BRUSSELS/NEW YORK – Over the last five years, a sharp rise in food prices has highlighted the global food system’s vulnerability to supply shocks – and reminded the world how tenuous is the food security of millions of people. Unexpected events, such as flooding and drought, can have dire consequences: sharp drops in rural incomes, surging food bills, and severe food shortages.
The need to protect vital assets from the negative effects of unexpected events has driven the development of sophisticated insurance markets around the world. In the developed world, privately insured assets include footballers’ legs and tennis players’ arms. Where the potential pay-out is too big for a single private insurer to bear, reinsurers take over a portion of their risk for a given premium. Insurance has often also become a public responsibility in developed countries: the taxpayer cedes a portion of his income, in return for which the state may provide unemployment benefits, health care, and other essential services.
In contrast, nearly 80% of the world’s poor do not have access to any social protection to shield them from the effects of unemployment, illness, or disability – not to mention crop failure or soaring food costs. If a crisis hits, they must resort to drastic measures, such as removing their children from school to save money, or selling the assets that they use to generate income, such as land or livestock, thus jeopardizing their ability to cope with future shocks. Often, their only “retirement plan” is to have more children.
In many developing countries – especially small countries in which a large portion of the population is susceptible to the same risks – governments may be understandably reluctant to insure their citizens. If a single event affects a significant portion of the population, not only will demand for social support grow too rapidly for the government to absorb, but the shock may decrease government revenues at the same time by, for example, lowering tax or export revenues.