Guest editorial

Citation

Tan, A.P.L.P.a.P.ß.S. (2015), "Guest editorial", Agricultural Finance Review, Vol. 75 No. 1. https://doi.org/10.1108/AFR-05-201

Guest editorial

Article Type: Guest editorial From: Agricultural Finance Review, Volume 75, Issue 1.

IARFIC 2014

A significant global transformation must take place in order to increase food production by 70 percent by 2050, a figure the UN’s Food and Agriculture Organization (FAO) estimates is needed to feed the world’s future population. This is not an easy task, however, as agriculture is faced with a number of major challenges. Therefore, it is important that issues regarding food security, stability, sustainability, investment, innovation, multi-stakeholder partnerships, governance, etc., are addressed. The International Agricultural Risk, Finance, and Insurance Conference (IARFIC) aims to facilitate important and timely discussions regarding these challenges, through bringing together leaders across the globe and across disciplines, including agriculture, actuarial science, finance, statistics, and risk management.

The third annual IARFIC was held in Zurich, which was an ideal location for the conference as it represents an increasingly important location for reinsurers and many of the world’s leading specialty agricultural units. The inaugural IARFIC took place in June 2012 in Beijing, China, and was a tremendous success, and in 2013 the conference was hosted in Vancouver, Canada. The conference was hosted by the Waterloo Research Institute in Insurance, Securities and Quantitative Finance (WatRISQ), University of Waterloo, Canada. Co-organizers included China Institute for Actuarial Science (CIAS), China; Central University of Finance and Economics, China; and the University of Manitoba, Canada.

Each year the conference continues to grow and gain traction, and the 2014 program included participation from approximately 140 registrants, with representation from roughly 50 percent academics and 50 percent industry and government personnel, from a record 22 countries! With six featured keynote speakers, 25 panel discussants, and 41 research presentations, participants found the presentations motivating, innovative, and in some cases provocative! The incredible representation demonstrated the necessity and timeliness of the discussions and goodwill of the participants.

The opening ceremony heard remarks by the IARFIC co-host, Lysa Porth, Assistant Professor and Guy Carpenter Professor in Agricultural Risk Management and Insurance, Warren Centre for Actuarial Studies and Research, University of Manitoba, Canada, followed by a welcome address by Junsheng Li, Deputy President, Central University of Finance and Economics, Beijing, China. A very sincere and stimulating presentation followed from Amer Ahmed, Chief Executive Officer, Allianz Re, Munich, Germany. Ralph Bone, Executive Vice President, Global Agricultural Leader from Guy Carpenter & Company, Minnesota, USA, also gave welcoming remarks. Next, we heard from Michael Kortenbusch, Managing Director, Business and Finance Consulting, Zurich, Switzerland, who gave presentation on “Financing farmers in Georgia and Turkey: innovating credit delivery.”

The opening ceremony continued with rich and dynamic presentations in the auditorium. Our first keynote presentation was by Marco Ferrnoni, Executive Director, Syngenta Foundation for Sustainable Development, who gave a fascinating talk on “The role of index insurance in agricultural risk management.” Immediately following, we heard from Raushan Bokusheva, Senior Researcher and Lecturer, Department of Agricultural Economics, ETH Zurich, with an informative presentation on “Weather-based insurance market development: challenges and potential solutions.”

After a brief Networking and Refreshments Break, sponsored by Guy Carpenter & Company, the morning continued with keynote, Ines Kapphan, Product Manager, The Climate Corporation, San Francisco, USA. Transitioning from her keynote was the first plenary session on “Innovations in index-based insurance,” which was moderated by Joshua Woodard, Assistant Professor of Agribusiness and Finance, Zaitz Family Sesquicentennial Faculty Fellow, David R. Atkinson Center for a Sustainable Future Faculty Fellow, Dyson School of Applied Economics and Management, Cornell University, USA. The use of index-based insurance, as distinct from traditional insurance products, is relatively new but has grown in recent years. Much of this growth can be attributed to the many benefits of index-based insurance, including transparency, no on-farm los adjustment, lack of adverse selection and moral hazard, low operational and transaction costs, rapid payouts, etc. However, there are a number of major hurdles that must be solved in order for index-based products to become more widespread and to move beyond the pilot stage in some countries. For example, basis risk is still a major constraint, and other difficulties include the technical requirements and expertise regarding design, triggers, limits, data, rating, agro-meteorology, etc. Our six panelists discussed some of the innovations in index-based insurance from their own perspectives. The panelists included Marie-Christine Bélanger, Analyst in Agricultural Risk Management, FADQDI, Quebec, Canada; Barry Goodwin, William Neal Reynolds Distinguished Professor, Department of Economics and Agricultural and Resource Economics, North Carolina State University, USA; Ines Kapphan, Product Manager, The Climate Corporation, San Francisco, USA; Josh Ling, Microinsurance Actuary, Mercy Corps and MiCRO, Medellin, Colombia.; Navin Sharma, Vice President �" Health and Weather, ICICI-Lombard, India; and Olga Speckhardt, Head of Global Insurance Solutions, Syngenta Foundation for Sustainable Agriculture, Switzerland.

