A new approach to managing weather risks
Weather insurance has been a long-neglected drought risk management tool in Australia. That changed last week, when the National Farmers’ Federation urged the Federal Government to consider a 150% income tax incentive for five years on climate related insurance during the Drought Summit in Canberra ‘to increase the viability and uptake of agricultural insurance products.’ These include multi-peril crop insurance (MPCI) and farm income protection policies.
This would be a great step forward for Australian farmers, where the take-up of MPCI is less than 1%. The 80 farmers in NSW who took out MPCI this season were rewarded with “peace of mind” and the ability to pay their employees and cover their costs until the next harvest, according to Mr Gourly, a Narrabri farmer interviewed by ABC News.
So why is the take-up so low in Australia, when the benefits of MPCI are so apparent during a drought? Deloitte, in a report published last year, cites a range of barriers: high premiums and upfront costs, a lack of awareness, systematic risks, adverse selection, moral hazard, and a lack of data and underwriting skills. Government actions during drought such as concessional loans and grants, while helpful in the short term, also discourage market-based risk management tools from being developed and adopted in the long term.
This is at odds with our global peers, where MPCI is more common; countries like the US subsidise half the cost of crop insurance premiums. It is also consistent with what farmers are telling Hillridge as part of our market research: the prices, payoffs and risk coverage of existing products are not in line with what farmers need. Current MPCI products in Australia cover only winter broadacre crops and aren’t even offered in some regions. And there are only a handful of insurers in this space.
Tax incentives and the elimination of stamp duty (currently, the tax still remains in Western Australia, Queensland and Tasmania) are a start, and should encourage more farmers to protect themselves. This is especially important for farmers with high debt levels—a fact of life for farmers trying to gain scale, investing in new technology, or just getting started. The call by the Insurance Council of Australia for access to better quality data is also helpful. This will allow policies to be better tailored and prices to be reduced.
But the government, the National Farmers’ Federation and Grain Growers Australia should do more than just support the incumbents and existing products. Encouraging the development of tools for the under-served livestock and horticulture sectors is critical. Extending support to new forms of weather protection—such as weather-index and yield-index products—would drive innovation, better product design, and greater protection for more farmers.
That would be a true win for all Australian agriculture.