Following the launch of a new Insurance Development Forum-backed sovereign risk transfer program to provide cover for Mexican smallholder farmers, Guy Carpenter’s Alfredo Honsberg outlines to ESG Insurer how the scheme will work in practice and how it will scale up following the pilot phase.

Alfredo Honsberg

One of the key themes to emerge from last November’s COP26 talks was a growing acknowledgement of the important role insurance can play in helping build resilience for vulnerable communities. 

This month has seen the launch of a major initiative which builds on that concept, with the Insurance Development Forum unveiling a parametric risk transfer initiative aimed at delivering affordable insurance to smallholder farmers in Mexico.

Reinsurance broker Guy Carpenter, alongside carriers Axa, Munich Re and Swiss Re, led the development of the initiative, with Mexican state-owned (re)insurer Agroasemex serving as local partner and insurtech Raincoat providing the technology platform.

Honsberg, CEO and managing director at Guy Carpenter México Intermediario de Reaseguro, told ESG Insurer that insurance is a critical tool to improve resilience among vulnerable populations.

“In the case of smallholder farmers, being at the bottom of the pyramid means that their coping mechanisms are rather slim, and in the case of a climate event where entire communities are affected, the ability to help each other is significantly reduced, potentially hindering the effectiveness of other public policy interventions related to better farming practices,” he said.

Honsberg said the product will utilise the CHIRPS rainfall data set, which is captured using satellite technology. Each insured crop parcel will be allocated to a grid point for which the CHIRPS data is captured.

“Both drought and excess rain indexes have been built using this rainfall data and it will be monitored on a daily basis by an independent party to provide transparency to the claim process,” he explained.

“As for the triggers for payment, there will be three levels of payout for each of the risks covered with the intention to mitigate basis risk. For the excess rain cover, if the accumulated rainfall during a three-day period exceeds the determined level on any given grid point, a claims payment is triggered for all insured parcels within it, and the payout will depend on the amount of accumulated rainfall recorded,” he added.

In the case of drought, Honsberg said a five-day moving average of rainfall will be estimated for each grid point and if that value falls below 3mm it will be considered a dry day.

“If the number of dry days during the coverage period exceeds the predetermined level, then all parcels located within it will be eligible for a payout, for which the amount will depend on the number of dry days,” he said.

Next phase

Once a successful pilot has been delivered, the insurance unit of Mexico’s Ministry of Finance will be engaged to introduce the program as a public policy, establishing a long-term financing mechanism to support the scheme. 

“The annual amounts to be budgeted will depend on the extension of the roll-out phases during the coming years, in accordance with a defined path of geographical priority and crop types, starting with corn, then followed by beans, wheat, rice and sorghum,” Honsberg said.

“As soon as the program is ready to be brought to scale, Agroasemex, the federal-owned insurance company, will finish its role as carrier and will assume a reinsurance role as well as being the custodian of the operating and technical model, and the project will be available to the private insurance and reinsurance markets.”

Novel aspect

Honsberg said a novel aspect of the program is its “last-mile component”, both at the moment of enrolment and the payout following a loss being triggered.

He said this will see field staff deployed across multiple municipalities, in collaboration with the Ministry of Agriculture, as the program seeks to strengthen its offering. 

Honsberg said these “last-mile” efforts will include conducting informative sessions centred around climate risks and the importance of insurance as a tool to face extreme weather events.

Farmers will also be provided with a proof of insurance to take home, with steps also being taken to enable the direct payment of claims via bank transfer or payment orders. 

“When we move towards the scale-up phase, it will be up to each insurer joining the program to facilitate such last-mile efforts using the lessons learnt from this year’s pilot,” he said.

Through the whole process of design and development, Honsberg said the team have been “careful in doing it in a way that the concept can be easily transferred to other geographies with the required adaptations to each local necessity, regardless if it is done under the concepts of a public-private initiative or a pure private project”.