenses are in 2003 but is still agricultural not covered. Rates vary from 3.75 to very marginal, reinsurance 6.05%. Livestock insurance is offered and the demand business was only to cattle herds. The coverage has is limited mainly handled through a a deductible of 10% of the loss, and Livestock to high-value reinsurance facility original gross rates vary according to animals. The issued to a single the final animal (dairy, breeding, or federal government reinsurance broker fattening) and herd size. For example, does not provide who acted as an original gross rates for herds of any support insurance agent. between 30 and 100 animals are 4% for agricultural for dairy cattle and 3% for fattening insurance, and the cattle. country does not have any form of special agricultural insurance legislation. Table A.19 Agricultural insurance country fact sheet: Windward Islands Agricultural Agricultural insurance products Market volume (US$) Government support Market status Market structure insurance delivery to agricultural insurance Type Features Penetration rate channels Premiums Liabilities The Windward Islands, WINCROP is the only Between 1988 In the establishment phase WINCROP provides named-peril crop In 2007 450,000 4,400,000 comprising Dominica, St. insurance company and 2002 all the of WINCROP, government insurance for damage from windstorms WINCROP had Lucia, St. Vincent, and in the Windward BGAs required support was provided in two (including localized windstorms, 2,767 insured Grenada, lie at the western Islands that offers their banana- forms: tropical storms, and hurricanes) and growers, fringe of the Caribbean. crop insurance. exporting members 1. Enactment of crop volcanic eruption in the single crop of representing The islands are extremely No insurance is to be insured insurance legislation (the bananas. The WINCROP banana policy about 63% all exposed to North Atlantic available for other by WINCROP. Banana Insurance Act of is a standard damage-based indemnity banana growers and Caribbean tropical crops or livestock. Any registered 1988). This legislation has policy that was specifically designed for export and cyclones. Bananas are active member been very important to to be simple and transparent and to 62% of the vulnerable to windstorm WINCROP is producing and the success of WINCROP operate at low cost for large numbers cultivated area of damage. constituted as a exporting bananas by giving it a mandate of smallholder banana growers, often this crop. 128 ] Agricultural Insurance in Latin America mutual insurance was therefore to provide compulsory with an average of 1 hectare or less of Since the 1950s the company owned by automatically windstorm insurance bananas. The policy protects against island governments and the island BGAs and insured by in export bananas on physical damage by wind to the banana the Banana Growers their members. WINCROP, and all islands, thereby plants, defined as snapping, toppling, Associations (BGAs), the premium was permitting the company and uprooting of the plant and leaf at various times, have WINCROP operates deducted by the to achieve both spread stripping. The sum insured is established attempted to operate on a strictly BGAs on the sales of risk and a critical on the basis of each grower’s three-year mutual insurance schemes commercial basis of each grower’s premium mass and also rolling average banana production and against windstorm in but does not pay bananas and paid to experience much- deliveries to the BGAs. The premium is bananas. Most of these dividends to its to WINCROP. reduced marketing and deducted at source by the BGAs and earlier mutual schemes shareholders. Since 2002 the operating costs because paid to WINCROP. Simple damage count failed due to a lack of spread Trading surpluses BGAs have been of the compulsory nature loss assessment procedures are used to of risk because individual are used to privatized on all of cover. estimate the percentage damage to the islands elected to insure by strengthen claims islands except St. 2. Start-up capital provided total number of banana plants insured, themselves as opposed to reserves. In recent Vincent. In St. by the Island governments and this percentage damage is applied Crop named-peril pooling their risk. years most of the Lucia the banana through the BGAs to form to the sum insured. For the past 15 years BGAs have been export business WINCROP’s paid-up share the policy on all islands has maintained The Windward Islands Crop privatized. has been divided capital. a standard 20% deductible for each Insurance Ltd. (WINCROP) up between five and every loss. This high deductible is was established under WINCROP insurance private companies, Since WINCROP commenced required to maintain premium rates at the special crop insurance scheme is reinsured and crop insurance operations in the 1987–88 affordable levels for farmers. legislation of the Banana in the international has been made season, government has Insurance Act of 1988, reinsurance market voluntary. not provided any form of The actuarially determined premiums which made windstorm through a stop-loss financial subsidy or support for windstorm cover are high, ranging cover in bananas compulsory facultative treaty. Under the to WINCROP. In the past, from 20% on the most exposed northern for all export banana voluntary scheme one of the BGAs elected to islands to 11% on the least exposed growers on the four Islands. now operating provide premium subsidy southern islands in the Windward chain. The act sets out the basis of on this island, support to its grower In view of the high premium rates, the windstorm insurance cover crop insurance is members but was forced to BGAs have traditionally maintained provided to farmers. beginning to be withdraw this support when the sums insured at about 35% of the marketed through its reserves were exhausted. full production costs for bananas. In WINCROP’s local the event of windstorm damage the agents, insurance indemnity amount has therefore only brokers, and the covered the basic costs to reestablish the banks. banana holding. World Bank Insurance for the Poor Program 1818 H Street, NW Washington, DC 20433 www.insuranceforthepoor.org