2022 French reform of the crop insurance and the tools for managing climatic risks in agriculture

Underpinning research

Two academic contributions in the crop insurance and climate risk management domains have led to the recommendations made by the Pr Guillaume Bagnarosa to the French Senate.

First, Pr Guillaume Bagnarosa’s research focus was on the development of a quantitative model designed to gauge and mitigate basis risk inherent in existing index-based crop insurance contracts. This model originated from collaborative efforts with the Roullier Group, a prominent fertilizer producer in France with an annual revenue of 4.1 billion euros. The primary aim of this model was to effectively represent the climate exposure of the industrial group, particularly concerning the provision of short to mid-term loans to collaborating farmers.

In their publication in the North American Actuarial Journal, Pr Guillaume Bagnarosa and his co-authors extended this credit risk model to crop insurances and conducted a comprehensive case study assessing the risk transfer efficiency of an insurance framework utilizing their model. The study compared the latter model with alternative state-of-the-art approaches commonly employed in the industry. The authors posit that their proposed framework will increasingly gain relevance among practitioners, particularly in light of advancements in sensing technology within the agricultural domain. The contemporary ability to gather precise weather information at the farm level enhances insurers’ capacity to adopt models akin to those introduced in this research.

Refine spatial pooling techniques

This technological progression enables insurers to refine spatial pooling techniques, thereby tailoring yield index-based insurance policies to local weather conditions and specific attributes of the insured farming industry, such as land use distributions. This adaptive approach serves to mitigate farm weather risk, minimize local basis risk, and circumvent the moral hazard associated with other conventional insurance contracts which could consequently facilitate the distribution of insurance products to farmers.

The second noteworthy academic contribution pertains to the Samaritan’s Dilemma, a concept explored by Professor Guillaume Bagnarosa and his co-authors within the crop insurance sector.

Farm incomes are inherently susceptible to various risks, and effective management is imperative to facilitate strategic investments for enhanced competitiveness. Simultaneously, policymakers intervene to assist farmers in the face of natural disasters or market crises. The economic theory, however, does not offer definitive guidance on the optimal level of financial aid. Notwithstanding good intentions, the literature on the Samaritan’s Dilemma highlights the potential counterproductivity of such benevolent interventions for the recipients. Guillaume Bagnarosa and his co-author demonstrate that in the context of France, expedited ex-post compensations are readily extended to farmers facing hardships, these measures exhibit a tendency to undermine ex-ante instruments such as crop insurance which inadvertently contribute to the perpetuation of crises. These post-factum interventions, while well-intentioned, risk exacerbating the incompleteness of insurance markets, displacing ex-ante instruments. The authors thus assert that the state’s intervention triggers should thus be clearly described to avoid any grey zone regarding the government financial support in case of natural disasters which would thus avoid cannibalizing the available private insurance products.

References to the research

Academic references :

1. Crop insurance spatio temporal modelling: A Dynamic Stochastic Integrated Climate–Economic Spatiotemporal Model for Agricultural Insurance Products
2. Farm incomes shocks and the Samaritan’ dilemma: Samaritan Dilemma (sfer.asso.fr)

Guillaume Bagnarosa’s official invitation to present his research before the French senate: Groupe de travail “Assurance récolte” | Sénat (senat.fr)

News Papers citing Guillaume Bagnarosa’s research on crop insurances: Agriculture – Savoir se protéger des risques climatiques (ouest-france.fr) – Ouest France September 2019.

« Moins d’un tiers des agriculteurs sont assurés contre les aléas météorologiques » (lemonde.fr). Le monde – May 2021

L’agriculture de demain dans un champ de data | Les Echos – Les Echos – November 2021

Réchauffement climatique. Les aides de l’État suffiront-elles aux agriculteurs ? (ouest-france.fr). Ouest France – Février 2022

Details of the impact

As part of his research on crop insurance, Guillaume Bagnarosa was contacted by the French Senate, in particular Senator Laurent Duplomb, to provide recommendations for promoting the development of crop insurance in France. Based on the two pieces of work previously described the recommendations he made to the French senators were the following (see the slides 7 and 8 of Guillaume Bagnarosa’s presentation before the French Senate):

1. Clarify the conditions for exceptional interventions, in particular to avoid competition with index insurance.
2. Insurance premium and trigger threshold are too high
3. 3 bet years average (also named “Olympic average”) is not sufficient to effectively estimate yield losses
4. Offer to the farmer the choice between MRC and low-cost index insurance (faster, cheaper, limited basis risk) + Strong incentive to hedge through private insurance product

Following Guillaume Bagnarosa’s presentation on January 28, 2020, before the Senate’s Economic Affairs Committee (see the link Groupe de travail “Assurance récolte” | Sénat (senat.fr)), the senators issued a report that retained certain recommendations made by the RSB’s professor, and which was subsequently retained by the deputies of the French National Assembly for the final text of the crop insurance law reform.

