Severe droughts have repeatedly hit Australia, South America, Europe, and North America over the past decade. From 2017 to 2019, Australia experienced one of its worst droughts, resulting in an estimated AUD $53 billion in losses. In South America, a 2019-2020 drought significantly impacted the agriculture and cattle ranching sectors, carrying US $546 million in losses. Annual economic losses from drought are estimated at USD 9.6 billion for the EU and UK, and between $6-8 billion in the US. When compared to other natural events, drought is one of the most prevalent and costliest hazards.
Compounded by climate change, the combination of severe drought and abnormal heat waves causes a significant drop in crop production and strains water levels across affected regions.
As corporate drought exposure becomes exacerbated, traditional modeling and insurance products fall short, leaving many clients under or unprotected. Descartes offers a new generation of insurance protection against water scarcity, drought, or lack of precipitation. Using in-house algorithms, machine learning, IoT and climate models derived from gridded satellite data, we provide agri-producer cooperatives and food & bev suppliers with bespoke, first-in-class parametric coverage against drought anywhere in the world.
Our proprietary parametric drought model uses a combination of high-resolution satellite data, IoT, precipitation or soil moisture deficit datasets, enabling us to provide an unparalleled assessment of drought risk.
In full collaboration with the broker & client, we design a customized cover that is structured to payout based on third-party data that identifies the index of soil moisture deficit or cumulative precipitation. Structures are calibrated to each insured asset and/or crop type, and we monitor drought risk over the policy period using a soil water deficit index.
Our revolutionary product unlocks coverage for agribusinesses and suppliers all around the world.
Client Need: A cane grower in New South Wales, Australia, was severely impacted by drought in 2019. The drought created conditions that encouraged disease infestation in particular crop plots and reduced overall yield.
Pain Point: Left with significant exposure, the client experienced AUD 3.5 million in damages. The lack of rainfall after the irrigation process also resulted in circumstances where half a million of input costs were wasted. Unfortunately, a majority of their financial losses were not covered under their indemnity policy ‘risk period’.
Our Solution: At their next renewal, the cane grower opted for a parametric cover that would provide financial protection despite climate volatility. This enabled the client to select a risk period specific to their needs, with a policy structure tailored accordingly. The client was concerned that they would not recover in the event of another loss year, as input costs are high and are heavily leveraged. With a parametric policy, the client only needs to pay the amount of the premium, rather than a larger sum for a bank loan to cover the loss if they generate no revenue in the next season.
The Result: Descartes’ approach leverages machine learning, satellite data, and advanced risk models to assess low precipitation levels across the client’s farm accurately. The fully-customized parametric cover fills the gap left in the traditional market and ensures efficient financial recovery from future droughts.