Technology is finally helping farmers, and insurers, take some of the risk out Australia’s volatile weather.
by Joshua Hoey
In 2014, the Mace family of Nindigully, in the grasslands of southwest Queensland, made a claim against their multi-peril crop insurance (MPCI) policy, something no Queensland farmer had been able to do before. They had good planting rains, but conditions dried up, drought hit hard, and yields fell. When the Maces finally harvested, their revenue from the low crop yields was well below the insured amount, so they were able to recoup their losses.
The policy was part of a MPCI pilot by one of Australia’s first MPCI providers, Latevo, along with then-insurer Allianz (earlier this year Latevo entered into a Managing General Agency agreement with Assetinsure, with support from Swiss Re).
Australia is one of the few developed nations without major MPCI policies, but in the past two years a number of new products aimed at the industry have been launched.
If these new policies prove viable, and insurers can get enough growers to sign up, the premium writing potential in the Australianmarket is significant. Latevo wrote $1.5 million in premiums during the one-year pilot program. It’s a small figure, but still a significant one considering it was essentially the first time this kind of policy had been available to Australian farmers.
NEW PLAYERS, BROADER COVER
Currently available MPCI policies only cover winter crops, such as wheat, barley, oats and canola.
BIG DATA FARMING
Big Data has come to agriculture and is changing not only the way farmers manage their crops, but also the way they insure them.Launched in 2007, the US-based Climate Corporation is one of the first in this emerging sector. The company pulls together more than 50 terabytes of data daily to provide growers with field-based forecasts and yield predictions right on their smartphone in app form. The information can be used to decide when and what to plant, but can also be used to build parametric insurance cover specifically tailored for an individual grower.Farmers in the US have access to government-subsidised multi-peril crop insurance, but coverage is usually limited to 60% of crop value. By contrast, the coverage offered through Climate Corporation uses a combination of yield and projected crop prices to offer coverage of up to 85% of expected revenue.In building the information service, the Climate Corporation has pulled together 60 years of historical crop-yield data from the US Department of Agriculture and matches that with weather information from 159 Doppler radar stations.A more advanced version of the app provides forecasts on soil nitrogen levels based on how much of a fertilizer is used, as well as data on soil types and hydrology. It also uses satellite imagery to capture biomass density, allowing farmers to pin point low-growth areas within a field to investigate further.Celsius Pro offer similar data and parametric products in Australia, but a lack of accurate crop yield data means they are limited to weather data and biomass imagery. Climate Corporation say they are currently developing their international strategy, and do see potential in offering both their data and insurance products in regions like Australia. The company is currently assessing data in various areas outside the US.
According to the Australian Bureau of Statistics, the combined value of these crops for the 2012-2013 financial year was almost $12 billion. Previous studies on the viability of MPCI in Western Australia and nationally indicate that close to one in five farmers would purchase insurance if it were offered.
As the name suggests, MPCI provides farmers with protection for a range of perils beyond the usual fire and hail protection currently available for crops. Allianz recently began offering its own MPCI product via its subsidiary Primacy.
“Insured perils include drought, excessive rainfall, frost, wind, wildlife damage,” says Primacy Managing Director Bernie Mayers.
Procrop Insurance, underwritten by CGU, offers MPCI that includes a weather trigger, meaning claims are paid after revenue loss and once rainfall drops below 50% of the local mean average. Latevo is offering a revenue-based model that is customised on an individual basis. “You can’t go in and buy this off the shelf,” says CEO Andrew Trotter. Beyond traditional MPCI, Celsius Pro offers farmers protection through parametric weather derivatives that pay out when specific weather conditions fall outside pre-agreed levels.
Canada, the United States, the EU, Brazil and many other nations have all had various forms of MPCI for many decades, but they all invariably require significant government subsidies for premiums, with indemnity payouts frequently many times greater than premiums paid in by farmers.
