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Insurance-based risk management for drought

Mayers, B. Mr; Ph. (08) 8396 3635; Fax: (08) 8396 3698

Research Organisation: Agricultural Risk Management P/L, 1317 North East Road, Tea Tree Gully, SA 5091

Sponsor: LWRRDC, Land and Water Resources Research and Development Corporation

Objectives:

1. To define technical and administrative constraints to developments and implementation of rainfall- or weather-based drought insurance programs in general;

2. To undertake an international survey and review of rainfall- or weather-based insurance programs and determine how these constraints have been addressed;

3. To review the success and longevity of these overseas programs;

4. To review technical and administrative constraints to adoption of this technology in Australia; and

5. To plan and initiate a technical awareness program for Australian underwriters based on the above results.

Methodology: Rainfall and weather-based insurance is increasingly being adopted internationally as a means of underwriting farmers' incomes during drought. Impediments to introduction and adoption in Australia have included lack of robust crop modelling technology to generate actuarially accurate risk premium rates, definition of drought and specification of appropriate low rainfall triggers, moral hazard, adverse selection, loss assessment, and lack of in-house insurer expertise. These issues will be addressed by drawing together international experience in weather-based insurance programs, reviewing their success and adopting this technology for Australian conditions. Based on the results of the project a technical awareness program for Australian underwriters will be initiated.

Progress: Whilst past theoretical studies in Australia have suggested doubtful feasibility of yield and rainfall-based drought insurance programs in Australia, overseas experience and the small number of successful programs in Australia demonstrate that this may not be the case. As it is highly unlikely that government will intervene in the market for this class of insurance, the initiative to review it must come from the private insurance market.

A technical awareness program for Australian underwriters has been initiated. This was undertaken as follows:

1. during implementation of this project, surveyed and cooperating Australian insurers were informed of the progress of the international survey and preliminary findings. All insurers have received copies of the Final Report and other survey findings with follow-up discussion; and

2. underwriters currently involved in rainfall and drought insurance programs in Australia have reviewed these programs in cooperation with ARM in the light of survey findings.

Period: starting date 1993-07; completion date 1994-02

Status: completed

Keywords: drought; insurance, farms and farming; risk analysis; climate; sociology

Publications:

Mayers, B. (1995). Insurance-based risk management for drought. LWRRDC Occasional Paper No. CV02/95.

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