Written by Taylor Davis, Senior Counsel in Clyde & Co Atlanta
Barriers to the growth of crop insurance globally include the ratio of loss adjustment expenses to premiums and moral hazard. Until recently, the only reliable way to determine and settle claims in the developing world and to combat the moral hazard of farmers destroying a percentage of their yield to obtain insurance payments was to send in adjusters. Innovative technologies — including satellites, drones and ground sensors — are able to solve both problems.
A few examples of how technology is enabling agricultural insurance and promoting resilience in the developing world are explored below.
Crop insurance programs. Blue Marble Microinsurance launched a pilot crop insurance program in 2016 with smallholder farmers in Zimbabwe. Blue Marble uses satellites, ground sensors and two-way mobile communication to obtain data about conditions on the ground, providing confirmation of events that may trigger the parametric insurance. Parametric insurance pays a fixed amount upon the occurrence of a triggering event, in this case crop failure. In 2018, Blue Marble launched a similar program for smallholder coffee growers in Colombia.
Index insurance programs. Beginning in 2000, the World Bank sponsored a series of pilot projects involving index insurance, or parametric insurance, for weather risks in four countries: Ethiopia, Morocco, Nicaragua and Tunisia. The World Bank team leading the pilots received additional grant funding to explore agricultural insurance in several other countries, including India, Mexico, Mongolia and Ukraine.
Global Index Insurance Facility. The World Bank team that piloted index insurance programs in 2000 established a Global Index Insurance Facility ("GIIF") in 2009 to assist farmers in developing countries. GIIF focused at first on agriculture risks in Africa but now has expanded the program to Latin America, the Caribbean and Asia. Unlike traditional crop insurance that pays out when certain yield damage thresholds are reached, index insurance gathers meteorological and climatic data. When the established parameters are met, such as a lower average rainfall for the coverage period, the facility pays farmers, whether their crops are damaged or not.
Aerial observations. For decades, satellites have been relied on as important sources of data on global and regional weather patterns. More recently, satellites equipped with sophisticated sensing technology, such as light detection and ranging, or LIDAR, and infrared cameras, are able to gather detailed data on surface conditions and elevation. Drones, which operate much closer to the ground, are emerging as useful tools in agriculture, meteorology and risk assessment in the developing world. Aerial observation technology offers multiple advantages for the developing world, including:
- Alternate sources of meteorological data. Some developing countries’ national meteorological services are vulnerable to severe weather conditions or lack the resources to provide reliable data. Satellites and drones offer alternative ways to generate data that support individuals and communities at risk by allowing them to prepare for expected weather events and plan around climate change.
- Informing underwriting and claims decisions. Aerial observation technology provides the insurance and reinsurance industry advanced methods of capturing data that can inform decisions about underwriting agriculture and flood risks. In addition, it can help to survey large areas following severe weather and natural catastrophes, which can make loss adjustment safer and more efficient.
These examples show that new technologies are making agricultural insurance more cost-effective and feasible in the developing world, thereby producing a positive impact on the resilience of farming in those countries. These technologies are likely to develop further and become more widely used, raising interesting legal and regulatory issues, many of which were explored in our recent report on Parametric Insurance.