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THE IMPORTANCE OF AGRICULTURAL

INSURANCE POOL IN ASIA AFRICA REGIONS

Prepared for

FAIR Case Study Competition

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Written by

Heddy Agus Pritasa

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Let’s Go Green ............

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THE IMPORTANCE OF AGRICULTURAL INSURANCE POOL IN ASIA AFRICA REGIONS

By Heddy Agus Pritasa

Abstract: This paper is aimed to observe the impacts of global warming, the climate change, the economic recessions and crowded populations towards agriculture factors in Asia Africa regions. This study comprehensively reviews the agricultural livelihoods and its risk management applications in some countries. Insurance as the risk transfer tool is aimed to save the low-income farmers thus maintain the food supply. The research methods use some successful examples of insurances and catastrophe pools in Asia Africa and Caribbean islands (CCRIF) and how this leads to the concept of the formation of the FAIR agricultural insurance pools in Asia Africa regions. The benefit of the pool is for the Asia and African countries to protect their farmers and food availability towards the risks due to climate changes, such as droughts, typhoons, floods, etc. The governments’ involvement in the formation of every pool is crucially needed.

Key words: agriculture insurance, climate changes, Asia Africa countries, agricultural pool, the governments.

I N T R O D U C T I O N

The Earth is getting older. As the third planet from the Sun, the Earth, the planet which we

live on, is already around 4.54 billion years. Since Adam and Eve period, the world has

changed and developed rapidly. Rapid developments are everywhere in every country in the

world. High-rise buildings, office towers, apartments, shopping malls have been built not

only in cities but now also spread to towns or rural areas. The recent study carried out by the

UN shows that population in the cities firstly outnumbered the population of rural areas in

1980 (UN Population Division, 1980). The World population is becoming crowded although

family planning program is carried out in highly-populated countries such as China, India,

Indonesia and the like. Such rapid developments occupy the fertile lands which are ideally

used for agriculture. It changes the nation’s policy of a country. For instance, Indonesia in

1980’s was focused to produce rice for their own domestic need but now Indonesia should

import rice from neighbouring countries. The property development in Indonesia use fertile

land ideally used for agriculture and the current Indonesia government’s policy does not put a

strong priority on agriculture like in the past decades. This makes Indonesia lack of rice and

should import it from other countries. These trends happen not only in Indonesia but in any

other parts of the world. Nowadays, there are 26 Megapolitan cities with more than 10

million people iving in each city. It increased from 8 Megapolitan cities in 1950. Along with

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that, the price of rice has increased steadily over the years. The table below shows the price

of rice that has steadily increased over the years.

Figure 1. The curve showing the gradual increase of price of rice

Apart from the above, every country suffers from the highly costs economic phenomenon.

Inflation is high in many countries. Economic recession not only impacts developing

countries but also modern countries such as European countries or even the USA. The table

below shows the inflation of big countries per June 2012.

Social unrest, political unrests and terrorism threats make the condition worse. The scarcity

of fuel oil also contributes to make it even worse. These may cause inflation ratio easily

increase causing the hiking prices of daily necessities.

Table 1. Table of inflation of big countries (per June 2012)

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There is a serious threat that not all people are realtively aware of. It is a global warming that

triggers the climate change gradually. The change of modern lifestyle also contributes to the

climate changes. In the future, the quality and quantity of hazardous risks may change as the

result of combination of two significant factors, i.e., developing cities and the climate change.

Although the cities only occupy 1.5% of land area in the world, they are the economic

generators of around half the world’s PDB (Product Domestic Bruto). Along with that, the

lifestyle also changes. The use of air conditioners in cities and other areas release CFC,

chlorofluorocarbons or well known as Freon, will deplete and damage the ozone layers

impacting the climate change. The layers contain relatively high concentration of ozone (O3)

and have the main function of the absorption of the Sun’s ultraviolet (UV) radiation that can

damage our skin. The release of carbonmonoxide resulting from the exhaust fumes of cars or

motorcycles contributes to the damage of this layer. The recent study shows the CO2 content

of the atmosphere increased by more than a third during the main phase of industrialization

era following year 1800. The earth temperature is now getting warmer and this make the

change of climate. The mean gobal temperature has risen by 0.7°C over the last 100 years

and by 0.3°C in the last 20 years. According to preliminary estimates by the World

Meteorological Organisation, year 2005 was, in global terms, the second warmest year ever

recorded. It resulted the melting of ice layers in Greenlands. As a consequence, it increases

the sea levels by 7 meters. The melting of ice layers in West Antartic could increase the sea

level by 5 meters resulting flood disasters in many coastal area. The most destructive flood

event recently occurred is in Thailand in October 2011. This flood disaster started from

extreme annual rainfall in northern regions of Thailand. The water inflow in Bhumibol dam

and Sirkit dam exceeded outflow resulted severe flood. It is the costliest natural disaster

occurred in South East Asia and most costly insured flood worldwide borne by commercial

insurance market. More than 20 provinces in Thailand were affected. S&P recently estimated

the final insured market gross losses of USD 16-18 billion. The flood in Bangkok city lasted

for months since October 20122. Many high-tech industries in seven industrial estates in

Thailand were flooded. Insured losses range from large commercial, SME (Small Medium

Enterprises) industries to residential exposures outside industrial areas. The reinsurance costs

are very expensive for Thailand risks. Some reinsurers may consider not to provide flood

insurance cover for Thailand risks.

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The global threats relating climate change result the average value of damage at $59 billion

per year (EMDAT, 2009) from 1990 to 2008, or around 0.1 % of the world’s GDP in 2008.

Tropical Typhoon contributes 44% of damage and 33% of flood.

