The growing line of agriculture reinsurance
Michael Leahey, global head of agriculture at Axis Re, explains how farmers have a greater awareness of climate change and what this means for (re)insurers.
Various commentators have predicted agriculture reinsurance will grow in 2024. How do you see this manifesting next year?
We have seen this line of business grow year on year, and we anticipate that it will continue to grow in 2024. There are numerous factors driving this. First, we are seeing an increase in government support and agriculture is an industry that benefits from a lot of subsidies. Second, farmers are also continually becoming more aware of insurance and its benefits. Third, demand is driven by the impacts of climate change and the price volatility this causes. And finally, recent geopolitical events, such as the Russia-Ukraine conflict, have highlighted the crucial issue of food security for many nations.
To what extent are changing weather patterns and climate change impacting agriculture reinsurance? And how are policies being designed?
Climate change is undeniably changing agriculture. However, how it influences insurers is not straightforward. At the ground level, farmers today have a better understanding of the negative impacts of climate change, but these are to some extent offset by improvements in farm risk management, genetics, crop selection, irrigation, better use of fertilisers, etc.
From a carrier’s perspective, we have seen changes in products and coverage – which risks are covered, and which ones aren’t. One notable reaction is an increase in the use of index-based insurance products. This is not a move away from standard indemnity-based insurance products, but rather complements the traditional method with the advantage of having a simplified claims process and providing a risk transfer mechanism in regions where actual historical yield data isn’t available.
For insurance and reinsurance providers, it is extremely important to have strong technical agriculture knowledge to navigate these dynamics and select and price risks profitably.
To what extent do global population growth and food supply concerns impact agriculture reinsurance?
We are seeing a general increase in demand for agricultural products, not just because of the increasing population but also due to a shift in diets, the rise in the use of biofuels and increased stockpiling of food because of geopolitical uncertainties. At the same time, agriculture is getting more efficient through the widespread use of technology, enabling food supply growth. This increase in output means crop values are growing, so farmers have a bigger need for insurance.
The big question for farmers is around the affordability of adequate insurance coverage and its proper management so they can trust it. Again, this is where governments play a key role in supporting affordable risk transfer solutions through premium subsidies, along with making data available for risk pricing, rate management and scheme oversight. Hence, governments are critical in supporting the food supply chain, oftentimes through public-private partnerships, which Axis Re very much supports.
What do you see as the biggest opportunities and challenges for agriculture reinsurers next year?
The challenges in this industry include a lot of uncertainty around geopolitics. Government policy can also change quite quickly. For example, if a new government or agriculture minister decides to pay less in subsidies to farmers, that could have knock-on effects for the agriculture (re)insurance industry. Further, volatility of commodity prices and input costs is also a factor, with the latter particularly impacted by inflation.
With regards to opportunities in this market, agriculture is constantly growing. Farmers have an increasing awareness of climate change. They take it seriously and realise the need for greater financial security. As a specialist reinsurer, Axis Re is well equipped to meet the demands of our customers by providing specialist underwriting expertise and tailored solutions relevant to this dynamic market.