QFF is working with our members, the insurance sector and universities to develop appropriate insurance products and improve the understanding of parametric insurance and its use as a risk management tool for farmers and the agriculture sector.
To bridge this gap and bring suitable products to market faster to provide farmers with additional risk management tools, QFF is working on, and has completed, several projects.
Crop insurance is not available for many agriculture commodities, and while some industry-specific insurance is available, it is an underdeveloped market and its applications are often not expanded beyond traditional uses.
Due to this, most Australian farmers have not taken up crop insurance (where available) despite facing some of the greatest weather-related challenges of any developed farming economy.
While farmers are generally aware of the potential for crop insurance to be used to manage risk, it has not been widely taken up due to a detrimental cycle of adverse selection, poor results and increasing premium costs.
The development of new and innovative parametric crop insurance products is an exciting prospect for the agriculture sector in its ongoing need to better manage risk.
The basic concept of parametric insurance is simple: Parametric insurance covers the probability of a predefined event happening (e.g., a tropical cyclone) and pays out pre-determined amounts, based on a series of event thresholds.
These thresholds are agreed in advance and are based on independent data sources such as, in the case of a tropical cyclone, the Australian Bureau of Meteorology.
Events may refer to an index-based trigger or an event within a defined area for instance a tropical cyclone. The policy might be structured to pay out 50%, 75% or 100% of a predefined limit for a Category 3, 4 or 5 cyclone occurring within a 50-kilometre radius around the client’s point of interest.
This differs from traditional (indemnity) insurance as parametric payouts are not based on actual losses, but on factors highly correlated with actual losses. To structure a parametric product, the triggering event or condition must be objective, observable, easily measurable, independently verifiable and consistent over time.
Parametric insurance is ideal for relatively infrequent, but high-intensity losses associated with natural perils and weather-related risk where there is an insufficient history of losses captured as insurance-readable data.
Managing the Financial Impact of Weather Risks
QFF and partners, Uni SQ, Willis Towers Watson and CelsiusPro are developing parametric solutions to support the resilience of farmers to weather risks. The project funded through the Australian Government Future Drought Fund Innovation Grant, investigates parametric insurance as a risk management tool to enhance yield potential and profitability.
To learn more about the project contact Project Manager, Kerry Battersby Kerry@qff.org.au or Project Officer – Farm Business Resilience, Bec Tkal rebecca@qff.org.au.
Through the use of satellite imagery and available data from Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) and the Australian Bureau of Statistics (ABS), this project established a time series of commodity maps and yields over a 20-year period (1997-2017) within the Darling Downs region.
The project provided indispensable baseline information required by insurance companies willing to expand current offerings to new regions and commodities or develop and offer new agricultural insurance products to Queensland producers.
Queensland farmers are subject to highly variable climatic conditions, including droughts and floods, which can decimate production and challenge farm viability. Insurance could play an important role in helping Queensland farmers manage their climate risk. However, the use of insurance to manage climate-related production risk is currently poorly understood and utilised by farmers.
Funded by the Queensland Government, the project conducted focused reviews on climate risk in agriculture and how insurance products could be used to address these risks. Based on these reviews, prototype insurance products have been developed to manage these identifiable climate and weather risks for farmers.
The project team is currently developing industry-specific case study examples of how the product works and pricing it up.
The objective of this project was to improve the understanding of agricultural insurance and assist with the initial development of new products that met Queensland farmers’ needs through the provision of data, education and extension.
The project demonstrated that the initial development of an insurance product was possible with quality base level data and agricultural industry support.
The work conducted in this area is predicted to have flow-on effects in strengthening partnerships with the insurance sector and individual agri-focussed companies.
Specifically, the project undertook:
From the projects above, a number of case studies and reports have been developed.
These can be viewed under the insurance section on QFF’s resource webpage.