Map 1.1. Global Catastrophe risks map

The map above shows the catastrophe risk area in the world. The risks range from the

typhoons, droughts and earthquakes. As we can see from the map above, the most hazardous

risks on earths are droughts then followed by earthquakes and storms/typhoons.

Figure 2. Return period curve of tropical storms with various intensitiy in America

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The above curve shows that the global warming phenomenon increases the frequency of

disasters – temperature is getting warmer. The curve also shows the reccurent period of

tropical storms with various intensity in the USA for one specific climate model. The storm

of US$ 100 billion occurs once in every 100 years in America based on the current climate

condition. However, the warmer temperature in the future will increase the recurrent period

to be once in around 56 years. (Source : Mendelsohn, Emmanuel and Chonabayashi, 2010)

Another research carried out by Munich Re in 2010 shows that the intensity of the natural

catastrophe events per continent increase gradually over period of years. We also notice that

the Australia and the Asia continents are the highest among other continents.

Graphic 1.1. The increase intensity of natural catastrophe events per continent (1980-2009)

THEORETICAL FRAMEWORK

Insurance is a vital industry. It will excellently support the business activity of the real

industry, such as manufacturers, factories or large companies. Imagine one large

multinational car manufacturer was not insured and severely damaged due to a destructive

event. Apart from the physical losses, the other losses after the physical damage will follow

like the snowball effects. For instance, the death or injury of surrounding people, business

inerruption and the local economic condition will be suffered or perhaps this will give

impacts on global economy, the unemployment, social unrest or political impacts, etc.

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In the risk management system in general, there are four steps to take from risk identification

phase to risk control phase. Risk identification phase is a step to gather all kind of risks

within an organization. These can be external or internal risks, controllable or non-

controllable risks and the like. All we have to do in this step is only gather all kind of risks.

The second step is risk analyses phase, i.e. to classify which one is a controllable risk, which

one is non-controllable risk. Which one is external or internal risk. At this stage, we know

each classification so that we can evaluate each risk in every classification.

The next step is risk evaluation phase. At this stage, we will evaluate each risk we previously

analysed. It includes the process of evaluating how the financial impacts of each risk when it

occurs.

Figure 3. The main risk management process

A Nation’s earthquake insurance scheme - JER’s Japan case study

The final step is the risk control, where the insurance could play as a risk control mechanism.

At this final step, we will decide, after knowing and deciding the financial impacts of each

risk, which risk we could retain or eliminate and which risk we could transfer to another

party. Coming back to example of the car manufacturer above, rather than self-insuring the

risk itself, the car manufacturer will transfer its financial risks to the insurer by insuring the

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whole car manufacturer plant and as a consequence, it only pays relatively small premium

amounts. It is substantially cheaper than self-insuring the car manufacturer itself.

In a wider complex, insurance as a risk transfer mechanism is also used by a nation to protect

itself from various kinds of risks such as natural risks, man-made risks, catastrophe risks,

terrorism threats, financial or non financial risks, etc. Many nations use insurance as part of

risk management to protect the nations from financial risks due to the occurrence of a risk.

For instance, Japan is a volatile country towards earthquake risks that use insurance as a risk

management process. Many severe earthquake events took place in Japan and some of them

changed the nation’s policy to anticipate the nation from the potency of financial risk due to

earthquake occurences. Some big earthquakes led Japan set up a nation’s insurance

instrument that protects its people from financial losses due to earthquakes. The Great Kanto

earthquake struck the Kanto plain on the Japanese main island of Honshu on Saturday,

September 1st 1923. The earthquake had a magnitude of 7.9 on the moment magnitude scale

(Mw) with the focus deep beneath Tzu Oshima Land in the Sagami Bay. The cause was a

massive rupture of the Sagami Trough due to exertion of huge energy from the Phillippine

Sea Plate subducting under the Okhotsk Plate. Because the quake occurred during the lunch

time, many people died due to many large fires that broke out. Some fires developed into

firestorm that swept across the cities. Many people died when their feet became struct in

melting tarmac. The tsunami following the earthquake struck the coast of Sagami Bay, Boso

Peninsula, Izu Islands and the east coast of Izu Peninsula within minutes. The tsunami

waves were up to 10 metres and it killed many, about more than 100 people died. Over

570,000 homes were destroyed leaving 1.9 million homeless. Altogether, the earthquake and

typhoon killed an estimated 99,300 people and another 43,500 people went missing.

Another big earthquake in Japan is the Niigata earthquake of June 16, 1964. It had a

magnitude of 7.5 and caused severe damage to many building and structures in Niigata.

Although around 2000 houses were totally destroyed, only 28 lives were lost. A following

Tsunami triggered by movement of the sea floor associated with the fault ruptured, totally

destroyed the Niigata port.

Those two big earthquakes in Japan led the government of Japan created “Japanese

Earthquake Reinsurance” (JER) scheme in 1966, which has been revised several times. In

this scheme, houseowners may buy earthquake insurance from an insurance company as an

optional rider to a fire insurance policy. The insurers enrolled in the JER scheme who have

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to pay earthquake claims to houseowners share the risk among themselves and also the

government, through the JER mechanism. The government pays a much larger proportion of

the claims if a single earthquake event causes aggregate damage of over about 1 trillion yen

(about USD 8.75 billion). Below are the main coverages of earthquake insurance in Japan.

Figure 4. Earthquake Insurance coverages in Japan

To protect the people and the nation’s interests, the government of Japan undertakes the

reinsurance for the earthquake insurance and necessary laws have been launched including

losses to be covered, claim settlement method, amounts insured, participation method, etc.

