Posted on 16 Jan 2013 by Neilson
Global agricultural production must increase by 60% to feed the world's population, which will reach 9 billion by 2050. Swiss Re's latest sigma research publication, "Partnering for food security in emerging markets" proposes a multi-stakeholder approach to address the problem of food insecurity, putting agricultural insurance on the table to help manage agricultural risks, stabilise farm income, and encourage agricultural investment to strengthen the food chain infrastructure.
Food security today means having physical, social, and economic access to sufficient, safe, and nutritious food. But steady population growth, insufficient farm investment, socio-economic instability, and adverse weather events remain key challenges to the world's food supply, often barring people's access to food. Moreover, dietary preferences and nutritional demand are changing and are also putting pressure on food production and availability. Recently, rising food prices have become a major concern due to a combination of complex factors.
"Volatile food prices (up 74% since 2005) and supply issues due to the 2012 US drought have heightened food security concerns recently, especially for vulnerable people in emerging markets," explains Clarence Wong, Swiss Re Chief Economist for Asia. Out of the 850 million people suffering from hunger worldwide, 98% are located in emerging markets. The Asia-Pacific region has the greatest number (528 million), followed by sub-Saharan Africa (237 million).
Achieving food security requires a multi-stakeholder approach
Part of ensuring sustainable agricultural production includes employing holistic risk management strategies that help to reduce, mitigate, and cope with various farm risks. "Insurance is an integral piece of the puzzle," says Wong. "Meeting growing food requirements necessitates massive investment in agriculture, even in the midst of an economic crisis. Innovative, multi-stakeholder cooperation is the way to make progress towards global food security."
Agricultural insurance can help to manage risks in the agricultural value chain, stabilise farm income, and promote investment in agriculture. It can also act as collateral for credit. A typical example of agricultural insurance is area-yield crop insurance, which bases pay-out on the shortfall of an area's realised crop yield relative to its average historical yield. This kind of insurance was implemented in 2010, for example, by the Vietnamese government in partnership with re/insurance companies to provide rice farmers with risk protection.
Agricultural insurance is growing, especially in emerging markets
In 2011, global agricultural insurance premiums were estimated at USD 23.5 billion, around USD 5 billion of which was generated from emerging markets (mostly China and India). Insurance cannot provide food security on its own in emerging markets, but it can play a big part in aligning production incentives, raising awareness of the importance of risk mitigation, and encouraging investment in agricultural efficiency. Farmers and producers, governments, communities, cooperatives, and agribusiness can benefit from risk management solutions offered by re/insurers at multiple levels.
Nevertheless, agricultural insurance penetration remains very low and is far from reaching its full potential in emerging markets, estimated at three to four time the current market size. "Tapping the full power of agricultural insurance in emerging markets requires a lot: proactive and enabling government policies, supportive infrastructure, innovative products, cost-effective business models, new distribution channels, and advanced technology. Much of this can be achieved by partnering with insurers," says Amit Kalra, a co-author of the sigma study.