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Insurance and Reinsurance are risk transfer activities which particulars and companies may use as a means to offset their liabilities and exposures to various hazardous perils or contingencies.
Insurance pretty much is directed at particulars and companies who wish to decrease their exposure to a number of specific perils and contingencies (fire, earthquake, flood, liability, etc.). By taking up insurance with a specialized risk taker or "Insurance Company" against a "Premium" that reflects the Insurance Company's exposure, the Insureds can plan their operations on the basis of a fixed cost and knowing that, against certain conditions being met, they can proceed with their life/operations, decreasing their risk of insolvency and potentially irreversible indigence.
By the same token, so Insurance Companies (Insurers) need to plan the transfer of the risk they accumulate through the policies they write and for the sake of needing to grow as any other company does. The assets of a company are finite and cannot respond for all the liabilities (imagine an Earthquake catastrophic event occurring at anyone time, on a certain location and affecting a huge number of policies written by one same Insurer), which implies Insurance Companies need to "cede" part (or sometimes all) of their taken risks to some much bigger (most of the times, that is the case) companies called Reinsurers. They also protect themselves against their probability of claims surpassing a certain threshold and up to a certain limit but that...is another story...
On the basis of parameters like Frequency and Intensity, nature of the risks, economical context, suplly & demand, amongst other factors, Insurers and Reinsurers alike can devise what is the best premium to charge to the Insured or Reinsured. A "competition" then ensues between the various proposing companies (either directly or through Brokers) to offer the best price, Terms & Conditions to their client (either from the point of view of Insurance or Reinsurance).
Though usually Insureds' ignore that their policies are being Reinsured by their Insurer (unless on some big operations where the Insured knows why the Premium, Terms & Conditions are such and such), the truth is that one (Insurer) could not exist without the other (Reinsurer) and vice-versa.
It is said that without Insurance the World could not function as the sheer volume and value of iabilities would be too much for any Insurer to bear on its own but, without a question of a doubt, it would be impossible to exist even more without Reinsurance. This is a hugely important activity, with a global footprint across continents and frontiers.
Well, in case you haven't guessed yet, Agriculture is indeed an acitivity exposed to many hazardous perils and in dire need of Insurance and, consequently, Reinsurance. Let us see below...
There are two major ways of ensuring agriculture (Crops, Aquaculture, Livestock, Forestry): Indemnity Basis and Index.
Indemnity basis refers to the way on how the loss carried by the farmer is considered and calculated: there is an event of an insured peril (hail, for instance) whose intensity and facts need to be ascertained in the terrain by an appointed Loss Adjuster. It is the traditional way and the one that farmer's usually "understand" better as they relate "what they see" in the terrain against the calculations done by the Loss Adjuster within the framework of the policy's Terms & Conditions. There are variations, though, in the number of perils covered, for instance, or if they are discretionarily "named" or if the cover is on an Alls-Risks basis (covering everything but whatever it is excluded against a historical yield), or if it includes a revenue element, as it is fashionably the case of most policies in the US.
However, Agricultural Insurance/Reinsurance needs to face three main elements that can complicate a healthy and honest underwriting by the Insurance Company or any other element involved in the process (Brokers, Surveyors, Loss Adjusters, Reinsurers, etc.): Asymmetry of Information (the Insured may be withholding information related to the risk being covered that may be material to price it or even accepting it at all or the conditions in the terrain may prevent a quick and reliable evaluation of the situation); Adverse Selection (the Insured may choose to cover only those crops/parcels, etc. that he finds are more prone - frequent - to have a loss); Moral Hazard (the Insured may bend his decision making and drive it with the perspective of having a financial gain through the insurance).
With the advent of "cheaper" (and more ubiquitous) technology and sophistication of mathematical models, many see the other major type of agricultural Insurance (Index or Parametric) as the future.
It can be applied over weather-related parameters (excess or lack of Precipitation; Radiation or hours of Sunlight; Wind; EVTP; NDVI; etc.) or yield over a certain area and against a well established historical average. The usage of satellites is common (in particular to monitor climatological parameters).
It can also be applied over Gross Margin, where the cost of inputs (feed, for instance) against the value of the animal (in this case) in a certain moment in time can be benchmarked against the same parameters measured in a few months time when the animal (in this case) acquires a certain weight for sale.
All these options need also to be considered within a more political/economic context as it is very difficult to have completely private agricultural insurance schemes due to the sheer cost (high frequency with every so often high-intensity episodes) for both Insurance Companies and insureds due to the high premiums considered. The high premiums also limit having more penetration and spread which, therefore, limit having even more penetration, in a self-sabotaging cycle.
Entry the PPP's or Public-Private Partnerships where Governments may participate by defining the legislation and juridical framework but also by Reinsuring the whole scheme (capping the participating companies exposure) or even participating financially with their own budget or, alternatively, by securing external funds, as it happens in the EU under recent CAP legislation.
A final word for the typology of Reinsurance that can be used according to the sub-line of business (Crops, Aquaculture, Livestock, Forestry).
Pretty much all of them can (are) be covered on a Treaty basis, meaning entire portfolios of agriculture-related policies respecting the framework of acceptance of the Treaty. In that way, the Reinsurer has a better spread (as one hail event, for instance, may not affect the entire portfolio, geographically speaking) and can reduce administrative costs as it is not the same handling the cover of one sole policy as managing a number of them at the same time within a macro, summed-up structure.
However, there is a growing demand for the special coverage of agricultural related policies on a Facultative basis, meaning, one on one acceptances (with the "faculty" of being refused if the Reinsurer does not feel comfortable with the risk's quality instead of blindly accepting it as it happens on a Treaty).
Aquaculture, Forestry, and Livestock are commonly placed on a "fac" basis (there are a few minimal specialized markets for those) whilst crops, much less, as the exposure to uncontrolled weather elements, frequency of events that may lead to losses, the concentration of assets in a certain specific time frame and geographically, amongst others, are all factors affecting the exposure of crops to potentially depleting events in a higher degree.