Insurance in Agriculture: A Primer for Unpacking the Bundle
Index
Overview
Insurance Today
Value Chain Structure
Types of Insurance
Indemnity Shortcomings
Index Insurance
Distribution
Final Thoughts
1. Overview
For decades, the insurance industry managed to tiptoe around the ‘digital’ elephant in the room. Now, not just in the consumer space, but in the agriculture space, insurance is evolving into an increasingly digital business.
One opportunity in the ag insurance space is around delivery and execution of insurance, including the usage of on-farm data and the ability to “unbundle” traditional insurance.
Insurance Today
Insurance is crucial for the success of the agriculture industry. The risks in farming are immense and without strong insurance infrastructure, we wouldn’t have the thriving industry that we have today. Farmdoc Daily recently shared Crop Insurance as a Payment Program, which asked the following:
Maybe, it is time for a strategic reassessment of crop insurance and its role in the farm safety net before SCO subsidies are increased.
Structure
The insurance value chain is complex from the upstream reinsurers all the way down to the farmer. I was sent a useful image by my friend Damon Johnson to navigate:
Source: Damon Johnson, parametrics.ag
The image illustrates the flow of the value chain. The reinsurance broker works closely with the reinsurance market to deliver product fundamentals and actuarial analysis to support the risk/price matrix.
The insurer shares risk with the a panel of reinsurance markets and coordinates directly to finalize contract terms.
The insurer and the managing general agency (MGA) have an agreement that is binding that outlines how the MGA is able to conduct their business, such as sales, claims, commissions etc. for the coverage year. MGAs can play an integral role in the insurance distribution value chain.
The MGA enables licensing agents to deliver the product to the farm. For the admin and operations expenses, they pay a commission to the agent. The MGA is the group responsible for collecting the payment from the farmer. Examples include ProAg and Rain and Hail.
What is notable is the fact that the MGA and agent side of the chain can attribute agent fees can often total up to 30–40% of premiums.
Types of Insurance
There are several types of insurance available for farmers, including:
Indemnity
Indemnity based insurance products determine claim payment based on the actual loss incurred by the policyholder. If an insured event occurs, an assessment of the loss and a determination of the indemnity are made at the level of the insured party. This is when an adjustor comes out to the field to assess actual losses. The classification is often divided into further sub-classes called named peril (eg: hail) and multi peril agricultural insurance. Multiple peril could be anything that hinders yields below a specific level such as flooding, drought etc. Cover is normally set in the range of 50 % to 70 % of the expected yield. In turn, the expected yield is determined on the basis of the actual production history of the producer or the area in which the producer operates.
Financial
This is a catch all for products that protect insured parties from the consequences of low yields, low prices or a combination of both. This might be a margin insurance for example such as that from Global Ag Risk Solutions.
Index
Products payout based on the value of an “index”, not on losses measured in the field. Also known as parametric insurance. The index is a variable that is highly correlated with losses and that cannot be influenced by the insured. Indexes can include rainfall, temperature, or even getting into specific incidence of insects or disease in the future (with adequate data and underwriting). For example, a heat blast parametric insurance product would trigger once the specific temperatures were hit— no adjustor, no assessment, paid out in automated fashion once the variable is hit. Good for the farmer and scalable for the insurance company.
The way I visualize this in my head is through this image: