In recent years, governments have focused on promoting private drought insurance markets. However, public schemes are also possible and exist in many other countries, says Mr Neal Hughes, Senior Economist, Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES).
In an article in The Conversation, he says that a well-designed public drought insurance scheme – with premiums to cover costs – might have some advantages over private insurance. For example, governments may be better placed to absorb losses in years of severe widespread drought (although re-insurance markets might provide a way for the private sector to manage such risks).
However, public drought insurance schemes could, depending on their design, reduce demand for private insurance. This problem also extends to other forms of government drought relief: farmers may be less likely to pay for insurance if they suspect ad hoc drought assistance will be available.
Better data is essential
Ultimately, public and private insurance schemes face similar technical challenges. Solving these technical issues requires detailed data both on weather and farm outcomes, Mr Hughes says.
Numerous reviews have cited data limitations as a key constraint on the Australian farm insurance sector. A recent review by Australian Bureau of Statistics and ABARES highlighted the patchy and fragmented nature of existing government and industry agricultural data.
There is a good case for government to support the supply of this data, similar to the National Flood Risk Information Project established following the Australian 2011 floods. Investments in data are likely to have many applications beyond insurance, including the development of improved tools to support farm decision-making.
While drought insurance schemes have had mixed success to date, there remains some hope for the future. The emergence of big data collected from satellites and Internet-enabled devices promises to revolutionise both farm production and risk management. In time, smart products underpinned by better data might finally help solve the challenge of drought policy, Mr Hughes says.