Operating Systems and Procedures for Aquaculture (Shrimp) Insurance

Operating Systems and Procedures for Aquaculture (Shrimp) Insurance

1. 
   It was outside the scope of this study to visit and report on the organization of the shrimp-farming sector. If shrimp farmers are members of NGOs/MFIs it should be possible to design insurance operating systems and procedures for shrimp farmers along the lines of the partner-agent model outlined above for crops and livestock.
   
1. 
   Institutional and Financial Considerations
   
   1. 
      This chapter presents a review of the potential roles that the Government of Bangladesh, the private commercial insurers, and the banking, microfinance, and cooperative sectors might play in the future under a public-private partnership (PPP) for agricultural insurance in Bangladesh.
      

2. 
   The origins of agricultural insurance can be traced back to France in the 18^th century, when groups of livestock farmers came together to form cooperative or mutual livestock insurance companies. Similarly, crop-hail mutual insurers started in many European countries in the 19^th century, and these products were transferred by emigrants to the United States, Canada, and Argentina in the late 19^th and early 20^th centuries. The tendency since then has been for many of the mutuals either to fail because they lacked reinsurance protection against catastrophe losses, or to be replaced by private commercial companies. However, leading examples of mutual insurers that continue to operate today include Austrian Hail, Groupama in France, the National Farmers Union in the UK, and several mutual insurers in the United States, South Africa, and Argentina. In Mexico, the Fondos program for self-insurance groups represents an interesting mutual crop-credit insurance model for small crop and livestock producers and may have applications for Bangladesh.
   

3. 
   The US Federal Crop Insurance Program represents one of the earliest examples of government intervention in the provision of public-sector crop insurance. Its origin’s date to the early 1930s. In the 1980s there was a major expansion of public-sector crop insurance in developing countries including several in Central and Latin America, India, and the Philippines. Most recently, since 2000, governments have increased their intervention in agricultural insurance both in developed markets in the United States and Europe (e.g., subsidized MPCI in France, and efforts in emerging markets of Poland and Romania) and especially in developing countries (e.g., new subsidized programs in China, South Korea, Brazil, Chile, and Turkey).
   
4. 
   Reasons cited as to why governments should intervene in agricultural insurance often include (i) Poorly developed insurance markets and nonavailability of private-sector agricultural crop and livestock insurance; (ii) financial capacity constraints of private commercial insurers, particularly for systemic risk (drought, flood, epidemic diseases, etc); (iii) high costs of insurance administration; and (iv) inability of farmers to afford agricultural crop and livestock insurance premiums.
   
5. 
   In 2009, agricultural crop and/or livestock insurance is available in over 100 countries. Agricultural insurance is most developed in high-income countries in North America, Europe, and Australasia. The programs in the United States and Canada carry very high levels of government financial intervention in the form of premium subsidies and subsidies on the operating and administration costs and reinsurance programs. In Europe 15 of the 27 countries with agricultural insurance have public-private–supported programs, of which the largest program is the Spanish national agricultural insurance scheme. In the remaining 12 European countries the programs are implemented exclusively by private commercial insurers with no form of government subsidy.
   
6. 
   In Asian developing countries, public-sector agricultural insurance has a lengthy tradition in India and the Philippines, and public-private subsidized agricultural insurance is now being heavily promoted by government in China and South Korea. In Latin America many countries introduced public-sector agricultural insurance programs in the 1970s and 1980s, most of which have now been terminated and/or privatized. Today agricultural insurance is found in about 15 Latin American countries. The largest programs are located in Mexico, where the commercial insurers receive a high level of support from government, and in Argentina, which is a private crop-hail insurance market and until recently had received no government subsidies. Agricultural insurance is poorly developed in most of Africa, the main exceptions being Mauritius, Sudan, and Morocco, where the programs operate with government support, and South Africa, which has a well-developed private and mutual company crop-hail and MPCI insurance market with no government intervention.
   
7. 
   Table 6.1 provides a summary of the types of government support in a sample of the major national agricultural (mainly crop) insurance programs from developed and developing countries.
   
8. 
   Public-sector versus private-sector agricultural insurers: In the 1970s and 1980s many governments in developing countries created public-sector agricultural insurers to underwrite highly subsidized multiple-peril crop insurance for small-scale farmers. These public-sector programs tended to act as a major disincentive for the entry of private commercial insurers into agricultural insurance. The majority of the public-sector agricultural programs performed very poorly, prompting governments to (i) terminate the programs, (ii) take measures to strengthen and reform the public-sector programs, or (iii) transfer responsibility for implementation to the private insurance sector. It is noticeable that most of the new crop and livestock insurance programs which have been introduced in the past decade have been implemented by private commercial insurers with or without support from government, including those in Chile, Brazil, Colombia, Honduras, Sudan, South Africa, and Turkey.
   
