Agricultural insurance is a powerful tool for protecting farmers against unexpected climate events. However, several challenges are hindering the market penetration in Brazil.  Despite being a major agricultural powerhouse, and the fourth biggest agricultural producer in the world, the country lags behind in agricultural insurance adoption when compared to other countries.

One of the factors that contribute to this scenario is increasing climate unpredictability. For instance, the floods that are occurring in the southern region of Brazil, with catastrophic damages to agriculture and properties that have already surpassed R$ 1 Billion, will demand resilience from the agricultural insurance sector as a whole.

In this article, we intend to assess the current market scenario, the reasons behind agricultural insurance's low penetration, and identify potential solutions to boost insurance coverage in Brazil.

The state of the market

In 2023 Brazil was the fourth largest agricultural producer in the world. However, the amount of land covered by insurance in Brazil has fallen drastically, dropping by almost 53% between 2020 and 2023, from 13.26 million hectares to 6.25 million hectares, which corresponds to 9.8% of the gross cultivated area in the country.

Many reasons contribute to this decline. On the side of the producers, the three main factors are:

• Financial Pressure on Farmers: Farmers are facing financial strain due to increased accidents, which raises insurance costs along with production expenses, making it hard for them to afford insurance products.

• Government Subsidy Program: To help farmers, the Ministry of Agriculture and Fisheries launched the Agricultural Insurance Premium Subsidy Program (PSR) in 2006. This program covers a portion (30-35%) of insurance premiums for farmers. However, the funding for this program has been decreasing over the years. For example, in 2023, the budget was cut by 12%, and the situation doesn't look good for 2024 either, with only a fraction of the requested funds being allocated.

  The decrease in government support is juxtaposed to the increase in weather-related accidents affecting farming, especially in grain cultivation, which drives up insurance prices. As a result, fewer farmers are buying insurance, leading to less land being insured.

• Education: It is important to highlight that there is a general comprehension deficiency regarding this insurance category by farmers, which contributes to the low adherence to insurance in Brazil. What usually happens is that producers lack knowledge about terms, costs, and benefits of the policies.

Take, for instance, the calamitous climate events of 2021 and 2022, where a significant portion of farmers planted their crops outside the parameters of the Zoneamento Agrícola de Risco Climático (ZARC) calendar. This calendar, devised by Mapa and Embrapa, serves as a benchmark for assessing risk. Insurers often tie insurance contracts to this calendar, meaning that farmers who deviate from its recommendations are a priori left without financial assistance in the event of a disaster.

On the side of the insurance companies, there’s also a struggle. They're facing higher claim rates in regions prone to weather disasters, which leads them to withdraw from these areas and focus on places with fewer claims. This reduces their overall presence and increases their financial losses, which have totaled around R$3.1 billion in recent years.

The landscape of agricultural insurance in Brazil is facing a combination of challenges. Recent years have seen a surge in losses due to accidents, prompting reinsurers to adopt a more austere stance when it comes to guaranteeing harvests. This has led to a spike in contract pricing with insurers, creating a ripple effect across the entire insurance chain. Some well-known insurers have even slowed down and halted product offerings in the Brazilian market.

Beyond this, there is a lack of preparedness among both insured farmers and some brokers when it comes to navigating policy intricacies and coverage conditions, exacerbating the disconnection between insurers and the agricultural community.

The knowledge gap underscores a broader issue that reaches both producers and insurers within the production chain; while some farmers remain oblivious to the protective benefits of insurance, insurers and brokers struggle to effectively communicate and distribute their services in a manner that resonates with farmers. Without addressing these challenges, scaling the agricultural insurance sector will remain difficult.

Despite facing less-than-ideal conditions, the agricultural insurance sector must rise to the challenge to match the projected 23.1% growth in agribusiness for 2024. Last year, Latin American agricultural production took a hit from El Niño, with torrential rains and droughts that impacted crops across various regions. Farmers found themselves dealing with unexpected losses, having to replant amidst significantly worse conditions than anticipated. This underscores not only the unpredictability of weather patterns but also the difficulty in forecasting which regions will be affected by specific phenomena.

While the southern regions battled with relentless storms, the central west struggled with the opposite; a scarcity of precipitation. Such variability amplifies the demand for crop insurance, mirroring the heightened risk, which, in turn, drives up costs and reduces coverage availability.

Despite the challenge of aligning insurance strategies with unpredictable climate changes, there's a considerable opportunity to expand the insurance market to encompass underserved regions. By offering tailored services and extending coverage to areas with limited options, insurers can not only sustain their operations but also diversify their portfolio effectively.

Parametric Insurance might not be a silver bullet, but it presents opportunities

In a world where agricultural production faces increasing threats from unpredictable climate disasters, traditional crop insurance struggles to keep up with real-time monitoring.  In this scenario, parametric insurance emerges as a more dynamic alternative that harnesses technology and data analysis for smarter risk management.

Unlike traditional insurance, where compensation hinges on assessing damage post-disaster, parametric insurance operates with customized solutions.  It allows producers to acquire policies based on indexed values tied to specific risk factors affecting their crops. For instance, in regions prone to drought, insurers compensate producers for each millimeter of rainfall below a predetermined threshold, determined by historical data and climate risk analysis. This compensation aligns with expected yields and production pricing. Shifting the paradigm from reaction to anticipation.

