A new risk management tool could help financially protect farmers from crop damage caused by weather.
American internet company eWeatherRisk has offered insurance against damaging weather events, including drought, excess rain and frost, in Canada and the United States since August.
Brian O’Hearne, president and chief executive officer of eWeather- Risk, a privately held company headquartered in Billings, Montana, said the product differs from regular insurance coverage because damage does not have to be proven to collect.
You buy protection against a specific weather event, such as reaching a freezing temperature on certain days, and if the temperature falls to that level, the contract pays out.
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O’Hearne, former president of the Weather Risk Management Association, said any industry affected by the weather – agriculture, energy, construction, retail – could use the product to offset the risk presented by precipitation and temperature.
“We have been working on this for four or five years and everything finally came together this summer.”
He presented information on how farmers can use the product at the Agri-Trend Farm Forum event in Saskatoon Nov. 17.
“It is designed to address the gaps in crop insurance coverage,” O’Hearne said in an interview.
“It is not an insurance product. There is no proof of loss. There is no adjuster. It is very objective … The weather either happened or it didn’t.”
In Western Canada, the system uses 300 weather stations.
Users select one or more stations near their farm and identify a situation that they want to be financially protected against.
For example, due to an excellent growing season a farmer could have a crop with the potential to yield 40 percent more than what is covered under crop insurance. He is concerned that excess rain late in the season could destroy yield and quality and wants to reduce the financial risk hanging over the bumper yield not covered by crop insurance.
Through eWeatherRisk, he could select a period of days and a cumulative amount of rain to hedge. He also would select the amount of coverage he wants to buy.
“Right now we have to write risk outside of the forecast period, so 15 days before the risk starts,” O’Hearne said. But the company is working on shortening that period.
The website’s tools show how often over the past several decades the situation he has selected has happened.
If the situation were common, the premium to buy that hedge likely would be unaffordable. Also, if long-term weather forecasts include the possibility of the event happening, it adds to the premium cost. If the event is rare and if it is not in the long-term forecast, the premium falls.
If the user thinks the premium is too high for the parameters he has selected, he can adjust them to lower the cost. It might be possible this way to achieve a balance of affordable cost and worthwhile protection.
O’Hearne said processors can also use the service.
“An agribusiness, say a barley processor – what happens if he has too much rain in his area and gets feed quality instead of malt quality? He does not have crop insurance.”
Anyone in Alberta can buy the contracts, but in Saskatchewan and Manitoba only those who meet the criteria of accredited investors can use it. Those criteria include people who own assets having an aggregate value of more than $1 million or whose net income before taxes exceeded $200,000 in each of the two most recent years.
By registering with the eWeather- Risk website, interested people can test it without cost to understand better how it works. Making transactions requires the user to provide financial information.
O’Hearne said eWeatherRisk offsets its risk by the variety of users and their geographic dispersal.
For example, farmers and natural gas producers might both buy contracts to cover their risks regarding spring weather. Farmers want to insure against cold weather but energy companies insure against warm weather because they want to sell more natural gas for home heating.
The company also reinsures with a publicly traded global reinsurance company.
