Multi-Peril Crop Insurance in Australia – Obstacles and Growing Opportunities

Agriculture is the most essential industry for life; but unfortunately it’s the most unstable industry too. Surprisingly such an unstable industry contributes $56 billion per year to the Australian economy. This remarkable contribution from the agricultural sector is a sign of the fact that farmers have been successful in managing their risks. Yes, of course! And they use an array of risk management tools one of which is crop insurance.

Multiple Peril Crop Insurance

MPCI or multiple peril crop insurance offers coverage in a single policy against a set of perils that can affect crop production. It offers cover against perils presently omitted from other named peril insurance, including excessive rainfall, drought, wildlife damage and wind. MPCI policies were first brought in the market in 1974 and again in 1999; but they were restricted only to Western Australia and didn’t continue after one season.

At present, there are only a few providers that provide MPCI policies. These policies are restricted to winter crops like barley, lupin, oats, canola, wheat and triticale.

Although named peril insurance enjoys a high acceptance of more than 75% by farmers, multi-peril insurance is comparatively newer with an uptake so far is low.

Obstacles to a Larger Market

The earlier unsuccessful attempts to introduce MPCI products and the present low take-up rates in Australia bring forth a range of obstacles.

High Premiums

Premiums that are higher than traditional crop insurance and other strategies farmers apply for risk management is the main reason for low acceptance of MPCI policies. For example, MPCI premiums are often in the range of 5% – 10% of the crop value whereas that of named peril insurance is 0.55% – 3.5%.

Systematic Risk

This refers to a risk that impacts a large number of policy holders at the same time. Weather-related episodes covered under MPI like excessive rainfall or drought can affect a significant number of farmers at the same time.

Adverse Selection

This refers to an event when there are more chances that higher risk farmers buy an insurance policy for a certain price compared to lower risk farmers. To justify the higher risk profile of policyholders, insurance providers have to heighten premium prices. Due to higher premiums, comparatively lower risk farmers tend to get omitted from the program.

Moral Hazard

This occurs when a policyholder fluctuates from his behaviour and increases his exposure to risk when insured. This can include changing production practices and turning to something risky because they are insured. Challenges in distinguishing losses resulted from poor farming practices and adverse events can cause additional costs for the insurance provider.

Lack of Information and Underwriting Skills

The insurance sector lacks full climatic information to precisely evaluate the exposure of an event and expected duration of an insured event. Simultaneously, there are only a few specialist underwriters in Australia.

Lack of Awareness

Due to the fact that the product is rather new in Australia, there is no adequate information with farmers about it and how it can suit their comprehensive risk management strategy.

High Advance Costs

There are costs included that should be paid in advance like financial costs (e.g. fee for policy evaluation) and non-financial costs (e.g. thorough farm records needed). These costs may act like a hurdle to exploring more about MPCI policies for farmers who lack cash and/or time.

Government Policies

These in the form of grants or concessional loans for farmers after natural disasters may act like a hindrance to buy the crop insurance.

Opportunities

In spite of the above long list of obstacles, examples of disruption do exist that produce optimism for further development of MPI sector.

Risk Diversification

Because of the success achieved by MPI in Europe and other regions, insurance providers might be able to spread risks by merging Australian exposure with European exposure. The seasonal as well as geographical differences will help mitigate the systematic risk barrier.

Better Data Access

Satellite, drones, the Internet of Things and technology have increased farm-related data and help decrease the asymmetry in information, thereby the adverse choice as well as moral hazard problems.

Change in Farm Business Model

If widespread merger and acquisition activity takes place, Australia could convert from a primarily ‘owner-operator’ model to a ‘corporate-tenant’ model. Larger farming businesses with a diverse portfolio of enterprises and properties would have larger budgets for buying MPCI.

Product Innovations

Product innovations that can meet the needs of Australian farmers will also guarantee higher acceptance and a more sustainable MPCI policy. For example, this could involve requiring policies to be bought throughout multiple seasons to ascertain that the risk can be managed by insurance providers.

Appropriate Government Incentives

Right kind of government incentives in the form of incentives for financial organizations or tax incentives lent to farmers who buy MPCI can also increase acceptance.

The distribution of risks among farmers (self-insure or minimise risk by adopting preventative measures), insurance providers (third party risk transfer) and the Government (body that bears risk to achieve social goals) would decide if the MPCI market will develop further or not. Disturbance within agricultural sector and elsewhere in the economy will give rise to rearrangement of the balance between risk mitigation, self-insurance and risk transfer and therefore changes to who bears the risk. Eventually a market will build to offer price signals to inspire an efficient distribution of risk.

Conditions are improving as growing number of Australian farmers are buying crop insurance to protect their farm against drought conditions and with unpredictability of climate change, this could be a still growing trend in the future as believed by many.

Thus when rains fail to occur and there are small production and drought conditions everywhere, conditions are not disastrous for farmers who insure against drought. The farmer pays the premium and the insurance provider tops farmer’s income back up to the decided level and that allows the farmer to carry on for the current year.

Just before a few years, Australian farmers could insure only against fire, frost and hail. However, after several years of planning as well as advances in weather prediction technology, multi-peril crop insurance products have entered the Australian market and farmers are buying them, which is an optimistic situation.