Climate variability is creating a major protection gap for global farmers with many unable to afford traditional insurance an audience at the Bermuda Captive Conference heard.

In a session called “Crop It Like It's Hot: Parametrics & Agriculture” various professionals discussed parametric insurance as an alternative insurance cover for the farming industry.

Parametric insurance pays out automatically when a predefined event or threshold is met, such as a hurricane reaching a certain wind speed or rainfall exceeding a predetermined level.

Because it is not based on an assessment of actual losses, claims can be processed quicker than traditional insurance.

Stefan Wunderlich, head of alternative risk transfers and parametrics at Beazley, saw parametric insurance complementing traditional insurance programmes.

“But there is clearly also a bit of a competition between these products,” he said.

In fact, he said parametric insurance could be an all-out substitute for traditional insurance, particularly in micro insurance terms where a farmer finds the overhead cost of traditional insurance be too high to maintain.

Kathleen Finlay, president of the Glynwood Centre for Regional Food and Farming in Cold Spring, New York, said farming has always been a risky business.

“The margins have always historically been tight, and it is getting riskier,” she said.

Extreme weather events are hitting farmers hard, Ms Finlay said.

“How to move water is really one of the key challenges that farmers face right now, so climate variability is what farmers are really against,” she said. “They are trying hard to get ahead of it.”

She sees opportunity in that.

“The insurance sector can really incentivise practices on the land that mitigate the risk from the start rather than experience the risk and have to make a claim,” she said.

Mr Wunderlich said some insurance companies do not have enough understanding of agricultural risk and variability.

He added that those who employ capacity and capital into understanding in detail will be the ones who see the opportunity.

Appleby Bermuda office managing general partner Brad Adderley said parametric insurance can often reach more people.

Using India as an example, he said in certain regions, claims handling is being processed through artificial intelligence.

“They are paying claims automatically to make it easier to get it quicker to the end user,” he said. “Without these new skills, there is no way you can get to the risk.”

He added: “If you are trying to reach smaller policies or small groups of people, you can be cost‑efficient. Parametric provides a very cost‑efficient way of reaching people and also paying the future claim.”

He said thanks to this alternative type of insurance, more people are accessing coverage.

However, Mr Adderley said parametric insurance can create a tricky regulatory and practical dilemma.

Regulators must decide whether parametric triggers really represent genuine risk transfer and benefit policyholders and how that impacts capital requirements.

There is concern about situations where a loss occurs but the parametric trigger doesn’t fire. Sometimes countries do not properly budget or pay premiums but still expect payouts.

He questioned whether the Africa Risk Capacity facility would have even formed without parametric insurance.