Insurance options in facilitating

risk management in agriculture

Reinhard KuschkeAgriculture Underwriter Swiss Re

2009 AFRACA Integrated Risk Management Expert Meeting

Slide 2

Swiss Re History

Swiss Reinsurance Company Ltd

Swiss Re is a leading and highly diversified global reinsurer.

The company operates through offices in more than 25 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress.

The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management.

Slide 3

Presentation overview

Swiss Re Agro

Intention of insurance

Insurance products

– Traditional, re-innovated, parametric products

Micro insurance

Reinsurer’s perspective

Swiss Re position in Africa

Slide 4

Swiss Re Agro background

Swiss Re Agro Team formally established in 1991

Comprises of 15 Underwriters

Physical presence in the Americas, Europe and Africa

Geographical penetration globally

To advise and support the agricultural market

Underwrite on both a facultative and treaty basis

Global 2008 Agro Premium: USD 440 million

Slide 5

Swiss Re Africa background

Swiss Re Africa premium production dominated by the South African market

Mainly Crop Hail and MPCI business written in South Africa

Rest of Africa balanced business

Slide 6

Swiss Re Africa background

0

20

40

60

80

100

Crop Forestry Livestock Aquaculture Floriculture

Premium distribution per category

Slide 7

Intention of insurance programmes

Risk management option by transferring risk

Loan collateral

Provides stability for long-term business plans

Mitigation of farm level non-recovery risk

Macro level – support towards national disaster plans

Slide 8

Agricultural value chain risk management participants wide of insurers

Farmers Traders Consumer Processors

Banks/Investors

Input suppliers

Government

Reinsurer

Agro insurer

Slide 9

Insurance products

Two types of insurance cover

Traditional indemnity based cover

– Covers losses due to one or more perils

– Most common are named-peril and multi-peril crop insurance

– Well established globally

Parametric

– Protection provided against correlated risks such as extreme weather events

– Growing awareness

Slide 10

Traditional insurance products

Multi Peril Crop Insurance (MPCI)

Yield shortfall product

Grouped systemic perils

May affect broad geographical area

Can present excessive losses

Loss determined when yield is harvested

Requires detailed UW, risk evaluation, continuous monitoring

Places a heavy burden on the insurance infrastructure

Asymmetrical information and adverse selection

Slide 11

Traditional insurance products

Named peril crop insurance

Damage based product

Nominated perils

Localized occurrence

Accumulation of losses tend not to overwhelm capital reserves

Loss adjustment based on physical and visible damage

Requires fair knowledge of crop production

Cover available for most field and horticulture crop, floriculture and as specialised form forestry

Slide 12

Re-innovating and tailoring of traditional insurance products

Benchmark products

Based on the MPCI product

Applied on micro-level

Field sizes varying between 0,5 and 3 ha

Farmers Cooperative Union as insured and individual farmers populating the schedule

Farmers grouped geographically with at least one field selected as benchmark site

Underwriting and loss assessment based on benchmark

Slide 13

Re-innovating and tailoring of traditional insurance products

Mauritius

Currently operational

Mauritian Government agreed to subsidize premium from 2009

Increased uptake anticipated

Ethiopia

Pilot launched in 2007

Scaled up to include a second Farmers Co-operative Union in 2008

Micro-financing via Farmers Co-operative Union drives insurance need

Slide 14

Parametric insurance products

Provides protection against correlated risks

An index is selected that closely correlate with actual losses

Based on historical patterns, be objective and easily observable

Mainly two types of triggers:

Meteorological or weather events

Area based yield triggers

Slide 15

Parametric insurance products

Affinity

Eliminates moral hazard

Immune to adverse selection

Reduces transactional cost

Restriction

Basis Risk – the mismatch between amount resulting from the trigger and the actual loss

Slide 16

Micro insurance

Micro Insurance is defined as the provision of insurance to the low-income base

Frequently in conjunction with a micro-finance loan

Agricultural micro insurance mainly covers crop (dominated by MPCI) and livestock

Slide 17

Micro insurance

Micro Insurance feasibility requirements

Cheap and lesser complex

Compulsory participation

Selling to groups

Distribution through entities like agricultural co-operatives

Government support

Slide 18

From a reinsurer’s perspective

Long-term view

Government support in legislation, regulation, premium

Market maturity in UW capability, technical expertise, insurance acceptance by agricultural community

Well developed insurance infrastructure

Sound underlying risk analysis

Well developed business plans

Supportive towards the pioneering spirit

Slide 19

Swiss Re’s position in Africa

Swiss Re …

recognises that the bulk of the African livelihood depends on Agriculture as major constituent of the continental GDP

further recognises the vulnerability of the continent’s agriculture to climate shocks

provides capacity for the African Agricultural insurance market

is supporting and pioneering innovative small-scale risk transfer schemes

Slide 20

Swiss Re’s position in Africa

Swiss Re …

strategise towards geographical and segment diversification with expansion into Africa as a key priority

aims at establishing long-term business programmes

Slide 21

Thank You