Protecting the harvest

Protecting the harvest | Insurance Business Australia

Protecting the harvest
In July, the Australian government released its Agricultural Competitiveness White Paper, outlining a $4b package aimed at growing the nation’s agricultural sector and strengthening the economy.

Of $3b allocated to a new drought and risk management package, $29.9m (over four years) was set aside for farm insurance advice and assessment grants. These grants are designed to assist farmers in choosing appropriate insurance. The white paper acknowledges the impact insurance can have in reducing farmers’ financial risk from production losses. It also recognises the current availability of a greater range of products targeted at protecting farmers’ assets, including multi-peril crop insurance.

Talking to Insurance Business about multi-peril crop insurance, Karl Sullivan, the Insurance Council of Australia’s general manager for policy, risk and disaster, says, “The ICA has participated in several reviews over the last two decades on this, trying to get this up and running. It’s become clear though through all those reviews that it couldn’t be done without very significant government subsidies, exactly the way it is in other jurisdictions.

“The government and the broader community see a great need for this to work properly because of the amount of money we spend on drought relief every year and the impact that has on tax holders.”

Sullivan says the allocation of almost $30m for farm insurance advice and assessment grants is a very significant commitment.

“Ultimately, in a mature system when most farmers are accessing these things, it might require more money than that. But in terms of a first step and the principles being applied, it’s almost revolutionary in terms of how effective it could be in the Australian market.”

John van der Vegt is the managing director of specialist rural insurance broker, AgriRisk. He agrees that government input in multi-peril crop insurance is critical. “I think, if we look worldwide, there haven’t been many, if any, multi-peril crop insurance programs that have worked without government subsidisation,” he says.

Discussing overseas markets where MPCI is available, he says, “The rates to purchase or cost of coverage overseas is very expensive, but the government assistance is hidden in that, so it’s relatively cost-effective for them, whereas we don’t have that level of government assistance.”

The market
Van der Vegt says it’s his understanding that MPCI products sold a combined total of less than 200 policies last year in Australia.

“I guess my concern, from a broker’s perspective, is are growers really interested in this, or have they just gotten used to having production variability and the only people interested are those growers that are really sailing close to the wind?”

Van der Vegt also thinks the premium costs will concern many growers. “We’ve got highly variable production and the costs are going to be very high. They’re going to be in the order of six to 15 percent of production. That’s very expensive.”

Perhaps the player who holds the most viable solution for crop protection is a disruptor – an insurance outsider. Uber has profoundly disrupted the taxi industry, and Apple has achieved similar results in the mobile technology space. Is it possible that Latevo International will have a similar impact on the crop insurance market?

“Latevo is not an insurance company.  We’re a managing general agent,” says CEO Andrew Trotter. “We’re more of an agricultural company that’s using insurance as a solution to the problem.”

Latevo’s product provides coverage for effectively all natural perils and is available Australia-wide. “We offer what we call comprehensive crop insurance,” Trotter explains. “We offer comprehensive cover. We’re able to do basically all the natural perils with no exclusions, and that’s a really important signature part of our program.”

Trotter says the ability to offer a no-exclusions solution is possible because of a requirement that a risk assessment (at a fee of $5,500) is undertaken upfront. “This is an incredibly risky space, and if you don’t do the correct due diligence upfront, you can’t offer the coverage that you would like to offer the grower, and secondly, you can’t offer them enough coverage. If you don’t accurately understand the risk of the enterprise, you can’t tailor the right insurance contract.

“The reason why the Latevo model works, quite frankly, is we individually assess, so we reward good farm management. The program is based on protecting your income and aimed to protect what it costs to grow a crop. And then we insure on revenue, rather than yield, which has less volatility. Latevo, as a model, goes back to the foundation of what insurance was: if you lose it, you get paid. It doesn’t matter why you lost it or how you lost it, you get your claim back and there’s no funny exclusions in between.”

Trotter himself is a farmer, who founded Latevo because of his frustration at the absence of a product in the market that could protect the family farm in north-western Victoria from times of insufficient rain. “There was no way a farmer could manage a catastrophic risk with an insurance tool prior to Latevo. There was no way to deal with the variability of climate change.

“I just said, ‘Well I’ll go build it’. I travelled the world, found the product, found the people and created the solution.” Latevo’s coverage is modelled on a program that’s successfully operated in Canada over the past six years.

