Innovative new hi-tech Agri-insurance

The traditional image of farming contrasts greatly from the space age world of satellites or the hustle and bustle of the financial sector. However, innovation in the agricultural insurance sector is bringing these contrasting factors together.

The result is a new generation of agricultural products that make use of sophisticated satellite imaging to provide farmers with faster pay-outs at lower costs when the weather turns against them.

Farming is exposed to the elements

Farming is a commercial enterprise. However, unlike retail, manufacturing or financial service industries, it is a commercial enterprise where most of its production takes place outside – fully exposed to the elements. This means exposure to hail, wind, floods, and – as we are quite painfully seeing in South Africa right now – drought.

For this reason, farmers may experience a very high degree of volatility in their income. If the weather is good, crops are good and income is predictable. However, if the weather or climate patterns are not in the farmers favour, then income streams may be disrupted for a season – or even a longer period.

Adapting the business model

As an industry, we are quite good at mapping traditional insurance solutions to farmers. Crop shortfall solutions would be familiar to most players, as would the types of products that protect the industry along the agricultural value chain from financial institutions, input suppliers, processing plants, transport companies, through to storage companies.

However we need to find ways to improve the value we bring to the farmer. We need to think beyond traditional crop insurance with its focus on yield volatility, and adapt to the modern day business approach where the focus should be on revenue volatility.

There are new solutions entering the market that can provide the farmer with a guaranteed minimum income. This next generation of products work by removing the income volatility risk in a simple, fast and transparent solution. Products already exist that are underpinned by a regional index. They measure the environmental conditions that can produce a loss of yield by using are monitored by satellite imagery or high tech weather stations. Payouts can be tightly linked to the commodity price, which can be observed by a third party to ensure fairness.

Satellite based insurance

A big advantage of this type of satellite based insurance product is that there is less need for physical loss assessments on the farm. This leads to a much quicker claims process, especially in regions in Africa where the simple cost of sending a loss adjustor out into remote locations can be prohibitive.

Of course, such a product cannot be viable without reliable data and statistics to create a sound scientific underwriting basis. This highlights the need for strong partnerships to develop and launch the product – and to access the data that is vital for the product once it is up and running. It also requires solid legislation and regulation to ensure that insurance techniques can be brought into the market in a way that is sustainable and protects both the interest of the farmer and the insurer.

It is important to remember that insurance is not a rescue boat for poor farming practice. Appropriate risk management and mitigation by farmers is a corner stone of keeping farms viable and risks insurable.

However, with the financial security that an insurance policy brings, farmers can rest a little easier and remove the financial volatility from their business.