Parametric Insurance Launches in Canada
New form of insurance available to farmers with implications for agribusiness
Parametric Insurance Launches
This week was big on the parametric insurance announcement front. This evolution in insurance for farmers is new in North America and has a ton of potential, all enabled by data.
Going through two different launches this week I think makes for an interesting compare and contrast between two different approaches.
The first is the Farmers Edge parametric product then parametrics.ag powered by Global Ag Risk Solutions.
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Farmers Edge* launched a parametric product specific to canola.
Before diving into their product, what is parametric insurance?
a non-traditional insurance product that offers pre-specified payouts based upon a trigger event
This means the payout is based on a specific “event” or “trigger” occurring versus how small or large of a loss occurs due to some event.
A farmer that has parametric insurance gets paid based on the event itself taking place and is underwritten based on massive amounts of data that proves to reinsurance companies the likelihood of the event and value of that event.
For example, if the heat blast product is based off of a specific temperature event happening, the farmer gets paid out a set amount of coverage when that threshold is reached, no adjustor necessary.
The announcements this week focus on heat blast in canola in the Canadian prairie provinces. Heat blast happens every year in canola and causes a reduction in seed set due to hot temperatures causing crop stress.
The underlying principles of this product have implications for major crops like corn, soybean, wheat or cotton in the future too (and others). The weather events can also be extrapolated out: fall frost events, drought insurance or flood insurance or anything being triggered by a quantifiable, uncontrollable event.
Farmers Edge announced their partnership with reinsurer, Munich Re in September of 2020. This is the first product with the partnership.
There are a few noteworthy considerations for the Farmers Edge product that you can see in the below image for 2021:
The ones that stood out to me:
Must be a FarmCommand user for 1 year
Coverage must be placed within 2 days of seeding.
Average price is $10/ac.
Farmers Edge is ultimately using this as another benefit to farmers to obtain acres onto their platform.
If a farmer wants to access it, they also need to sign up for at least the Smart product.
The take rate for Farmers Edge from this product wouldn’t be large, likely somewhere between 10 and 20% so it does add incremental revenue, but the key is that they sign up more acres that want access to the product and reduce churn of current acres.
They also need a customer to be on the platform for one year to help with the data acquisition on their localized weather stations. So for this year, only their 2020 customers can access the product, but I would imagine we will see a push to get more acres sold asap so that they can sell even more of this parametric product in 2022.
The coverage being placed 2 days after seeding does not leave much flexibility for a farmer who is busy seeding other crops. This is a tight constraint that I think will hinder adoption in 2021 and probably shows a miss across a significant chunk of acres due to seeding already occurring.
The average price being $10 is for the insurance only. There is another $3/ac to get onto the Farmers Edge platform to be able to access the parametric product. It becomes relatively pricey, especially when considering competitors coming to the market (more later).
This creates a challenging sale because you need to be able to sell a digital product then sell an insurance product. That’s a bigger hurdle and tough for staff to be able to manage.
The details available were light and when I asked staff to learn more there wasn’t any information available. I hope to learn more in the coming weeks.
I found some of their positioning to be worth noting:
“We are thrilled to offer Canadian canola farmers this novel product that can help them deal with the catastrophic effects of climate change on their crops”
“Catastrophic” is the wrong term to be using when alluding to parametric insurance. Catastrophic effects or loss is what multi-peril insurance is for (traditional crop or margin based insurance). Parametric insurance is targeted at covering those small, previously uninsurable losses that do not trigger multi peril insurance but cut into a farmers profitability. Parametric should be used to augment a multi peril insurance product to de-risk against smaller, but meaningful hits to farm revenue.
After the Farmers Edge launch I began digging into competitor products and I came across only one.
Global Ag Risk Solutions is an insurance company in western Canada who just launched their own parametric platform, parametrics.ag.
Their launch product for 2021? Canola heat cover.
I reviewed their website and some sales literature that explains in detail their product and four things stood out to me:
Heat Blast Units
Heat Blast Units
Defining a term to use with a new product to ensure consistency and ease of understanding is important and I think a smart move. Specifically when creating a new category of product.
Heat blast units or HBU’s are not explicitly defined, I assume because there is a proprietary nature to it. The basics of the situation are that they have identified some specific temperatures that when the temperature is above for a specified period of time during the crops reproductive period, the field in that specific area accrues “HBU’s”. My assumption is this triggers somewhere around 30 degrees celsius for a day time high with some number around 20 degrees for night time highs.