Following lunch was Breakout Sessions I and II, with a total of 21 research presentations. The first day concluded with keynote Bob Burden, Consulting Manager, Serecon, who gave a thought-provoking presentation on “The role of non-traditional metrics in risk modelling.” The second plenary session followed on “Risk modelling and pricing in agricultural insurance,” moderated by Ken Seng Tan, University Research Chair Professor, University of Waterloo, Canada, and IARFIC Co-chair. A sound and scientific agricultural ratemaking approach is essential for maintaining a sustainable and viable risk management solution for farmers, governments, insurers, and reinsurers alike. In the rate-making process, the goal of the underwriter or actuary is to determine the fair risk charge, often through the use of available historical observations. However, agricultural insurance can be quite difficult to price due to unique challenges, including availability and quality of data, spatial correlation, etc. Therefore, the aim of this panel was to discuss some of the challenges in pricing and modeling agricultural risks, as well as present recent developments in this area to achieve an improved scientific framework and possible consistency over time. Discussants included, Milton Boyd, Professor, Department of Agribusiness and Agricultural Economics, University of Manitoba, Manitoba, Canada; Bob Burden, Consulting Manager, Serecon, Alberta, Canada; James Long, AVP Corporate Risk, Head of Agriculture Analytics, Renaissance Re, Bermuda; Misha Novakovic, Senior Structured Risk and Agricultural Underwriter, Catlin Insurance Company, Hamilton, Bermuda; Fanny Rosset, Agriculture Underwriter, SCOR Global P&C Specialty Lines, Zurich, Switzerland; and Petra Winter, Dr med vet, Underwriter and AVP, Department for Agriculture Risks, Swiss Re, Zurich, Switzerland. The night concluded with a Pre-Dinner Reception and Gala Dinner at Haus zum Rüden, Limmatquai, sponsored by Allianz Group.

The second day of the conference began with Breakout Session III, which included 11 research presentations. After a networking and refreshments break, we heard from keynote Scott Pellow, Chief, Business Risk Management Policy, Strategic Policy Branch, Agriculture and Agri-Food Canada, who gave a thorough overview of the “Canadian business risk management policy evolution and opportunities for insurance tools.” Our next keynote was Barry Goodwin, William Neal Reynolds Distinguished Professor, Department of Economics and Agricultural and Resource Economics, North Carolina State University, who gave a comprehensive presentation “On modelling dependence.” This helped set the framework for our third plenary session, “Government policy: public-private partnerships,” which was moderated by Keith Coble, W.L. Giles distinguished professor of agricultural economics, Mississippi State University, Mississippi, USA. There are a number of market impediments to the commercial development of agricultural insurance products, such as systemic risk, limited infrastructure, market failure, ad hoc disaster payments, etc. As complexity and costs increase, neither the public nor private sector can meet the challenges alone. The objective of this session was to discuss the importance of public-private partnerships, as well as the role of each, in order to establish a healthy and sustainable policy-driven agricultural insurance scheme. The discussants included, Michael Anthony, Head of Emerging Markets Development, Allianz Re, Zurich, Switzerland; Bart Fischer, House Agriculture Committee, Washington, DC, USA; Mark Hagen, Managing Director, Guy Carpenter, Minnesota, USA; Daniel F. Miguez, Economist, Ministry of Agriculture, Argentina; Bruce Stephen, Director, Agri-Risk Initiatives, Agriculture and Agri-Food Canada, Ottawa, Canada; Marc Tueller, Head of Agriculture, Qatar-Re, Zurich, Switzerland; Qiao Zhang, Professor and Director of Agricultural Information Institute, Chinese Academy of Agricultural Science, Beijing, China.

