88097 1 Mexico Agriculture Insurance Market Review October 2013 Strengthening a Successful Public-Private Partnership The Need for Agricultural Insurance total economic losses from weather-related disasters in Mexico occurred in the agricultural sector (CEPAL, 2007). Additionally, 76 percent of the total cultivated area Agriculture plays an important role in Mexico, is rainfed, which exposes agricultural production to particularly in employment and the food security rainfall and temperature changes. of rural households. The broad agricultural sector1 accounted for 17 percent of Mexico’s GDP in 2011, Given the centrality of agriculture in Mexico’s with the North-western parts of the country, where employment and in the livelihood of the rural poor, cereals are widely grown, contributing the most coupled with the exposure of the agriculture sector to agricultural GDP and the South and South- to systemic weather events and market volatility, both eastern parts contributing a smaller amount, but farmers and the Government have to manage risks with greater emphasis on cash crops and fruits and in order to provide a safety net for the rural poor and vegetables. ensure that the agriculture sector is sustainable. The agricultural sector also plays an important social The Agricultural Insurance Market in role given the importance of agriculture income in the Mexico total income of the rural poor. Although employment in agriculture has declined over the past 10 years (from The agricultural insurance market in Mexico is among 18 percent in 2000 to 14 percent in 2012), it provides one of the most developed in Latin America and the formal employment and income to more than 3 million Caribbean (LAC). Like many other OECD countries, people (including workers and their families). One fifth Mexico has a well-defined public-private partnership of working men in Mexico are formally employed in for agricultural insurance, termed the National System agriculture as are 4 percent of working women. for Insurance of the Rural Sector (SNAMR). While agricultural insurance penetration in Mexico is one of The agriculture sector in Mexico is, however, highly the highest in LAC, it is still lower than the average in vulnerable to a range of exogenous shocks, such as OECD countries.2 weather events that affect production, output/input price volatility, and threats to animal and plant health. The first public agricultural insurance program in Weather shocks have been one of the main causes Mexico dates back to 1942. The program was based of recent economic losses in the agriculture sector, on arrangements between mutual unions and private particularly the recent frost and drought in 2011. insurance companies. In 1961 the first specialized During the past two decades, over 80 percent of the public company for crop insurance was created, the 1 The broad agricultural sector’s contribution to GDP includes 2 In 2007, Mexico showed a level of agriculture insurance penetration primary production (4%), agribusiness (5%), food industry (4%), and of 0.38 percent of Agricultural Gross Domestic Product, which is other food-related industry (4%). below the OECD average of 1.36 percent. National Crop and Livestock Insurance Company 2. Farmers with some difficulty obtaining credit, (ANAGSA), which ultimately faced high losses due who have been able to pool risks, organize to lax monitoring, unsound pricing, and fraudulent insurance and gain access to financing from claims. A reform to the Mexican crop insurance banks or financial institutions: For these system in 1991 replaced ANAGSA with the current farmers, the policies and support programs to public reinsurer Agroasemex, and also adopted a mutual insurance funds (Fondos) have been special legal framework to support mutual insurance the main instruments, including the premium funds, or Fondos. Since 2002, Agroasemex has left subsidies of insurance policies sold by Fondos. the direct commercial crop insurance market and Fondos were originally supported by the has also acted as an agricultural reinsurer in the Government in order to allow farmers to pool private market, allowing for the expansion of private risks and access credit by obtaining insurance, insurance in the country and especially of Fondos’ and have now evolved into memberships that market share. include large commercial farmers. The most recent program implemented by the 3. Small, vulnerable farmers with no access Government of Mexico is the CADENA program, to commercial credit or insurance: The which is targeted at small farmers who are excluded CADENA program was originally designed from agricultural insurance and credit. Launched for this group of the most vulnerable in 2003, CADENA is intended to provide State farmers with the central objective of being Governments with co-funding to assist farmers after a small farmer safety net through the co- a natural disaster or to provide a subsidy for the financing by the Ministry of Agriculture, Government to purchase insurance in order to have Livestock, and Fisheries (SAGARPA) and enough fiscal resources to respond ex post. State budgetary resources to respond to climatological contingencies in rural areas. The SNAMR has identified three distinct target groups Today, however, CADENA is also financing for programs and policies related to agricultural premiums for the catastrophic layers of the insurance. These three groups and the related key commercial insurance products sold under programs and policies are: the SAB scheme. Furthermore, an extension of eligibility from 10 hectares to 20 hectares 1. Commercial farmers with access to credit for recently introduced by CADENA in 2013 whom agriculture insurance is a requirement will bring more commercialized farmers into to obtain financing from the Banks, CADENA, especially in irrigated areas. safeguarding the loan: For these farmers, credit policies and programs through FIRA Figure 1 demonstrates the relationships between the (a trust fund of the Central Bank), Financiera most important programs and players in Mexico’s Rural (a first tier public sector Bank that system of agricultural insurance. provides credit to agriculture), and a public subsidy to commercial agriculture insurance Since 1997, the Mexican agricultural insurance premiums have been the instruments used by market has been based on a public-private the Government. The premium subsidy was partnership (PPP). Private insurance companies, originally designed to support the purchase