March 2013 Number 183 76205 www.worldbank.org/enbreve A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank‘s Latin America and Caribbean Region (LAC). The Agricultural Insurance Market in the Caribbean by Diego Arias Carballo and Laura dos Reis Agricultural insurance is a tool to manage agricultural production risks and help producers reduce the effects of negative shocks and improve the allocation of resources. It provides a mechanism to transfer a variety of risks faced by crop, livestock, forestry, or aquaculture production. The lack of agricultural insurance instruments in the Caribbean Agricultural Insurance in the Caribbean is the result of a number of factors. Government officials and members of the financial and agribusiness sectors are unaware The small island nations of the Caribbean are highly exposed to of the potential benefits and limitations related to particular tropical cyclones, hurricanes, and other weather hazards—and are insurance instruments. Insufficient technical capacities in the particularly vulnerable to drastic losses from natural disasters. A public and financial sectors to design and administer agricultural single catastrophic event can affect a large proportion of clients, and insurance contracts further constrain the development of general this is often reflected in the insurance premiums charged by local insurance instruments. Additional challenges include: insurance companies, especially if they only underwrite risk in one or a few neighboring islands (as is common in the Caribbean). To be • A multi-cropping structure (many different crops able to pay many claims all at once, insurers must either purchase on a single plot) of smallholder farming (between their own insurance (re-insurance), which is expensive, due to the one and two hectares), which complicates the high exposure to extreme weather events, or hold a large amount evaluation of exposure of different crops to the of cash reserves. As a consequence, crop insurance policies are various hazards; relatively expensive and are generally offered as non-catastrophic policies—providing no coverage (stop-loss) in the case of extreme • The lack of affordable delivery mechanisms or weather events. adequate infrastructure for banks and insurance companies to offer insurance to small individual The particular characteristics of the region’s agricultural production farmers, some in hard-to-reach remote areas; structure and high exposure to extreme weather events have • The insufficient quality and quantity of agro- resulted in expensive re-insurance options, with only two agricultural climatic data to undertake probabilistic analysis at insurance companies in operation. In the Eastern Caribbean, the a disaggregated level; and Windward Island Crop Insurance Ltd. (WINCROP) provides insurance • The provision of ad hoc ex post support emergency for banana growers. In the Dominican Republic, the Aseguradora Agropecuaria Dominicana SA (AGRODOSA) provides multi-peril response programs, which reduces famers’ insurance to 7 percent of the cultivated area. Apart from these two willingness to pay for insurance. exceptions, agricultural insurance for individual farmers is non- existent. 1 As a result, farmers rely on a combination of informal (crop diversification, off-farm income) and limited formal mechanisms (government and/or international support, mutual funds and other forms of risk-sharing through commodity boards) to deal with systemic and intense weather events. Market-Based Agricultural Risk Management Options The development of market-based agricultural insurance options in the Caribbean can range from regional and macro- level applications (sector, country, or groups of countries) to the micro-level (farmers). The inability of a large segment of small farmers to cover extreme agricultural losses (and pay insurance premiums) has been the driver for public interventions after past catastrophic weather events. While the Bank recognizes that Private-Public Partnership in the Dominican these public interventions are crucial, there remains a need and Republic ample opportunities to improve their efficiency and effectiveness. Possible options are: Support of private-public partnerships provides a valuable policy Strengthen Public Delivery Mechanisms option to improve private sector participation in the medium-term through the development of new market-based instruments. In The distribution of public sector assistance to farmers can be Jamaica, the Bank proposed a private-public partnership to structured through clear ex-ante rules, which should include provide insurance for intermediate risks and supplement the a clear process for registering and becoming eligible for public disaster assistance program already in place. This could be such support. In Jamaica, for example, the Bank conducted done through the provision of new financial products (hurricane an assessment of weather risks in two selected parishes and vouchers), in addition to the basic government coverage. This proposed the implementation of an income supplement scheme additional option would be developed and underwritten by the to replace existing ex post ad hoc assistance. In Grenada, the Bank private insurance market. proposed alternative delivery mechanisms (input and technology vouchers) for the government to address