This gives them the calculation potential for when payments get triggered:
Once a pre-determined index in triggered for the township where the canola is planted, we pay producers per HBU as the crop is exposed to more and more damaging heat
What is the same as Farmers Edge is the payment potential, up to $100/ac of coverage.
When I reached out to the group at parametrics.ag to learn more they informed me that this isn’t an all or nothing trigger event either. There will be instances of less intense HBU’s accumulated which could mean a pay out of say $50/ac, depending how many HBU’s have accumulated. This payment is fulfilled automatically and the farmer ends up with payment within 10 days.
Deadline Date and Enrolment
The deadline date also stood out to me. Farmers need flexibility and the parametrics.ag deadline for enrolment is June 10th or 2 weeks prior to flowering. This is a distinct contrast to Farmers Edge 2-days after seeding.
The ease of farmers accessing coverage comes from using the companies app or website to be able to report only their seeding date, canola variety and township for each insured field then their system handles the rest including automated pricing, heat-blast monitoring and payment settlements. No adjustors or direct sales people, although I would suspect with the Global Ag Risk sales force there will be individuals creating awareness as well as there for questions and support.
One of the most compelling aspects of this product is the pricing. There is no external digital platform enrolment necessary - any farmer that seeds canola prior to June 10th can access this parametric product.
The pricing is not a one size fits all: for a farmer in the hotter areas of the prairies, like southern Saskatchewan, there is a higher risk so the price is slightly higher, where as in the north east of Saskatchewan where it is traditionally cooler, the price is going to be less. Less risk of heat blast = lower price to the farmer.
Pricing for this product is based on local data with a price range from $4/ac to $9/ac.
Compare this to Farmers Edge with an average price of $10/ac + $3/ac to access the Smart product.
We have developed a network of 6-mile x 6-mile grids that all functions of this product are based within. We establish our pricing, monitor each field and payout insurance within each township grid-point which creates consistency and accuracy through all stages of the policy’s duration.
Weather data is being modelled and verified through the world’s most technically sophisticated satellite and radar systems for each township. This creates accurate and transparent data flow relative to each field being insured and adds trust to the entire process
parametrics.ag has created it’s own scaled, gridded network with 7,518 measurement points while Farmers Edge uses in-field mechanical sensors that require maintenance and calibration.
Implications for Agribusiness
This has been a more farmer centric write-up, but I want to tie it back to agribusinesses such as retails or crop input manufacturers as it becomes apparent there are unique implications surrounding these sorts of products in the market.
Differentiated Bundling - Today we see seed and chemistry companies packaging a rebate program with a seed or chemistry purchase. What if you could differentiate a bag of seed with parametric insurance? If we think about this from the perspective of Syngenta, who has been attempting to do the same sort of thing with crop protection products in AgriClime, this sort of insurance could also de-risk fungicides for example too. That means integrating unique bundled offerings that a farmer receives real benefit from in season with minimal hassle.
This has implications for agribusinesses understanding their customer and their products better as well and could be used to embed within digital platforms.
There is an entire area of biostimulants and micronutrients positioned around mitigating abiotic stresses, like heat blast. These products typically range in price from $4 to $10/ac too. Will we see a reduction in these recommendations or will we see the positioning change?
Agronomic decisions. Today we often see many farmers seed earlier, at the risk of frost, into too wet of seed bed or at the risk of a reduction of vigour, to avoid July heat in canola. With a de-risking of this, we may see a different approach to seed timing in some geographies. This could also change the mix of canola varieties being bought by farmers as well.
The future of parametric insurance is exciting. It brings new potential for farmers to be able to offset risk and insure profitability even during challenging conditions along with new opportunities for risk mitigation and products for agribusinesses themselves.
I am also excited about the utilization of data for a product that directly benefits the farmer. This is especially apparent with the parametrics.ag platform; simple access to a product that solves a problem that frequently reduces farmer profitability.
On the parametric.ag site they noted this stat:
93% of canola growing townships were affected by heat blast in 2020
I think these products are something that will draw major attention from farmers in 2021 and become a consistent tool for them to help manage the hoards of risk thrown at them every single year.
This is a new space packed with potential that I think will continue to develop with new offerings and offer a unique opportunity for agribusinesses as well.