Income insurance in Brazil and the government's role

January 2013 - The insurance and reinsurance market must innovate and develop differentiated solutions that are more in keeping with the actual conditions in each region, as it has done in Brazil in the last two years. Nevertheless, it is still necessary that the government become more involved in the issue and create a specific program for the sector, as has occurred in Mexico.

Since the federal government implemented the Insurance Premium Subsidy Program in 2005, the insured area in Brazil soared from 70,000 hectares to more than five million hectares in 2011, while the sum insured increased from 127 million reais to more than seven billion reais.

This growth was driven by the increase in available subsidy resources from 10 million reais in 2005 to close to 255 million reais in 2011. Nevertheless, this volume, which has remained relatively stable since 2010, has not been sufficient to insure even 10% of the total planted area in the country.

Despite the efforts of the technical staff at the Ministry of Agriculture, Livestock and Food Supply (MAPA) to propose improvements to the program, the lack of resources continues to be the main impediment to the growth of agricultural insurance in Brazil, which has lagged far behind the level attained in other Latin American countries.

Given that scenario, the insurance market has elected to study and facilitate solutions that could, a priori, be included in a rural producer's agricultural-management plan with no need for the producer to have an insurance-premium subsidy.

In response to this need, in 2010 a private insurer launched what is known as “agricultural income insurance,” in order to offer productivity coverage with a price guarantee. The company benefitted from the support and experience of Swiss Re in developing the product, which has now been taken out by a number of American farmers and accounts for more than 85% of agricultural-insurance transactions in the United States.

In Brazil, the Income Insurance Program began as a pilot program in the state of Paraná, serving more than 10 soy producers in an important cooperative in the region, with an insured sum of approximately five million reais. In 2011, another private insurer — in this case linked to a bank that provides rural credit — began offering the product, generating 15 million reais in premiums for an insured sum of approximately 213 million reais. In both cases, the average claims rate was considered very good and did not surpass 35%.

Agricultural income insurance has been unable to establish more of a foothold due to producers' unfamiliarity with the product and with the price-protection mechanism, the limited reach of the sales network, and the lack of subsidies available for the sector overall, among other factors.

Despite the positive results of this product in just three years, risk remains concentrated in the southern portion of the country, which is more exposed to climate events than are other regions. Another important point is the relatively high cost of the product, which is equivalent to about 9% to cover 70% of the producer's expected income. Therefore, without a subsidy, this insurance is practically unaffordable for the producer.

Income insurance accounted for just 3% of total premiums of the agricultural-insurance market overall, reflecting the bottlenecks encountered in the channelling of federal subsidies to the sector, since this product has limited acceptance if resources are insufficient to meet demand. Currently there is a need for more than 800 million reais in insurance-premium subsidies in Brazil.



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