Expanding Brazil’s Rural Insurance

CEIC Brazil Data Talk - July 3, 2014 - Volatile earnings in Brazil's agriculture sector – mainly due to uncertain commodity prices amid inclement weather conditions – have brought the issue of agriculture insurance adoption to increasing prominence over the years. While there have been many plans aiming to boost rural insurance in the country since the 1960s, these schemes enjoyed limited success until the initiation of the Subsidy Programme to the Rural Insurance Premium (PSR) in 2005. The PSR sought to promote access to rural insurance, guarantee its role as a tool for stabilising agricultural income, induce the use of appropriate technologies and modernize agricultural enterprise management. The scheme saw a rise in the insured area from 68,148 hectares in 2005 to 1.56 million hectares in 2006 – rural insurance covered 5.24 million and 9.60 million hectares of agricultural area as of 2012 and 2013 respectively. Despite the PSR, overall farmer participation in agriculture insurance barely breached 10% of total planted area throughout 2006-2012 (only 7.91% of total planted agricultural land was insured as of 2012 compared to its peak of 10.38% during 2009). However, in 2013, insured area has since increased to 13.71% of total plantation area (amounting to 9.60 million hectares). Increased insured area coverage was, in part, attributed to continued government support on the rural agricultural insurance scheme. Government grants on the rural insurance premium has stabilised to over 50% of total revenue received by rural insurance providers. As of 2013, the government contributed approximately 56%, little changed from the previous year. However, present day rural insurance support is a large improvement from the support of around 27% provided during 2005. Brazil's rural agriculture insurance made large strides during 2013 as coverage was almost doubled. The number of rural insurance policies rose to 101,850 policies (insuring BRL16.84 billion of capital) compared to 63,328 policies (insuring BRL8.78 billion of capital) during the previous year. Agriculture insurance revenue also increased 75.25% in 2013, breaching BRL1 billion for the first time since the government's intervention. According to the Ministry of Agriculture (MAPA), starting with the upcoming winter harvest in 2014, the percentage of the premium subsidy for rural insurance will be 60% for the second corn harvest, and for oats, canola, barley, rye, sunflower, sorghum and triticale. For wheat, the percentage of the premium subsidy for rural insurance will be 70% of federal resources, with the percentages applied regardless of production in the region. Despite the successful expansion of rural insurance, much remains to be done. While revenue per insured capital (i.e. premium paid before government grant) has stabilised at 5.5-7.0% as of 2010-2013 (5.94% in 2013), the perceived high insurance premium remains a barrier for many farmers. This has two key ramifications. First, it may lead to potential under-estimation of catastrophic risk-to-insurance costs (though some creditors require insurance as a pre-requisite for credit). Given the potential impact from adverse weather conditions on some of Brazil's more vulnerable crops (coffee and sugar cane being a notable example), the absence of insurance may push affected farmers into bankruptcy. Second, on the supply side, the concentration of risk in certain areas (especially in the South) – i.e. where only farmers in the high-risk southern regions insure their crops – has made it less attractive for insurers to enter the market, hence raising overall premiums. Fortunately, adoption of insurance has been picking up rapidly in several states, particularly in Bahia, Goias, Minas Gerais and Tocantins, among others, which saw large improvements in areas insured (in spite of the fact that some farmers tend to under-estimate risk and under-insure). Beans, coffee, corn, maize and wheat crops are also seeing increasing insurance coverage with only small increases in premiums (based on premium per insured capital). The premium on maize crops has actually declined marginally to 9.45% of insured capital as of 2013 from 10.14% of insured capital during the previous year. A greater commitment by the government towards premium subsidies has helped somewhat, though Brazil's persistent budgetary issues mean that the sustainability of these subsidies remains a concern both for farmers and for private insurers in encouraging increased participation in agriculture insurance. By Bruno Vasconcelos Google+ Author Profile - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
7th July 2014 Expanding Brazil’s Rural Insurance