After lunch, we had our final Breakout Session IV, which include nine research presentations. Our last keynote was Michael Carter, Department of Agricultural & Resource Economics, University of California, Davis, who gave a fascinating talk on “Emerging insights from behavioural economics for the design of agricultural index insurance in developing countries.” This served as an excellent lead-in to our final plenary session on “Agricultural finance,” which was moderated by Calum Turvey, W.I. Myers Professor of Agricultural Finance, Charles H. Dyson School of Applied Economics and Management, Cornell University, New York, USA. Agriculture is a major source of livelihood throughout the world, especially for the majority of poor people living in rural areas in developing countries. A key challenge for many of these farmers is access to finance. Lack of access to finance is a main impairment to farmers in improving the efficiency of their production and adopting better technologies. The discussants included, Esther Boere, PhD Candidate, Wageningen University, the Netherlands; Michael Carter, Professor, Department of Agricultural & Resource Economics, University of California, Davis, USA; Thomas Heintz, Global Head of Agriculture, Allianz Re, Zurich, Switzerland; Michael Kortenbusch, Managing Director, Business and Finance Consulting, Zurich, Switzerland; Don Preusser, President, John Deere Insurance Company, Iowa, USA; and Ron Weber, Sector Economist, KfW Development Bank and Georg-August-Universität Göttingen, Germany. The conference concluded with a closing ceremony, and announcement of the fourth annual IARFIC venue, which will be held in Washington, DC, USA, June 7-9, 2015!

As the Guest Editors of this Special Issue of Agricultural Finance Review, and co-Chairs of the Third Annual IARFIC, we are thrilled to feature ten papers presented at the IAFRIC conference in Zurich, covering a range of important issues dealing with agricultural finance and risk management.

Michael Carter’s (keynote) paper, co-authored with Ghada Elabed (Mathematica Policy Research) and Elena Serfilippi (University of Namur, Belgium) on Behavioral Economic Insights summarizes results from two west African field experiments with cotton farmers. They note that not all farmers follow the expected utility theorem when it comes to insurance decisions and are particularly sensitive to basis risk and uncertainty about payments. The conclusions suggest that insurers might see greater uptake in in index-type insurance products if they take into account lessons from behavioral economics.

Barry Goodwin’s (North Carolina State University) paper challenges the design of crop revenue insurance. These challenges include the multivariate nature of risks, technological changes to agricultural production, and volatile market prices. In addition some dependencies may not be as obvious, as the “natural hedge” between prices and yields. In addition to these dynamics in production, markets and revenues so too does government policy change with respect to revenue insurance, that challenges researchers to adopt new approaches to replace the difficult-to-follow standard actuarial practices.

Ron Weber Wilm Fecke, Imke Möller, and Oliver Musshoff (KfW Development Bank and Georg-August-Universität Göttingen) examine meso-level weather index insurance with an application to cotton yield and rainfall risk in Tajikistan. Much of the emphasis on weather risk has been to initiate insurance products at the farm level, however, there is a growing interest is using index insurance at the meso-level, that is at the banking industry level with spillover-benefits to farmers and credit supply.

In a similar fashion the paper by Sun, Turvey and Jarrow (Cornell University) examines the use of CAT bonds to substitute for sovereign debt in small agrarian economies where catastrophes can have significant covariate effects on agriculture. Whereas Weber and his colleagues examine meso-level insurance, Sun et al. examine macro-level insurance. They develop a dual-tranche CAT bond to immunize agricultural losses from failure in Kenya’s long and/or short rains.

Exploring further the application of financial engineering techniques to problems in agricultural economics Hirbod Assa (University of Liverpool) provides some important insights into the theory of storage and agricultural prices. Using a blend of theory and modern techniques in financial engineering, Assa’s crafts a dynamic equilibrium of commodity demand and then extends this to the pricing of agricultural derivatives, reviewing the Feynman-Kac theorem along the way.

Roberto Bacchini (University of San Andres) and Daniel Miguez (University of Buenos Aires) investigate the use of NDVI (Normalized Difference Vegetation Index) to insure pasture lands for livestock in Argentina. NDVI and remote sensing in agricultural insurance is of great interest. Bacchini and Miguez build on this literature and advance a technique to insure animal livestock insurance.

In a theoretical paper, Maria Osipenko, Zhiwei Shen, and Martin Odening (Humbodlt University, Germany) investigate whether producers would have a preference for a series of individual insurance contracts or a multiple year contract. Using US data they conclude that single and multi-year contracts can co-exist with a positive substitution of single year contracts for multiple year contracts. Importantly, Osipenko et al. argue that the demand for multiple-year insurance contracts is not necessarily based on a time diversification argument, but on the willingness to pay a margin for constant insurance premiums.

