Crop insurance key to drought help

26 Nov, 2014 01:00 AM
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A well-functioning private insurance program can save governments money

THE managing director of a business management firm believes the fledgling multi-peril crop insurance (MPCI) sector in Australia has the ability to provide a central plank in a solution to the vexed question of government drought assistance.

Jay Horton, of Sydney-based Strategis Partners, said farmers, agribusiness and government would all benefit from a working multi-peril system.

And after years of being unable to get commercial MPCI products off the ground, he is optimistic that the tide is turning.

“There have been some successes in the space, such as Latevo’s product, which has had a lot of publicity and I think a lot of people are starting to take notice of that.

“I think it will be a really good tool, especially for growers with higher risk levels to mitigate that risk.”

Down the track, according to Mr Horton, such products could create a more sustainable farming system.

“There is no reason a no-plant product could not be developed to allow growers cash flow even though they choose not to plant in a poor season.

“I see that as being particularly useful in more marginal, low-rainfall areas, where the best system long term may be planting two years out of every three.”

He said it could play a huge role in freeing up farm equity.

“If there was something there that could allow the banks to cut out that risk premium in their financing it would be a big saving.

“I see MPCI as having a crucial role in how the farm is financed.”

Benefits of a brand new system

Mr Horton said starting with a brand new system would allow Australia to avoid the mistakes of North American and European MPCI systems, which are heavily reliant on government subsidies.

“Obviously for farmers in those places the schemes are very generous, even though half of the insurance makes it back to producers, the rest being chewed up with administrative costs, but I think overall they are very costly for taxpayers.

“The other side-effect has been that the government assisted programs have crowded the market, stifling private investment.”

Mr Horton said he felt government’s role should be to stimulate use of MPCI programs, perhaps through tax incentives, rather than participating in the market in its own right.

He said the difference in getting MPCI products up and running in Australia now compared to previously is the availability of better data.

“There is now a good amount of data around the farm itself, in terms of performance and operation that allows insurance providers to deliver customised products according to the individual farmer’s situation.”

One of the problems identified in setting up a strong Australian MPCI sector has been the lack of critical mass, with our relatively small number of growers.

However, Mr Horton said there diversity within the geographic spread in Australia, and international insurance companies would love to participate in a country that is counter-seasonal to the US.

“The El Nino-La Nina cycle that is influential on our seasons also has an impact in North America, the rough rule is when we have good years they have bad ones and vice versa, so it is an attractive prospect for insurers looking to spread their risk.”

Down the track, Mr Horton said there was no reason multi-peril insurance could not work in other agricultural sectors such as horticulture, dairying or livestock.

MPCI good for government

MPCI benefits will also extend beyond growers, according to Mr Horton.

“From a cost-benefit analysis, a well-functioning private insurance program can save governments money.

“In the best-case scenario it would mean an end to expensive drought interest rate subsidies and other government programs.

“At present our drought policy is all wrong, we’re chasing the ambulance to hospital. A strong MPCI sector would allow growers to be resilient throughout periods of climatic variability on their own two feet.

“That’s not to mention the inherently arbitrary nature of region-based drought assistance packages where one side of a road is eligible, but the other is not.”

He said the major hurdle would be getting growers to participate in a MPCI project to start with, however, he said government could help get growers involved through encouraging them to trial a product through tax incentives or other schemes.

“I don’t know yet what the best format for that would be, whether it be a straight tax incentive, or whether it is funding to allow growers to improve their farm records to get them up to the standard required by the insurance sector, but that is how I see government involvement in this space, just a light touch.”

Strategis Partners will hold a symposium on MPCI in Sydney on December 2.

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FarmOnline
Gregor Heard

Gregor Heard

is the national grains writer for Fairfax Agricultural Media
Date: Newest first | Oldest first

READER COMMENTS

bigpen
26/11/2014 5:58:37 AM

The problem in Australia is always going to be the cost or premium to insure against the extreme variability of our production. I don't envisage it being attractive to government or more importantly private producers
RWH
26/11/2014 9:06:51 AM

I agree that a Multi Peril program would be ideal for Australian producers, however the private companies have been talking about this for 20 years and still not launched a product of substance (which suggests that they don't think it is profitable). The major programs, especially in North America, strongly rely on government subsidy and they have much less volatility than we have. I agree with bigpen that the premiums under any privately run program will be too high (say insuring for a 1 in 10 year event is going to be well above 10% when risk premium and profit is added in).
incognito
27/11/2014 6:53:04 PM

2 new players in mpci market as early as 2015 will be interesting to see what happens to premiums.

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