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How Parametric Crop Insurance Works

When The Climate Corporation first
debuted in 2006, it brought a new twist to the crop insurance business. The
products from the San Francisco firm differ from those of federal crop
insurance in that they are parametric insurance.

“It pays out on specified parameters,
rather than loss adjustment,” says David Friedberg, CEO of The Climate
Corporation.  

Adverse weather is an unseen thief,
invisible pickpocketing yield potential that surfaces at harvest. Under the
firm’s parametric insurance business model, farmers are paid if adverse weather
thresholds are reached. If temperatures exceed a level that dents yield
potential on a certain day, payments are made. Ditto for drought.

The firm faces a tough sell. If a
farmer spends $60 per acre on a federal multi-peril crop insurance, he or she pays only one-third of that.
Federal subsidies pick up the rest.

Conversely, costs
of the firm’s Total Weather Insurance (TWI) product tallies $40 per acre with
no subsidy.

“It is more
expensive,” says Friedberg “We’ve had to reframe the conversation. Initially,
growers think about how much they are spending (on premium), instead of how
much they are getting in return.”

He notes that
federal crop insurance reduces risk, but most of its heavy payouts occur only
in disaster years.

Meanwhile, a product
like TWI could get pay several times the amount of the $40 per acre premium in
years where federal crop insurance would not pay out, he says.


So how can they afford it?

Friedberg says
The Climate Corporation works with Swiss Re Corporate Solutions Ltd, a global
reinsurer. Payouts made by The Climate Corporation are huge in a drought year.
However, Swiss Re has a worldwide risk pool in diverse areas, such as earthquake
insurance in Japan. Large payouts made to farmers during the 2012 drought are countered
by premiums taken in elsewhere where no weather calamites have occurred.


Supplemental
Insurance

TWI coverage supplements federal crop
insurance. “It gives you coverage when weather is not catastrophic, but when
farmers still lose money to (adverse) weather events,” says Friedberg. “It also
hones in specifically on individual fields that farmers may want to insure more
than others.”

Payments are based on up to five parameters: 

· 
Early drought

· 
Drought

· 
Daytime heat
stress

· 
Nighttime heat
stress

· 
Excess
moisture.

Once a deductible is reached, payouts
are triggered when one or more of these adverse events occur. “Growers get a
check once the coverage period (the growing season) is over,” Friedberg says.

The Climate Corporation has obtained
the go-ahead to dovetail sales of its products with federal crop insurance. It’s
opened a claims adjustment office headquartered in Kansas City.

 

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