Swiss Re sigma study shows: Robust insurance development in emerging markets and opportunities in agricultural insurance

Feb., 2007 – Growth in insurance business in emerging markets continued to outperform in 2005. Strong economic fundamentals and further liberalisation will ensure continued robust growth in the coming years. Agricultural insurance is largely underdeveloped, even though agriculture remains a key sector in many emerging economies. Agricultural insurance schemes, at times leveraging on public-private initiatives, can provide more economic security to the agricultural community and support the sector’s development.

Emerging market growth remains on track

Emerging market economies continued their strong growth in 2005, despite rising global interest rates and commodity prices. According to Swiss Re’s latest sigma study, “Insurance in emerging markets”, both life and non-life insurance premiums registered further gains, of 7.5% and 6%, respectively, in real terms. In 2005, the importance of having adequate insurance protection against natural perils was highlighted when Mexico was hit by USD 1.8 billion losses from Hurricane Wilma. In 2006, the Mexican government became the first sovereign state to enter into a reinsurance agreement – signed with Swiss Re – that included an insurance-linked securitization for providing earthquake protection. While uncertainties stemming from the global interest rate cycle and geopolitical tensions persist, the insurance growth outlook remains solid.

Greenfield for agricultural insurance

Agriculture is one of the most important economic sectors of emerging markets. A properly-designed risk management system is essential for protecting farm operators and reinforcing rural development. Existing agricultural insurance regimes in emerging economies, however, show a mixed record: some schemes suffer from low insurance penetration and weak underwriting performance, due to high administration costs or adverse selection. Total premiums were estimated at around USD 1.1 billion in 2005.

Trade liberalisation and the shift from subsistence farming to commercial farming point to higher sophistication in farm production and hence higher investments. These will heighten the need for agricultural insurance.

Public-private partnerships

Agricultural risk management strategies articulate the complementary roles played by public disaster relief and private insurance support. Public-private partnerships can create an environment that is more conducive to agricultural insurance. Government efforts to improve rural financial infrastructure and weather data collection, for example, can facilitate insurers’ access to potential clients and support their underwriting activities.

Significant growth potential of agricultural insurance

The volume of emerging market agricultural insurance has the potential to reach the USD 10 billion mark if governments and insurers become more proactive. USD 10 billion will be commensurable with the insurance penetration levels seen in more developed markets.

Agriculture insurance premiums as a % of total and agricultural GDP

Swiss Re

Swiss Re is the world’s leading and most diversified global reinsurer. The company operates through offices in over 30 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Re is rated “AA-” by Standard & Poor’s, “Aa2” by Moody’s and “A+” by A.M. Best.