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  • Research powered by Kondinin Group

    Managing risk using Multi-Peril Crop Insurance

    2018 Edition — A review of MPCI products for use in cropping operations

    G R A I N G R O W E R S L I M I T E D

  • As one of the many tools farmers can use to manage risk, Multi-Peril Crop Insurance (MPCI) should have a place in grower considerations, along with decisions such as enterprise selection and best management practices.

    MPCI isn’t new to Australia. However the current product range is quite different to that offered in the past. This booklet will enable you to compare what’s on the market.

    A recent GrainGrowers survey on MPCI showed 13 per cent of growers were considering taking out MPCI but 49 per cent were not. Most commonly, this was because they considered the premiums were too high.

    A lack of information and understanding of available insurance policies and companies also appear to be contributing factors in the low uptake of MPCI. This publication hopes to assist in correcting this.

    Companies offering MPCI and the specific product attributes may change from year to year. However, while the product range described here is not an exhaustive listing, and offerings may change, GrainGrowers has endeavoured to identify as many MPCI or similar insurers as possible.

    It should be noted that premiums paid will vary significantly depending on location, cropping history and risk profile.

    What is MPCI?

    Multi-Peril Crop Insurance (MPCI) protects against crop yield and farm revenue losses by enabling farmers to insure a percentage of crop production or revenue.

    PRODUCT TYPES INCLUDE:

    · Farm income protection · Agreed minimum yield · Parametric or weather indexed. PERILS COVERED INCLUDE:

    · Rain — drought/flood · Heat/frost/wind stress · Disease/pest damage · Grain price risk · Revenue shortfalls below an

    agreed level.

    CROPS COVERED INCLUDE:

    · Winter cereals · Pulses · Oilseeds · Hay crops · Summer crops · Irrigated crops, and · Other selected crops.

    GrainGrowers is pleased to release this report highlighting the range of MCPI options available for grain farmers.

    This is the 2nd Edition of the GrainGrowers Managing risk using Multi-Peril Crop Insurance Report following the inaugural report in 2017.

    Managing risk using Multi-Peril Crop Insurance

    2 GRAINGROWERS — Managing risk using Multi-Peril Crop Insurance

  • WEIGHING UP THE OPTIONS MPCI is just one of the tools farmers can use to manage risk. The cost of the insurance needs to be considered against the cost of alternative risk management practices. When adding up the cost, remember to include the costs of your time in compiling the farm records and historical data which the insurer may require in an application.

    A review of the product range shows there are a number of MPCI types on the market. Some offerings will prevent losses by covering the costs associated with producing a crop. Others look to provide proportional income surety by offering to top-up farm income, to a proportion of historical returns.

    There are also weather event based options, known as parametric insurance. Farmers taking out these policies can insure against a particular weather event as opposed to insuring against the impact an event might have on the farm.

    Multiple weather event insurance over the growing season can also be purchased. While this is a more simple form of insurance, parametric insurance policies do not cover against perils such as pest damage.

    PRICING Pricing for MPCI products can vary between $10/ha and $60/ha depending on location, the level of cover and the depth of risk understanding the underwriter has.

    Your MPCI check list In comparing MPCI products you should consider:

    • Which perils are covered ................... page 7

    • The level of cover and other features offered ...................................... page 8

    • If your state is included ..................... page 8

    • How/when premiums are paid .... page 10

    • Closing dates for applications/what stages are covered .............................. page 10

    • What information is required to support an application .....................page 11

    3 GRAINGROWERS — Managing risk using Multi-Peril Crop Insurance

  • 4 GRAINGROWERS — Managing risk using Multi-Peril Crop Insurance

    Additional information provided by the grower regarding risk on MPCI policies can reduce premiums as it enables the insurer to better understand their exposure.

    WHEN SHOULD I CONSIDER MPCI? Most MPCI providers close off their offering before the seeders have finished or in some cases as early as January. This limited window of opportunity may be holding growers back from MPCI uptake. It means that the following year’s crop must be considered at harvest the year before.

