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Improved crop insurance options for climate risk management

A major research collaboration between the University of Southern Queensland, Willis Towers Watson and the Queensland Farmers’ Federation stands to transform how Australia’s agricultural sector insures against weather and climate risks.

Led by USQ’s Professor Shahbaz Mushtaq, experts from the Centre for Applied Climate Sciences (CACS) have undertaken research to inform the development of index insurance products and industry initiatives to allow farmers to better manage climate-related risk.

“Not all risk is manageable, and at some point, there is a limit to adaptation,” Professor Mushtaq said.

“The main insurance product available to Australian producers has been multi-peril crop insurance, and under this kind of policy, crops are covered under a single policy against damage from a range of perils such as drought, excessive rainfall, wind, hail, and fire,” he said.

“However, this isn’t affordable for the vast majority of farmers, so we worked with Willis Towers Watson and the wider insurance industry to develop cheaper and more suitable ways to insure against the major risks to the sector.”

Professor Mushtaq’s research found no multi-peril crop insurance was taken out in Australia in 2020.

“It is expensive, and it requires a visit from an assessor if a claim is made, The loss adjustment process can be a very protracted and unpleasant process and claims can take months to finalise,” he said.

“In comparison, index insurance responds to objective and independent measurements of weather variables such as rainfall, temperature or soil moisture, and the farmer can select the element that is most critical to the farm operation and the index level at which protection is provided by the insurance.

“The payout mechanism is pre-agreed so there is no ambiguity or argument regarding the claim amount should the event occur. If the policy trigger is breached, the payout is immediate, with no need for any expensive on-farm assessment and his can reduce the cost of the policy by up to 40 percent.”

Under an index insurance product, Professor Mushtaq said the farmer could, for example, set an index threshold of 50mm of total rainfall during January and February.

“If their nearest Bureau of Meteorology weather station only recorded 35mm for those months the payout would be immediately triggered, no questions asked,” he said.

“The flexibility of index insurance means that a grower who mitigates against weather and climate risk by adapting their on-farm practices can take more calculated risks knowing the index insurance will be their safety net.”

Professor Mushtaq said while the availability of new insurance products was a positive step for Australian farmers, it is critical that primary producers feel confident in utilising the new offerings.

“There will need to be a culture shift in the industry because the higher the uptake, the cheaper it will be for everyone,” he said.

Queensland Farmers’ Federation Project Manager Kerry Battersby said the collaboration with USQ and Willis Towers Watson addressed a critical need to look at insurance differently after recurring natural disasters in Queensland.

“Insurance can be unattractive, and many farmers have had really bad experiences with insurance agents, so it’s important to hear these experiences and also show farmers a new and improved way of managing financial risk,” he said.

The research project is funded by the Queensland Government’s Drought and Climate Adaption Program (DCAP) that aims to improve drought preparedness and resilience for Queensland producers.

Cotton farm
Cotton farm in Grassdale, Queensland.