The yield insurance products have been used in Australia. They are of two types such as traditional insurance products and newer index-based products.
The key difference between them is that payments triggered in traditional insurance are based on realised individual farmer yields and payments under index-based products are based on other variables, such as weather or regional-level yields.
1. Traditional Insurance Products in Australia:
Named Peril Insurance:
Named peril insurance products provide farmers with protection against specific perils, such as frost, hail or fire.
The effects of these perils are typically localised and, therefore, exhibit little systemic risk.
As the farmer has no control over the impact of these events, moral hazard is not a significant problem.
These products are commercially available in Australia.
2. Index-Based Products in Australia:
Farmers can use these new tools to insure against yield risk. An index may simply be a set of numbers representing a single variable, such as rainfall or temperature over a given cropping season; or a more complex calculation involving many variables, such as various climatic data or shire-level yield data that are thought to have an impact on farm yields. Types of index-based products include weather derivatives, yield index insurance and area yield index insurance.
Weather derivatives, or weather certificates, are relatively simple products based on an index representing a single variable, such as rainfall or temperature.
They work in much the same way as financial derivatives; that is, they are derived from an underlying measurable variable.
Weather derivatives indexes are developed using data from weather stations.
An index can be developed for any weather station where sufficient data exists.
The farmer chooses the closest weather station to his or her farm to ensure that the weather index is the closest approximation to conditions on their farm.
The weather derivative would payout if, for example, rainfall is below a pre-specified amount over a pre-specified time period.
A broker designs and sells the product to the farmer.
One example of a weather derivatives product, CelsiusPro, currently operates in Australia.
Yield Index Insurance: Yield index insurance is more complex than weather derivatives, bringing together many more variables to predict farmer yield through computer modelling.
Variables may include shire-level yields and climate related factors, as well as crop specific factors, such as timing of planting, crop phenology and crop management practices.
The model provides a forecast for a farmer’s yield based on this information. At the end of the season the model provides an updated estimate of farmer yield based on realised weather conditions.
If the estimate is lower than the original forecast, the farmer receives a payout.
One example of a yield index insurance product, YieldShield, currently operates in Australia.