Opportunities for Introduction Opportunities for Introduction of Index-Based Insurance in of Index-Based Insurance in

Moldova, Ukraine and Russian Moldova, Ukraine and Russian FederationFederation

East Agri 2008 AnnualEast Agri 2008 Annual Meeting, ParisMeeting, Paris

Roman ShynkarenkoRoman ShynkarenkoAgricultural Insurance and Risk Management Agricultural Insurance and Risk Management

ConsultantConsultant

Essential factors for the demand Essential factors for the demand for index insurancefor index insurance

Importance of agricultural sectorImportance of agricultural sector

Risk exposure - per regions, per crop, per type of producerRisk exposure - per regions, per crop, per type of producer

Availability and effectiveness of risk instruments for Availability and effectiveness of risk instruments for

managing systemic risksmanaging systemic risks

Cost of Index Products compared to traditional insuranceCost of Index Products compared to traditional insurance

Knowledge of Index Insurance concept and legal frameworkKnowledge of Index Insurance concept and legal framework

Willingness of insurance companies to introduce new Willingness of insurance companies to introduce new

solutionssolutions

Major pre-requisites for testing Major pre-requisites for testing IBIIBI

Weather infrastructureWeather infrastructure

Weather and Yield data available (over 20 years) and cost of this dataWeather and Yield data available (over 20 years) and cost of this data

Insurance legislation and regulation – recognition of index insurance Insurance legislation and regulation – recognition of index insurance

conceptconcept

Deficiencies of traditional insurance products – certain regions and Deficiencies of traditional insurance products – certain regions and

cropscrops

Human resources – actuaries and product designersHuman resources – actuaries and product designers

Access to reinsurance market to manage systemic risksAccess to reinsurance market to manage systemic risks

Government understanding of risk management in agricultural Government understanding of risk management in agricultural

sectorsector

Common features – Moldova, Common features – Moldova, Ukraine, RussiaUkraine, Russia

Agriculture is important for the national economies (Moldova – Agriculture is important for the national economies (Moldova –

15,1% of GDP, Ukraine – 8%, Russia – 5%)15,1% of GDP, Ukraine – 8%, Russia – 5%)

Good quality weather data and sufficient crop yield data is Good quality weather data and sufficient crop yield data is

available (30 yrs+)available (30 yrs+)

Weather data is Weather data is EXPENSIVEEXPENSIVE in all countries surveyed in all countries surveyed

Lack of automatic weather stations and other weather Lack of automatic weather stations and other weather

registration equipmentregistration equipment

MPCI is a dominant crop insurance program subsidized by the MPCI is a dominant crop insurance program subsidized by the

national governmentsnational governments

High impact of classical insurance problems – asymmetry of High impact of classical insurance problems – asymmetry of

information, adverse selection, cost of administrationinformation, adverse selection, cost of administration

Regular occurrence of systemic risksRegular occurrence of systemic risks

Moldova – specific factorsMoldova – specific factors

- Limited opportunities to diversify agricultural risk portfolio due to - Limited opportunities to diversify agricultural risk portfolio due to

small territorysmall territory

- High impact of systemic risks (CAT events – 2000, 2003, 2006, - High impact of systemic risks (CAT events – 2000, 2003, 2006,

2007, 2008)2007, 2008)

- Small size of agricultural insurance portfolio – insurance market is - Small size of agricultural insurance portfolio – insurance market is

underdeveloped, farmers lack understanding of insuranceunderdeveloped, farmers lack understanding of insurance

- No access to the international reinsurance markets- No access to the international reinsurance markets

Excellent weather infrastructure – 82 weather data collection Excellent weather infrastructure – 82 weather data collection

locationslocations

Government is interested in systemic risk management instrumentsGovernment is interested in systemic risk management instruments

Insurance companies have qualified manpower and interest but lack Insurance companies have qualified manpower and interest but lack

specific knowledge to design index products for agricultural sectorspecific knowledge to design index products for agricultural sector

Ukraine – specific factorsUkraine – specific factors

- Index concept is recognized and practiced already (!!!);- Index concept is recognized and practiced already (!!!);

- Regular systemic risks (CAT events – 2003, 2006, 2007, 2008);- Regular systemic risks (CAT events – 2003, 2006, 2007, 2008);

