<mark>associate between themselves. From a risk-financing perspective, Fondos pool crop yield risks from farmers with similar risk profiles. The concept of insurance through mutuality-type organizations was developed in Mexico based on a sound insurance market approach (including sound underwriting techniques, adequate financial reserves, loss adjustment procedures based and actuarially sound premium rates developed), while taking advantage of mutuality type organizational principles and a structure of incentives to keep transaction costs under control.</mark> <mark>The Fondos can not sell insurance to their members unless they have a proper reinsurance treaty negotiated before the beginning of any specific agricultural cycle of production. Since these organizations do not have capital to guarantee the solvency of the Fondos, they must buy enough reinsurance to guarantee that the members of the Fondo will receive the full amount of indemnity in the case of a peril (no default risk). The regulation requires that any reinsurance contract negotiated by the Fondos should be defined to absorb any exceeding indemnities after the financial reserves of the Fondos have been exhausted. Therefore, an unlimited stop loss reinsurance treaty is implicitly requested. Historically, the state-owned reinsurance company Agroasemex has offered to the Fondos this unlimited stop loss program. The Government supports also a training program to enhance the operations of the funds through Agroasemex. The training programs include technical aspects related to the underwriting and loss adjustment procedures, the development of new products, accounting, legal aspects, etc.</mark> _<mark>Source</mark>_ <mark>: Ibarra and Mahul (2004).</mark>

# **Box 2. Turkish Catastrophe Insurance Pool**

<mark>In the aftermath of the August 1999 Marmara earthquake, The Turkish Government with World Bank technical and financial support created the Turkish Catastrophe Insurance Pool (TCIP). The program operates as a catastrophic risk transfer and risk financing mechanism that limits the government’s financial exposure to future natural disasters by absorbing up to UD$ 1 billion from Turkish homeowners. Under the program, compulsory earthquake cover is introduced for all property-tax paying dwellings.</mark> <mark>The government aimed at creating a pool in which sufficient reserves could be accumulated over time, thus making Turkey less vulnerable to future earthquakes. The key objectives for the TCIP defined by the Government of Turkey were:</mark> <mark>- Ensure that all property tax paying domestic dwellings have earthquake insurance coverage;</mark> <mark>- Reduce government fiscal exposure to recurrent earthquake;</mark> <mark>- Transfer catastrophic risk to the international reinsurance market;</mark> <mark>- Encourage risk mitigation through the insurance mechanism.</mark> <mark>The World Bank provided the initial capitalization of the TCIP through a committed contingent loan facility of US$100 million, extended to US$180 million in 2004. Although the risk capital requirements of TCIP are much higher, they are funded through commercial reinsurance, in the amount of US$750 million, and the build-up of surplus. The disbursement of the World Bank facility would be triggered by occurrence of a loss, as evidenced by insurance claims from a major earthquake. The line of credit has now expired as the pool has now built up adequate internal reserves.</mark> <mark>The TCIP’s earthquake insurance is legally compulsory for many urban Turkish homeowners, although the compulsion is not well enforced. Local insurers act as distributors of the TCIP (they do not currently retain any fraction of TCIP’s earthquake risk), in exchange of a commission (1520% of written premium), and provide additional coverage in excess of that offered by the pool. Since its inception in 2000, the TCIP’s penetration ratio has averaged 17% but is now in excess of 20%.</mark> _<mark>Source</mark>_ <mark>: Gurenko et al. (2006)</mark> 8