Also considering insurance based on weather, Jia Lin, Milton Boyd, Jeffrey Pai, Lysa Porth (University of Manitoba) with Qiao Zhang and Ke Wang (Chinese Academy of Agricultural Sciences) investigate willingness to purchase weather insurance in Hainan Province, China. Agricultural insurance in China is important but underdeveloped from a technical point of view, largely because it lacks historical data at the farm level. Weather insurance is therefore of great interest. Surveying 134 farmers they find that weather insurance might provide a lower cost alternative to conventional crop insurance but basis risk is significant and problematic. They also find that many farmer’s tepid response to weather insurance was because it was not understood and to encourage farmers to adopt agriculture insurance substantial subsidies might be required.

Agricultural finance and risk scholars are also very much interested in markets and how markets move. In “$25 spring wheat was a bubble, right?” Xiaoli Etienne (West Virginia University) with Scott Irwin and Philip Garcia (University of Illinois) investigate an aberration in the price of spring wheat in 2007-2008 was a speculative bubble. Their analysis shows that just because a price series looks like a bubble does not necessarily mean that it is a bubble. Their analysis does rule out the existence of small bubbles here and there, but does conclude that the bubble-like price movements observed in wheat was more likely due to fundamentals.

Finally, an overlooked area of agricultural finance and risk is in the development of human resources. In his paper “Human resource risk and succession planning”, Edward Staehr (Cornell University) argues that succession planning is a critical risk strategy. Staehr provides an overview of the development of university extension programs in New York State to help farmers develop succession plans and argues that agricultural extension programs should consider farm transitions. To bolster this case Staehr illustrates how university-based extension programs such as Cornell’s NY FarmNet initiative has provided conflict resolution services for farmers.

In closing, we would like to extend our thanks to the research presenters, panel discussants, and all of our attendees. We would also like to thank the Local Organizing Committee, including Milton Boyd, Professor, Department of Agribusiness and Agricultural Economics, Faculty of Agriculture and Food Sciences, University of Manitoba, Canada; Jean Webster, Administration Officer, WatRISQ, University of Waterloo, Waterloo, Canada; Jelena Ciric, PA to Global Head of Agriculutre and Operational Support, Allianz Re, Zurich, Switzerland; and Beat Krauer, Senior Underwriter-Agriculture, Allianz Re, Zurich, Switzerland. In addition, thank you to the IARFIC Scientific Committee, including Milton Boyd, University of Manitoba, Canada; Keith Coble, Mississippi State University, USA; Xiaolin Li, Central University of Finance and Economics, China; Lysa Porth, University of Manitoba, Canada; Ken Seng Tan, University of Waterloo, Canada; Harry Tuo, Capital University of Economics and Business, China; Calum Turvey, Cornell University, USA; Holly Wang, Purdue University, USA; Joshua Woodard, Cornell University, USA; Qiao Zhang, Chinese Academy of Agricultural Science, China; and Xianhua Zhou, Central University of Finance and Economics, China.

A distinctive thank you to Allianz Re for the exceptional conference venue, which was held at the new Allianz Suisse Headquarters. Allianz Group is one of the strongest financial communities in the world with a premium income of more than 106 billion euros in 2012. Allianz Re as the Group's Reinsurer is an active and contributing part of this community. Within Agriculture, Allianz Group writes the subclasses crop, forestry, livestock, aquaculture and bloodstock in three main insurance product groups: indemnity-based, index-based and crop revenue products. Thank you to Guy Carpenter & Company for their strong and continued sponsorship of IARFIC. Guy Carpenter’s Agriculture Specialty practice develops comprehensive reinsurance solutions for agriculture risks worldwide, helping clients quantify exposures and manage portfolios for profitability. The Agriculture specialty is also actively involved in collaborating with academic institutions to develop innovative and efficient risk transfer tools for the farming community worldwide.

Again, we would like to thank all IARFIC participants and especially those contributing to this Special Issue of Agricultural Finance Review. For more information please visit: www.iarfic.org

Assistant Professor Lysa Porth

Warren Centre for Actuarial Studies and Research, University of Manitoba, Winnipeg, Canada, and

Professor ßKen Seng Tan

University of Waterloo, Waterloo, Canada