Climate volatility increases the risk of drought exposure. The significant financial burden of drought on the agricultural industry, however, most often leads to severe underinsurance. With swift, guaranteed payout following a triggering drought event, & a straight-forward structure, parametric insurance has emerged as a leading source of fresh capacity, rapid liquidity and client-customized cover for the industry.
Parametric drought policies are underwritten based on the probability of when and to what extent a drought will occur. With quick, transparent claims indemnification, it offers a great solution to concerned crop growers, agribusinesses, and co-ops.
Key benefits
Real-time monitoring and swift payouts help clients bounce back and prepare for the next season
Each structure is tailor-made to a client’s specific needs, risk appetite and budget
Covers can be customized depending on planting seasonality & vegetational life-cycles, such as during the flowering or sowing seasons: critical times for crops to come to fruition
As climate change intensifies, the risk of water scarcity increases, impacting a variety of industries, including food & agri businesses.
Over the past decade, severe droughts have repeatedly hit North America, Australia, South America and Europe. Due to its geographic location, Australia in particular has always been prone to water scarcity. Major droughts from intense El Niño events in recent Australian history include 1982-83, the Millennium drought of 1997-2010 and 2017-2019. These events left devastating impacts on the agricultural industry, including crop failure, major livestock loss, drought, bushfires, dust storms, and land degradation.
Challenges faced by the agricultural industry
As temperatures continue to rise, many agri businesses and co-operatives are experiencing massive underinsurance. Agriculture represents the world’s largest industry, generating over $1.3 trillion dollars worth of food annually and crop and pasture occupying more than 50% of our land. Un- or under-insurance for drought and water scarcity events adds increasing pressure on crop growers, agribusinesses, and co-ops who need to cover financial exposures (e.g. lack of revenue and replanting costs) in uncertain times.
Parametric crop insurance: a resilient solution for agribusinesses
Parametric risk transfer solutions offer access to new sources of capacity globally and fill the gap left in the traditional market, ensuring efficient financial recovery from future droughts. These bespoke and customizable covers provide an alternative solution to all water-dependent industries and deliver transparent terms and swift liquidity when agribusinesses need them most. Descartes’ parametric products are client-customized and structured to meet specific needs, budget, risk appetite, and asset location(s). With a parametric crop insurance cover, agribusinesses can bounce back faster following a water scarcity event and prepare for the next season.
case study example
Drought risk for property assets
A cane grower faced insufficient drought coverage in the traditional market Left with significant exposure, they experienced AUD 3.5 million in damages after a 2019 drought impacted their crop production & harvest.
Problem
The drought reduced yields & encouraged disease infestation. Lack of rainfall after irrigation resulted in circumstances where half a million dollars of input costs were wasted. A majority of their financial losses were not covered under their indemnity policy ‘risk period’.
Solution
At their next renewal, the cane grower opted for a parametric cover that would provide financial protection despite climate volatility. The client could select a risk period specific to their needs, with a policy structure tailored accordingly.
Under 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 financial impact if they generate no revenue in the next season.
Descartes' approach leverages machine learning, satellite data, and advanced risk models to accurately assess low precipitation levels across the client’s fields, ensuring efficient financial recovery from future droughts.
