Key points
- Our science underpins new forms of insurance for farmers.
- Novel insurance products are being developed in Australia that specifically target climate risks and/or management actions for farmers.
- The first product can help manage risks associated with fertiliser management in sugarcane.
Everything in life has a risk. But there are actions you can take to guard against them. You walk across a busy road at a pedestrian crossing so you don’t get hit by a car. You go outside when it looks like rain but you take an umbrella to stay dry.
Risk is also the reason why you insure things like your house or car. You think about the worst-case scenarios and decide the cost of insuring yourself against them will protect you financially.
But what about agriculture? Farmers face daily risks. Things like drought, floods, storms and frost threaten their crops, animals and livelihoods.
These risks also impact how farmers operate and how they make decisions on managing those risks.
But despite good planning, sometimes the risks can’t be controlled, and farmers wind up losing income. They might reduce fertiliser applications when fertiliser prices are high but lose yield as a result. Or, suspecting a crop might fail because of drought, they might not apply enough fertiliser to reduce their costs and minimise financial risks, only to find the weather was kind and they lost the opportunity for a good crop.
So, what if those risks could be modelled using agricultural systems’ science? What if a financial product like agricultural insurance was developed to protect against those risks? One that could help farmers manage costs or improve their income. Helping them better manage inputs to crops and protecting their crop and income if it all goes wrong.
Luckily, we’re working to support exactly that.
Benefits for growers, fewer environmental impacts
We’re all aware of the role of traditional insurance. If your house burns down, you’re protected if you’re insured.
In agriculture, this sort of traditional insurance already exists. For example, farmers can insure their crop against fire and hail damage. These products are based on a type of insurance known as indemnity insurance. But each claim is manually assessed, which is time consuming and costly for insurers.
But another type of insurance, called parametric insurance, can be developed to provide faster and more efficient assessment of losses. Insurance premiums are calculated based around the value of different parameters related to the risk.
A problem with this approach is the 'parameter' can be quite abstract. So, it’s a difficult form of insurance to develop. Science can help overcome these problems, making parametric insurance more intuitive for farmers.
The best way to explain is with an example. A farmer is worried their crop’s yield might not produce enough income to cover planting costs. Or worried there might be a drought coming. They insure against these outcomes and receive a pay out if the weather is unfavourable and they don’t achieve the expected yields.
This type of insurance could, in principle, be applied to other risks. If an irrigator reduced water use in anticipation of good rains, they could be protected if their crop didn’t hit a certain yield.
As you can imagine, the numbers behind this can be complex. Beyond inputs such as water and fertiliser, insurers need to consider other factors to calculate an agricultural insurance premium. Variables such as crop varieties, soil type, local climate, and weather events all impact crop success.
Data about these sorts of different variables already exist in platforms such as the Agricultural Production Systems sIMulator (APSIM).
Sugarcane leads the way
While a variety of crops could benefit from parametric insurance, it has already been applied to sugarcane. Sugarcane growers in north Queensland can insure their crops against low yield resulting from reduced nitrogen fertiliser applications.
The benefit can be two-fold. Firstly, saving money by applying less nitrogen to their crop (while being protected if the crop doesn’t perform to expectations). And secondly, reducing nitrogen runoff onto the Great Barrier Reef as added environmental benefit.
Sharing the risk for wheat and other crops
Based on this concept, we are also developing the underpinning science for a yield-based index insurance product for wheat as part of our Drought Resilience Mission. This would provide a risk sharing strategy between farmers and insurers for dry or drought conditions.
This R&D has demonstrated the potential value of novel forms of parametric insurance in agriculture, and how it could be applied to help future-proof further crops in Australia and internationally.
The information provided by CSIRO does not constitute financial advice of any kind, nor is it an endorsement of any insurer or insurance product. Nothing in this information is intended to provide, or imply, any recommendation or opinion about an investment in any financial product or the utility of any particular insurance product. Prospective investors in financial products, and prospective insureds, should obtain independent advice before making any financial decisions relating to any financial product including any insurance product. To the maximum extent permitted by law, neither CSIRO nor the authors of this information accept any liability for any loss whatsoever arising from the use of this information.