Challenges and opportunities of agricultural risks transfer

Despite the rapid movement of the modern world towards digitalization, high technology and process sophistication, the longtime existing agricultural industry remains important for satisfying the primary needs of humanity in food and basic material. In parallel with all technological development people are returning to forgotten principles of sustainable nutrition. Can agricultural industry support this trend? Which challenges agricultural industry experience itself in the era of climate change? We have discussed these and other questions with Olena SOSENKO - International expert in agricultural risk management.

XPRIMM: What is the modern trend in the food consumption?

Olena SOSENKO: The individual diet and food product choice depends on many factors that include national and family traditions, financial status etc. However, nowadays in postindustrial countries we could see some trend when people want to eat healthier and with higher care for the environment. They are more concerned about the food quality, sugar content and often prefer the organic food. Some opt the vegetarianism. Also, people would like to choose the optimal combination of the food price, quality and nutrition content.

XPRIMM: What are the current trends in the agricultural production?

O.S.: Agricultural industry in line with the other industries is becoming more technological and input/outcome efficient. This tendency involves the precision farming, remote sensing technology, digital decision-making tools, use of innovations in seed varieties and other input material. In some countries small farms are merging into bigger production units. Some small percentage of farms opt narrow specialization - organic production, high value fruits/vegetable production etc. However, still most of agricultural enterprises rely heavily on the chemical input industry, doesn't pay deep attention to destructive environment impact and work out of borrowed money. Such a production model exists already for a long time.

Overall agricultural production is quite unsustainable, by definition. It experiences substantial fluctuation of the income; it impacts the society and environment in not always positive way. For example, the supermarkets establish own standards for fruits and vegetables. All fruits and vegetables need to have the certain size and look good. Fruits that are out of standards are waisted. And on the reason of regulation restrictions they cannot be even processed for juice or jam.

Big agricultural output from 60th caused a substantial destructive influence on the environment. Crop industry is exploiting fertile soils and reducing their qualities. Less fertile soils face the salination increase because of the fertilizers' utilization.

It is a known fact that livestock production contributes into the atmospheric pollution through the green gases emission; the crop production in its turn causes the soils and water pollution through the chemical input as well as water over usage in some countries. That is why vegetarianism and/or organic eating is considered as a style of life that supports the environmental sustainability.

XPRIMM: How the climate change is influencing the agricultural industry?

O.S.: As we discussed previously the agricultural industry contributes into the environmental pollution resulting into the climate change. However, the agricultural industry is one that suffers mostly from the climate change. First of all it relates to the crop production, which is considered as an open sky industry. The unfavorable weather patterns are damaging the crop on the fields more and more. We observe sharpening of spring frost, hail severity and drought frequencies. Many farmers admit that the weather patterns observed today were not present still 10 years ago. The new climate inspires the outbreak of some pests and diseases. As a result of this - the farm income becomes more volatile and farmers - more financially vulnerable.

XPRIMM: How to help farmers to cope with the climate change consequences?

O.S.: With or without climate change the farm production is exposed to the unfavorable weather and disasters. When farmers lose the whole or part of their yield in one year, sometimes they hardly can continue their operation further. They need external help in the form of risk transfer and financial compensation. In many cases farmers have no other choice as to hope for such compensation from their governments. However, the help from the government is never fully predictable and requires a substantial bureaucratical application procedure.

Overall risk management should involve different actions and steps. First in the range of actions is to be clearly aware about own risk possibility and extent; then - to develop a suitable risk management strategy that can include risk prevention through weather prediction, risk avoidance through technology, financial back up through savings, risk transfer and others. Farmers and their investors are generally aware about risk possibility, but they rarely can calculate the extent of the potential damage and in many cases, they don't have a structured risk management strategy. Their response is rather reactive than proactive.

One of the most structured and professional ways of risk transfer is insurance. The insurance specialists are better equipped for prediction and calculation of the potential crop damage from the risks. But I need to admit that different countries use their agricultural insurance potential not equally. While Western Europe seems to be better organized with agricultural insurance systems Eastern European countries are still facing a significant protection gap. I can nominate Hungary, Slovenia, Czech Republic as countries with higher agricultural insurance penetration. Poland stays also in the leader list by agricultural insurance premium, but it faces various challenges as from insureds' as from insurers' satisfaction point of view. Ukraine and Romania being traditionally agriculturally oriented countries could have a substantially higher agricultural insurance premium volume than of today. Russia has a story with fluctuating success of agricultural insurance being currently at the lower point.

There is lots of potential in Eastern European countries that can be realized through new insurance product development and agricultural insurance market expansion, which will lead to the great help for farmers and governments.

XPRIMM: What can and should be done in the area of agricultural insurance?

O.S.: In the era of digitalization, complex modeling, artificial intelligence the agricultural risks require better recognition and estimation. Every country should have a consolidated data base of the risks influencing the farm production and certain models for the risks prediction and estimation. Such data base can improve communication between different stakeholders in the country and better understanding how the risks should be shared between them. We offer the concept of Agricultural Risk Metrics - the platform for tracking, forecasting and modeling of agricultural risks with the simultaneous access for multiple stakeholders.

Insurers and governments in the countries should create the solutions for more complex risks rather than only traditional hail and fire coverage. The increasing spring frosts, winter kill and droughts should be covered by insurance with a state support wherever it is needed.

One of the biggest challenges in agricultural insurance is the loss adjustment. Many countries lack of proper local loss adjustment expertise, so, the cross boarder know how transfer should be considered.

Education and knowledge deepening is needed not only in the loss adjustments area but for the entire scope of agricultural risk management, underwriting, portfolio management, product development etc. For this purpose, we propose a unique training on agricultural risk management that can be useful as for the beginners as for experienced market players.

For success of agricultural insurance to work, communication and education need to be accomplished simultaneously at levels of different stakeholders - governments, farmers, agricultural value chain members, financial institutions. We are happy to assist various actors on their work and development of agricultural insurance.

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