Crop insurance in Brazil

• Agricultural insurance was introduced in the form of hail coverage in Brazil in

1938. The early performance of the program was poor, with loss ratios (i.e.,
the ratio of indemnities paid out to premiums collected) above 3.8 being
observed in the early years. In January 1954, the federal government of Brazil
established the Agrarian Insurance Stability Fund to guarantee insurance
market stability, cover catastrophic risks, and to provide a number of other
initiatives to improve crop insurance. However, the program was not
successful.

• In December 1973, the Farming Activity Guarantee Program, called PRO-

AGRO, was created to protect the financial system in case of large-scale
defaults on loan obligations by producers. From its beginnings through 1993,
the program accumulated large deficits ($1.6 billion) and suffered from a
number of operational problems, including fraud and abuse. New legislation
in 1996 stipulated specific seeding rates and introduced differentiated
insurance premium rates for farmers that adhered to recommended
practices. Brazil also has state run insurance programs like COSESP(state of
Sao Paulo) and COSEMIG(state of Minas Gerais).

• Several private insurance companies currently offer crop insurance in Brazil.

Although the amount of business is still small, some pilot projects have been
implemented, including area-wide plans based on county yields in the State
of Rio Grande do Sul. Unlike other countries, such as, U. S. and Spain, which
develop their insurance programs long ago, Brazil started the Federal Crop
Insurance Program in 2004.

Table 1

Country Period I/P A/P (A+I)/P

brazil 1975-81 4.29 0.28 4.57

India 1985-89 5.11 - -

Japan 1985-89 0.99 3.57 4.56

USA 1980-89 1.87 0.55 2.42

Source: Hazell

Conditions for sustainable insurance are as follows:

(A+I)/P < 1
 Where

A = Average administrative costs

I = Average indemnities paid

P = Average premiums paid

As can be seen from the table Brazil has a very high I/P ratio. The absence of a
suitable actuarial method to price crop insurance contracts is one of the main
reasons for the poor performance and ultimate failure of this agricultural risk
management program. High premium rates inhibited demand for the insurance
by producers and, at the same time, selected only those growers with a higher
probability of receiving the indemnity (Adverse selection).

Products

More recent developments have progressed in a slower and better informed

manner, and have been largely led by the private sector. New style apple cover
started in 1998, wine and table grape covers in 1999, and broad acre crops such
as soybean, wheat and maize in 2000. Despite these developments, crop
insurance business is very small in relation to the size of the agricultural sector
in the country. Some recent developments include moves to introduce crop-
revenue products, under area-based determination of loss. Other types of crop
insurance including individual farm coverage and cooperative loss-sharing
arrangements can also be found in the country.

Premium Rates

• During the 1973 when PROAGRO was started, farmers could insure
(voluntarily) up to 80 percent of the credit granted, and they were charged a
flat premium rate of 1 percent of the coverage. (Hence the premium was
heavily subsidized). In 1980, it was raised to 3 percent on production credit
granted. Eligible for the lower 1 percent if they spend at least 15 percent of
production costs on modern inputs such as fertilizers and improved seeds.
Under PROAGRO, farmers had to wait until the crop is harvested and then
they receive indemnities only if the revenue from the sale of the product is
not enough to cover the balance of the credit due.

• There is a high potential for crop insurance business in Brazil. But the
Brazilian crop insurance market suffered a decline from a premium volume of
USD 22 million in 2003 to USD 11 million in 2005, following a multiyear
drought in the southern states.

Government Support
Historically, crop insurance in Brazil has been offered by the government at both
the federal and state levels and the crop insurance system in Brazil can be
described as heavily Government subsidized. The Government has always intended
that the environmental risks to crops should not lead to large scale credit default by
farmers and also that the Government does not has to dole out huge reliefs. This
has led to very active Government interference in the crop insurance market.

Reinsurance

Currently the reinsurance system is not open to foreign companies and it is the
Government which primarily provides reinsurance support. Institute of Reinsurance
Brazil supports the state run insurance programs like COSESP (state of Sao Paulo)
and COSEMIG (state of Minas Gerais).

In India, the risk is borne entirely by the insuring companies.