AgriRisk - system to measure and price agricultural risks

Abstract

Agribusiness in Brazil accounts for approximately 25% of GDP and accounts for almost half of the financial exported volume. Despite the high representativeness, the agribusiness production chain represented by the agriculture and livestock has several risks that make the sector's income stability extremely difficult. According to the report by the World Bank and Embrapa, called "Agricultural Risk Management in Brazil: Pathways to an Integrated Vision", launched in 2015, among a multiplicity of risks faced by the sector, the one that presents the greatest criticality is the occurrence of drought . Among the various risk management programs, the Crop Insurance Premium Subsidy Program (PSR) is the most important, as increasing budget volumes are allocated to increase rural insurance among rural producers. In 2019, the budget was R $ 380 million. In 2020, a budget of R $ 1 billion is foreseen and for 2021, the government estimates a value of R $ 1.5 billion. The PSR is operated by the private insurance market through brokers, insurers and reinsurers. Despite gaining increasing importance in the Government, the private market has obstacles that hinder the spread of rural insurance. One of the main ones is the absence of statistical data on agricultural yield at "intra-municipal" spatial level. The insurance market needs data in sufficient quantity and quality to carry out the correct measurement and classification of risks (underwriting), their pricing and the development of products in line with the needs of producers. The main source of data used by the insurance market today is based on the municipality yield estimates of the Brazilian Institute of Geography and Statistics (IBGE). However, these data have certain characteristics that hinder their use by the insurance market. The methodological basis is purely subjective, often leading to inaccuracies in calculations, especially in the agricultural frontiers regions located in the Northeast and North of the country. Another point that deserves attention is the spatial scale. The data are used at municipality level and rural insurance is provided at the farm level. Visibly, this fact may lead to under or overestimation of local risk, leading to inaccurate calculation of the premium rates and inadequate coverage. This is one of the main sources of complaints from rural producers. The proposed solution aims to overcome scientific and operational challenges, by making an estimate of agricultural productivity in a regular grid of 2 x 2 km2 throughout the national territory. The expected result is to provide the insurance market with reliable historical series of agricultural productivity, at an appropriate level of spatial detail, so that insurance companies can perform premium rate calculations much more precisely, substantially improve the underwriting process and create products more adherent to rural producers. On the Government side, the expectation is for greater efficiency in public spending within the scope of the PSR, insofar as there will be an adjustment in insurance rates and products more in line with the sector's needs. (AU)