local farmers’ needs in An example of a successful public-private insurance scheme is response to losses from financial and food crises. Aseguradora Agropecuaria Dominicana SA (AGRODOSA), the only insurance company offering agricultural crop insurance to Improve the Public Risk Financing farmers in the Dominican Republic. The company is owned by private and public capital, but is managed on strictly commercial Structure insurance principles and is subject to private insurance A risk layering approach (figure 1) could improve the regulations. Under the current arrangement, the government government’s risk financing options by introducing new risk has an active role in formulating the agricultural insurance law financing instruments that provide coverage for different levels and supporting agricultural insurance through the provision and types of risks. Low cost (high frequency) risks could be of crop insurance subsidies. In 2009, government spending for financed with reserves and personal savings (risk retention), while crop insurance subsidies was around US$1.25 million, ranging more catastrophic (lower frequency) risks could be financed with, between 33 percent and 50 percent of crop insurance premiums. cooperatives and mutual insurance strategies (risk pooling) or re- insurance support strategies (risk transfer). Governments could AGRODOSA currently offers a multiple-peril crop insurance act as reinsurers of last resort or provide post-disaster aid. (MPCI) loss-yield policy for rice and other crops, and named- peril insurance for banana producers. MPCI yield-shortfall covers Access to good quality and quantity of weather data constitutes drought, floods, excess rain, hail, wind and cyclone (tropical a very important tool for the development of crop and livestock storms and hurricanes), and unknown pests and diseases. The insurance programs. An early-warning system based on good coverage is triggered when the actual yield obtained by the data can help prevent the effects of weather hazards. Increasing insured on its insured unit falls below the guaranteed yield the density of weather stations in agricultural zones and in determined for each county and crop season. Named-peril crop strategically located watersheds can help improve the availability insurance covers flood and wind perils due to tropical storms of weather data and the research on weather variables. and hurricanes. The coverage is based on damage to the banana 2 plants (snapping, toppling, and uprooting) caused by wind, and Mountain region are subject to damage from high winds and rotting of the plant caused by flooding. The insured receives an heavy rains associated with hurricanes and tropical storms, indemnity proportional to the percentage damage to the plant payouts would be based on a model that simulates the winds population on the insured unit, times the sum insured. associated with cyclones that occur during the hurricane season. The model includes the spatial distribution of winds from past Risk Pooling storm events and considers storm characteristics and physical features, such as topography. Farms are grouped into 16 zones, according to districts and altitude bands. Vulnerability functions Wind Insurance in the Windward Islands based on the stage of growth, exposure patterns, and expected and Jamaica harvests are used to correlate, as closely as possible, the payout levels against the expected losses. Since the 1950s the governments of the Windward Islands and the banana growers’ associations had attempted to operate Country Risk Pooling across the Caribbean mutual insurance schemes against windstorm damage. However, most of these early attempts failed due to the lack of a The Caribbean Catastrophic Risk Insurance Facility (CCRIF) was diversification strategy, as most islands were insuring individually created in 2007 to finance early rehabilitation activities and public instead of pooling their risks. In 1987 the Windward Island Crop sector costs following catastrophic weather events (hurricanes Insurance Ltd. (WINCROP) was established in Dominica to provide and earthquakes). Sixteen countries are currently participating insurance against wind damage. It was expanded to St. Vincent in this catastrophe insurance program: Anguilla, Antigua and and the Grenadines in 1996 and Grenada in 2000. Established Barbuda, Bahamas, Barbados, Belize, Bermuda, Cayman Islands, as a mutual insurance company owned by the banana growers’ Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, St. associations WINCROP is currently the only insurance company Vincent and the Grenadines, Trinidad and Tobago, Turks and in the Windward Islands offering crop insurance. Government Caicos, and Haiti. participation was limited to the enabling legislation and provision of the paid-up share capital. By 2007, WINCROP had 2,767 insured CCRIF constitutes a macro-level approach with the objective of growers, representing about 63 percent of all banana growers for providing budget support following a specified catastrophic export and 62 percent of the cultivated area. Part of WINCROP’s weather event. It allows participating countries to pool their success is explained by the use of On-Call Assessors to carry out country-specific risks into a single, better-diversified portfolio. This assessments. Current challenges are