of reinsurers, as well as Fondos, have been steadily commercial insurance, but the Government is increasing premiums collected from agriculture now seeking to expand it to farmers who are insurance. In recent years, the growth in premiums not currently insured through the promotion for the CADENA catastrophic coverage to State of the public basic crop insurance scheme, Governments has been an attractive new business called SAB. line for private insurance companies. Figure 1. Mexican System of Agricultural Insurance Commercial Agriculture and Livestock Subsistence Agriculture and Livestock* Protection in case of Commercial Insurance Natural Catastrophe Direct Insurance Parametric, Private Fondos CADENA Satellite and Lack or Insurers Excess of Rain Insurance premiums paid for by the Reinsurance State and Federal Governments Direct Insurance AGROASEMEX Reinsurance Reinsurance for Catastrophe Programs and Reinsurance Retrocesion of the Reinsurance taken for the Fondos Reinsurance International Reinsurers Distribution of the Agriculture Insurance Premium Subsidy (SAB) *Producers with < 10-00 Hectares or < 45 Animal Units Source: Authors. However, the PPP in the agriculture insurance market coordination and a medium and long-term has been lacking a medium to long-term strategy strategy to become more effective. in the past decade. Individual programs supporting agriculture insurance have been managed in an b) Technical: The Mexican agricultural insurance isolated manner, with a low level of coordination. system has a mixed history of success at the At this point in the development of the Mexican technical level. On one hand, the system has agriculture insurance market, there is a clear need to benefitted from the development of strong develop a medium to long-term strategy and consider technical underwriting and loss adjustment the creation of a platform for decision making and capabilities that are available for both public coordination across all programs and policies related and private sector actors; on the other hand, to the management and transfer of agriculture risks. the system has a weaker capacity to define long-term actuarial pricing benchmarks for Strengthening the Public Private different insurance programs. Partnership c) Financial: Financial risk management The Government of Mexico is facing several practices of the system have undergone constraints and challenges in designing an improved limited changes in the past two decades. strategic and comprehensive agricultural insurance Private companies and Fondos retain very framework. These constraints can be grouped into 5 little risk and therefore are highly dependent major categories: on reinsurance capacity, with Fondos especially dependent on the reinsurance a) Strategic: Public and private programs in capacity offered by Agroasemex, whose own the agriculture insurance market need better risk transfer strategy (retrocession of risk to external markets) focuses on intermediate and programs, several options that are available to events, limiting the budget for risk transfer. An improve existing programs and the coordination extreme frost in 2010-11 also highlighted the between programs will be unprecedented in terms low pricing of premium rates from Agrosemex of international experiences. Mexico has been a to Fondos in the State of Sinaloa. The implicit leader in implementing innovative PPP for programs consequence has been that the Federal to develop an agriculture insurance market and Government has acted as residual reinsurer (or cover small vulnerable farmers. The Fondos system “reinsurer of last resort”) for extreme events. is a unique program without direct international comparison, and the CADENA program with the use d) Legal and regulatory: The direct supervision of index-based products has been followed world- of the system by the Government has been wide as an example of moving from ex post towards limited and, in some cases, even delegated to ex ante risk management and transfer. third parties. The current supervisory framework for Fondos has important weaknesses with The challenge is now for Mexico to learn from this regards to the operational independence and experience and continue to introduce reforms and objectivity of the supervisory authorities and the improvements. Although fundamental changes need consistency of the current system of integrating to occur to reach sustainability, such as the case of agencies in carrying out supervisory work. In Fondos and the reinsurance role of Agroasemex, addition, the Government has had a very limited this should not be at the expense of the knowledge role in the regulation of rates in the system. and capital accumulated so far. A carefully drafted transition strategy and integrated PPP program e) Product design and operations of existing needs to be put in place. programs: Agroasemex has been the main source of agriculture insurance market About the Authors innovation and new product development. This paper contains a partial summary of the report Fondos and private companies have played “Mexico: Agriculture Insurance Market Review” (June, a limited role in this area, and there is ample 2013) which was authored by a World Bank team led opportunity for a closer coordination of the by Diego Arias (Senior Agriculture Economist, LCSAR) and composed of Charles Stutley (Senior Agriculture R&D agenda. Additionally, the Government Risk Management Specialist, LCSAR), William Dick plans to continue migrating from ex post (Senior Agriculture Risk Management Specialist, direct payments following natural disasters to LCSAR), Sandra Broka (Senior Rural Finance Specialist, ECSAR), Michael Grist (Senior Financial Sector ex ante risk based approaches, the success Specialist, FCMNB), Hector Peña (Economist, LCSAR), of which is dependent on the capacity of the Sophie Storm Theis (Enviornmental Specialist, LCSSD), system to generate the necessary technical Mildred Brown (Economist, LCSOS), Miguel Camarillo (Agriculture Insurance Specialist, LCSAR), Marcelo conditions. Angione (Agriculture Insurance Specialist, LCSAR), Héctor Ibarra (Senior Financial Officer, FABBK), Erika Given the global leadership of Mexico in designing Salamanca (Project Assistant, LCSAR) and Ariel Donnini (Senior Agriculture Reinsurance Specialist, LCSAR). and implementing agriculture insurance policies This paper is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this paper do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.