Lay of the land

Drought-plagued Western Australian wheat farmers have spent much of the past four years looking to the skies for rain but their salvation may come in another form, with forthcoming insurance products look set to cover drought and other perils for the first time.

Hundreds of grain farms along the WA wheatbelt are for sale, a situation that is nothing new in a country with frequent climate extremes and no crop insurance subsidies, resulting in costly cover and low uptake.

In global terms Australia’s $220 million rural insurance business is tiny, especially when compared to the United States where crop insurance attracts $US9 billion annually in government subsidies of up to 65c in the dollar for premiums paid.

A comprehensive Ministry for Agriculture, Fisheries and Forestry report published last October showed scant hope for the no-subsidy stance changing for broadacre, non-broadacre and viticultural farming, no matter what government is in power.

The government’s policy is to “focus on creating an environment of self-reliance and encourages farmers to adopt better risk management practices”.

WA’s Premier Colin Barnett has agreed, however, to look at multi-peril crop insurance (MPCI) as part of a $7.8 million aid package for financially stressed farmers.

Hope on horizon

His interest in this type of insurance – until now uneconomic for insurers to introduce without subsidies – follows announcements that two multi-peril crop insurance (MPCI) products covering all perils, including the most important flood and drought protection, are on the way.

Although the long-term viability of these products remains to be proven, other agricultural insurance products have been introduced to the Australian market recently, including financial derivative-type covers that are popular with crop exporters familiar with their use.

Index-based insurance products are a low-cost solution. They use indirect proxies, such as rainfall at a local weather station or shire-level yields, for yield losses on a farm.

The Agriculture Ministry says further investigation is warranted into the role of government in the compilation and provision of information to improve shire-level yield or weather station data, or in supporting research and development of crop simulation models.

Behind the game

Steven Green, Managing Director at Primacy Underwriting Agency, says Australia is lacking in adequate data gathering infrastructure, although he notes some scientists are exploring the use of satellites to track Australia’s farms to measure vegetation, moisture content of soil and virility of crops down to granular levels. The research, however, is still in its infancy.

Weather radars used in index-based products are few and far between in Australia and do not attract private investment because of the high cost and low uptake of insurance. Farmers cannot set up their own radars because they must be consistent and signed off by third parties.

In the US, there are government-funded radars every four kilometres in many rural areas, which can measure the precise rainfall and soil moisture in a three-metre square area.

State of play

In Australia, rural insurances policies traditionally cover perils such hail, fire and frost.

“A lot of cover is based on yield with variations before and after harvest,” Green says.

“The issues always come down to hot and cold weather, frost, cyclones and windstorms.”

He says that as many agricultural insurance products on the market are similar, it was up to insurance brokers to differentiate themselves by giving better service and ensuring they could give sound, knowledgeable advice.

A recent National Rural Advisory Council study into agricultural insurance noted it was an important challenge for industry and government to increase awareness of insurance options through training, as part of a broader role in building capacity to manage risks.

Green says farmers are, by and large, traditionalists and it will take a while for them to get their head around such advents as multi-peril insurance.

Up to 80 per cent of the country’s rural insurance cover is in the largest broadacre sector, covering crops such as wheat, barley and corn.

Insurance for broadacre farms in WA might be 1 per cent of the sum insured, rising up to 5 per cent in NSW where there are more weather variables.

Horticulture accounts for about 10 per cent of the insurance market and viticulture attracts little interest, because wine growers have vines in different regions to mitigate their weather risk.

Meanwhile, cover for the high-value cotton crop is based around hail and fire damage, while sugar cane can usually be insured only against the risk of fire.

The players in MPCI

The financial hardship facing Western Australia’s drought-plagued wheat farmers has prompted two insurance players to move to introduce multi-peril crop insurance (MPCI) for the first time in Australia.

Global reinsurer Swiss Re’s Corporate Solutions business and Victorian farmer Andrew Trotter’s Latevo International will unveil details in coming months.

Zurich-based Swiss Re’s global head of agri-corporate business Bernard Belk has met twice this year with WA farmers, politicians and industry leaders to canvass support for a yield-based insurance product that will achieve cost efficiency through relying heavily on detailed weather readings from radar systems.

A Swiss Re spokesperson says as most crop failure is related to drought or flood its product will complement existing standard hail and fire crop insurance. The launch is planned for late 2013, in time for farmers to cover their crops for the 2014/2015 season.

Latevo International has launched its website and Trotter and his team have been on roadshows around the country touting the new product with Clark Coulson, a partner in Canada’s Global Ag Risk Solutions. This insurer administers an MPCI through Lombard Canada, a wholly owned subsidiary of Toronto-based insurance management company Northbridge Financial Corporation.

Trotter says, however, the company does not have an Australian Financial Services licence to run an insurance company and that Latevo will be a managing general agent for an as yet unnamed existing insurer and that it will have a “multitude of underwriters”, who also have yet to be named.

To apply, interested farms will need to have their crop plans and financial records independently audited and pay a $3000 upfront fee.

Trotter says the model had the support of Guy Carpenter, a global giant in re-insurance broking, provoking industry speculation this could be one of the reinsurers.

“We are targeting 100% of the progressive producers in the dryland cropping regions of Australia,” he says.

“There are massive differences in rainfall across districts. Our product is individually assessed and based on revenue rather than yield and district averages. The model deals with the missing revenue in the exact production years where the problem occurs.”