Agricultural risk management is undergoing a transformation as new technologies and alternative insurance models emerge to address longstanding challenges in the sector. With evolving data sources and innovative approaches, stakeholders across the farming supply chain are finding new ways to protect their interests against unpredictable environmental threats.
“Farmers have been managing the risks to productivity throughout human history, for example, by selecting the most appropriate choice of crop to plant according to state of soil moisture at the time. This is efficient, dynamic risk management the old-fashioned way,” says Julian Roberts, managing director, Risk & Analytics (Alternative Risk Transfer Solutions) at WTW.
Since the late 19th century, indemnity insurance has been the primary method for protecting against agricultural perils such as hail, drought, flood, frost, heatwave, and windstorm. However, as farming practices and technologies have advanced, so too have the options for managing risk.
“What’s more, these alternative solutions can allow farming supply chain partners, from processors, manufacturers and retailers, to protect their particular interest in the primary inputs into global food and beverage,” Roberts says.
According to Roberts, traditional crop insurance depends on accurate measurements at the field or farm level. This often requires site visits, which can be time-consuming and may not always result in timely payouts.
“Visiting farms and fields, often in remote locations can prove both time-consuming and may not give farmers the payouts they need to recover from losses when they need them,” Roberts says. He notes that widespread loss events can overwhelm the available pool of loss adjusters, delaying the evaluation process.
Roberts points to alternative insurance arrangements, specifically parametric solutions, as a way to address these challenges.
“They don’t rely on on-the-ground loss adjustment, as there is no need to prove loss, as in indemnity insurance. Instead, the insurance contract provides a payment based on a threshold being met on a pre-agreed scale or index,” Roberts says. “Such an index may be quite simple, for example, the millimetres of rainfall recorded during the growing season or a critical part of it.”
Roberts also notes that payments under parametric insurance are made automatically once the contract terms are met, eliminating the need for a conventional claim process.
“While the index will have been calibrated to reflect conditions that are likely to have caused a crop loss, the actual condition of the crop, and resulting harvest, are not considered when the payment is calculated,” Roberts says. This approach can be applied to a range of risks across the supply chain, including annual and perennial cropping, livestock, aquaculture, and forestry.
The integration of satellite technology has further expanded the potential of parametric insurance. Roberts highlights that the availability of satellite data allows insurers to assess vegetation health and detect evidence of burning without visiting the insured location.
“The routine availability of remotely observed data from satellite sources removes the need for insurers to visit the location of the insured assets for either risk or loss assessment. Such data sources let insurers measure vegetation health and evidence of burning remotely,” he says.
This data-driven approach enables stakeholders throughout the food and beverage supply chain to protect their interests, even if they are not directly involved in the production process.
Roberts provides an example: “If your business relies, for example, on the successful harvest of coffee in Brazil but you’re not the grower of that coffee crop, you can still protect your interest with an appropriately designed parametric contract.”
Parametric contracts, he notes, can operate outside the traditional requirement for an ‘insurable interest’ and proof of loss, allowing for greater flexibility in risk management.
For those considering parametric insurance, Roberts suggests that the process may be more straightforward than it appears.
“Parametric insurance may sound complicated and sophisticated but, in practice, almost the reverse may be true. While it may take the careful input of highly skilled experts to construct such products and to ensure they are fit for purpose, for the end user they should be easy to understand with payments, when due, being swiftly settled,” he says.
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