Here’s the link to the Senate website (Assurance récolte agricole : Sénat (senat.fr)), which states that Mr. Duplomb’s recommendations (following Guillaume Bagnarosa’s four recommendations) to the deputies will be retained in the final text:

“…the senators also convinced the deputies to guarantee the application of the most advantageous deductible and insurance premium subsidy rates allowed by European law, respectively 20% and 70% (related to Guillaume Bagnarosa’s point 2), while obtaining that the State will intervene from 30% of losses for the least insured sectors such as meadows, and that it will make the system more transparent through multi-year public intervention rates (this is Guillaume Bagnarosa’s point 1).

 Incentives for prevention through a reduction in the insurance premium (related to Guillaume Bagnarosa’s point 2), revision of the minimum surface areas to be covered in contracts, preservation of the right to contest loss assessments, including through an index-based system (this is Guillaume Bagnarosa’s point 4), thoughts on reforming the Olympic average (this is Guillaume Bagnarosa’s point 3): all these points defended by the Senate rapporteur Laurent Duplomb are included in the final text.”

This final text the French Senate website is referring to is the following law promulgated on March 2, 2022, related to the reform of agricultural climate risk management tools.

La réforme de l’assurance récolte | Ministère de l’Agriculture et de la Souveraineté alimentaire
This law retains the points proposed by the Senate in connection with what Pr Guillaume Bagnarosa presented in 2020 to the Senate Economic Affairs Committee.
The extent of the impact on the French agriculture is substantial as mentioned in the same website publication of the French senate:
“The text resulting from the work of the joint committee on the draft law to improve the distribution of crop insurance in agriculture and to reform the tools for managing climatic risks in agriculture, which reached agreement on Wednesday February 16, finally proposes an ambitious direction for crop insurance in agriculture, incorporating the many contributions proposed by the senators.”
Regarding the societal impact of the reform.
Prior to this reform, the system had been based since the 1960s on the natural disaster scheme, in which insurers played only a minor role. This system did not provide fair and uniform coverage for all the farmers, and some were even excluded from climate protection. Furthermore, the lack of clarity in the old system prevented a balance between insurance premiums and farmers’ needs. With this reform, all farmers will have access to climate protection, the conditions of which will be clearly pre-established and supported by the insurance companies. The agricultural sector being extremely sensitive to climate change, this reform will help reduce inequalities among French citizens with regard to climate risk (SDG 10). The impact of this reform will also help French agriculture adapt to climate change, while providing farmers with important information about the cost of climate risk protection. This cost will ultimately have an incentive effect on the French farmers’ choice of crop rotation and investment decision for more resilient production systems which will ultimately contribute to the European food security and autonomy (SDG 2 and SDG 13).

Sources to corroborate the impact

Guillaume Bagnarosa’s Invitation from the French Senate: Groupe de travail “Assurance récolte” | Sénat (senat.fr)

A power point presentation used by Pr Guillaume Bagnarosa during the Senate’s interview.
Senate website: Assurance récolte agricole : Sénat (senat.fr)
News Papers citing Guillaume Bagnarosa’s research on crop insurances:

• Agriculture – Savoir se protéger des risques climatiques (ouest-france.fr) – ouest France September 2019.
• « Moins d’un tiers des agriculteurs sont assurés contre les aléas météorologiques » (lemonde.fr). Le monde – May 2021
• L’agriculture de demain dans un champ de data | Les Echos – Les Echos – November 2021
• Réchauffement climatique. Les aides de l’État suffiront-elles aux agriculteurs ? (ouest-france.fr). Ouest France – Février 2022

Period when the impact occurred: 2020-2022
Research Centre: Agribusiness
Dr Guillaume Bagnarosa, Associate professor and director of the Agribusiness research centre, Rennes School of Business