Agricultural re/insurance in Vietnam
18 Jan 2013
Despite its recent industrialisation, around a fifth of Vietnamese economic output is within the agricultural sector. It is a major export earner for the country. Vietnam is the second largest global exporter of paddy rice, the second largest exporter of coffee and the largest aquaculture exporter. The country is exposed to natural hazards which can severely hamper agricultural production. Re/insurance products can provide cover under such conditions, helping smooth earnings and strengthening agricultural resilience.
Vietnam is the second largest global exporter of paddy rice. Production is concentrated in the Mekong Delta (south) and the Red River Delta (north). A total of 12 provinces constitute the Mekong Delta, popularly known as the "rice bowl" of Vietnam. It is where approximately 17 million people live, 80% of who are engaged in rice cultivation. The delta produces about 20 million tons, roughly half of the country's total production. The rice bowl is crucial to the food security of the population, which receives 75% of their daily calories from rice. In fact, rice is a staple in the diet of nearly 50% of the world's population of 6.7 billion people.
Rice production has grown over time. The land area for rice production has increased and yields have risen due to the introduction of hybrid rice varieties, more efficient irrigation and a higher quality of input supplies. Vietnam now has one of the highest yields in Asia and will soon reach yield levels of 6 tons per hectare, which is comparable to China, the country with the highest yields in the region.
Farmers in the Mekong Delta often grow rice twice per year. However, in recent years, they have also grown a third or fourth season rice crop. Despite being protected by a dyke system, this additional crop is prone to early flood. Nevertheless, the damage is small compared with the total additional production gained.
Natural disasters in Vietnam
Vietnam is one of the world’s most exposed countries to multiple natural disasters, including tropical cyclones (typhoons), tornadoes, landslides and droughts. An estimated 59% of its total land area and 71% of its population are prone to cyclones and floods.
Vietnam experiences multiple typhoon landfalls in any given year. The tropical cyclone season lasts from May to December with storms hitting the northern region in May, before gradually moving south to affect southern Vietnam in November.
Figure 1: Vietnam's main hazards by region
During the monsoon rainy season, Vietnam is highly exposed to a combination of river plain flooding, flash floods and associated landslides. River plain flooding is the major problem in the low-lying southern Mekong region and in the northern Red River Basin. Vietnam has a dense river system (2,372 rivers comprising 13 large river systems) that is prone to flooding in the summer rainy season.
While Vietnam does receive large amounts of average rainfall, moderate and severe droughts occur across the country, albeit with diverging frequency. They are more common and more severe in the North-eastern part of the country and the Red River Delta, but have also been reported in the Mekong Delta in the South, despite widespread irrigation.
Agricultural insurance in Vietnam
The government of Vietnam has been investing large amounts of funds in improving agricultural production, including irrigation, pest and disease control, dyke strengthening, farmer support and training. Disaster relief programs have been put in place in case a disaster strikes.
As a further ex-ante risk management measure, the government decided in 2011 to implement an agriculture insurance scheme starting with a pilot programme during the period 2011-2013. After the completion of the three year pilot scheme, the intention of the government is to roll out the scheme nationwide. A decision on the nationwide rollout will be taken during spring 2013.
The programme provides cover for rice, livestock and aquaculture farming against storm, flood, drought, cold, frost, tsunami and other perils. It also provides cover against named pests and diseases and epidemics specific to rice, livestock and aquaculture. During the pilot, the programme is being implemented in 20 provinces throughout Vietnam. The rice insurance scheme is index based, the livestock and aquaculture schemes are indemnity based. In 2012, around 60% of the premium written originated from aquaculture risks.
The government provides premium subsidies for farmer households as follows: (i) poor households – 100% of total premium; (ii) near poor – 80% of gross premium; (iii) other households outside these two categories – 60% of gross premium; and (iv) big farms and businesses – 20% of gross premium.
The Ministry of Finance (MOF) and the Ministry of Agriculture and Rural Development (MARD) provide guidance and support for the programme implementation. MARD defines farming procedures, best practice and plans. It also steers agriculture production, announces outbreak and termination of diseases and epidemics, orders vaccinations of livestock and outlines measures to apply in case of diseases and epidemics.
The Vietnam National Reinsurance Corporation, Vina Re, and Vietnam’s two largest insurers, Bao Viet and Bao Minh were appointed by the Ministry of Finance to participate in the design and implementation of the pilot programme.
Swiss Re was asked to provide technical support and reinsurance capacity. More specifically, Swiss Re contributed its experience in the field of agriculture insurance elsewhere in the world and provided actuarial services in calculating insurance premium rates.
