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How parametric crop insurance works

02/03/2014 @ 10:32am

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, The Climate Corporation.  

Adverse weather is an unseen thief, invisible pickpocketing of yield potential that surfaces at harvest. Under the firm’s parametric insurance business model, you 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. 

It’s partially able to do that based on the computer models The Climate Corporation has built, which are capable of hyperlocal weather monitoring. “Rather than the airport 20 miles away, we record the weather  that is happening right in that field,” says Jeff Hamlin, the firm’s director of agronomic research. “What is happening in that field is different than in the field across the road.”

Tough sell 

The firm has faced a tough sell, though. If you spend $60 per acre on a federal multiperil crop insurance, you pay 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, you think about how much you are spending on premiums, instead of how much you 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 pay several times the amount of the $40 per-acre premium in years when federal crop insurance would not pay out, he says. 

How Risk is Spread

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 calamities occurred, Friedberg points out.

Two New Products 

The firm is offering two new agronomic services in 2014. 

• Climate Pro will help you with 40 key decisions (mainly weather-related) that you make annually, say company officials. It will supplement Monsanto’s Field Scripts hybrid and agronomic information with weather-related components.  

“It takes into account real-time weather information,” says Tristan D’Orgeval, the firm’s product director. 

Climate Pro will give users agronomic recommendations on planting, fertility, pests, harvest, and variable-rate technology.

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