July 24th, 2014

The Drivers of Agriculture Insurance in Asia, Part II: Factors At Play

Posted at 1:00 AM ET

peter_book_-smaller-hs2Peter Book, Head of Agriculture, Asia Pacific

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Some would argue that individual governments have limited means to control the demand side of the equation. In respect of drivers such as food security and standard of living they are likely to be the main protagonists for change. Certainly the agricultural production sector and individual producers have even less influence.

Assuming that population growth and changes in standard of living are unstoppable the issue becomes how to influence the challenges on the supply side of the equation. Putting aside the theoretical yield constraints, the remaining issues can be displayed as a sequence, below.

All Charts_June Renewal 2014

More Efficient Production Methods Required

In order to increase or maintain supply (growth in output must equal or exceed growth in population), it is necessary to increase output. Assuming some resources are finite, such as land and other highly valued resources such as water, more efficient methods of production are going to be required. This generally requires technology transfer in the form of physical property (mechanization or improved varieties) or intellectual property (management practices, decision systems), which invariably requires some form of investment.

Investment on its own will normally seek to attain some sort of equilibrium between risk and reward. The higher the risk is the greater the required (or potential) reward. If the risk is too high the required return may be too great for a producer to service and the result may be that the investment heads elsewhere.

All Charts_June Renewal 2014

It is at this point that risk transfer can play a vital part in the process of improving the supply side of agriculture as it reduces the risk retained in the agricultural production system to a level that reduces the required rate of return on investment to one that is serviceable by an individual producer, input supplier or financier.

This article first appeared in the June 2014 edition of Asia Insurance Review and is reprinted here with permission from Asia Insurance Review.

Link to Part I>>

Link to Part III>>

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