Opportunities for Ag Companies with Parametric Insurance

Verdant Partners LLC (Verdant) has been working with Gallagher, a high-profile global insurance brokerage group based near Chicago, to assist agribusiness companies in managing their risks in various ways.  In a previous document, we highlighted opportunities to use Reps & Warranties Insurance in connection with the acquisition or disposition of a business.  In this article, we are communicating information that can assist with weather related risks.

Dean V. Cavey, Managing Partner

Weather risk insurance has existed for a long time. Originally derived in the energy industry to manage volume risk due to temperature exposure, these mechanisms either as insurance or derivative formats have branched out into any number of applicable industries. The natural progression was branching out to the assist companies in managing volume-based exposure in the agricultural supply chain.

The food supply chain has several inherent risks where someone relies on the supply and demand volumes of a broad array agricultural commodities. For companies that are subject to substantial risk but are not insurable through the federal crop insurance program, parametric insurance may be an appropriate answer. A parametric insurance policy is simply a formulaic policy with event and geographic defined triggers, i.e., parameters. These policies cover independent or multi‐variable weather concerns – rainfall, temperature, wind speed, yield – nearly everything but hail.  Weather events typically available for coverage either alone or in combination are:

  • Temperature (min, max, mean)
  • Freeze (early/late freeze)
  • Precipitation (lack of/excess)
  • Wind speed
  • Solar irradiance
  • Growing Degree Days
  • River height and flow for inland shipping delays

Anyone with volume-based exposure, be it seasonal, mid or long-term, is potentially insurable. Typically, parametric insurance best applies to those parties who do not have an insurable interest in crops directly thus not having the ability to buy federally subsidized crop insurance.

What information is needed for underwriting? The geographic location of the underlying exposure to weather events is key. This would, for example, be the farm where seed is sold and planted since that is where drought would directly impact crop performance. Additionally, the defined weather event(s), including seasonal definition or date ranges, and any associated revenue or cost sensitivity to an increasing or decreasing weather event. The underwriter also needs pricing of unitary risk, or assignment of exposure in dollars to locations. That exposure in agriculture is usually a unitary price, such as a price per bushel or per acre, multiplied by the volume.  While historic data is provided by third‐parties or owned directly by the insurers, historic exposure data is paramount to managing this risk and transferring it efficiently.  Pricing is based upon the historic analysis of the defined weather trigger at a particular location or basket of locations. Historical trends and facts are important components.  The indicated and quoted prices in terms of premium are typically a percentage of limit purchased. Pricing is unique to the individual situation and its defined parameters and locations.

In evaluating and managing the premium, the insured can select varying trigger points. The higher/lower the trigger would essentially be seen as selecting or controlling the deductible. Evaluating historical payouts with the increasing or decreasing of a selected trigger point would effectively be the self‐insuring or retention of weather risk. The more one retains the less the cost which is generally consistent with most insurance products.

There are between five to seven potential insurance markets for any one transaction. Most of these markets are significant global insurance companies.  Various carriers have varying minimum premiums and offer different levels of quantitative support. Establishing a lead carrier or subset of the available carriers/reinsurers will typically yield best results.

Verdant is providing this information as a service and it should be noted that Verdant receives no fees or any other financial benefit should you decide to pursue parametric coverage with our friends at Gallagher.  This is being offered purely for informational purposes.  Should your business have a need for such risk management then Verdant would be pleased to put you in direct contact with a representative of Gallagher.

 

About AJ Gallagher:  Arthur J. Gallagher & Co. is a global insurance brokerage and risk management services firm headquartered in Rolling Meadows, Illinois (a suburb of Chicago). The firm was established in 1927 and is the third largest insurance broker in the world.  Gallagher is a public company traded on the New York Stock Exchange under the symbol of AJG.