The earthquake reinsurance program as of April 2002 is as follows:

Figure 5. A diagram of liability sharing of insurance companies and Japanese government

The above figure shows us that JER uses an Excess of Loss layer program for its earthquake

reinsurance protection. There are only two participating parties involved, ie the insurance

industry and of course the the government. No other parties, like the World Bank for

isntance, are involved.

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Parametric trigger method

The trigger of claim in JER uses parametric trigger method. It is a type of insurance claim

that does not indemnify the pure loss, but ex ante agrees to make a payment upon the

occurrence of a triggering event. The Parametric trigger is mostly used in catastrophe natural

risks, such as earthquake, flood, typhoon and the like. This can also be applied in agricultural

crop insurance. The Parametric insurance is therefore suitable for catastrophe risk insurance

having low frequency but high intensity losses, such as earthquake loss events. The diagram

below shows the difference of indemnity and non-indemnity basis.

Figure 6. Difference between Indemnity with Non-Indemnity basis

The Parametric method mostly starts working when one loss reaches specified criteria agreed

by parties involved in one insurance contract. The specified criteria can be a specified ratio,

earthquake magnitude or rainfall ratio. To make the parametric insurance work best, a long

and accurate historical data is needed to make the best probability scenario. The advantage of

using parametric method is the claim settlement is faster compared to indemnity claims

settlement. Other advantages are as follows:

• Clear and Transparent – It is clear what the kind of losses that are covered and

transparency on the how the losses are triggered.

• Relatively No disclosure on underwriting aspects – being contrary to the indemnity

events that required details of risks, there is relatively no need to gather underwriting

details in every risk.

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• Relatively Simple – The risks are reviewed simply in parametric method and therefore

no need to survey the risks.

• Less dispute - as the claim settlement is simple and quickly settled, there is relatively

less dispute of all parties involved

• Relatively objective – As everything is set in advance clearly, therefore the claim

settlement is objective. No grey area aspects are involved.

However; there are also disadvantages of parametric trigger methods although the list is little.

They are listed as follows:

• The Parametric trigger requires accurate and comprehensive data, especially when

establishing the parametric model.

• The Parametric trigger is not easy to understand. The parametric trigger involves high

technology tools and therefore it is not easy to understand.

• There may be a big amount difference between the loss calculated from the

parametric model and the actual loss on the ground.

The formation of TREIF (Taiwan Residential Earthquake Insurance Fund) in Taiwan

Another example of risk management system using insurance is taken by the Taiwan

government. As we all know, Taiwan is prone to earthquake risk since it is located in the

Circum-Pacific seismic zone, one of the most three major seismic regions. Some big

earthquakes led the Taiwan government to establish a residential earthquake insurance

system called TREIF (Taiwan Residential Earthquake Insurance Fund) in 2001. One of the

most influential earthquake occurrence is an earthquake called ‘Chi Chi earthquake’ or 921

earthquake. This quake occurred on September 21, 1999 with the magnitude of 7.3. It struck

Nantou County in Central Taiwan. 2,415 people were killed, 11,305 injured, 53.768 buildings

were severely damaged and NT$ 300 billion (US$ 10 billion) worth of damage was done.

The quake was recorded as the second-deadliest quake recorded history in Taiwan, after the

1935 Hsinchu Taichung earthquake.

This quake prompted the Taiwan government to set up an earthquake insurance pool system

and built a concensus to strengthen an earthquake insurance mechanism. At the end of 1999,

the competent authority also introduced amendments to Article 138-1 of the Insurance Law to

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include provisions on underwriting residential earthquake and establishment of a mechanism

for assuming earthquake risk. This amendment was approved on 9 July 2001 and the Taiwan

Residential Earthquake Insurance Fund came into existence. In accordance with Article 138-1

of the Insurance Law, the authorities announced the “Enforcement Rules for Residential

Earthquake Co-insurance and Risk Bearing Mechanism” on 30 November 2001. The rules

stipulate NT$ 50 billion in excess layering as the figure below.

Figure 7. TREIF excess of loss layering program

As we can see from the above figure, TREIF puts a NT$ 18 billion in the second layer after

the residential earthquake coinsurance pool of NT$ 2 billion in the working layer. The

government will step in at NT$ 10 billion when the earthquake losses exceeds NT$ 40

billion. Another risk management approach is more modern and complex since it involves

some regional countries having similar risk exposure. It is what we call as CCRIF

(Caribbean Catastrophe Risk Insurance Facility) which was established in 2007. This is also

the first insurance instrument to successfully develop parametric policies backed by both

traditional and capital markets. The formation CCRIF was prompted by Hurricane Ivan in

2004 which caused billion dollars of losses across the Caribbean. In both Grenada and the

Cayman islands, losses were close to 200% of the national annual GDP. After the Hurricane

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Ivan, the Caribbean Community (CARICOM) Heads of Government held an emergency

meeting to discuss critical issues surrounding the need for the provision of catastrophe risk

insurance for its members. As a result, CARICOM resolved to take an action and approached

the World Bank for assistance to design and implement a cost-effective risk transfer

programme for member governments. From this, the CCRIF came into an existence. It is a

regional catastrophe fund for Caribbean governments, designed to limit the financial impact

of devastating hurricanes and earthquakes by quickly providing liquidity when a policy is

triggerred. CCRIF operates as a PPP (Public Private Partnership) and is set up as a non-profit

‘mutual’insurance entitiy in Cayman islands. As other catastrophe insurance pools for

nations, the CCRIF also uses parametric trigger in a claim method.

RESEARCH METHODOLOGY

Several different methodologies have been applied in this study, including literature review

and other documents for desk study. Some examples of successsful methods are brought

forward into this writing to generate the idea of the formation of an important pool for the

multi benefits of Asia African countries.