9. 
   In 2009, Canada was the only major high-income country where crop insurance continues to be provided through the provincial government public crop insurers. Conversely, a higher number of developing countries currently have public insurance companies, including India, Philippines, and Brazil (table 6.1.).
   

1. 
   Co-insurance pools in agricultural insurance: In several countries, government has promoted the formation of agricultural co-insurance pools, of which the largest is the Agroseguro, Spain pool program formed in 1980. Since 2000, co-insurance pools have also been formed in Chile,⁷¹ Turkey, and China (table 6.1.). A pool is a legally binding risk-sharing agreement entered into by a number of independent insurance companies for the purposes of collectively underwriting an agreed class(es) of insurance. Each insurer participates in the premiums, claims, profits, and losses according to its proportionate interest (percentage share of 100 percent) in the pool. The potential benefits of an insurance pool include (i) the ability to underwrite a much broader and larger book of business; (ii) the potential to achieve a much better geographical spread of risk than if the each company operated independently; and (iii) the opportunity to take advantage of economies of scale in the costs of developing new products and programs and in underwriting risks and adjusting claims where a single lead co-insurer is appointed (or a separate technical support unit is created) to administer the business on behalf of the pool members. There are also major potential cost savings in the purchasing of reinsurance protection for a pooled co-insurance program.
   
2. 
   In developing countries where insurance markets are often poorly developed and there is no tradition of crop or livestock insurance or rural insurance infrastructure, a pool co-insurance program may be a much more attractive proposition to commercial insurance companies than if they were to try to operate independently. Indeed, a pool approach may be the only economically viable solution by which barriers to entry by individual companies can be overcome. These barriers include the following scenarios:
   

• 
  The company has a low capital and reserves base the ability to participate in and to share in the results of the business by taking up a very small share in the pool. For example, in Spain there are about 35 participating co-insurers, some with shares of less than 1 percent, and in Turkey the 16 participating commercial insurers each have an equal 6.5 percent share in Tarsim, the managing insurance company they created to underwrite crop and livestock business in 2006.
  
• 
  The companies share the costs of the centrally based technical and underwriting staff and claims adjusters as opposed to having to recruit these staff to their own company.
  
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  The companies share the costs of staff training, product design and development, the creation of marketing, and loss adjustment infrastructure and systems and procedures.
  
• 
  The companies share the costs of the pool reinsurance program.
  

12. 
    Currently the most common form of government support to agricultural insurance is through direct insurance premium subsidies, applicable to all the countries listed in table 6.1.⁷² Governments often justify premium subsidies as a means of making crop insurance affordable to all farmers and especially small farmers.
    
13. 
    The costs of government premium subsidies are extremely high in most countries. In 2007, MPCI premium subsidies in the United States amounted to US$3.8 billion for crop MPCI and US$0.8 million for livestock premium subsidies. In Spain total premium subsidies were US$581 million; for crops premium subsidies amounted to 70 percent of the total premium cost and for livestock, premium subsidies were 74 percent of premium. In Japan, which has a very large crop and livestock insurance market, total 2007 premium subsidies amounted to US$549 million with an average premium subsidy level of 49 percent of premium. In Canada, crop insurance premium subsidies amounted to US$546 million (50 percent premium subsidy level). In Europe, Italy and Portugal provide extremely high levels premium subsidies to their farmers, while France and Turkey introduced premium subsidies in 2005. In Asia, high levels of premium subsidies apply to almost all the major programs, including India, Philippines, China, and South Korea. In Latin America, Chile introduced premium subsides in 2001, and in Brazil, the federal government ratified the reintroduction of premium subsidies in 2005.
    
14. 
    India provides heavy crop insurance premium subsidies for the national area-yield index insurance program (premiums for food crops are capped at about one-third the actuarially determined rates, but premium rates for horticultural and commercial crops are charged at the full commercial premium rates). In Nepal, government provides 50 percent livestock insurance premium subsidies on the small farmer cooperative livestock insurance scheme. In China government is also providing very high levels of crop and livestock premium subsidy support. In 2007 premium subsidies amounted to US$283 million. It is apparent, however, that most developing countries, including Bangladesh, could not afford such high crop and livestock premium subsidy levels.
    
