New options for managing drought risk – drought insurance survey

What can the insurance industry do to help? Learnings from the most comprehensive market survey about drought insurance

January 20, 2021

agriculture drought insurance

he world has seen a a record heat year, 2020 will be the second hottest ever measured after 2016, and the 2011-2020 decade will be the warmest ever according to the World Meteorological Organization (WMO) . This situation puts farmers and other actors of the food value chain under pressure. A hot and dry season can easily put their income at risk if they are not properly insured. AgroInsurance and VanderSat partnered up to conduct a global drought insurance survey to develop a better understanding of the current situation and the upcoming trends in the drought insurance market.

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We collected around 89 fully completed surveys, from all over the world, covering all major actors in the insurance value chain. Brokers, insurers and reinsurers took part in our survey, but also governmental organisations, consulting companies and data providers. Given the huge interest triggered by our survey, there is no doubt that the insurance world is looking for new opportunities to expand its business in drought and drought related perils.

The results of the survey show how unanimous all respondents are about the fact that drought is an important and increasing problem. Without a single exception, all respondents that are not offering drought insurance yet, are planning to do so in the next few years.

The survey suggests that drought is typically not insured as a stand alone product, but is often part of a multi-peril cover or is covered by a yield area index insurance. Further, a wide palette of parametric products are used for insuring drought. Index based on meteo station data are currently the most common indexes, however the interest is particularly high for parametric products working with soil moisture data.

The results also indicate that currently satellite data and yield assessment in the field are both widely used for measuring drought. A clear majority of the respondents would prefer to move toward satellite data in the future for assessing the impact of drought

Governmental organisations and brokers are interested in ‘plug and play’ solutions while insurance and reinsurance would like to work with partners offering accurate drought related data. The need for accurate drought related data is strong for all types of actors, but even more prominent for actors with a large geographical focus.

Recurring and damaging droughts, a strong alignment of all actors and the rapid rise of accurate satellite technology are all elements that let us believe that the way is paved for a rapid growth of parametric drought insurance in the upcoming years.