As Demand Grows for Microinsurance in Asia, Swiss Re Launches First Agricultural...

Nov 2010
Vietnam, November, 24 2010 - High risk exposure to natural perils in Asia is driving microinsurance development for agricultural protection as international reinsurers and insurers recently introduced several programs in South Asian countries where farming is a major export and economic activity.

Many Asian countries will be severely influenced by natural catastrophes related to climate change, according to Swiss Re. "Rising awareness of possible impact among populations, industry and government institutions will increase demand for functional risk transfer products," said Roman Hohl, head of agriculture in the Asia/Pacific region at Swiss Re.

Swiss Re has introduced the first index-based insurance program in Southeast Asia for Vietnam Agribank Insurance Joint Stock Co., an insurance unit of Agribank, for protection of financial risks due to weather-related impact on farming production.

Swiss Re and Vietnam National Reinsurance Corp. jointly offer reinsurance protection for ABIC to cover loans to rice farmers in up to 10 provinces in Vietnam. The reinsurance proportion between Swiss Re and Vina Re was not disclosed.

"The insurance scheme will ensure Agribank can confidently offer rice loans and use potential payouts of the parametric insurance program to mitigate the impact of credit defaults resulting from poor harvests," said Chief Executive Van Minh Nguyen in a statement.

Vietnam has high exposure to natural perils including droughts, floods and typhoons, and climate change may make rice harvests more volatile, said Nguyen. In the past, damage to agricultural production has affected up to 5% of Vietnam's gross domestic product. Rice is the most important crop in Vietnam, which is the world's second-largest exporter, contributing 20% of global tradable rice surplus.

Under the insurance program, ABIC will insure Agribank's rice farming clients against inability to make loan repayments due to low yields. Payouts are defined by an independent area-yield index based on Vietnam Bureau of Statistics data.

Agribank's bank agents are the only distribution channel for the product. With 2,300 branches and transaction points in Vietnam, Agribank is the largest lender for agricultural loans with 5 million rice-farming households as customers. "We expect that insurance will provided to some 500,000 rice-farming households and clients of Agribank at the initial phase," said Hohl.

With this insurance solution, Nguyen said "we can continue to sustain a key sector that provides a means of livelihood to more than 50% of Vietnam's 86 million people." Swiss Re provides the risk management framework and know-how in program structure, in addition to reinsurance capacity.

"Rice is a key commodity for Asia and the agriculture production system and lending environment in Vietnam is very similar to other Southeast Asian countries and to some extent China," said Hohl. Southeast Asian countries with similar conditions to Vietnam "will find this product very interesting."

"The risk transfer product implemented in Vietnam is flexible enough to be tailored to specific needs of other markets, and a replication is therefore promising," said Hohl. But it will take time to define adequate insurance solutions supported by committed partners, large reinsurance capacity and skills.

In underwriting agriculture products, Hohl said the key is to insure a large number of small risks in the rural sector with "efficient distribution and a tailored product." In Asia, the average rice area per farming household is about one hectare, yielding up to three rice seasons per year.

Ideal distribution is an existing business channel to which an insurance product can be attached. Hohl said good platforms are cooperatives, input suppliers, agriculture banks and larger nongovernment organizations.

In underwriting an agriculture program, it is important the product can cover systemic perils such as droughts, typhoons or floods and is affordable for farming households. Hohl said key products that fulfill such criteria are yield-index and weather-index products. But it requires reliable data to produce an adequate index to limit basic risk.

In rural sectors, crop insurance is often the first product offering for farmers, who must be made aware of the benefits and function. In Vietnam, Hohl said Agribank and ABIC have rolled out education programs for farmers.

In Asia, Hohl said the potential for microinsurance "is considerable, particularly with increasing wealth and awareness of risk in a growing population."

Hohl said most insurance projects currently focus on life and health products in urban areas with an annual growth rate of more than 10%. The nonlife markets are still lagging behind, even with large infrastructure and agriculture risks due to natural perils.

In China, Swiss Re teamed up with the Beijing municipal government to provide reinsurance coverage for catastrophe risk under Beijing's government-funded agricultural insurance scheme in 2009. In August, the reinsurer set up an agriculture team in Asia to support the growing business.

In October, Munich Re rolled out its first microinsurance product in the Philippines to provide protection for the lending capacity of cooperatives to low-income groups against extreme weather events. The product will enable low-income households to receive benefits through their cooperatives after devastating natural events. It is distributed by 1,800 cooperatives (BestWire, Oct. 11, 2010).

Sompo Japan Inc.'s first weather-related microinsurance product in Thailand has seen strong demand, exceeding the first-year sales target since its launch in January. The Japanese nonlife insurer said it plans to expand the product to other provinces in Thailand and countries in Southeast Asia (BestWire, Aug. 20, 2010).

Swiss Re currently has a Best's Financial Strength Rating of A (Excellent).


Research Analysis Tools

The fund indexes, institution benchmarks and other market information displayed here are all Symbiotics designed analysis tools, created in-house by our analysts and experts. Symbiotics has one of the oldest track records in microfinance investment analysis dating back to the late 1990s; its indexes and benchmarks have been regularly used as markers by investors, asset managers, financial institutions and practitioners. These, as well as several other research products, are available through the Research Account. Click on the link below to find out more.

Learn More