    APPLICATION FEES To determine risk profile and potential exposure, most, but not all, MPCI insurance providers require a grower to pay an application fee.

    Application fees can vary between providers and can vary according to the size of their operation and the product on offer.

    STAMP DUTY Stamp duty varies between states. Victorian, South Australian and NSW producers no longer pay any stamp duty on MPCI policies, Western Australian, Tasmanian and NT growers pay 10 per cent, while Queensland growers pay 9 per cent.

    Added to the cost of a policy, stamp duty can be a significant barrier to uptake. State governments in WA, Tasmania and the Northern Territory are being pressured by industry groups and insurance providers to follow the lead from other states and withdraw stamp duty on MPCI.

    WHO SHOULD I DISCUSS MPCI OPTIONS WITH? Discussions regarding MPCI should be made with appropriately qualified individuals holding an insurance broker’s license.

    It may also be worth checking that this advice comes from a party with their own professional indemnity insurance. n

    HOW MPCI WORKS A REVENUE INSURANCE EXAMPLE The 5-year historical average revenue of a farm is $1 million. For 2017, the farmer is offered 70 per cent revenue coverage, at $25 per hectare, for a premium of $57,500. In 2017, the farm’s revenue falls to $500,000, which is 50 per cent of its historical average. This triggers a payout of $200,000, which is the difference between the sum insured of 70 per cent of the historical average ($700,000), and what the farmer earned for the year.

    For 2018, the historical 5-year average for the farm would fall to $900,000. If it again takes out 70 per cent coverage, the threshold for a payout would fall to $630,000. If again the farmer makes $500,000 for the year, the payout would fall to $130,000 for this year.

    Revenue insurance implicitly insures against commodity price downturns that affect farmer income. However, price downturns are often the result of higher yields, which would offset some of the price downturn.

    Source: Adapted from review of Multi-Peril Crop Insurance Incentive Measures, Independent Pricing and Regulatory Tribunal, October 2016, page 18.

  • 5 GRAINGROWERS — Managing risk using Multi-Peril Crop Insurance

    GOVERNMENT REBATES The Federal Government is offering a one off rebate for advice and assessments to help farmers prepare and apply for a new insurance policy to manage drought and other production and market risks. Eligible farm businesses can apply for a rebate of the costs of engaging an accountant or farm advisor to undertake an assessment required by an insurance provider, compiling historical farm financial performance and production data, and analysing insurance options based on a long-term, whole-of-farm risk assessment.

    The rebates are for half of the costs incurred by eligible farm businesses from 1 July 2015, up to a maximum of $2,500 (GST exclusive).

    The farm business must have a written offer from an insurance provider for a new or additional policy covering a peril or climatic event that the farm business has not insured against within the past five years.

    This is limited to MCPI products, parametric products (based on rainfall or other climatic factors), or other single-peril products (e.g. fire, hail and frost insurance).

    The rebate cannot be used to offset premiums.

    For more information about the Federal Government’s Managing Farm Risk Program visit:

    http://www.agriculture.gov.au/ag-farm- food/drought/assistance/mfrp

    Support for farmers’ take-up of MPCI products in other jurisdictions is as follows:

    QUEENSLAND The Queensland Government in 2017 announced research grants of $100,000 for projects that collate and/or interpret agricultural production data on a regional or industry/crop specific basis that could be used in the assessment and development of risk management products such as crop insurance further down the track.

    VICTORIA Victorian farmers no longer pay stamp duty on MPCI policies.

    NEW SOUTH WALES On the back of the final Independent Pricing and Revenue Tribunal (IPART) report: Review of Multi-Peril Crop Insurance Incentive measures (2012), the NSW Government has announced it will abolish the 2.5 per cent stamp duty on Multi-Peril Crop Insurance products from 1 January 2018 to make them more affordable to farmers.

    However, since the IPART report found no evidence of market failure to justify direct government intervention, the government said it would not be introducing a subsidy scheme