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Agricultural insurance portfolio management – reinsurer’s suggestions for Ukraine

Agricultural insurance portfolio management – reinsurer’s suggestions for Ukraine

It is considered that big well spread ag insurance portfolio is more stable and profitable than small localised one. Preferably the portfolio should consist of average size accounts/policies (ag enterprises). Big amount of small policies will increase the portfolio servicing cost (monitoring, loss adjustment), insurance of big ag holdings can increase the risk accumulation and fraud possibility (for some Ukrainian holdings).

Better to start building the portfolio of the “standard” most common in the market products = “mass products” (e.g. subsidized crop insurance). The non standard “experiments” (vegetable insurance, flower insurance) are acceptable when the main part of the portfolio is sustainable enough and ag department has enough experience.

Portfolio diversification

Geographical diversification of the portfolio is one of the key factors of loss ratio/profitability management. To some extent the amount of premium and liability written in some of the regions is dictated by general ag production size/quality in that region. For example, in Dnepropetrovsk or Odessa oblasts the crop grain production is substantially higher than in Lviv, Ternopil oblasts, thus the crop insurance premium will be higher in Dnepropetrovsk, Odessa oblasts. However, the ag underwriter should limit the premium/exposure in regions where concentrations of similar risks is possible (drought is south oblasts of Ukraine; winter frost in eastern oblasts of Ukraine; flood in western oblasts). The second determining factor is sales forces distribution and development. For example, better established Khmelnitckiy and Vinnitckiy regional representations can produce substantially higher premium/liability than other representations. The ag underwriter should limit them to avoid obvious domination of some regions putting some reasonable limits. The management of the company should held developing other regional representations to the same level.

The portfolio should be diversified not only geographically but also by other features (crop/animal type, size of policies etc). Currently when the government subsidy for crop insurance is not available the portfolios will shift more from wheat-ray domination into higher concentration of risky crops (rape, barley). So, some risky crop limits should be introduced as well.

Rating

It is known that the insurance rate for any program type should reflect the true price of the covered risk and include loadings for the relevant expenses (insurance commission, loss adjustment, office expenses). The problem in Ukraine is that nobody really knows the true price of covered risks. The rates that are applied in Ukraine are rather “marketing” rates than “actuarial” rates. The only way to improve this situation is to accumulate the insurance statistic over years and do actuarial calculations based on it. The important moment here is to be conscious of possible catastrophic year. The company’s ag underwriter should do the analysis about possible maximum loss. The PML should be reflected in the insurance rate and notified to reinsurers. PML size influences on the reinsurance price as well.

Marketing

In the countries with developed insurance markets the portfolios are renewed: portfolios consist more or less of the same insureds and have some stable profile and distribution. The Ukrainian insurance market is growing and companies portfolios are not renewable but rather are opportunistic (one year they include one insureds another year insureds are different). Under this circumstances the insurance company is struggling with planning/budgeting for future years and has increased marketing expenses (every year selling people should approach new clients instead of having “lighter” negotiations with existing clients for the insurance renewal).

The amount of potential agricultural insureds is limited in every region and whole country in general. Every representation should have the list of all potential clients in their region, try to negotiate with all of them and define who is willing to buy the insurance. Then representatives should be well aware about competitors activity in their region and realistically estimate their share/potential in that region. Main efforts should be directed into establishing long term relationships with agricultural producers on the acceptable terms and conditions of insurance.

Loss adjustment

Under the best scenario, a country should have a certified loss adjustment institution with loss adjustment procedures that are satisfying both insurers and insureds. This is not the case of Ukraine yet. But insurance companies can lobby the creation of such institution whenever it’s possible. So far, Ukrainian insurance companies have been working up their own loss adjustment procedures that might vary from the company to company.

One of the key issues in terms of loss adjustment is the relevant staff. While the ag portfolio is not developed in terms of size and profit it is not reasonable for the company to train their own specialists to very high level on ag loss adjustment. In this case the company can rely on the outsourced service. At the moment ukr companies use the service of AgriRisk, Dedal and ag research instituts. It seams no one of these services is ideal, however, they provide the necessary loss adjustment solution.

It would be useful if Ukrainian companies would do the economical analysis of loss adjustment expenses and would come up with optimisation offers. In terms of this, companies should approach their accounting systems to allocate and report relevant expenses attributable to agricultural portfolio.

Analysis, planning

Analysis of ag portfolio performance (loss ratio, rates, deductibles), expenses etc is the key mean to make this portfolio sustainable and profitable. Such analysis should be done minimum three times a year after finishing seasonal marketing (winter, spring) and after harvesting and finalising losses. The necessary precondition for such analysis is a company’s policy reporting system where the relevant data base and reports can be created.

The figures derived from a database can and should be used by also actuarial analysis. The actuarial analysis should estimate the pure risk price (netto tariff) and necessary loadings (brutto tariff) to cover marketing, loss adjustment expenses and possible catastrophe events.

All mentioned analysis should be done per crop (type of animal), rayon, oblast and for the portfolio in total.

Reinsurers normally require such figures from reinsureds for their own underwriting and actuarial analysis.

Reinsurance

The common types of contracts that are available for agricultural reinsurance are quota share (crop, livestock), stop loss (crop, livestock), excess of loss (livestock only). Surplace reinsurance and excess of loss for crop are not applicable for ag reinsurance.

As a general principle, the non proportional reinsurance is too expensive for small size portfolios. Secondly it requires the deposit premium based on the estimated total premium. For the growing opportunistic portfolios it is very difficult to estimate premium precisely. As a result, the company will overpay or will be undercovered in terms of reinsurance unless the premium planning will be well optimised.

Thus, for the start it is better to opt a proportional reinsurance. Later to define the reason/necessity for non proportional reinsurance the company should estimate size of PML and frequency of loss ratios higher than 100%

Livestock specific

Livestock insurance in Ukraine is considered less risky than crop insurance similarly to livestock production in comparison to crop production. The most dangerous risk in livestock insurance is infection diseases, especially for poultry and pigs. However, natural hazards and fire sometimes can cause significant damages to livestock enterprises.

The key element of livestock underwriting should be robust control of animal health and vaccination before policy inception, fire preventive system, general animal herd, shelter conditions. The selective approach in underwriting (not taking for insurance “suspicious” enterprises) will help avoiding big losses in the portfolio. Ag insurance department of the company should monitor animal health conditions around the country.

The most vulnerable animals are those that are brought from overseas. If the local feeding and “living” conditions are not suitable for foreign cows (pigs) the level of their mortality is high.

Insurance data analysis is equally important for both crop and livestock. However, livestock doesn’t have seasonality feature. So, the data can be analysed, say, quarterly.

(Source  –  http://www.agroinsurance.com/en/agribusiness_insurance/?pid=9323#sthash.4hNtmHWc.dpuf)

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