Parametric insurers calculate premiums using historical climate data and forecasts sourced from government agencies, offering a more reliable approach to compensation. Unlike traditional insurance, where negotiations over compensation can be lengthy and contentious, parametric insurance leaves little to no room for debate. This aspect seems particularly appealing in regions like Brazil where litigation is common, policy clauses can be ambiguous, and legal decisions often favor the insured. By providing clear guidelines on what should or should not be compensated, parametric insurance helps mitigate financial losses for insurers and reinsurers during climate-related calamities, while providing more clarity and transparency for the insured.

Furthermore, this data-driven approach not only reduces the risk of fraud but also enables broader coverage, ensuring that producers across all regions can access support in the event of production losses.

Despite the scarcity of local benchmarks, given the nascent nature of this product in Brazil, there are good proxies in Asian countries, where the agricultural sector is highly vulnerable to climate-related disasters. In these regions, there are massive productive lands, and the impact of natural disasters is often exacerbated by socioeconomic factors, with the poorest populations bearing the brunt of the devastation.

China serves as a good example. Since 2016, the Chinese government has subsidized a parametric insurance program, swiftly reimbursing material damages caused by cyclones and torrential rains, particularly in poorer provinces. This rapid and efficient response is crucial for containing the aftermath of such disasters.

However, there are challenges. The indexed nature of parametric insurance can be a double-edged sword. For farmers, while it streamlines the compensation process, it may also generate resistance due to its fixed nature and lack of flexibility in assessing individual circumstances. Additionally, its tailor-made approach can sometimes lead to a more expensive product. And, on the insurers' side, there is little margin for negotiation.

In Brazil, managing risks for insurers presents unique challenges, exacerbated by the uncertain climate patterns. The shifting landscape of climate events, including a rise in heat waves and prolonged droughts, complicates risk assessment and pricing for insurers. Regions like MATOPIBA, Goiás, Ceará, and northern Minas Gerais are particularly vulnerable to erratic weather patterns, leading insurers to concentrate their efforts in areas deemed lower risk, such as the South.

Furthermore, implementing parametric insurance requires seamless collaboration between meteorological institutes and the agricultural insurance sector, which can be a big challenge in Brazil, where the agricultural insurance market is still developing. This integration requires significant public investment to subsidize policies for farmers. Although progress is being made, current investments aren't enough to meet the needs of agribusiness.

Final Thoughts

While parametric insurance holds promise as a transformative solution for the agricultural insurance landscape, its adoption in Brazil faces challenges. Technical, regulatory, and cultural hurdles impede the seamless integration of tailor-made insurance offerings, further complicating the market dynamics. The maturation of the insurance market as a whole in Brazil is essential for the widespread implementation of parametric insurance. However, given the recent climate disasters and their implications for the insurance sector, this development is hardly going to occur any time soon. Thus, while parametric insurance presents the potential for enhancing resilience, its implementation hinges on navigating the complex terrain of Brazil's insurance landscape amidst climate change.

Moreover, beyond the hurdles faced by parametric insurance, recent climate disasters - a notable example being the recent torrential floods in Rio Grande do Sul - have intensified in Brazil due to the effects of climate change. This forecasts a continued contraction of the insurance sector in the country in the coming years. Rio Grande do Sul stands as an example, with an estimated 90% of the state already struggling with extensive material damage from floods. This surge in natural disasters has led insurers to confront unexpected levels of compensation claims, driving them toward reconsidering their involvement in the Brazilian market. Inevitably, this potential withdrawal would compound the challenges faced by an already weakened agricultural insurance sector, which has been significantly undermined by events spanning from 2020 to 2023.

Glossary

Mapa (Ministério da Agricultura e da Pesca):

The Ministério da Agricultura e da Pesca, (Ministry of Agriculture and Fisheries) is the body of the Brazilian federal government that formulates policies and guidelines for the development of agriculture, livestock, supply, and fishing in Brazil. Its responsibilities include promoting food security, encouraging agricultural and livestock production, ensuring food quality, and protecting the ecosystem.

CNA (Confederação da Agricultura e Pecuária do Brasil):

Loosely translated as the Confederation of Agriculture and Livestock of Brazil, it is an entity representing the political articulation of Brazilian agricultural producers, which defends their interests before the government, promotes the development of agribusiness, and offers technical assistance and training.

PSR (Programa de Subvenção ao Prêmio do Seguro Rural)

The Agricultural Insurance Premium Subsidy Program (PSR) is a Brazilian government initiative that aims to encourage the taking out of insurance policies for agricultural and livestock production against climate-related accidents. Through this program, the federal government subsidizes part of the agricultural insurance premium, reducing costs for producers and making policies more accessible.

ZARC (Zoneamento Agrícola de Risco Climático):

Agricultural Climate Risk Zoning is a tool that the Brazilian government created to guide producers in choosing the most suitable crops for certain regions and planting times, associated with their climate risk. ZARC uses technical studies of climate data to establish risk zones and which crops are most likely to thrive in each area, and is also used as a criterion for access to agricultural credit and crop insurance.

MATOPIBA:

It is the region formed by the state of Tocantins, and parts of the states of Maranhão, Piauí and Bahia, a region of strong agricultural expansion in recent decades, given its high potential for the production of grains and other agricultural commodities. The term MATOPIBA is an acronym formed by combining the first syllable of each state in the region.

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