Based on Munich-Re research of 2010 on the socio-economic effects of climate change in

East, Southeast, South, North and Central Asia, the climate change may result destructive

economic foundationof a nation. The essence on this report is that the changes in the physical

sphere determine the current status of the climate. The climate change has already modified

the physical sphere such as higher temperatures, increases or decreases of rainfall and

changes in the frequency and intensity of extreme weather events. The dominant weather

phenomenon in Asia is the moonson. The area being impacted by the climate changes are

water, coastal and marine systems, infrastructure, settlement, agriculture forestry, health,

tourism, energy and transport. These area can be of relevance to insurance and finance

sectors. Some brief explanations regarding such area are as follows:

- Water : there is a widespread dependency on water throughout the whole Asia. Rapid

development in urbanisation, industrialization and inefficient use of water use are the

main causes. In climate change terms, glaciers are melting quicker in the whole of

Asia due to Himalayan glaciers that fed the major river systems in northern, southern

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and south eastern Asia. In local use, the use of water for industrial purposes

outnumbers the use of water for domestic purposes.

- Coastal and Marine systems and fisheries : Coastlines, harbours and shipping face the

danger of more intense typhoons and storm tides. The sea level may rise to flood to

many coastal regions if no adaptation takes place. As the use of land changes,

mangrove forests of Southern and South East Asia are at threats. Deep sea fishing is

affected due to ocean temperature rise.

- Human health: The spread of infectious disease particularly in South and Southeast

Asia results from bad sanittary conditions and social factors The effects of climate

change will even also affect the spread of of insect-borne virus diseases such as

Malaria and Dengue fever.

- Agriculture and forestry – this is more important area to consider. The climate change

impacts the agriculture and forestry in the whole world. Agriculture is very prone to

the climate change. Every one percent in temperature rise will impact the agriculture

sectors. As the result the agriculture output may reduce and the price of food will

increase due to scarcity of the agriculture output. The rise of the temperature may

result the reduction in yields of rice, maize, wheat and other cultivars in most parts of

the world. The climate projections confirm this phenomenon. To anticipate this from

getting worse, some adaptations should be introduced, such as irrigation systems for

the purpose of maintaining sustainable yields. The rising demand of food by a rapidly

growing population will lead to the food scarcity and the increase price of food.

As explained, a conclusion can be drawn that some crucial adaptation to climate change are

very important. Based on the above list of area that may be affected by the climate change,

the agriculture is the vital area to focus. The intention is to secure the food supply leading to

avoid the price hike of the food. As the main aim of the writing is for the Afro African

countries purposes, therefore this writing is mainly focused on the agriculture aspects in Asia

Africa countries and how some risk management methods through insurance are carried out.

Most Asia and African people consume rice, wheat, corns or cassava. Rice is mostly

consumed by Asian people. One of the most prominent countries having a steady focus in

crops production is Thailand and Vietnam. Both countries export rice to other countries. For

this study, we discuss Vietnam in terms of agricultural livelihoods in the climate change

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context and the risk management efforts towards the food availability. However, we discuss

not only Vietnam case in this writing. We also present some other cases. The study cases

presented below are the experience cases from countries among Asia, Arab and African

countries. The experience can be a successful or unsuccessful story. However it can be

useful for us to gather experience of how they build the agriculture insurance concept from

zero ground.

Vietnam Study Case : Failure on agriculture insurance

Eighty percent of the population in Vietnam live in weather-dependant livelihoods such as

agriculture, aquaculture and forestry. Around 90% of the people live in rural areas.

Agriculture itself accounts for 22%of Gross Domestic Product (GDP), comprising of 30%

exports and 60% of employment. The majority of the rural population makes is living by

growing and selling crops, selling livestock and fish and from forest product. Rice accounts

for 45% of agricultural productions. However, Vietnam is also among the most disaster

prone countries in the World. According to the World Banks’ (WB) research, Vietnam will

be one of the five countries most affected by climate change. Shocks like typhoon, flood,

drought, epidemics, fire, sea level rise, can cause severe damage and loss for livelihood

means; thus dramatically reduce the households’ assets, eliminate their income resources and

force the poor deeper into poverty. To prevent this from getting worse, the Vietnam

government take some necessary actions as outlined in the following pharagraphs.

Agriculture insurance is an economically effective financial tool that strengthens Vietnam’s

resilience to extreme events, especially climate-related events. Agriculture insurance in

Vietnam not only promotes agricultural production, it also eliminates negative impacts of

disasters on agricultural activities and raises the awareness of self-protected spirit for

vulnerable community.

Insurance funds /budget generated by farmers, agricultural firms and the State could

contribute to decreasing the financial burden for the State budget in emergency response and

provides sufficient and timely supports for affected people in early recovery. As it covers the

nation’s interest, the government should step in by passing regulations. Existing legal

framework has laid a fundamental foundation for risk financing mechanism in general and for

agricultural insurance in particular. The most important document is the MoF’s Plan to pilot

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agricultural insurance for 2011 – 2015, which was submitted to the government in 2009 for

consideration.

In the past decades, agriculture insurance was piloted by some insurance companies (Bao

Viet, Bao Minh and Groupama) but few farmers paid for it. In total approximately US$ 1

million in fees were collected in 2008 mostly for livestocks and rubber trees but no crops. At

that time, the agriculture insurance failed due to many factors. According to MoF’s report,

these include insurance products not suitable to the need and the local context, high risks due

to high losses, small profit for insurance companies, limited financial capacity, undeveloped

insurance market, not an insurance culture, poverty, scatted production, moral hazard and

adverse selection, lack of strong legal framework, no central database, and weak PPP (Public

Private Partnership).

