Demystifying multi-peril crop insurance
As a crop farmer, you probably have named peril insurance to cover frost, hail or fire.
But what about the other risks your crops face? These are the disasters that may result in your operation coming a cropper and include:
- Rain (or lack of) including drought, flood and hail
- Disease and pest damage, including from wildlife or livestock
- Grain price volatility
- Heat stress, wind storm, snow
- Accidental or bush fires
- Grain price risks
- Revenue shortfalls below an agreed level
Many of these risks to your production are on the rise – through factors like climate change, for instance. Severe weather events will increase in number and intensity, as will dry days with average temperatures up 1.5°c within a decade, according to the Federal Department of Agriculture Water and the Environment.
Boosting your risk management
You can improve your farm’s risk management by:
- Backing your hunches with historical and up-to-the-minute farm records using technology such as drones and internet-monitored fields
- Understanding what underpins your risk attitude (wary, neutral or daring)
- Scrutinising your inputs and costs to shrink debt, cut losses and boost profits
- Investing in property in different rainfall or geographic zones
- Diversifying to a range of crops to reduce income volatility
- Having a robust disaster recovery and succession plans ready to go
- Ensuring you have adequate insurance for life, property, machinery, crop, etc.
Types of multi-peril cover
To manage these diverse risks, multi-peril crop insurance has been available for almost 50 years on and off to farmers, mostly in Western Australia. However, few farmers have opted into this cover, possibly because the offerings and premiums can vary between states. This includes whether stamp duty is payable or not. Grain Growers Limited has produced this detailed resource to show you the cover options state-by-state. Meanwhile, the Queensland Farmers’ Federation has insurance insights for sugarcane and macadamia farms, plus agriculture more generally.
Another hurdle to taking out multi-peril crop insurance is that farmers need to present their cropping history (sometimes up to a decade’s worth) and detail their risk profile for the insurer to assess. This could incur a one-off application fee. It’s how insurers work out premiums based on the likely frequency and size of each cropping operation’s claims.
Multi-peril cover is generally on offer to those growing:
- Winter cereals
- Pulses
- Oilseeds
- Hay crops
- Summer crops
- Irrigated crops
- Other crops, such as lupins.
But, it’s not a blanket cover for all perils. Multi-peril crop insurance does not cover changes in trading conditions, such as China’s sudden imposing of an 80% tariff on barley from May last year, a move Australia has referred to the World Trade Organisation.
Options for multi-peril cover
The Grains Research & Development Corporation offers a useful resource for those deciding whether to insure for multiple perils. It sees such a policy as giving farmers confidence to pursue long-term profit outcomes with higher short-term risks. Premiums can be 1% of your turnover, but if you fail to take out cover, you could lose all your crops in a single event.
There are a lot of choices for multi-peril crop cover, which is offered in these three broad categories:
- An agreed minimum yield
- Income protection
- Parametric weather index
The latter protects against a particular event rather than the impact an event could have on your farm, but excludes pest damage.
These choices can give you a lot to think about, so ask us as your broker/adviser about demystifying your options so we can customise coverage to your needs.
Useful links:
Grain Growers: Managing risk using Multi-Peril Crop Insurance
http://www.graingrowers.com.au/wp-content/uploads/2018/04/mpci-booklet-2017.pdf
Deloitte: Multi-peril crop insurance in Australia: barriers and opportunities
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