MULTI-peril crop insurance can be complex and costly, ranging anywhere from $15 to $35 a hectare.
For insurers, trying to assess risk in a new crop type or region, where there may not be good historical data, can be difficult when figuring out premiums, and assessment, administration and processing can be time-consuming.
These issues are behind the slow uptake in Australia, however they are being addressed by insurance companies, according to Rural Directions farm consultant Patrick Redden, who gave an independent view on MPCI products at a recent farm business update.
More common MPCI products were parametric insurance, yield-based insurance and revenue-based insurance, he said.
Parametric, or weather index, policy holders can purchase certificates against certain weather events. The claim is based on the occurrence of the event, rather than the impact on-farm.
“Parametric products, such as Celsius Pro, are used a lot by event managers hosting outdoor concerts, or the construction and mining industry,” Mr Redden said.
“For farming, if the weather station outlined on your certificate records a frost event in a certain period as per your certificate, then you will get a pay-out.
“There hasn’t been a huge take-up by the ag industry, but they are simpler to measure and define.”
More complex MPCI products were yield-based.
“With these, you nominate your yield based on average historical production, nominate a certain amount of hectares, and the premiums are worked out on a percentage of that yield,” Mr Redden said. “If the yield falls below that, then a pay-out is made.”
Mr Redden said there were also products with a rainfall trigger, which required the rainfall to be a certain portion less than normal, as well as the yield, for a pay-out.
“One of the challenges I see with these products is there are things that can affect yield other than rainfall, such as heat and frost,” he said. “You could have a good rainfall year that gets frost, so while you may have lower yield, it might not qualify in the policy, and not achieve the original intention of reducing variability on-farm.”
The most advanced MPCI products are revenue-based, such as policies being offered by Latevo International and Primacy (Primeguard).
“These are based on yield and income off that hectare, which is similar to income protection insurance,” Mr Redden said. “This gives you cover in case something goes wrong, to build your income back to a pre-defined level.”
Mr Redden said this insurance was not necessarily linked to a rainfall target. “But there is more direct measurement involved and an audit is required at the farmer level making it more costly to administer,” he said.
“But it is farm specific, rather than district-based.”
Mr Redden said moral hazard played a part in how premiums were calculated.
“As people can change the way they behave once they take out insurance, it changes the outcome of the insurance,” he said. “With increasing moral hazard, insurers will increase premiums to cover that, which makes MPCI more expensive and less attractive.”