A case study in India : A successful agriculture insurance

India has similar conditions to Vietnam to start up weather index insurance. The agriculture

insurance in India was initiated by a private insurance company with the technical report

from the World Bank. The key success of the program is the linkage between insurance and

financial services at the grassroots level. The following lessons should carefully be studied t

ensure successful applicability.

• Strong partnership among government sector, private companies and financial

institutions.

• The delivery channel must be trusted and comprehensive. It is necessary to include

feedbacks from farmers to the design.

• The product delivery channels to farmers should be linked to finance, inputs and other

service that allows pre-financing of premiums.

• Investment in raising awareness for farmers and marketing is the key factor to scale

up the program.

• Finally, favourable legal framework and infrastructure investment is they pre-

condition to implement the weather index insurance program.

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Mongolia Case Study – A mixture of social and commercial insurance

Mongolia represents one of the strongest cases in mixing social and commercial insurance

with a carefully constructed project. The index-Based livestock Insurance (IBLI) pilot

program has a unique financing structure that was designed to account for the lack of

access to commercial reinsurance, the large financial exposure associated with correlated

losses and the insurers and the regulator’s lack of experience with this class of insurance.

The structure follows best practices by structuring layers of risk financing. Insurance

companies retain some portion of the risk, pool risk with other companies, pay

reinsurance premiums to the government and are protected from the most extreme losses

by a combination of (1) the Base Insurance Product (BIP) reinsurance reserve and (2) a

contingent loan from the World Bank for the most severe losses.

Philippine Case Study : small and marginalized farmers

Agriculture insurance in the Philippines is a government’s program targeting small and

marginal income farmers. The Phillippine Cross Insurance Corporation (PCIC) was

authorized to operate the program. PCIC has various offices from control to local levels

and a network of authorized underwriting agents (UA) such as Lending Institutions (1.1.),

Lending Conduits (LC), etc. The LI’s include commercial, development, rural banks,

NGOs, Coops, and even government entities. LIs share premium rate with borrowing

farmers about 17%-22% of the premium rate, government subsidies 50%-60%, the rest is

paid by insured farmers.

To apply the model, two pre-conditions must be presented e.g. strong legal framework and

commitment from the government and the presence of LI as grassroots level. In Vietnam,

the LIs are operating business at local level, especially the banks (e.g. Agribank, ABC).

For the former condition, currently the Government of Vietnam is going to enact an

agriculture insurance program. A feasibility study is needed to investigate the marketing,

technical, management and financial aspects of the program. A clear subsidy mechanism

must be presented before operating this model.

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Indonesia Study Case : A failure due to shift of the economy focus

During the past three decades, Indonesia was among countries that had a strong focus on

agriculture. As the nation’s policy, the focus on agriculture sector was stated in the five year

development planning several (called REPELITA in Bahasa Indonesia abbreviation). At

least, it was stated in two REPELITAs that the nation’s development will include the main

focus in agriculture. However at end of the four REPELITA, the nation’s economy focus

changed. The government shifted the economy focus from the agriculture to industry. Two

main industrial focuses were national car brand plus its manufacturer and the aircraft

manufacturer. Timor was the national brand car and IPTN Nurtanio was the national aircraft

manufacturer. It was good at the beginning. However; when President Soeharto’s regime

ended, then the change of the nation’s leader changed the economy focuses overall. The next

presidents after Soeharto did not have sustainable focuses in their national development

program. Mostly they were busied to secure their political positions and their political parties’

interests which supported the presidents’ positions. As a result of gradual shift of economy

focus, Indonesia changed from agricultural country to industrial country. When Indonesia

and other neighboring countries were hit hardes by the global economic recession in 1998,

Indonesia was among countries that was very slow in economic recovery. The prices of daily

necessities hike and the price of food were very expensive due to the rapid increases on

prices. Thailand, as Indonesia’s neighboring country had a relatively faster economic

recovery. One of the successful factors was that Thailand could fulfill domestic needs on

food supply and demand.

Near the end of July 2012, one of the famous Indonesia’s newspapers, Kompas, put a

headline story mentioning Indonesia was volatile on Food Crises. The impact of current

drought in the USA resulted hiking price on some commodities globally and it impacts

Indonesia to become volatile on Food crises. The strong dependency on the food import

gives the unpleasant shocks on food supply and food prices in domestic markets.

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Figure 8. Kompas’ headline news showing Indonesia is prone to food crises

In terms of agriculture insurance in Indonesia, it seems no progress at all. There is one

general insurance company in Indonesia, i.e., PT Asuransi Jasa Tania, that seems closely

connected to crop insurance business. However the main focus is only on forestry owned by

the government.

Kenya Study Case : Agriculture Insurance model using cell phones

One of the many problems on agriculture insurance development in developing country is

smallholders’ unwillingness to invest in better seed and fertilizer. Those farmers do not see

this as a kind of investment but merely costs only. In Kenya, for instance, only half of the

farmers buy improved seeds or other inputs. Many farmers use poor-quality seed from

previous harvest. The reluctance of the farmers are somehow reasonable. Droughts or flood

can easily destroy their crops and wipe out the benefits of the purchased inputs. The result of

not using the best inputs is that yields remain far below their potential.