The insurance distribution network
To reach a large number of small scale farmers in the most efficient way, the agricultural insurance scheme took advantage of Vietnam’s existing and well-functioning rural distribution network.
Farmers in each commune appointed one representative to interact with insurance companies on their behalf. This could be a senior person from the community, the commune head or the local head of the farmer’s union who is familiar with implementing micro scale programmes. The representative, whose appointment is endorsed by local authorities, receives all necessary support from local authorities. The representative acts in fact much the same way as an agent, but the difference is that he/she represents the farmers and gets better support from local authorities.
The representative in each commune signs up the farmers interested in the insurance programme. This individual records all insurance relevant information such as area planted per season for rice, number of livestock per type, the aquaculture area and volumes produced before issuing an insurance certificate to the farmer.
The insurance company issues the insurance policy to the representative, who is also responsible for collecting the insurance premium from the farmers and distributing claims payments. Without such support from local authorities, insurance companies cannot easily gain access to groups of farmers.
Source: Vina R
Advantages of index based insurance
Index-based insurance products, compared to conventional insurance products, offer a number of advantages, including transparency, low costs for administration/loss adjustment (following initial investment costs) and faster pay-out. Some of the other advantages include:
• Simpler information requirements: Because index insurance indemnity payments are not tied to actual losses incurred, there is no need to classify potential policyholders according to their risk exposure. In the case of index insurance, no farm-level information is needed. In turn, to calculate actuarially correct rates, high quality area yield statistics are required. The yield data series need to be at an appropriate geographical resolution and gathered by an independent organisation (which can be the government, as in Vietnam). It is difficult to construct an index insurance scheme where good data is not available.
• No loss adjustment: One of the significant challenges for traditional insurance products is the high cost of loss adjustment. Under a traditional insurance policy, the insurer has to determine whether each individual household has suffered an insured loss and, if so, the extent of the loss. This can be extremely costly, particularly in remote, rural areas. In the case of index insurance, there is no need to conduct household-level loss adjustment. Indemnities are based solely on the realisation of the underlying index relative to the pre-specified threshold. It also leaves room for interpretation about the level of loss and disputes are not uncommon.
• Reduction of moral hazard: Because the indemnity does not depend on the individual’s actual losses, the policyholder cannot change his or her behaviour to increase the likelihood of receiving a payment. However, the policyholder may claim that losses experienced are higher than the index suggests, creating acceptance problems within the scheme.
• Reduction of adverse selection: Index insurance is based on widely available information, which reduces the opportunity that informational asymmetries can be exploited or that the most risky individuals will be the primary purchasers of the insurance.
• Low administrative cost: Indemnity payments are based solely on the realized value of the underlying index as measured by government agencies or other third parties. Without the need for individual risk assessments or loss adjustment, the costs to the insurer can be significantly less, particularly for individuals with very small units, which in turn lead to lower premiums.
• Standardised and transparent structure: Index insurance contracts can have simple and uniform formats. Contracts do not need to be tailored to each policyholder and so, again, administrative costs are lower. Nonetheless, despite the transparency, initial investment is required in explaining and clarifying the scheme to participants.
• Reinsurance function: Since index insurance pays for large correlated losses, it can also be used to protect local insurers against large losses from correlated weather risks. The potential for large financial losses from correlated weather risk is an inhibiting factor to the development of insurance markets. Using index insurance as reinsurance - insurance on an insurance portfolio - would make it easier for local insurers to offer traditional farm-level agricultural insurance without the threat of large financial losses that could result from a natural disaster.
Current status of the partnership programme
The state-supported agricultural insurance programme has thus far proved a considerable success. As of September 2012, over 130,000 farm households had signed up to the programme, with total written premiums of USD 6.1 million. It is expected that the take up rate will increase in 2013 as more information campaigns come on stream; and that the benefits of insurance are witnessed by farmers at first hand. The insurers and reinsurers on the programme have undertaken field research and have found risk management very satisfactory.
Agricultural insurance schemes, such as that in Vietnam, can significantly contribute to rural resilience against the occasional and inevitable events that will periodically cause production to drop. Having a backstop against catastrophic losses allows farmers to invest in their farms with greater confidence; and lenders to provide capital for such investment. Effective agricultural insurance can be one significant pillar for governments to strengthen food security.
 Vietnam National Reinsurance Corporation (Vina Re), Background Information, Vietnam Agricultural Insurance Programme
 A household with monthly per capita income of USD 20 or below is classified as poor
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