University of Sydney PhD candidate Jan Orlowski says that the problems posed by moral hazard and adverse selection are particularly difficult to mitigate when it comes to MPCI.A farmer could stop spraying for pesticides, or not fertilise sufficiently once he has comprehensive MPCI in place, and insurance models that rely on district averages mean adverse selection is high. “These, coupled with high administration costs are part of the reasons why MPCI products are difficult to introduce when some form of subsidy is not present,” Orlowski says.
Despite some recent talk of tax offsets for crop insurance, the Australian Government has thus far been unwilling to subsidise MPCI, and so there’s been no major, lasting program.
While Primacy’s PrimeGuard cover is a traditional yield-based model, Latevo is touting its revenue-based Certainty Insurance. “We’ve designed a model that doesn’t need subsidies,” Trotter says. Growers have to pay around $5000 upfront for a five-year, independent financial audit. Production and grain marketing plans for the upcoming season are also closely analysed, but it means lower premiums. “Our premiums are a third what they would be if you had district rating,” Trotter says, adding that growers are seeing effective insurance rates of 5% of the effective sum insured.
Parametric cover, like that offered by Celsius Pro, is built around specific weather conditions and so offers less comprehensive cover than an MPCI policy. Using satellite imagery and the Bureau of Meteorology’s network of weather stations, the company is able to provide weather data down to a 5km-square grid across Australia. “A lot of reinsurers and brokers use us because we can provide rainfall data, or temp, or whatever – any climactic variable – for any particular grid reference,” says Celsius Pro CEO Jonathan Barratt.
CASE STUDY: NEW TYRES, NEW BOOTS
Phil Koschitzke grows wheat, lentils and other pulses northeast of Warracknabeal in Victoria’s wheat belt. He took out MPCI with Latevo last year, after looking for a multi-peril crop product for some time. Latevo developed a policy based on his financial history, and production and grain marketing plans for the coming season, with a premium of $29.93 per hectare.Koschitzke’s 2014 season turned out to be a bad one, with a combination of drought and frost reducing his crop to one-tenth of normal production. With his MPCI in place, however, Koschitzke was able to put in a claim and carry on with his business.The MPCI coverage kept Koschitzke’s bank happy, and simplified refinancing negotiations. “I explained that the claim was being processed, and that my income level would be topped up by the claim amount,” says Koschitzke. The payout also gave him the space to make essential purchases he would normally have put off during drought. “The first thing I did once the Latevo cheque had cleared was to go into my local Tyrepower dealer and order four new tractor tyres.” At $1500 each, the tyres are big-ticket items, but essential to his business. “I needed the tractor tyres, but there is no way I would have been completing that purchase without the MPCI payout,” The cover also meant Koschitzke could still get his pair of ceremonial post harvest work boots despite the tough season. “A $100 pair of boots is insignificant in a half-million dollar business, but in a bad year I don’t make the purchase to remind myself that it is a time to be frugal, and to restrict my overall spending as much as possible,” he says. “Without the MPCI top-up I would have had a disastrous financial result; but with it the year has become ‘tolerable’, and I’ve got new boots.”
Being a derivative product means there’s no stamp duty or GST, which also keeps costs down. Farmers can access Celsius Pro’s data online, compare it to their own records, and take out derivatives as they see fit. “Our largest payout to a farmer was $750,000. He was concerned that a front would bring too much rain, so he took out a window, and it really pelted,” Barratt says. Those looking for cover can layer derivative products as well, with less cover for slight changes in expected weather dovetailed with larger cover for extreme, unlikely weather.
As it is still early for MPCI products in the Australian market, insurers are generally playing it safe. Primacy’s policy is available on limited release only to broadacre farmers in non-drought affected areas. A minimum of 500 hectares is required, and all eligible crops must be insured. At Latevo, Trotter says other products beyond the winter crops could also be included, but that more data is required. “The biggest limitation on going into other segments is the data.” It is a point echoed by Barratt, who says that unlike in the US and Europe, the Australian Government doesn’t collect comprehensive crop-yield data, which would dramatically improve MPCI and parametric offerings.
Yet, despite the caution, these products have the potential to increase grower confidence and drive productivity increases in Australian agriculture. “It’s a safety net for rural Australia,” says Trotter. “Effectively, it could be the start of an agricultural boom.”