To overcome the problem, the Syngenta Foundation – A foundation for sustainable

agriculture to improve the livelihood of smallholder farmers - launched the Agriculture index

insurance initiative in 2008. The aim is to explore and develop the potential of

microinsurance for smallholders. The insurance is branded “Kilimo Salama”, which means

“safe farming”. The main features of such insurance should be simple, affordable and

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relevant to small farmers. With Killio Salama, the farmers can insure selected farm inputs at

ther local retailer and pay half the premium. Mobile phone technology is very widely used in

rural Kenya. The stockist registers the farmers using a camera phone to scan a bar code on

each input sold. A text message confirming the policy instantly goes to the farmer’s cell

phone. To make the agriculture insurance affordable to smallholders, Killimo Salama

agribusiness partners pay the other half of the premium. In the 2009 pilot phase, the

agribusiness partners were Syngenta East Africa Limited and a fertilizer company called

MEA. Their involvement made the program successful quickly, in time for the next growing

season. The Syngenta Foundation is adding more agribusiness partners and insured products

as the initiative moves forward.

To monitor insurance progress, the Foundation has set up the automated weather stations. If

a station reports at the end of the season that local rainfall has been insufficient, farmers in

the affected area receive a payout. Using weather station data rather than the field assessment

visits further contributes to keeping the cost of insurance low and thus within farmers’ reach.

Payout via phones avoids problems with intermediaries, cash transport to remote areas, etc.

Bostwana Study case – Agriculture Insurance finnaly launched

In January 2010, Agriculture Insurance had finally been launched for the first time in

Bostwana. In the long run this agriculture insurance tried to move forwards full

commercialization. Soonest after it was launched, Agrinsure Bostwana a joint venture effort

between South Africa’s Farmers Technical Insurance Service Company (FTISC) and

Alexandra Forbes Bostwana, was officially unveiled to stakeholders in the industry. The

establishment of agriculture insurance in Bostwana is a major milestone in the sector as the

idea for such a product has been in the pipeline for many years and it will now strengthen the

country’s effort to attain food sustainability.

Iran Study Case : Bad loss ratio of agriculture Insurance

Agriculture Insurance is exclusively available and provided though Agriculture Products

Insurance Fund. The fund covers crops, livestock, poultry, bees, fish, silkworms, forestry and

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pasture, orchards and others under an area-yield programme. Up to 69% of total premiums

are subsidized by the Iran government.

The perils covered for this agriculture insurance are flood, hail, storm, windstorm, heavy

rainfall, frost-bite and earthquake. Drought is so far included only in those the insurance

programme which has been launched by the Fund for the protection of wheat (irrigated and

dry), barley, tea, rice and cotton, as well as forestry and pasture. The fund covers all 29

provinces of the country and nearly six million hectares of land.

The loss ratio for agriculture insurance is bad, which exceeds 100% while the penetration

ratio stands at 0.8% of agriculture GDP.

Sudan Case Study : Shariah-compliant agriculture insurance

Sudan is the country of the birthplace of takaful – i.e., the shariah-compliant business system

in Islam and adapted in the conventional business practice. Sudan is probably the only

MENA (Middle East and North African) country offering shariah-compliant agriculture

insurance. Crop insurance premiums are subsidized by 50%, and the loss ratio is 34%.

However, there is only 10% of the cropped area in the country is insured. A law was passed

in 2003, aimed at controlling agricultural risks and supporting agricultural insurance

providers. The 2003 law also set up a national fund to alleviate the impacts of natural

hazards. The fund provides for premium subsidies, reinsurance cover for all areas of the

sector, and the training of the personnel, among other plans.

RESEARCH ANALYSES

As explained earlier, insurance could acts as a disaster mitigation tool for agricultural sector.

Insurance plays a vital role in the risk management issues. There are some countries

successful to establish a regional insurance pool as part of risk management program like a

CCRIF which was formed to protect the countries in the Caribbean islands towards natural

catastrophes such as hurricanes or storms and the like. As the global warming issue is a

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problem of every country, therefore a close cooperation activity is needed either bilateral,

regional or multinational countries

In this part, we build a conceptual ground of risk management programme. Based on the

facts on the previous chapter, we can conclude that agriculture area should be protected

through risk management mechanism in Asia and African countries. We already know the

experience of the agriculture insurance, either it is a successful experience or unsuccessful

experience. To limit the approach, we choose insurance as a risk transfer tool via regional

agricultural insurance pool. FAIR could be an institution to facilitate this pool. The concept

of the formation of such pool should have the following criteria:

1. Selected Perils - The risks chosen should be the similar risks throughout Asia and

African Countries. For the benefits of the FAIR members, we put the risks that could

affect the agricultural products. Of course, we cannot accommodate to include all

kinds of perils from all FAIR country members. The risks selected are to protect the

agriculture products due to droughts, typhoons, storms, hurricanes and flood. The

selection of perils may change in the future depending of the claim experience of this

Pool.

2. Form of the Pool - The agriculture insurance pool for Afro Asian countries should

adapt the CCRIF Pool. It is because CCRIF is successful to protect Caribbean

countries toward catastrophe risk such as hurricane. There are 16 country members of

CCRIF.

Figure 9. CCRIF Insurance Protection Program

The above figure shows us that the protection format of CCRIF is on excess of loss

layers programme. The country islands will put specified funds to the CCRI Captive.

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The funds will be utilized to pay premium for reinsurance and CAT SWAP from the

World Bank.

3. The FAIR appointment - The organization to facilitate this agriculture insurance pool

is through FAIR – Federation of Afro Asian Insurers and Reinsurers. FAIR has

extensive knowledge and experience from its members. A similar Pool, ie the FAIR

Catastrophe Pool was successfully launched but not operational yet at the moment.

4. Government Involvement - Remember also the successful factor of this conceptual

Pool is the involvement of the government of each FAIR member country to take part

in the FAIR Agriculture Pool. In the previous part of the writing, the governments

always take part in agricultural insurances. This is logical since the government has

nation’s interests to protect the nations from the food scarcity and hiking prices of the

food. Therefore, the government involvement in this pool is a must and unegotiable.

