Latam Briefing: Agricultural insurance in Colombia
Boosted by government incentives and the introduction of new products like parametric cover, agricultural insurance has posted solid growth in the past decade in Colombia, attracting new players into the market.
However, insurance penetration continues to be low among Colombian farm producers, which reflects both the potential of the market and the difficulties that insurers face to reach out to more clients.
According to Fasecolda, Colombia’s insurance association, around 237,000 hectares of farmland were covered by insurance in 2020, the highest number ever in the country.
It meant that more than 60 farming activities were protected by insurance, spreading to 26 regional departments and covering 28,000 farmers.
“While between 2016 and 2018, some 3,000 to 5,000 producers had insurance cover every year, in 2020 we reached 29,000,” says Paola Torres, the head of the Agriculture Commission at Fasecolda. “In other words, the number of producers with insurance increased by five, mostly thanks to small producers.”
In the past 13 years, Fasecolda stresses, 11.1 trillion pesos (USD 260 million) worth of agricultural production were protected by insurance products in the country. Data from Finagro, a government agency that provides subsidies to the purchase of agricultural insurance, says that between 2010 and 2020, the total insured area increased 6.7 times, and insured values almost fivefold.
The growth of the market is also illustrated by the growth in the number of underwriters working the segment. If in 2012 there were only players, now seven companies vie for the custom of rural producers: Mapfre, Seguros Bolívar, Previsora, Suramericana, Allianz, HDI, Axa, Pro Agro and SBS.
But there is still a long way to go to make sure that a substantive share of Colombia’s agricultural production is protected from the floods, windstorms and droughts that often cause severe damage in the country. Mauricio Quiroz Quiceno, the director of agricultural insurance at Suramericana, estimates that a mere 3% of the cultivated area is covered by insurance every year.
“This is a very important number. It shows that the growth potential of the market is huge,” he says.
Fasecolda puts the penetration numbers a tad higher, at 5.1% in the bump year of 2020, and 4.2% last year, when the insured area dropped a bit to 197,411 hectares. In fact, the 2021 drop highlights one of the main factors holding the development of agricultural insurance in Colombia: the instability of government support to the segment.
As in other countries where small farmers answer for the largest share of agricultural production, the purchase of insurance by Colombian producers is highly dependent on the level of subsidies provided by the government. Among small farmers, official help can amount to 80% of the premiums paid. The number reaches 60% for mid-sized producers, and 50% for the largest ones. There are extra incentives of 5% for young farmers, women and producers based in underdeveloped regions.
The amounts destined to subsidize agricultural insurance, however, has varied across the years according to the federal government’s budgetary constraints. Fasecolda estimated that, in the past 13 years, 443 billion pesos (USD 115.2mn) of incentives have been granted by the government. The amounts have been raised in recent years, but unevenly so.
“In recent years, we have seen a degree of instability regarding the subsidies for agricultural insurance,” says Quiroz. “In 2020, there was around 60bn pesos. Last year, some 37bn pesos. In 2022, around 40bn pesos. It has generated some instability in the market.”
On the other hand, market players have noticed that while in the past it was common for the subsidies to be superior to what was demanded by farmers, in recent years they have run out in the first six months of their availability. The stronger demand is partially explained by an effort made by insurers to explain to small farmers the benefits of having their crops and livestock protected against the vagaries of the weather, diseases, theft and other risks.
“More than 90% of Colombia’s agriculture production is generated by small and mid-sized farmers,” Quiroz points out. “Today the market is very much focussed on small producers. Last year, insurance coverage for small farmers increased by more than 300%. In 2019, it reached around 5 million small farmers. Last year, the number was over 23 million.”
“If ten years ago the focus was on big producers of palm oil or banana, now 50% of our resources are directed to small producers,” says Carlos Eduardo Ballen, the director of Affinity at HDI in Colombia. “In 2020, 6,000 small producers had HDI insurance, in 2021 the number rose to 22,000, and now the target is to reach 30,000.”
Tapping this large potential market, however, creates its own set of challenges. Insurers say, for instance, that the risk management culture outside of the large agribusiness facilities remain quite underdeveloped in the country.
“The main difficulty faced by the market today is a lack of understanding by farmers of risk management and transfer strategies,” Quiroz says. “We also still lack a specialized sales force for agricultural insurance. Agents that can go meet farmers and tell them how insurance works.”
Insurers hardly have the means to send representatives to every corner of the large, sometimes sparsely populated and often risky Colombian territory to sell a few policies to small farm holders. They are therefore looking at alternative distribution channels to expand their foothold in the segment.
“We look for strategic partners to promote the use of insurance in more massive way,” Ballen says.
This group includes large and state-owned banks that maintain financial inclusion programmes, agriculture-focused lenders, and microfinance outfits that focus on providing loans to small farm producers. He adds that HDI is also investing in technology to make it easier for both partners and clients to sign up to the policies offered by the company and settle any claims.
Another tool deployed by some underwriters is parametric insurance, which simplifies both the underwriting and claims settlement processes, while allowing an easier understanding of how insurance works.
According to Torres, the first parametric coverage was issued in Colombia back in 2018, with a focus on the production of coffee, one of the country’s main export staples.
“Currently we have three companies that offer parametric policies for different kinds of produce in the country, and one of them covers all agricultural activity, not only production,” she says.
HDI has offered parametric coverage for three years, Ballen points out. The policies cover both excess rain and prolonged droughts. If rain levels are higher than the index, policyholders get paid, no matter if their crops have been damaged.
“In Colombia, parametric agricultural insurance premiums have reached
USD 70mn, of which USD 35mn have been subsidised,” Ballen says.
Suramericana, for its part, is developing a pilot parametric project with an eye on the growth potential of this methodology.
“It is a niche that is likely to develop strongly and has high potential,” Quiroz says. He adds that the company has also launched a number of sustainable insurance products which, in addition to weather events, also include market risks, to protect farmers in cases where price variance is too wide.
Colombian insurers have similarly expanded their offer of covers to livestock producers, as the government’s incentives have been recently extended to a broader range of categories.
Suramericana covers 34,000 heads of cattle, and have broadened its offer of products to pisciculture, shrimp farming and poultry producers. HDI, in addition to cattle and pisciculture, also covers swine production.