Farming has always been a risky business. Drought, flood and fluctuating commodity prices are regular features of life on the land, but now one of the world’s oldest industries is facing modern challenges that are changing the landscape for farm insurance. How can brokers respond?
The agriculture industry includes everything from crop growing to livestock farming and nurseries. In New Zealand, the agricultural sector represents almost half of all land use and, as of the year ending March 2021, it accounted for NZ$12.77 billion of GDP.
New Zealand rural insurer FMG has been providing cover for Kiwi farmers for more than 115 years. The firm’s chief product and pricing, underwriting and claims officer, Nathan Barrett, says farm risks are evolving rapidly.
‘The impact of climate change is increasing,’ he says, pointing to three major weather events in New Zealand in 2021 alone. ‘This means we need to be more focused on how we can prevent claims from happening and recognise new risks when they emerge.’
Climate change hits agricultural profits
While no industry is immune to the threat of climate change, farmers, in particular, are feeling the impact. In Australia, for instance, agricultural profits have fallen 23 per cent on average over the two decades to 2020 because of climate variability, according to the Australian Bureau of Agricultural and Resource Economics and Sciences.
Strong growing conditions in 2021 and a surge in global commodity prices led to predictions of a bumper crop for Australian farmers, until the Bureau of Meteorology announced in mid-November that a La Niña weather event in the Pacific was likely to persist into 2022.
By early March, south-east Queensland and northern New South Wales had seen one of the worst flood disasters in Australian history, devastating farmers with catastrophic losses of livestock and machinery.
While traditional risks such as property, liability and crop failure still exist for farmers, increasing climate-related risks are leading to a rise in insurance premiums. However, new farm insurance products are emerging to help farmers manage climate risk.
Insurance broker and risk adviser Marsh has recently developed a weather index insurance product through its managing general underwriter subsidiary, Victor Insurance. A new form of insurance for agricultural businesses, it uses 60 years of risk data and medium-term weather forecasts to underwrite exposure to weather hazards at crucial times in the year.
It pays out based on an agreed weather trigger, rather than the damage caused, and risks covered include low and high temperature, as well as deficit and excess rainfall.
‘Marsh is always looking to provide innovative risk solutions for the rural market,’ says Cameron Douglas, head of Victor Insurance, Pacific Region. ‘The recent La Niña weather pattern that caused a reported A$1 billion loss to crops in November on Australia’s east coast is an example of a risk that could have been insured against using this new product.’
Shifting supply chain risks for rural producers
Disease outbreaks often deliver a direct hit to farmers through the contamination of their produce — in 2004-05, a highly contagious strain of avian influenza, or bird flu, led to the culling of tens of millions of birds throughout South-East Asia.
But as the COVID-19 pandemic continues to cause major bottlenecks in farm labour, food processing, transport and logistics, as well as unprecedented shifts in customer demand, farmers are being forced to navigate a new risk profile for their supply chains.
The Australian Fresh Produce Alliance recently called on state and territory governments to change the COVID-19 isolation requirements for food, transport and distribution workers that are close contacts due to the industry’s critically low workforce.
‘Supply chain risk for agriculture producers is a big issue and the pandemic has only heightened the impact,’ says Douglas. ‘Getting fresh produce to market in a timely fashion, particularly in the horticulture field, where fresh fruit and vegetables have time-critical windows to get to market, carries obvious risks.’
Douglas notes there are very few insurance products that provide protection against these risks and that agriculture producers need to ‘look holistically at their businesses to make decisions to mitigate loss and manage risk exposures’.
‘Decisions around local versus overseas distribution have also meant that many growers have elected to avoid the vagaries of international sales over the consistency of domestic trade, which is still not without its own risks,’ he says.
‘The obvious insurance products growers could look to involve comprehensive marine insurance and covers such as product recall, but the implementation of various pandemic exclusions by insurers globally, often as a result of reinsurance exclusions, mean growers need good advice from a specialist in the area as to whether cover will, in fact, provide the protection they need.’
From cyber risks to agriculture technology
A growing reliance on technology — both on the farm and within the agricultural supply chain — is also presenting new risk for farmers.
In June 2021, for instance, global meat processing company JBS Foods paid the equivalent of US$11 million in ransom to end a cyber attack that halted its operations and impacted meat supply chains.
In February 2020, a ransomware attack on technology company Talman Software brought Australian and New Zealand wool sales to a halt for several days. The company processes more than 75 per cent of the countries’ wool sales. In Australia alone, wool exports turn over around A$80 million in an average week, and the disruption had a significant impact on growers.
The past decade has also seen a huge growth in investment in agriculture technology (agtech). Data from Juniper Research predicts the global agtech market will exceed US$22.5 billion by 2025. Innovations can help farmers regulate water usage, track soil moisture, remotely control irrigation pumps, help collect genetic information on livestock and drive autonomous machinery.
The technologies may result in lower costs and improved yields, but they also present cyber threats and the risk of equipment malfunction or failure.
A 2021 report from AgriFutures Australia shows agriculture, fisheries and forestry industries need to proactively manage their cybersecurity, but just 16 per cent have a formalised incident response plan, and only 18 per cent are confident they know who to contact for support during a cybersecurity incident.
‘Agtech is growing and brings with it new assets and exposures to insure,’ says Barrett. ‘Sadly, we’ve seen farmers who have had ransomware attacks and been locked out of their dairy shed or unable to access critical farm information.’
Brokers must take a proactive approach
Brokers can help farmers source the protection they may need. FMG’s cyber liability insurance, for instance, includes crisis management, business interruption and third party covers. It also provides advice to farming clients about the basic ways to avoid cyber risks.
Marsh also provides cyber cover as part of its general busines cover for agriculture businesses. However, Douglas says growth in agtech also presents a test for brokers.
‘New technology in agriculture creates challenges for brokers to navigate markets that can cover these emerging technologies and keep up with new insurance products covering these emerging exposures,’ he says.
To rise to the challenge, Douglas says farm insurance brokers must work harder to understand the modern challenges their clients face.
‘To demonstrate their value to the farmer in managing risk exposures, brokers operating in this market need to fully understand their client and the unique risks faced by them,’ he says.
As the landscape continues to evolve, Douglas says brokers need to spend more time ‘on the farm or in the orchard’.
‘Fundamentally, insurance is one way to manage risk, among other options such as avoid, accept and manage,’ he says. ‘FMG starts with advice, so we can help farmers and growers avoid losses and minimise disruption in the first place.
‘The key is to first understand exactly what the assets or challenges are in the business.’
Farm insurance: emerging risks and resolutions summary
1. Climate change:
increased risk of extreme weather events and changing temperatures and rainfall, leading to crop failure.
Insurance solutions: weather index insurance; crop failure insurance
greater use of automation and advanced systems in farming, increasing the cybersecurity risks and equipment failure costs.
Insurance solutions: cyber cover; business interruption insurance; property insurance
3. Supply chains:
ongoing disruption from COVID-19 lockdowns and reduced workforces has impacted farmers’ ability to get goods to market on time.
Insurance solutions: marine insurance; product recall insurance; reviewing and renegotiating existing policy exclusions