Triggering change

Over the past decade, agricultural insurance has evolved to address increasing risks posed by climate change, such as more frequent droughts and heatwaves and other extreme weather events. Land temperatures have now risen more than 2°C above pre-industrial levels, this trend is predicted to continue as climate impacts intensify, and the insurance industry must continue to evolve to provide effective risk management for farmers.

This is particularly true for the world's 600 million smallholder farmers, who are responsible for approximately one-third of global crop production. Until recently, these markets were difficult to insure, mainly due to the small size and diversity of farms, which created de facto a precarious protection gap.

In recent years however, parametric products have emerged as an innovative and effective way to tackle risks and bring quicker payouts to farmers. Once a niche offering, parametric crop insurance has now become widely established across the globe as a vital tool for supporting farmers, particular in regions that lack access to traditional insurance programmes.

Insurers have also been able to reap the rewards of this growing market. While according to our estimates the traditional insurance market for agriculture is growing at an estimated 5%, parametric markets are seeing growth of up to 15-20%. 
 

Put simply – a parametric product pays out when pre-defined conditions are met. 

These conditions are easily understood by farmers – rainfall levels, floods, intense winds, observable drought conditions caused by high temperatures or low soil water content which result in observable loss of biomass. Extreme weather events affecting crops and livestock can be approximated by simple physical parameters and are the based for an insurance cover. When the insurance parameter triggers a predefined value, a payment is made. For insureds, this often results in a faster payout than traditional insurance. 

This is especially beneficial for small farmers who don't have the financial resources to weather bad growing seasons. It also helps governments introduce financial protection and sure up their social safety nets.

The process can also be fully digitised and scaled easily – we've seen this in practice to rapidly help cover vast areas in Brazil, Bolivia, Kazakhstan and Australia, or to protect millions of farmers in Asia, Africa and Central America.

The pace of technology improvements continues with satellite Earth observation, greatly enhancing our ability to monitor fields and understand weather events. Compact and cost-effective satellites provide daily high-resolution land cover imagery, while new innovative radar-based imaging technologies offer enhanced capabilities even under cloudy conditions. Integrating these new capabilities into insurance products and processes allow insurers to improve and scale their offerings in an efficient way. 

Parametric product is based on close to real-time data to ascertain whether the payout conditions have been satisfied. This introduces a new player into product development – the data provider. 

At Swiss Re, we help insurers and governments bring these products to market. Our expertise covers product design and development, and through our partnership approach we can also help connect data providers with insurers and brokers where needed. Swiss Re's access to crop growth model yields allows it to structure products with significantly lower basis risks, long-term viability and technical soundness. Swiss Re products also stands out for their professional operations.

While parametric covers are tailored to a specific insurance scheme, standardised covers are emerging in the market such as: 

• Soil Moisture Index – the relative water content in the soil, which can be easily monitored from space using satellites - covering both drought and excess of rain and showing excellent correlation with yields on the ground.
• Rainfall and Temperature index based on data gathered by weather stations and satellite data.  
• Vegetation Index like Normalized Difference Vegetation Index (NDVI) which measures the greenness of crops and is proxy of vegetation intensity. Measured from space in highest resolution to allow to detect the finest difference in the fields.
• Area yield Index pays out based on the shortfall between actual yield and expected yield in a defined area larger than the farm level.

Swiss Re offering comes with an index viewer integrated into its crop and weather monitoring platform, Opti-Crop, giving farmers and other stakeholders real-time access to satellite data and updates on insurance payouts.

The advent of parametric insurance and satellite monitoring has changed the face of agricultural insurance, providing much-needed support to millions of farmers around the world. By providing timely payouts based on real-time data, this innovative approach not only mitigates the financial risks associated with unpredictable weather conditions but also empowers farmers to build more resilient and sustainable farming practices. 

To keep up with the speed of change we need to continue to develop and refine these products, to secure the future agriculture insurance and farming. At Swiss Re, we are partnering with our clients to develop the parametric insurance they need and to close the protection gap.