Reforms are urgently needed for the Philippines’ agricultural insurance sector, according to a recent World Bank report. It said the country’s main agricultural insurer, the Philippines Crop Insurance Corporation (PCIC), has been “totally un-reinsured” and is “very exposed” to catastrophic losses.
The Philippines is prone to natural catastrophe risk as one of the most climate-vulnerable countries worldwide. Floods, storms and cyclones cause losses of about 3% of GDP annually, according to a Swiss Re Institute study. When it comes to disaster risk exposure, the Philippines ranked number one out of 193 countries assessed in the 2023 World Risk Report.
Yet, the PCIC, which has a virtual monopoly on agricultural insurance nationwide, carries PHP 75.0 billion (US$1.52 billion) in liability for crops, livestock and fisheries without any reinsurance protection.
The World Bank
To address this, the World Bank report said the PCIC should engage a specialist reinsurance broker. This would allow for detailed risk modelling and actuarial analysis to develop an appropriate risk retention strategy and reinsurance program.
“The PCIC is only one of a handful of agricultural insurance companies that underwrites a national portfolio of crops, livestock, and fisheries against catastrophe (covariate) risks while being totally un-reinsured,” the report said, adding that a catastrophe could result in “much larger losses” given the current exposure.
The report cited the example of Mexican (re)insurer AGROASEMEX. In 2021, a rare severe freeze triggered losses exceeding 1,200 percent of its reinsurance loss ratio, which necessitated government recapitalization to avoid bankruptcy as it was hugely under-reinsured with international retrocessionaires.
In 2022, the PCIC said that it had never purchased reinsurance protection, opting instead to retain all risks to avoid paying premiums. It claimed its own actuarial analysis showed a tiny reinsurance claim would occur only once every 30 years.
However, climate change poses growing challenges for the Philippines. As a country that experiences an average of 20 typhoons annually, market-based reforms have become an urgent priority to strengthen the agricultural sector’s resilience going forward.
A World Bank study found rice yields in Luzon, the country’s largest island, could decrease by 20% by 2050. Meanwhile, weather-related crop damage from 2000-2010 totalled US$2 billion according to the Department of Agriculture.
In a blog post outlining needed reforms, researchers who compiled the World Bank report noted existing insurance products do not adequately cover most of the country’s 5.56 million farms. Without formal credit after natural disasters, many farmers resort to informal loan sharks, trapping them in cycles of poverty.
Despite PHP 4.5 billion (US$78 million) in substantial premium subsidies given out in 2022, insurance penetration within the agricultural sector remains alarmingly low, according to the World Bank. Only 45% of farmers and 36% of farmers and fisherfolk are covered by a PCIC policy.
One size does not fit all
Reaching the Philippines’ smallholder farmers is challenging for agricultural insurance programs. The PCIC offers free insurance coverage for up to 3 hectares of land for farmers cultivating less than 7 hectares total. Yet, with the average farm size being just 1.29 hectares, this policy has meant the average premiums generated per policy remained small.
As a result, high operating costs have also strained the PCIC. According to the World Bank, many of its product designs are based on percentage damage-based indemnity models tailored originally for large US cereal producers. These schemes are highly inefficient in addressing risks faced by small farms.
Small farm sizes present major roadblocks for insurers seeking to design crop and livestock insurance programs suited to their risk transfer requirements. Distributing and administering policies cost-effectively to the many small-scale producers have been difficult, the report said.
The World Bank noted that the farming population lacks sufficient stratification, with 98.2% of Philippine farms being less than 7 hectares in size. Farmers should be segmented based on their diverse socioeconomic circumstances, risk management capacities and risk transfer needs, the World Bank recommended.
Insurance penetration remains low, with just 45% of farmers and 36% of farmers and fisherfolk covered by PCIC policies, the report found.
While penetration rates have increased significantly over the past six years as the PCIC ramped up its operations, coverage levels remained inadequate. Currently, just one-third of farmers nationwide are insured, the report said.
This lack of comprehensive risk transfer has compromised the country’s resilience to natural catastrophes. As evidenced by a Swiss Re report, which found that only 6% of physical assets were insured against weather perils, the Philippines is underequipped to handle the financial consequences of intensifying climate hazards.
Pushing private insurers into the market
Urgent development of new agricultural insurance products is needed. The report recommended greater public-private partnerships and the mobilization of the private sector.
Proposed solutions involve introducing index-based insurance for vulnerable smallholders owning less than 1 hectare, which comprises 56.9% of all farmers.
A new dedicated risk management agency could help insurers design and rate new index-based crop and livestock insurance products through public-private partnerships. This would assist programs targeting semi-commercial and subsistence farmers currently lacking suitable protection.
The Philippines government should also make premium subsidies available to private sector insurers, allowing them to compete with the PCIC, the World Bank advised.
Recognizing the need for collaboration, the country’s Insurance Commission had previously authorized local private insurers to partner with the PCIC in designing and implementing new products starting in 2021. For example, one local microinsurer announced a venture with the PCIC to insure smallholders growing high-value crops.
World Bank
Injecting private sector expertise could help strengthen the insurance system in areas like risk modelling, data analysis, claims processes, data collection and distribution networks, the report said.
“Adoption of technology will be critical, for example using satellite data to assess losses or determine insurance payouts cheaply, transparently and quickly,” noted the World Bank researchers.
Satellite-based parametric insurance for typhoons, floods and drought could also protect vulnerable subsistence farmers, as well as area yield index insurance, by helping to increase insurance penetration among small-scale farmers, the report suggested.
“With these improvements, agricultural insurance can serve as an essential tool for Filipino farmers to effectively manage climate shocks,” said the World Bank researchers.
“It can safeguard their livelihoods, protect them from falling into poverty traps, enhance their productivity and innovation, and contribute to the overall enhancement of food security in the Philippines.”