15. 
    The next most common form of government support is to the reinsurance of agriculture. In India, government excess-of-loss reinsurance protection is free of charge, while in Canada, the United States, and South Korea this is provided at favorable (subsidized) terms.⁷³ In Spain, Mexico, and Brazil, agricultural reinsurance protection is provided at commercial market rates by the national reinsurers, Consorcio de Compensacion de Seguros (Spain), Agroasemex (Mexico), and the Brazilian Reinsurance Institute (IRB). This also applies to Portugal, where government offers a voluntary crop stop loss reinsurance program.
    
16. 
    Governments also offer subsidies on the insurance company’s administration and operating expenses. In the most comprehensive form in the United States, government effectively subsidizes 100 percent of insurer’s acquisition costs, administration costs, and the costs of adjusting crop losses. These subsidies are paid directly to the insurance company and the farmer bears only his share of the pure risk premium. In some countries, government provides financial subsidies for product research and development and for training and education programs.
    
17. 
    Further information on the structure and features of a selection of these public-private crop insurance programs is presented in annex 11. The lessons from international experience can provide useful insights for insurance planners in Bangladesh as it develops its own private-public partnership for agricultural insurance.
    

18. 
    International experience suggests that wherever possible, implementation of crop and livestock insurance should be through the private commercial insurance sectors and/or cooperative mutual insurance companies and microfinance/microinsurance entities, possibly supported by government.
    
19. 
    The private commercial (non-life) insurance sector in Bangladesh has indicated that it is unable to support any crop insurance initiative without strong support from government, and although some of the NGOs/MFIs are expanding their microinsurance activities, it is unlikely that they will be able to scale up their operations without public-sector support.
    
20. 
    Public-private partnerships for agricultural insurance may be further explored for Bangladesh. If agricultural insurance is to be developed in Bangladesh and made widely available to the country’s owners of small and marginal farms, it is therefore likely that this can be achieved only under a public-private partnership. The key stakeholders under a PPP arrangement for agricultural crop and livestock insurance are likely to include the Bangladesh private commercial insurance industry working closely with the main rural institutions (cooperatives, NGOs and MFIs), with support from a “steering committee” representing the public sector and including Ministries of Agriculture, Livestock and Fisheries, and Finance and the Department of Insurance. (An outline institutional framework for Bangladesh is presented in figure 6.1.). Other important stakeholders include reinsurance companies, potentially SBC, the national reinsurer and international reinsurers, and international aid donors.
    

Source: Authors 2009.

21. 
    It is recommended that under any PPP a Bangladesh agricultural insurance technical support unit (BAITSU) be formed. It would assist the insurance industry and its partners (e.g., MFIs) in the design and rating of new crop and livestock insurance products and would also act as a channel for technical assistance from the international development agencies and aid donors (figure 6.1). BAITSU would have a small technical staff of two or three agricultural insurance specialists. The suggested specific technical functions of BAITSI are presented in box 6.1. BAITSU would report to a steering committee of public and private stakeholders. Should the government and insurance industry and other potential stakeholders be interested in this proposal, the first task of the Steering Committee would be to identify the functions of BAITSU. The detailed business plan of the BAITSU (including staffing and costings and tasks and projects) could then be drafted.
    

22. 
    In reviewing the potential roles that government, private commercial insurers, banks, MFIs, cooperatives, and NGOs might play in developing agricultural insurance under a PPP for Bangladesh, it is useful to distinguish between the different types of institutional model for providing insurance and microinsurance products and services to Bangladesh’s predominantly small-scale crop and livestock producers. ProVention (2006) identifies four main delivery models for providing microinsurance, as described in box 6.1.
    
23. 
    The full-service model, whereby private commercial insurers (or occasionally public insurers) assume full responsibility for the supply of agricultural insurance products and services is the most common institutional form of insurance in the major public-private agricultural insurance programs reviewed above. In Bangladesh the former public-sector SBC crop and livestock insurance is an example of the-full service delivery model. In Bangladesh the private commercial sector has yet to assume any direct role in agricultural insurance.
    
24. 
    The partner-agent model has been adopted for micro-life insurance by the private commercial insurers and the NGOs/MFIs in Bangladesh, and as recommended in chapter 5, this model could provide one option for expanding and developing crop and livestock insurance in future.
    

25. 
    The current NGO/MFI livestock-credit protection schemes fall under either the community-based model or provider model. Chapter 2 provided an extensive review of the livestock credit-protection sum insurance programs currently offered by several NGOs/MFIs, and this chapter explores further the potential for strengthening and developing the role of the NGOs/MFIs in providing crop and livestock insurance.