related to a reduction in diversification results in a substantial reduction (between 45 and premium income, which has to do with a decline in the grower 50 percent) in premium costs. Although this type of instrument population, and to losses experienced in the banana sector. has been helpful in financing early rehabilitation activities and in filling the public financing gap when governments are raising In Jamaica, the Coffee Industry Board (CIB) operated a coffee additional funding for reconstruction purposes, it provides insurance scheme until 2006; since then, Jamaican coffee farms limited coverage for agricultural losses. Agriculture risks could have not had access to insurance. Based on a Bank-sponsored also be pooled within and across countries. feasibility study, the CIB is now exploring implementation of wind index-based insurance. Because coffee farms in the Blue A number of governments have expressed interest in CCRIF’s comprehensive risk management approach and in applying a risk layering structure to manage agricultural risks. However their ability to use additional financing through credit lines is limited by high debt levels. Moreover, additional analysis should focus on the development of instruments to cover intermediate and more frequent events (rainfall and droughts). CCRIF’s recent announcement of a new excess rainfall product to supplement its earthquake and hurricane policies is a step in the right direction. The excess rainfall product (developed by CCRIF and Swiss Re) is based on available NASA-processed satellite data. It constitutes a first iteration and improvements are expected. Once rainfall risk profiles have been developed, CCRIF will discuss coverage options with each country individually and policies will be offered once coverage levels have been agreed. The program will extend coverage to Guyana and Suriname and other Caribbean countries not currently members of CCRIF. 3 Conclusion Agriculture is an important sector in many Caribbean countries, Overall, agricultural insurance in the Caribbean has not yet from both an economic and a social point of view. Agricultural reached the levels of development of other countries in the production faces a myriad of risks in the region. Owing to the Latin American and Caribbean region. Although governments occurrence of weather events, pests, and diseases, agricultural in developing countries are already playing an important role producers cannot predict with any certainty the amount of in supporting agricultural insurance, in the Caribbean, there are output that the production process will yield. Thus, agricultural still large gaps in the provision of agricultural insurance. Despite insurance is just one risk management financial tool that is the advances already made in the development of agricultural used by agricultural producers in the region to transfer the insurance, the region still has a long way to go to develop fully risks they face. Farmers and governments have devised risk its agricultural insurance market, in particular for applications management strategies to deal with agricultural production risks. at the macro and meso level. The development of agricultural The management of agricultural production risks in the region insurance will require governments and the insurance industry relies on a combination of technical and, when they are available, to overcome institutional, operational, technical, and financial financial tools. challenges, including the development of long-term public- private partnerships. Bibliography Agricultural Insurance in Latin America: Developing the Market, World Bank, 2010. Catastrophe Risk Financing in Developing Countries: Principles for Public Intervention, World Bank, 2009. CCRIF Newsletter. Caribbean Catastrophic Risk Insurance Facility, April 2012. CCRIF Quarterly Report. Caribbean Catastrophic Risk Insurance Facility, December 2011. Climate Change and Insurance in the Caribbean. Caribbean Catastrophic Risk Insurance Facility, 2010. Coffee Industry Board: Index Insurance Feasibility Study. Draft Report. World Bank, 2011. Grenada Agricultural Risks Management Assessment. World Bank, 2010. Haiti Coffee Supply Chain Risk Assessment. World Bank, 2010. Haiti: A Public Strategy for Financial Weather Risk Management in Agriculture. World Bank, 2010. Introducing Innovative Agriculture Weather Risk Management Mechanisms for Small Farmers: Pre-feasibility Assessment for St. Elizabeth and Portland Parishes. World Bank, 2010. Introducing Innovative Agriculture Weather Risk Management Mechanisms for Small Farmers: Pre-feasibility Assessment for St. Elizabeth and Portland Parishes. World Bank, 2010. Introducing Innovative Weather Risk Management Mechanisms for Small Farmers: Pre Feasibility Assessment for St. Elizabeth and Portland Parishes. World Bank, 2010. Market Based Agricultural Risk Management in the Caribbean. World Bank, 2012. About the Authors Diego Arias Carballo is Senior Agriculture Economist and Laura dos Reis is a Consultant, both in the Agriculture and Rural Development Department (LCSAR). Disclaimer: The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Executive Directors of the International Bank for Reconstruction and Development / The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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