AgriTech/Insurance intersections: The contribution of insurance and technology as a source of sustainable finance in agriculture and breeding livestock.
Agriculture and insurance have common ground and are challenging industries in terms of the risks they are associated with and how they are affected.
If we look closely at the field of agriculture and breeding; We see a range of global trends impacting food security and the sustainability of their systems. The world population is expected to reach approximately 10 billion by 2050 and agricultural demand is expected to increase by 50%. Currently, around 800 million people are chronically hungry and 2 billion are micronutrient deficient. It is predicted that income increase in low- and middle-income countries will also lead to higher demand as their consumption will transition from mostly grains to meat, fruit, and vegetables. As production is expected to increase at the same rate, the pressure on natural resources increases. On top of all this, food losses and waste cause a significant portion of agricultural procurement to be wasted.
Climate change is affecting the whole world, endangering crop and livestock processes, along with fish stocks and fisheries. Trying to meet the growing demands for agriculture with existing farming practices seems to lead to increased greenhouse gas emissions, further deforestation, and land degradation. The use of chemicals such as synthetic fertilizers and pesticides for agriculture greatly reduces soil fertility. As a result, agricultural activities produce a lot of waste and by-products, which leads to increasing our carbon footprint. When we consider organic agriculture, which is believed to have a positive effect on both the ecosystem and the product, we see the fact that it contributes negatively since it requires more land compared to traditional farming methods.
The degradation of natural resources, the loss of biodiversity, the de-localization of damages, and the spread of plant and animal diseases, some of which have become resistant to antimicrobials, are creating an obstacle for the efforts that take on these challenges. Although productivity increases with technology, the income, and welfare of the population engaged in agriculture and livestock breeding are decreasing due to shrinking profit margins.
In summary, we can list the critical problems facing agriculture as follows.
For all these reasons, agriculture and breeding are under high uncertainty and risk.
Factors such as decreased predictability and loss of locality make it difficult to insure agriculture. Insurers are reluctant to take risks on which they cannot provide a reasonable level of predictability. In other words, taking on these risks is a big risk for them as well.
However, in an environment of increasing risk, the financial sustainability of agriculture and breeding, and the masses working in these fields, need to be eliminated through insurance. Because, by definition, “insurance” means the transfer of risk from one business to another in return for a required premium, and the new undertaker of the risk becomes the insurer. Lack of insurance is the main cause of continuing poverty in agriculture, especially in underdeveloped or developing countries. While the insured producer can recover his entire production in a short time after a disaster, it is sometimes impossible for uninsured farmers to reach their pre-loss status, sometimes for decades.
We mentioned that the factors affecting insurability include predictability; including statistics and data depth so that the right premium can be calculated. Adverse selection, meaning the purchase of insurance only by the segment in need of insurance, and Insurance Abuse can also be listed as factors. In Agricultural Insurance practice, existing insurance coverage generally covers certain crop varieties and certain natural causes (eg drought, flood, pests, and wind).
At this exact point, let’s think about how it is necessary to include more insurance coverage for agriculture and breeding; how it would be possible to provide more -but also a more technically reasonable- risk transfer to the insurer, and how to increase the insurability of agriculture in a sense, to ensure that insurance coverage covers more risk... Don’t new technologies of the new age and the entrepreneurs and startups that can implement these technologies quickly and more agile with new business models come to mind?
I am aware that it is kind of a long introduction. However, this intro might be excused as we continue to disseminate the "pain points" that need to be focused on. Let's see how this situation creates opportunities for new technologies and entrepreneurs.
Agricultural technology or agritech is defined as the use of technology in agriculture, horticulture, and aquaculture to increase production, productivity and profitability. For example, the use of drones in agriculture, satellite cameras and sensors, IoT-based sensor networks, weather forecasting models, advanced automated irrigation systems, light and heat control, pest and disease prevention, use of advanced analytics on soil management, biotechnology, hydroponic farming practices, soil humidity sensors.
So, at which “solution points” can insurance and agricultural technologies meet?
Let's take a look at the prominent methods that focus on the solution points:
Now, let's talk about how to find common solution points with insurance through some examples of startups that offer agrotechnology solutions.
