Agricultural Risk Transfer

CHAPTER 3Agricultural Perils and Risk Modelling Concepts

3.1 INTRODUCTION

Agricultural production is exposed to a wide range of perils that can affect an individual farm or a sub-region (e.g. hail or frost), an entire country (e.g. drought, cyclones) or several countries with global consequences (e.g. drought in a large grain-exporting market). The same disaster can simultaneously impact different agriculture sub-sectors, causing both direct (immediate) and indirect losses. Depending on the severity and scale of the losses, some agricultural production systems can take years to recover, with long-lasting impacts on the larger economy and society. Systemic perils such as droughts, floods, cyclones, wildfires and epidemic disease outbreaks cause the largest losses to the agricultural sector. While some perils are reoccurring under regular climate variability patterns, such as the El Niño Southern Oscillation (ENSO), others occur randomly in both space and time.

Risk transfer products and modelling concepts have been developed for most perils to facilitate risk transfer to (re)insurance and capital markets. The agricultural risk transfer industry relies mostly on past insurance claims data to structure and price products; however, historical claims often do not reveal the full range of possible loss expectations, which leads to over- or underestimation of risks and inadequate insurance conditions. Through outputs of physical models and climate indices, the research domain offers ...