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©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
1
Managing Global Crop Insurance PortfoliosHeidi Wang, FCAS,CCMSenior Manager Business Development
Casualty Actuarial Society2013 Seminar on ReinsuranceSouthampton, BermudaJune 6-7, 2013
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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Agenda
• Crop insurance programs around the world• 2012 year-in-review • AIR agricultural risk model components• Model applications for crop reinsurance and insurance
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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Crop Insurance Markets Align with Crop Production
Corn Soybean Wheat Rice Cotton Rapeseed Sugarcane
U.S. 274 82 61.5 6.5 17 1 8
China 208 12.6 121 143 35 13.5 14.5
Brazil 72.5 83.5 4.5 8 6.5 - 37.5
India 21 11.5 95 101 25.5 7 25.5
Canada 13 5 27.5 - - 13.5 -
Russia 8 2 38 1 - 1 5
France 15.5 - 38 - - 5.5 -
Argentina 26.5 51.5 11 1 1 - 2.1
Mexico 21.5 - 3.5 - 1 - 6
Ukraine 21 2.5 16 - - 1.2 -
Australia 0.5 - 22 1 4.5 3 4.5
Source: USDA Foreign Agricultural Servicehttp://www.fas.usda.gov/psdonline/circulars/production.pdf
Major Crop Production Countries - Millions of Metric Tons*
* 2013 Projected
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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Crop Insurance Premium Is Significant and/or Growing in the Major Agricultural Countries
CountryCrop Insurance Premium
(Millions USD)
United States 11,082 MPCI + 953 for crop-hail (2012)
China 2,700 (2011)
Canada 1,100
Spain 809
India 656 (2012)
Brazil 456 (2009)
France 366
Russia 315
Argentina 240
Mexico 222Source: World Bank Survey 2008* Risk Management Agency, USDA
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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Government Involvement Makes Crop Insurance Feasible
• Impacted areas are large, especially for drought• Losses are highly correlated spatially
– Exception is hail
• Losses are frequent and can be severe for farmers• Premiums are subsidized• Administrative costs for insurers may be subsidized• Losses are limited by government• Gains may be shared with government• Governments typically determine
– Premium rates– Program changes, e.g. perils covered, types of policies– Level of protection
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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Growth of the U.S. Crop Insurance Program and Historical Loss Experience
108%
204%
162%
245%
121%
102% 102%
153%
0%
50%
100%
150%
200%
250%
300%
0
2
4
6
8
10
12
14
1981 1986 1991 1996 2001 2006 2011
Bill
ions
US
D
Total National Agricultural Premiums and Gross Loss Ratio
Agriculturalinsurancepremium
Loss Ratio
Source: National Bureau of Statistics of China
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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Agricultural Insurance Premiums and Claims in China Have Grown Significantly Since 2007
78%
75%
100%
60%
86%
74%
47%
0%
20%
40%
60%
80%
100%
120%
0
2
4
6
8
10
12
14
16
18
20
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Bill
ions
CN
Y
Total National Agricultural Premiums and Claims Sin ce 1998
Agriculturalinsurancepremium
AgriculturalinsuranceClaims
Loss Ratio
Source: National Bureau of Statistics of China
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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Weather Is the Key Source of Uncertainty Affecting Yields
% Crop Loss
Drought & Heat 37%
Excess Moisture 33%
Hail 13%
Cold, Frost & Freeze 5%
Wind & Hurricane 4%
Flood 1%
Subtotal – Directly related to weather 93%
Disease 5%
Insects & Wildlife 1%
Other 1%
Subtotal – Other perils 7%
Total 100%
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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0
10
20
30
40
50
60
70
80
90
100
Percent Saturated
Development of Sub-Surface Moisture Content for 2012 Crop Season
Oct 2011 Nov 2011 Dec 2011 Jan 2012
Apr 2012May 2012 Jun 2012 Jul 2012
Aug 2012Sep 2012
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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The 2012 U.S. Drought Event
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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AIR’s Estimated Losses for the 2012 Drought Compare Well to RMA Data
Range Gross Premium Gross Loss Gross Loss -Premium
Gross Loss Ratio
Upper USD 11 Billion USD 17.2 Billion USD 6.2 Billion 156%
Lower USD 11 Billion USD 15.3 Billion USD 4.3 Billion 139%
Range Retained Premium Net Loss Net Loss -Premium
Post-SRA Loss Ratio
Upper USD 9.3 Billion USD 10.9 Billion USD 1.6 Billion 117%
Lower USD 9.3 Billion USD 10.1 Billion USD 786 Million 108%
AIR 2012 crop insurance industry loss estimates as of November 2012 (Source: AIR)
Gross Loss Ratio (Observed)
2012 153%*
*Source: RMA
AIR’s estimated gross loss ratio range (November 2012) agrees well with the
RMA value (April 2013):
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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DAMAGE
Crop Performance Is a Physical Process and Can Be Modeled in a Fashion Similar to Other AIR -Modeled Perils
HAZARD
FINANCIAL
Insured Loss Calculations
Policy Conditions