This year, 66 farmers nationwide signed up for Latevo’s offering. On the market response, Trotter says, “It’s like any new technology. The early adopters have picked it up, and it takes a year or two for it to step into the mainstream. Firstly, Latevo had to prove to everybody that the model worked because there was a large degree of scepticism because of the failure of previous concepts in Australia.

“Latevo’s been around two years now, so we’ve passed that test. We’ve paid our claims, we’ve been in the marketplace.”

Last year, farmer Alistair Mace from southern Queensland became the first insured to claim on Latevo’s policy due to drought. He received a cheque from Latevo for $944,000. “No one bothers to work out how expensive is that $944,000 if he had to go to the bank to get it,” Trotter says. “And if you have another bad season in five years’ time, you’ve got to borrow more money. The reality is that buying catastrophic insurance is cheaper than debt funding. And this is a message that’s just not understood.”

The farmer and the broker
Trotter wants brokers to understand their crucial role in helping farmers to understand the importance of this coverage. “It’s a product that probably suits, at least, three-quarters of the farmers, if not more. In short, if you borrow money from the bank as a farmer, you should basically have this insurance policy.

“By nature, farmers don’t want to buy this. It’s more money that they’ve got to spend. It’s a product that has to be sold to them. And the people that have the ability to do that are the insurance brokers because they’re very trusted by the clients. And they have a responsibility to make sure they’re providing the right advice, insuring the things that you can’t afford to lose. The truth is, for a farmer, they can afford to lose a $30,000 or $40,000 vehicle, but they insure it. So why would you be insuring that when you haven’t got your million-dollar crop comprehensively insured?”

Trotter also says that Latevo’s product assists farmers in maximising their productivity. He explains that farmers, in doing without insurance, adopt risk averse behaviours that may help them minimise losses, but lessen their volume of productive activity. “I can categorically say every farmer that doesn’t have this comprehensive insurance is actually losing money. They’re not optimising their profit.

“Farmers currently are under-investing in their crops and not able to take advantage of early pricing opportunities due to a fear of a failed spring, and their risk aversion is impacting regional Australia. When the income is reduced or the crop fails from, say, a heatwave, farmers tighten their belts, they stop spending. This downstream effect starves the rural community of its essential revenue or cash flow because regional Australia is a one-horse town, it’s all agriculture.”

Trotter is clear on where he sees the coverage ranking in farmers’ insurance priorities. “When you sit down with a farmer and look at what insurances [they] should have, number one should be public liability, number two should be comprehensive insurance for crop because that’s the single biggest item [they] can’t afford to lose.”

Government support
On the subject of government assistance for crop insurance, Trotter says, “Latevo is very supportive of the government’s change in approach to drought assistance. The $29.9m risk assessment grants are a step in the right direction. We are fully supportive of further nudge polices that give the farmers a hand up, not a hand out. We can’t afford to go down the same path as the last drought package, which cost in excess of $4b from 2000 to 2011. The concept is to help farmers to be more resilient to the challenges of climate change.”

He strongly believes in government’s role in accelerating the uptake of insurance products. “Why did the government have to mandate superannuation? If it’s so obvious that we’re all going to retire, why is superannuation mandatory and paid for by the employer? Why was Medibank Private fully government-owned? Because there was market failure, the government had to intervene and set up its own private health insurance to start weaning people off the public system.

“If you ever want to see broad-base adoption of insurance concepts, you have to be supported by either the government or the banks...”

For Trotter, supporting MPCI will assist in achieving the government’s key aim of strengthening the economy. “At the moment, we’re on the cusp of recession in Australia. If we strengthen agriculture, we can carry some of the economic burden left by the mining and manufacturing sectors, assisting in holding the Australian economy out of recession. We need agriculture today more than ever before. How do we get a boom? You get wide scale adoption of a safety net.”

On the ICA’s hopes for precise allocation of the $29.9m provided for grants, Sullivan says, “We’re working with the department on that at the moment, and things have got a little way to go in terms of defining the mechanism and what is the process for a farmer being able to access that rebate. I think they’ve hit the sweet spot in terms of identifying that this entire scheme is about assisting farmers, who are increasingly very clever at risk management, to go that next step and get that extra bit of data that will help them get into a scheme that will help them further offset their risks.”