Swiss Re Study Examines Agricultural Insurance Role in Global Food Production

A new sigma study – Partnering for food security in emerging markets – from Swiss Re concludes that “global agricultural production must increase by 60 percent to feed the world’s population, which will reach 9 billion by 2050.”

The study proposes a multi-stakeholder approach to address the problem of food insecurity, putting agricultural insurance on the table to help manage agricultural risks, stabilize farm income, and encourage agricultural investment to strengthen the food chain infrastructure.

“Food security today means having physical, social, and economic access to sufficient, safe, and nutritious food,” Swiss Re explained. “But steady population growth, insufficient farm investment, socio-economic instability, and adverse weather events remain key challenges to the world’s food supply, often barring people’s access to food. Moreover, dietary preferences and nutritional demand are changing and are also putting pressure on food production and availability. Recently, rising food prices have become a major concern due to a combination of complex factors.

Clarence Wong, Swiss Re’s Chief Economist for Asia, pointed out that “volatile food prices (up 74 percent since 2005) and supply issues due to the 2012 US drought have heightened food security concerns recently, especially for vulnerable people in emerging markets.” Out of the 850 million people suffering from hunger worldwide, 98 percent are located in emerging markets. The Asia-Pacific region has the greatest number (528 million), followed by sub-Saharan Africa (237 million).

Wong pointed out that “part of ensuring sustainable agricultural production includes employing holistic risk management strategies that help to reduce, mitigate, and cope with various farm risks. Insurance is an integral piece of the puzzle. Meeting growing food requirements necessitates massive investment in agriculture, even in the midst of an economic crisis. Innovative, multi-stakeholder cooperation is the way to make progress towards global food security.”

The role agricultural insurance can play is essentially to help “manage risks in the agricultural value chain, stabilize farm income, and promote investment in agriculture,” the study concludes. “It can also act as collateral for credit. A typical example of agricultural insurance is area-yield crop insurance, which bases pay-out on the shortfall of an area’s realized crop yield relative to its average historical yield. This kind of insurance was implemented in 2010, for example, by the Vietnamese government in partnership with re/insurance companies to provide rice farmers with risk protection.”

Swiss Re also noted that “agricultural insurance is growing, especially in emerging markets in 2011, global agricultural insurance premiums were estimated at $23.5 billion, around $5 billion of which was generated from emerging markets (mostly China and India). Insurance cannot provide food security on its own in emerging markets, but it can play a big part in aligning production incentives, raising awareness of the importance of risk mitigation, and encouraging investment in agricultural efficiency. Farmers and producers, governments, communities, cooperatives, and agribusiness can benefit from risk management solutions offered by re/insurers at multiple levels.”

However, the report adds, “agricultural insurance penetration remains very low and is far from reaching its full potential in emerging markets, estimated at three to four time the current market size.”

Amit Kalra, a co-author of the sigma study, stated: “Tapping the full power of agricultural insurance in emerging markets requires a lot: proactive and enabling government policies, supportive infrastructure, innovative products, cost-effective business models, new distribution channels, and advanced technology. Much of this can be achieved by partnering with insurers.”

Source: Swiss Re