The government should put the money in the excess of loss layer program of FAIR

Agriculture Pool. The amounts put by the governments into this pool depend on the

extents of the excess of loss protection programme.

5. JER Excess of Loss format - The FAIR Agriculture Insurance Pool should adapt the

excess working layer like the one in JER – Japan Earthquake Reinsurance. The layer

like the one in JER is more appropriate than other kinds of layer, such as TREIF

excess of loss layer. The JER excess layer has a better involvement of all parties

from the working layer. From the working layer ground up, the industry and the

government are involved. This kind of layer is considered suitable for the newly

formed pool, like FAIR Agriculture Pool.

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Figure 10. JER excess of loss layer for earthquake risk insurance

From the above figure, we see that in the retention layer, the industry is firstly

involved when the claim arises. However, when the claim is bigger, the government

will step in at the middle layer. This is a good form to balance the involvement of the

government and the insurance. Depending on the claim result and the agreement,

who involve in the working layer will change the other way around.

6. Benefits for multi-parties - The agriculture insurance is good to a) protect farmers

from financial losses due to catastrophe events b) bank loans for protecting its credits

ratio and c) food security for the nation’s interests.

7. The Public Private Partnership (PPP) approach should be taken. In other words, the

involvement between the government and the private insurance industry is a must.

We see from the previous examples that PPP mechanism is a key successful factor

either for the conceptual FAIR Agricultural Insurance Pool or Microinsurance.

Details of the conceptual FAIR Agricultural Insurance Pool

The conceptual form of the layer of FAIR Agriculture Insurance is as per the following

figure. The form is adapted from JER Excess of Loss layer since it gives a good balance

from the participation of the government and other parties. This form should last for specified

years depending on the annual results of this Pool. At least, in the first year of the formation

of the FAIR Agriculture Insurance Pool as follows:

Figure 11. Conceptual Excess of Loss Form of the FAIR Agricultural Crop Insurance in the first year

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As seen on the above figure, the governments and the insurance companies of the FAIR

members are distributed in balance in the first working layer of the FAIR Agriculture excess

of layer program. The total protection amount is unknown at the moment and this should be

measured and decided by using a modelling calculation method. As the result in the first year

of the Pool relatively cannot be predicted, the participation of financial institution, like the

World Bank in this case, should be at the top layer. Of course, it can change depending of the

claim result and claim experience of the Pool itself.

When the results and experiences of the FAIR Agriculture Crop develop, then the form of the

layer may change. Perhaps the excess of loss form of TREIF can be used to substitute the

excess of loss layer form of JER. The decision of who will be in the working layer, i.e.,

whether the government or the insurance industry should be done after analyzing the

financial result annually. The figure of such excess of loss pool in the future (at least after

the first year) may be as follows:

Figure 12. The conceptual Excess Layer Form of the FAIR Agricultural Pool using TREIF’s Excess of Layer format

Having seen the above figure, we see that in this case the insurance company members are

put in the retention layer. In pratice, it may change depending the financial results of the pool

in specified year. However, it is suggested that this form is done after reviewing the previous

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form using JER’s Excess Layer Form. Since Capital Market is relatively more expensive

than insurance program, the capital market is put in the top layer after the protection layer of

overseas reinsurance.

Having discussed the operator of the Pool, it is strongly suggested that the operator of FAIR

agricultural Pool members should be a company having extensive catastrophe risk

experience, highly skilled resources and full commitment to manage the pool.

MICROINSURANCE Approach to support The FAIR Agriculture Insurance Pool

Apart from the conceptual form of the FAIR Agriculture Pool, there should be another

mechanism to support the successful of the conceptual FAIR agricultural pool. It is through

microinsurance mechanism.

Microinsurance is the protection of low-income people against specific perils in exchange for

regular premium payment proportionate to the likelihood and cost the risks involved. The

definition is exactly the same as one might use for regular insurance except for the clearly

prescribed target market: low-income people. Like regular insurance, microinsurance can be

for a variety of risk. These include both health risks (illness, injury, or death) and property

(damage or loss) risks. A wide variety of microinsurance products exist to address these risks

including crop insurance, livestocks/cattle insurance, insurance for theft or fire, heakth

insurance, term life insurance, death insurance, disability insurance, insurance for natural

disasters, etc. In this context, each insurance company member of FAIR should sell

microinsurance product to farmers. The Perils should be the same perils as those in the FAIR

Agriculture Pool, i.e. droughts, flood, hurricane, typhoon, storms. The intention of the same

perils is to make one mechanism will support the other mechanism. In other words, the FAIR

Agriculture Pool mechanism will support the microinsurance and the other way around.

To make the selling activity of microinsurance product effective and efficient, the agriculture

product should be sold via the national insurance association. Apart from the effective and

efficient points, the other intention is to avoid unnecessary competition among the insurance

members of the association and thus it maintain the costs down. One of the obstacles of

using the national insurance association as the central selling agency is that in many parts of

the world, such association is prohibited from doing selling activity. The reason is that this

national insurance association has the main tasks of supervising the activity of the insurance

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company members and it has role as the focal point of the insurance industry to the

government. If this happens, a dilemmatic situation arises and a preferable solution should be

reached such as passing a regulation to enable the association to do selling activity.

CONCLUSIONS AND RECOMMENDATIONS

We have already discussed extensively from the first chapter to the last chapter. Some

conceptual strategic approaches have been made including the formation of the FAIR

Agriculture Pool. Still, there are many jobs to do to make this a reality. However, we should

do this sooner or later to save the regions from the food scarcity which make the social and

economic situation get worse. The food scarcity will lead to inflation and hiking prices. This

may lead also to social problems such as riots, criminal activity, social unrest, etc.

