As farming gets ever more expensive and as margins get tighter, there’s less room for error, which means the need for risk management isn’t going away in the next 10 years. What will change, though, is the type of insurance products farmers will be able to buy, with innovations driven primarily by technology and by the shift to data-driven farming.
Already, farm machinery is capable of tracking practically everything the producer does, including the inputs they apply and the yields they take off, and more things are being tracked all the time.
And the insurance industry can’t wait to get its teeth into all of it.
“Potentially, that’s something we can use as we develop insurance products that are more tailored to an individual’s actual farming operation,” says David Van Deynze, VP of innovation and product support for Manitoba Agricultural Services Corporation (MASC). “We’re a little way from that, but it certainly begs the question: if we know with pinpoint accuracy everything that is happening on that farm, perhaps we can do more specific underwriting instead of relying on provincial-related programs and averages.”
It’s called tailored insurance, and with the added help of producer-owned weather stations, drones and satellite imagery it can lead to a huge step forward.
“There’s already some of that going on,” says Van Deynze. “Technology is changing quickly and could drive, in some cases, the type of insurance that producers are looking for, and the way we administer these products as well.”
The hurdle is for the insurance industry to figure out how to turn all that data into value for its clients.
“We are bombarded with data just as farmers are,” says Van Deynze. “It’s amazing what we can collect, but sometimes we have got to take a step back and say, how do I make this useful in my operation? And in our case, how do we make this useful in an insurance program?”
In the 2020s, farmers will be looking for flexible insurance options that suit their changing operations and their situations. Some of those options are just beginning to surface.
It’s not as easy as it sounds, though, to build overall farm policies from piecemeal insurance options covering multiple risks.
“We wouldn’t expect the farmer to buy a little piece of insurance for every specific potential cause of loss, so if the farm has a number of concerns — too much moisture, not enough moisture, an early snowfall, hail — and we start breaking them apart, it gets to be a challenge, so we are trying to find a balance,” says Van Deynze.
It is likely that there will always be blanket risk coverage because of these challenges, but producers will have many more options to add or top-up for specific risks that they see as important to their particular operation.
Today, most insurance across North America basically covers farmers’ costs, but doesn’t always keep up with farmers’ changing needs.
As an example, if a farmer in Western Canada takes crop insurance for canola, the coverage might be based on a yield of 36 bu./ac. based on historical or regional averages. But in reality, the farmer is targeting 55 bu./ac. and has to spend a much higher amount on inputs and seed to achieve that. This means that the farm’s break-even on the crop could be above 36 bu./ac., even though that’s all it is covered for.
That has to change, says Wade Barnes, CEO and founder of Farmers Edge.
“The insurance industry has coverage that’s based over a period of time, and you have to increase your indexes to grow, but they’re not going fast enough,” Barnes says. “What happens is, you have to measure the risk with all farmers, but what will happen as more farmers embrace digital technology and the data it will produce is that farmers are going to be able to get more ‘designer’ type insurance that meets their needs based on their information. The insurance companies have not been able to do that to date.”
Something close to designer insurance is available today via Global Ag Risk Solutions’ margin insurance, which could be a model for the type of insurance producers will be looking for more and more, as increasing volatility and uncertainty in weather, markets and other production issues means they need to better cover their risk throughout the growing season.
“The kind of farmer that is an early adopter of our insurance is one that doesn’t view insurance as an income stream, but as a true risk management tool,” says Grant Kosior, president and CEO of Global Ag Risk Solutions.
Margin insurance covers the base inputs of fertilizer, seed and chemical, and as a farmer spends more on those, their coverage goes up by the same amount. Plus, the plan also covers a margin above the costs.
As an example, if a farmer has a $100 per acre margin insurance, that covers the input costs plus another $100. So, if their input costs are $150 per acre, the coverage would be $250 per acre. Should the farmer need to spend more on something such as a fungicide pass in-season that costs another $25 per acre, the insurance coverage increases to $275 per acre.
“It’s an extraordinarily different kind of insurance because it changes the mindset of the grower,” says Kosior. “With other kinds of insurances that are out there there’s a set dollar amount, and as the grower starts putting more inputs in, they get closer to the dollar amount they’re covered for. If there’s a bad year, the only way to manage that risk is to start cutting back on inputs, which limits the potential of the crop, whereas the mindset with our growers is the more they spend, they more they are covered for, so why wouldn’t they keep spending, which in turn releases the agronomic potential of that crop.”
Bigger farm, more flexible insurance
As farms get bigger, farmers who are expanding will need more flexible insurance products in sync with their needs, says Kosior.
“The best farm managers are more profitable, and as such you need an insurance product that is aligned with the farmer that is trying to become more profitable,” he says. “The way of the future farmer is the one who embraces the digital revolution. The more that growers can know about their crop while it’s growing, the better equipped they will be to make the best decisions agronomically.”
In the next couple of years, Global Ag Risk, and likely others in the industry, will definitely be offering more insurance options geared towards these expanding operations.
“Let’s say a farm has a boomer of a crop, one of the best ones of their lives. One of the concerns that farm would have is to make sure they get it off and into the bin,” says Kosior. “But, at that point in time, does the farm have the liquidity to go out and buy a used combine to get it done quickly? In that situation they could use our insurance as collateral for a line of credit, so it creates more liquidity.”
Another example might be using the data from moisture probes to track available moisture in the ground in early July. Based on 30-year average rainfall data, the farm might then have above-average yield potential for that crop. In that case, the farm will be able to top up its insurance coverage and present a bulletproof case to the banker for any additional cash.
“Global Ag has allowed the farm to transfer its risk entirely, and the reason we have done that is because we know how much moisture is in the ground,” says Kosior. “Those are the kind of decisions farmers will be able to make by having more data-driven information, which will make it easier for the insurance and banking community to create more liquidity for them to farm to their full profit potential.”
The data revolution
Data will be the game changer when it comes to all aspects of farming in the next decade, insurance included, but industry players says farmers must be willing to share that data if companies are going to help them boost production and cover their risks.
“There are a lot of people saying farmers shouldn’t give away their data for free because there’s value to it, and that is a true statement, but in order for research and development to form into new ideas that can help them, these companies need the data that comes from the farmers,” says Kosior. “When a farmer or a group of farmers hands over their data the result is that a year or two down the road there will be products that come back to the farmer that will help them.”
A good example, says Kosior, is a new parametric product Global will launch next year that measures heat units in canola. It has only been made possible because of the massive data set they have accumulated over the last 10 years with the co-operation of their farm clients.
“If the farmers don’t give us access to that data, then I can’t give them new products,” Kosior says. The goal is to identify the problem that the farmer needs to solve, build a product around it, and deliver that product in a way that is affordable and understandable, “But none of that happens without the data to get the products built in the first place.”
The other advantage of farmers sharing data is in benchmarking their operation.
“If a farm never does that, they’ve got their data from the farm and they know what it did in ’14 compared to ’15, compared to ’16,” Kosior says. “But if the farm can look and see everything in a 100-km radius, there might be 450 farms that grew a variety they didn’t grow and they can see those results because they’ve got access to their data, because they shared their data,” says Kosior. It’s a change that is coming, he says, and insurance is going to be a big part of it.