Despite the challenges, agriculture continues to be a major part of the economy. The 2015-16 Agricultural Census by the Australian Bureau of Statistics places the gross value of Australian agricultural production at $56 billion from 85,681 farming businesses in the country.
Belinda Scott, Director, BJS Insurance Brokers Gippsland, explains that the Australian agricultural sector is drastically underinsured and, as a nation, we are behind in understanding the importance of this sector. In fact, John van der Vegt, Managing Director, AgriRisk Services, estimates total premium for crop insurance is $200 – $240 million depending on seasonal conditions and commodity prices.
Even though the crop insurance market is just a small part of the overall agriculture market, there is scope for brokers to play an important role.
The farming landscape
In the past few decades, the world has changed rapidly and the farming sector faces a plethora of risks but Aussie farmers are hardy.
Kylie Hull, Area Director for Dubbo at Arthur J. Gallagher, who has been working in the sector for years, believes that Australian farmers are some of the best farmers in the world and amazing
business people – inherently optimistic and resilient. But she says: “They are juggling many balls in the air at any one time – managing the effects of a changing Australian dollar, variable grain prices, rising costs of production and lack of good help with less family staying on farm – it is a risky business.”
She says, “Our farmers are not as protected and heavily subsidised like [those] in the rest of the world.” [See breakout].
Australia’s producers face one of the highest levels of yield variability in the world.
What can Australia learn from the US
What is MPCI and how can it help
Multi-peril crop insurance (MPCI) is one way famers can offset the risks of drought, frost, too much rain, among other things. But like big-screen TVs when they first came in, large premiums and low take-up rates continue to make this product unaffordable to many.
Mike Thomas, Branch Manager for Ballarat at Arthur J. Gallagher, explains that MPCI is now being spoken about as part of a risk management program but the policy in its current form is too expensive and restrictive to make it a viable option for the majority of farmers. If the industry is going to make this work long term it needs to utilise the knowledge of the farmers to develop a better product that provides a broader cover. He says, “The industry needs a multi-peril policy that we can offer to all farmers and not just for traditional broadacre farmers.”
Scott also agrees that the cost of the policy is prohibitive, “There is an industry perception among farmers that it is just too expensive. Consequently affordability remains key for most.”
Van der Vegt describes MPCI as the ‘holy grail’ for farmers and says that there has been significant activity in the Australian market specifically focusing on broadacre crops but the uptake has been low. He says, “Last year we estimate a total of 200 policies were underwritten in a marketplace of 22,000 growers. Clearly this low level of take up is unsustainable.”
The main reason for this low participation rate is the significant mismatch between the growers and insurers’ pricing expectations. This mismatch isn’t all caused by the insurers; farmers being notoriously optimistic and resilient, tend to underestimate the frequency and the severity of the poor seasons.
They have also become used to managing yield variability without insurance so to now be faced with a variety of different insurance products is confusing.
Van der Vegt explains, “If the season gets off to a good start they will forgo the insurance preferring to purchase the insurance when the seasonal outlook is poor. This anti-selection is a major issue for insurers as of course they want to collect premiums in both the good and bad seasons.”
With climate change likely to increase yield variability, this “anti-selection” issue will place increased pressure on premium rates which growers already believe are too high.
Our farmers are not as protected and heavily subsidised like the rest of the world.
Opportunity for brokers
IPART report on MPCI
With the inherent volatility, evolving technology and risks, many broking opportunities are emerging in the industry.
Scott explains, “There are many emerging areas for brokers such as: smart farming with advanced technologies, lifestyle farming which often involves million dollar homes on 100 acres, hobby farming and farm stays, as well as supporting industries such as agricultural contractors.”
Brokers also need to understand the unique situations faced by farmers to be able to play an important part in risk management. Scott explains that farmers are constantly under pressure to produce more from less, and to do so, their practices need to be continually evolving thus creating new risks and exposures for insurers.
Scott admits that, to an extent, the segment is advancing too rapidly for the insurance industry and brokers to keep up. She says, “Farming products have traditionally been underwritten similarly to retail products when they are actually often one of the most complex and diverse commercial risks on the market.”
The crop market in Australia can be broken down into two main components; the broadacre crop insurance market which provides fire and hail insurance offering to 22,000 cereal crop growers and the exotic crop insurance market that provides named peril type policies for cotton, viticulture, horticulture, plantation insurance etc.
Van der Vegt explains that the crop market doesn’t follow the same cycles as the property and casualty insurance market and is now hardening following significant broadacre and exotic crop losses over the last few years.
He says, “Primary producers are faced with significant production risks and natural perils that can impact on crop yield – in fact, Australia’s producers face one of the highest levels of yield variability in the world.”
Still Van der Vegt believes there are significant opportunities in the sector given the vast majority of horticultural fruit and vegetable crops are uninsured and remain exposed to a variety of natural perils. However, he says that this is impacted by the insurers, limited product range.
Scott reiterates that the broking role in this sector going forward is risk management. She says, “We need to ensure that risks are assessed and analysed adequately and supported by better underwriting practices and products.”
She explains that not all farms are the same, yet they are often provided with the same rate. “Our job is to work with both the insurance and agricultural industry to establish ways to better assess and risk manage these farms and their various exposures.”
But many brokers do not have a farming background, do not write a lot of insurance in this sector and as such have limited knowledge to assist with the review of these complex risks.
Scott who lives on a farm says, “Training is a must in understanding individual farming practices and exposures, as well as how to best utilise available insurance products. Working with farmers on better risk management is also essential.”
Things to keep in mind:
- Understand the sector and the risks facing each client. A onesize-fits all approach doesn’t work for farming clients.
- There are opportunities in this sector to holistically manage risks not just place insurance.
- You will need to get creative with the solutions you offer to clients and the presentations you make to underwriters on their behalf.
- There is a significant gap between the risks faced by the sector and the insurance cover giving brokers an opportunity to bridge the gap.
- Stay on top of government policies and regulation updates.