As a conclusion of all above discussion, we could summarize this writing into the following

conclusion sand recommendations:

1. The global warming will lead to the climate changes by raising the mean global

temperature by 1.1° - 6.4° percent by end of 21st century. The impact could be

gradually disastrous. The agriculture products are the first things to get the impacts.

2. As a risk transfer management step, an Agricultural Insurance Pool in Asia Africa

countries should be established. FAIR should be used as the vehicle to carry out the

project.

3. The agricultural Pool could use CCRIF excess of loss model in the first year of its

formation. The reason behind this is that the CCRIF excess of loss model gives a good

balance of participation between the government, the insurance industry and the other

financial institution.

4. The operator should be appointed among the insurance members of the FAIR. If

necessary, a committee member should be formed. It should consists of the FAIR

members having great skills and experience dealing with this kind of Pool.

5. The parametric index should be used. The index used by the CCRIF could be used

and copied for the FAIR Agriculture Insurance Pool purpose. We can see how this

index is used when there was a claim settlement for Grenada due to the Hurrcane

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Figure 13. An illustrated map showing the hurricane Ivan struct Grenada

Based on the above damage ilustration and a bit complex calculation, the insurace

clim payout for Grenada due to hurricane Ivan is US$ 179,317,000.

Figure 14. Claim payment calculation method for Grenada due to hurricane Ivan

6. As one the recommendations, the government should do a balancing approach on the

nation’s development planning. It means that every step of development plan should

consider the effects to the environment, climate and socio-economic aspects. Every

utilization of the land should consider the effects in the long run.

7. As personal recommendation, we ourself should change our daily lifestyles to care

our world and environment. We should use airconditions with environment-friendly

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substance, limit the use of plastic in our everyday life, plant as many as possible trees

in our garden. When shopping for any sort of products in the shooping malls – take a

moment to weight up the options to use the plastic bag or not. If yes, make sure the

plastic bag is easily-recyclable. If not, better leave it. To make this practice spread

among others, share your ideas to your colleagues, your subordinates, your freinds or

your family. Other ways to support environment friendly are to reduce eletricity

compsumption and reduce meat consumption. Turn off the electricity when we are

not using this, use energy saving light bulbs. In terms of reducing meat consumption,

livestock annualy belch an astonishing 80 millions tonnes of methane, a dangerous

greenhouse gas, into the atmosphere. Accoding some scientific survey, intense

breeding of livestocks and poultry leads to deforestration, land degardation and

contamination of water resources and other natural resources and use 40 percent of

the world’s total grain production as animal feed. If not us doing all of this to save

our environment, who else?

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R E F E R E N C E S

IDR/MAS/WHY/MAR (2012), Indonesia Rentan Krisis Pangan, Kompas, Gramedia

Publishers

Prasad, Neeraj and Frederica Ranghieri and Fatimah Shah and Zoe Troha and Earl Kessler

and Ravi Sinha (2010), Kota Berketahanan Iklim, Pedoman Dasar Pengurangan Kerentanan

terhadap Bencana, The World Bank and ISDR, Penerbit Salemba Empat

Non Life Insurance Rating Organization of Japan (2003), Earthquake Insurance in Japan,

Ikuta Shokai K.K.

Munich Re (2010), Munich Re Day Indonesia, Munich Re Publication

TREIF (2008), Annual Report 2008 Taiwan Residential Earthquake Insurance Fund, TREIF

Publications

Nations, The United and The World Bank (2010), Natural Hazards, UnNatural Disasters:

The Economics of Effective Prevention, Penerbit Salemba Empat

Centre, Corporate Climate (2010), Impacts Of Climate Change On Different Economic

Sectors – An insurance-based perspective from Munich Re Asia, Munich Re Publications

Coe, Christopher (2012), Crop Insurance Schemes in Asia, AON Benfield Presentation

Chinh, Ngo Cong (2011), Study On Resilient Financing Mechanism For Agricultural

Livelihoods In The Climate Change Context, Asian Management and Development Institute

www.syngentafoundation.com

www.menainsurance.com

www.ccrif.org

www.treif.com

www.jer.com

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CURRICULLUM VITAE

Personal Details

Full Name : Heddy Agus Pritasa, SS, MM, Cert CII, AAAIK, QIP

Place/Date of Birth : Jakarta, 2 November 1969

G e n d e r : Male

Email : heddypritasa@yahoo.com, heddy.pritasa@gmail.ocm

Current Academic Background

• Graduate of PostGraduate study on Financial Management, Association of Banking

and Finance Institute PERBANAS Jakarta

Professional Qualification Background

• Graduate of Certificate Insurance, Chartered Insurance Institute

• Graduate of Associateship of Indonesian Insurance Management Association

• Member of Indonesian Qualified Insurance Practitioners

Working Experience

1. (1992 – 1998) Agency Controller at PT. Sun Alliance Insurance Indonesia

2. (1999 – 2001) Broker Manager at PT. Royal Sun Alliance Indrapura Insurance

3. (2002 – 2004) Corporate Business Manager at PT Zurich Insurance Indonesia

4. (2004 – 2005) Broker Manager Corporate Division at PT Jardine Lloyd

Thompson Indonesia

5. (2005 – 2008) Broker Division Head at PT Asuransi QBE Pool Indonesia

6. (2008 – Current) Vice President at Technical Administration and Statistics

Division at PT Asuransi MAIPARK Indonesia

7. (2008 – 2011) Treasury at National Platform of Disaster Risk Management