Munich Re licenses AIR Worldwide’s crop insurance models for U.S., China

Munich Re has licensed AIR Worldwide’s Multiple Peril Crop Insurance (MPCI) Models for the United States and China in a bid to enhance the reinsurer’s risk management capabilities for its catastrophe-exposed agricultural treaties.

The updated weather-based models, which were released Tuesday, estimate underwriting gains and losses based on crop yield probabilities in the context of current conditions, notes a statement from AIR Worldwide.

The MPCI Model for the U.S., the first version of which was released in 2007, accounts for the latest Standard Reinsurance Agreement released by the U.S. government to estimate retained losses for the crop insurer, while the model for China, introduced in 2011, now includes the latest policy conditions used in the market and an updated database of industry exposure. The latter accommodates China’s complex policy conditions, which vary by crop type, peril and province.

In a bid to provide the most accurate probabilistic estimate of potential crop portfolio losses, the models “account for the effects of weather, technology improvements over time, changes in policy types and their market penetration, and changes in government protection agreements,” Dr. Oscar Vergara, business development manager at AIR Worldwide.

“The risk associated with agricultural insurance portfolios is extremely complex, which makes them challenging for insurance and reinsurance carriers participating in the U.S. MPCI program,” Lambert Muhr, senior underwriter for agricultural risks at Munich Re, says in the statement.

Noting that the models offer the ability to analyze the sensitivity of agricultural portfolios to different yield and price volatility scenarios, “that represents a major advantage given the recent changes in overall premiums, premium rates and other uncertainties affecting this market,” Muhr continues.

The model for China offers a fully probabilistic approach for determining the likelihood of losses to the country’s major crops of corn, cotton, rapeseed, rice, soybeans and wheat.

Weather is the predominant driver of agricultural losses in China, notes Karl Murr, Munich Re’s head of agriculture. “The model provides a holistic view of our risk and will be a central part of our China agricultural portfolio risk assessment process,” Murr adds.

Other updates in the U.S. model include multiple price volatility catalogues, the ability for the model user to modify industry premiums by adjusting default values as the U.S. government changes premium rates of key program crops, and the historical event catalogues now cover all years from 1974 through 2011.

A prognostic discussion of long-lead seasonal outlooks issued March 21 by the National Oceanic and Atmospheric Administration in the U.S. notes that “the precipitation outlook for (April, May and June) 2013 indicates elevated chances for below median accumulated precipitation for sections of western and southern (Continental U.S.).”

In 2012, the U.S. Corn Belt experienced its hottest and driest period since 1936, A.M. Best noted in a report released December 28, 2012. The report estimated gross underwriting losses, as of the third quarter of 2012, would be about U.S. $15.5 billion for firms offering multiple peril crop insurance in the U.S.

In February, Saskatchewan Crop Insurance Corp. (SCIC), a provincial Crown corporation, announced it was purchasing private reinsurance in 2013. “For the first time ever, private reinsurance will be purchased for the Crop Insurance Program to stabilize premiums, which will help protect producers in the event of a large claim year,” SCIC notes in a statement.

In March, the Saskatchewan government set out $198.3 million for crop insurance in its 2013-2014 budget, the largest amount set aside in the program’s history.