Aker Tech: Aker technology helps farmers to detect pests and pathogens in the earliest period and thus to take the most effective measures. Thus, the decrease in efficiency is prevented, costs are reduced and unnecessary drug use is avoided, contributing to environmental sustainability. Headquarters: Missouri, USA, Founded: 2016
Grower's Edge: Grower's Edge is a FinTech platform that helps growers increase profitability. It aims to improve the habits of farmers to use modern technologies through its proprietary data platform that uses datasets and forecasting methods. The company also provides market information, news, and weather data for the agricultural industry, while enabling insurance agents to submit policy offers with the SaaS platform it provides. In summary, Grower's Edge offers financial technology products, solutions, and tools that provide income assurance to farmers through data-driven methods. Headquarters: Iowa, USA, Founded: 2017
AQUAOSO: Aquaoso, a cloud-based SaaS revenue model, uses machine learning, data science, and geospatial processing to identify water-related risks, helping financial institutions reduce their overall risk burden in their lending operations. “A lender can use our platform to research and report water risk down to a single parcel of land for each new loan it considers. Our analytical model can be used to identify water risk mitigation strategies for existing loan portfolios.” Headquarters: California, USA, Founded: 2016
Tarla.in: Tarla.in performs accurate risk and damage assessment by compiling and using agricultural climate and land data. Losses due to fraud and lack of actuarial data cost approximately 10% of the total insurance claims paid. Appraisal costs are also high due to frequent site visits and a complex data collection process. Also, agricultural companies and financiers cannot monitor what is happening in the field in real-time, which leads to a lack of information. Tarla.in allows creditors and insurers to use historical and real-time data to support their decisions. Tarsim, the first customer of Tarla.in, makes great profits every year in damage processes and information supply. Tarsim entrusted Tarla.in with the task of detecting a major field fire damage to test the technology. Tarla.in determined the condition of the crop and the damage with satellite images dating back only 1 day before the fire and ensured the correct determination of the damage. Headquarters: Tallinn, Estonia (Founders: Turkey), Established: 2018
GramCover: Insurance broker GramCover provides affordable, customized, and versatile insurance products designed for India's agricultural areas. In recent years, India has suffered significant crop loss due to floods and heavy rains. Crop loss and consequent financial loss is the leading cause of farmer suicides in India. And as the world moves rapidly towards climate change, crop losses will inevitably continue to worsen. Insurers such as GramCover, Bajaj Allianz General Insurance, Royal Sundaram, LIC, ICICI Lombard, GIC Re, HDFC ERGO, Aviva Ventures, and others sell the product, animal, health, motor, and life, etc. insurance products.
What made GramCover acceptable in rural areas was the initiative's good understanding of biological production processes; how geography affects production, and how to cover these risks after making their assessments. GramCover uses remote sensing, UAV, etc. technologies for these purposes. While many insurers have largely adopted one prescription-for-all approach, GramCover is customizing their insurance policies, making them more affordable for farmers.
“Challenges in crop insurance mainly arise due to the nature of risk, information inconsistencies in underwriting, the geographically wide distribution of agricultural production, and the complexity of biological production processes. “Even though farmers' incomes are quite small, we can create value in their insurance processes by removing the risk of them not getting enough insurance coverage. By making use of technology, we enable rural customers to find products they can easily buy at affordable prices,” says Jatin, founder of GramCover.
As seen from these examples, Insurers,
Finally, let's finish with a look at how a 2018 Accenture article evaluated the potential role of Insurers in ecosystems:
“Within this ecosystem, there is an opportunity for insurers to insure crop, fixtures, machinery, infrastructure, supply chain (warehousing, transportation, import, and export), liability and business results. As part of an ecosystem of digitized agricultural players, insurers can offer services including:
· A marketplace for insurance
· Farming risk scores
· Auto agricultural insurance
· Seed financing for farmers
· Hassle-free damage management and damage removal services
The core competencies that insurers need to develop to provide these services are:
· IoT data-driven, risk assessment, and auto insurance
· Affiliate management and easy service integration
· A low-cost, fully digitally-enabled insurance platform (IT and operations)