Government Reinsurance
Private Reinsurance
Crop Damage /
Yield Estimation
Crop Insurance Program
Crop Requirements
Precipitation
Temperature
Terrain Elevation
Soil
Land Use Land Cover
(Satellite)
Exposure Information
Commodity Price Risk
Stochastic Event Set CatalogAWI
(Agriculture Weather Index)
Risk
Historical Yields
Typhoon Catalog
Historical Prices
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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In a Normal Year, Water Supply and Water Requiremen ts Are Balanced and AWI Indicates Positive Yield Outco me
Eva
potr
ansp
iratio
nR
unof
fS
oil M
oist
ure
Fav
orab
le fo
r Y
ield
sD
etrim
enta
l to
Yie
lds
Apr May Jun Jul Aug Sep Apr May Jun Jul Aug Sep
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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In a Normal Year, Water Supply and Water Requiremen ts Are Balanced and AWI Indicates Positive Yield Outco me
Eva
potr
ansp
iratio
nR
unof
fS
oil M
oist
ure
Det
rimen
tal t
o Y
ield
s
Apr May Jun Jul Aug Sep Apr May Jun Jul Aug Sep
Fav
orab
le fo
r Y
ield
s
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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In a Drought Year, Water Requirements Exceed the Water Supply and AWI Indicates Plant Damage
Run
off
Eva
potr
ansp
iratio
nS
oil M
oist
ure
Fav
orab
le fo
r Y
ield
sD
etrim
enta
l to
Yie
lds
Apr May Jun Jul Aug Sep Apr May Jun Jul Aug Sep
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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AWI Measures County-level Crop Performance During the Season
AWI proportional
to flood damage
AWI indicates significant
drought damage
End of Season AWI estimates
yield variation from normal
AW
I
Calendar Days
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
171990 1995 2000 2005 2010
8010
012
014
016
018
020
0
x
y
20081990 1995 2000 2005 2010
8010
012
014
016
018
020
0
x
y
20081990 1995 2000 2005 2010
8010
012
014
016
018
020
0
x
y
2008
AWI Removes Weather Variability from the Historic Yields to Reveal True Technology Trend
Yield Time Series
Trend Line Influenced by Weather Variability
True Technology Trend with Weather Variability Removed
17 Bushels
Yie
ld -
Bus
hels
/Acr
e
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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The Choice of Methodology Can Have a Large Impact on Insurance Contract Risk
Probability Density Function of Detrended Yield Time Series
100 150 200 250
0.00
00.
005
0.01
00.
015
Without AWI With AWI
100 150 200 250
0.00
00.
005
0.01
00.
015
100 150 200 250
0.00
00.
005
0.01
00.
015
100 150 200 250
0.00
00.
005
0.01
00.
015
Yield – Bushels/Acre
Pro
babi
lity
Yield Guarantee
100 150 200 250
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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… and all Other Crops Modeled in Detail as well as a ll Potential Interactions
Prices
Corn, Cotton, Sorghum,
Soybeans, Wheat
Historical Time Series on
National Level
Yields
Corn, Cotton, Sorghum,
Soybeans, Wheat
Correlations
Prices
Yields
Prices - Yields
Price / Yield Scenarios
Corn, Cotton, Sorghum, Soybeans, Wheat
Stochastic Catalog
Price Volatility
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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The Price Risk Component Takes Into Account Correla tions Between Total US Production and Harvest Price
40%
60%
80%
100%
120%
140%
160%
180%
60% 70% 80% 90% 100% 110% 120% 130%
Har
vest
Pric
e as
Per
cent
age
of
Pla
ntin
g P
rice
Yield as Percent of Normal
CORN - PRICE RATIOStochastic Catalog Historical
1983
1993
2010
2008
1988
2012
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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County Level Results Are Aggregated to State Level and Subject to SRA Rules and Regulations
6%
Assigned RiskFund
(Each State)after 20% retention
Commercial FundGroups 2 and 3
(Each State)after 35%+ retention
Commercial FundGroup 1 States #
(Each State)after 35%+ retention
500(max)
220
160
100
65
50
Loss Ratio
Company Share of:
Loss
Gain
Portion
Government Share of:
Loss
Gain
# Group 1 States: Illinois, Indiana, Iowa, Minnesot a, Nebraska
Net Book Quota Share of 6.5%Gain/Loss Ceded to Government
7.5%
3%
13.5%
3%
22.5% 97.5%
5%
42.5%
5%
40%
20%
10%
45%
65%
75%
40%
5%
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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AIR Agricultural Model Applications in CATRADER ®
AIR Agricultural Model for
Crop Insurance and Reinsurance
Enterprise Risk
Management
Pricing &Actuarial
Underwriting
Fund Designation
Claims
Risk Transfer
©2013 AIR WORLDWIDE CONFIDENTIAL: FOR CAS Reinsurance Conference only
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Summary
• Crop insurance and reinsurance are increasingly important lines of business worldwide
• Weather is the most important peril for agricultural portfolios; therefore, crop risk models need to account for the weather impact on crop yields
• AIR MPCI models are weather-based and maintain the natural geographical yield correlations that are key for unbiased crop portfolio analyses
• In addition to U.S. and China MPCI models already available, future models will include U.S. crop-hail, India and Brazil/Argentina