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Index-based-Insurance in Agriculture: A suitable Production Risk Management Tool for ECA?

Index-based-Insurance in Agriculture: A suitable Production Risk Management Tool for ECA?. Martin Odening, Oliver Mußhoff, Roman Shynkarenko, Federica Angelucci Presentation prepared for the EastAgri 2008 Annual Meeting, Paris. Background. Risk. Farm Investment. Productivity Growth.

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Index-based-Insurance in Agriculture: A suitable Production Risk Management Tool for ECA?

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  1. Index-based-Insurance in Agriculture:A suitable Production Risk Management Tool for ECA? Martin Odening, Oliver Mußhoff,Roman Shynkarenko, Federica Angelucci Presentation prepared for the EastAgri 2008 Annual Meeting, Paris

  2. Background Risk Farm Investment Productivity Growth Competitiveness Rural Income

  3. Objectives of the Study • Analysis of (Dis) Advandages of Index-based Insurance (IBI) • For which ECA countries are IBI suitable risk management tools?

  4. Methods and Data Sources Theoretical Analysis Experiences with IBI Success Factors / Preconditions for IBI Quantification Indicators Aggregation ‘Portfolio Matrix’ Data on ECA Pre-Assessment of Feasibility of IBI in ECA Recommendations for Donors / Goverments

  5. Index-based Insurance • Definition: Indemnity payments are not directly related to actual losses but to the value of a predefined index • Possible indexes: Weather (rainfall, temperature), livestock mortality, area yield • Potential advantages: no moral hazard, no adverse selection, low transaction costs for loss adjustments, prompt indemnity payments • Potential disadvantages: high basis risk, un-familiarity with the concept

  6. Insurance transaction Securitization insurance premium weather bond price Farmer Insuranceindustry Capitalmarket principal & coupons recoveries compensation unconditional payment payment when weather event occurs ART at Different Risk Layers

  7. Overview about Practical Experiences with IBI 1 ENSO – El Nino Southern Oscillation is the index measuring the Pacific sea surface temperature

  8. Preconditions and Success Factors of IBI in Agriculture • Factors determining the demand for IBI • Risk exposure of the farms • Hedging effectiveness of the instrument • Risk attitude of the decision maker • (Non) Existence of effective alternative risk reduction instruments • Transparency of insurance products • Cost of insurance • Policy environment

  9. Preconditions and Success Factors of IBI in Agriculture • Factors determining the supply of IBI • Cost of insurance product development • Cost of delivery • Cost to control adverse selection and moral hazard • Cost of loss adjustment • Market potential and volume • Risk premium • Political, legal and institutional factors

  10. Indicators for the Potential of IBI in ECA Countries (1)

  11. Indicators for the Potential of IBI in ECA Countries (2)

  12. Example of a Country Profile

  13. Factors Influencing the Potential of IBI in ECA Countries

  14. Portfolio Analysis for ECA Countries 2 4 Romania Bulgaria good Hungary Moldova Croatia Russia Kazakhstan Turkey Uzbekistan Preconditions for establishment of IBI Albania Azerbaijan Ukraine Serbia Kyrgyzstan Tajikistan Kosovo Georgia Armenia poor FYR of Macedonia Belarus 1 3 low high Demand for IBI

  15. Recommendations 1. Rigorous ex post assessment of IBI 2. In-depth feasibility studies in selected countries 3. Dissemination of study results  policy dialogue 4. Support to the introduction of IBI • Improvements in legal and regulatory environment • Improvement in data collections • Assistance in product development • Knowledge transfer and educational efforts • Financial support for the coverage of catastrophe losses

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