- Insurers have good opportunities for portfolio diversification;- Insurers have good opportunities for portfolio diversification;

- Very expensive weather and crop yield data (6500 USD per 30 - Very expensive weather and crop yield data (6500 USD per 30

yrs data-set per station);yrs data-set per station);

- Moderate density of weather stations (189) – high basis risk, - Moderate density of weather stations (189) – high basis risk,

lots of micro-climatic zones;lots of micro-climatic zones;

- Government is unclear in agricultural insurance policy;- Government is unclear in agricultural insurance policy;

- Some insurance companies are interested in indexes - Some insurance companies are interested in indexes

for high-value crops, loss of quality insurance and for high-value crops, loss of quality insurance and

catastrophic-related structures for drought and freeze catastrophic-related structures for drought and freeze

insuranceinsurance

Russia – specific factorsRussia – specific factors

- Lack of understanding of index concept within the insurance sector;- Lack of understanding of index concept within the insurance sector;

- Heavy reliance on subsidized MPCI program;- Heavy reliance on subsidized MPCI program;

- High volumes of formal insurance (subsidy-minded);- High volumes of formal insurance (subsidy-minded);

- Disintegrated weather data system, data should be purchased from the - Disintegrated weather data system, data should be purchased from the

regional weather authorities, high cost;regional weather authorities, high cost;

- Insufficient density of weather stations (1627) – extremely high basis Insufficient density of weather stations (1627) – extremely high basis

risk;risk;

- Government is interested in testing weather indexes for CAT - Government is interested in testing weather indexes for CAT

assistance;assistance;

- Excellent human resources;- Excellent human resources;

- Insurers are looking for new solutions to minimize administration costs Insurers are looking for new solutions to minimize administration costs

and moral hazard;and moral hazard;

- Pilots are requested for several regions to mitigate drought and freeze Pilots are requested for several regions to mitigate drought and freeze

risksrisks

Main findingsMain findings

MoldovaMoldova – IBI is interesting to insurance companies and national – IBI is interesting to insurance companies and national

government. Index insurance can help to mitigate systemic risks (country government. Index insurance can help to mitigate systemic risks (country

level) and to solve certain insurance problem (sector level) like access to level) and to solve certain insurance problem (sector level) like access to

the reinsurance, small-farms insurance, portfolio diversification.the reinsurance, small-farms insurance, portfolio diversification.

UkraineUkraine – weaker overall interest in IBI. Unclear government strategy. – weaker overall interest in IBI. Unclear government strategy.

Some insurance companies want IBI for high-value crop and quality Some insurance companies want IBI for high-value crop and quality

insurance, drought and spring freeze mitigation at the south of Ukraine.insurance, drought and spring freeze mitigation at the south of Ukraine.

Russia Russia – IBI application is challenging due to weaker density of weather – IBI application is challenging due to weaker density of weather

stations. Government is interested in applying IBI for CAT assistance stations. Government is interested in applying IBI for CAT assistance

program. Insurance companies require instruments to manage classical program. Insurance companies require instruments to manage classical

insurance problems like adverse selection, asymmetry of information, cost insurance problems like adverse selection, asymmetry of information, cost

of program administration.of program administration.

Possible strategiesPossible strategies

MoldovaMoldova – Overall assistance including guidelines, – Overall assistance including guidelines,

technology transfer, overall training to insurance companies, technology transfer, overall training to insurance companies,

finance institutions and government bodies. Modernization of finance institutions and government bodies. Modernization of

weather infrastructure.weather infrastructure.

UkraineUkraine – technology transfer, client and government – technology transfer, client and government

training . Modernization of weather infrastructure. Training training . Modernization of weather infrastructure. Training

to insurance providers and potential clients.to insurance providers and potential clients.

Russia Russia – training to insurance companies. Concept training – training to insurance companies. Concept training

to government bodies, assistance to market players to government bodies, assistance to market players

(insurance companies, stock market)(insurance companies, stock market)

Thank you for attention!!!Thank you for attention!!!

Roman ShynkarenkoRoman Shynkarenko

Agricultural insurance and risk management consultantAgricultural insurance and risk management consultant

Ukraine – 380-50-269-6717Ukraine – 380-50-269-6717

rshynkarenko@agroinsurance.com

For more information please visit – For more information please visit – www.agroinsurance.com