ICMIF member NFU Mutual (UK) is helping dairy farmers adapt to climate change by trialling a new type of parametric insurance which pays out in the event of increased hot weather which can cause heat stress in cattle which, in turn, can lead to reduced milk production.  The new cover operates on an index-driven model, and will ensure dairy farmers receive predetermined payouts based on trigger events such as certain temperatures being reached. This is achieved by the monitoring and recording of independent data ensuring accurate evaluation of whether temperature thresholds are reached that are specified in the policy.

The rural insurer has partnered with parametric insurance specialist Skyline Partners, broker Gallagher, and insurance provider Markel to develop and pilot the new cover – the first of its type in the UK dairy sector – in May 2023.

Research from NFU Mutual with dairy farmers has found that just over four in ten (41%) say that heat stress is a priority risk for their business whilst 70% are yet to take further steps to reduce the risk*.

Known as parametric insurance, this index-driven cover offers customers pre-determined pay outs based on a trigger event. Independent satellite and weather station data is recorded automatically. If limits are exceeded, the policy pays out at the end of the summer risk period, with farmers being able to use payments towards the cost of losses in production and improve their farm infrastructure to combat the effects of heat stress without the need to submit any claims evidence.

When temperature and humidity limits are triggered during the summer risk period, they are recorded to provide a calculated payment sent following the end of the policy term. Farmers will be able to tailor their insurance to suit their farm business’s risk appetite and budget, by selecting the total number of milking cows they wish to insure, with four coverage levels to choose from.

The first dairy parametric cover trial will be run this summer with selected customers in key dairy regions across the UK. NFU Mutual has developed the dairy product with their collaborative partners Skyline and Markel, with a long-term view to investigate a range of on-demand parametric covers which would automatically compensate farmers in the agriculture and horticulture sectors for climate-related losses.

Chris Walsh, Farm Specialist at NFU Mutual, explained that the new insurance had been developed in response to farmers growing concerns about the cost of heat-stress losses as farmers work to demonstrate ever higher levels of animal welfare on UK farms. The product also comes at a time when the industry is facing tight operating margins and falling milk prices.

“Heat stress in cows is becoming a major concern for many dairy farmers as summers get hotter,” he said.

“To help our dairy farmers cope with this growing problem, we’ve talked to agricultural experts, dairies, farmers, and insurers across the world to develop an innovative product which operates simply and effectively.

“Parametric insurance is already used to protect farmers’ incomes in some countries, but this is the first time it has been developed to support the UK’s dairy sector like this.

“We believe this type of cover may become increasingly important to protect other agricultural and horticultural sectors as the effects of climate change intensify, and we are working with farmers and growers to understand the need for a range of bespoke policies.”

To further assess the impacts of heat stress NFU Mutual consulted with Dr Tom Chamberlain, a leading expert on the impacts of heat stress on UK dairy farmers.

Dr Chamberlain’s recent 2022 study, in conjunction with Lallemand Animal Nutrition, found that across the nine farms within the study group, heat stress led to an average loss of production ranging from GBP 24,000 to GBP 90,000 depending on herd size.

Laurent Sabatié, Skyline Partners Co-Founder and Executive Director, said: “We’re excited to be working with leading rural insurer NFU Mutual to bring parametric insurance to the UK agricultural sector. Parametric insurance products such as this which we created for NFU Mutual, promise a radical change to the way businesses are insured.”

Skyline Co-Founder and Executive Director Gethin Jones said: “Claims under traditional insurance policies require physical loss or damage to trigger a claim. But not all losses involve a fire, the death of an animal, or another physical loss. A heatwave can drastically reduce milk yields for example, and even put a farm’s sustainability at risk over a long period. Parametric insurance can help protect farms from these climate-related losses with cover tailored to individual farm’s needs and a simple, transparent pay-out mechanism.”

Rob Wells, Head of Livestock at Markel’s International division, said: “At Markel, we’re always looking for new, smarter ways to support our customers and to trial promising new ideas that respond to changing needs. We are delighted to work with our partners, NFU Mutual, Skyline and Gallagher, on this initiative and to support farmers’ risk management in a way that traditional insurance products have not.”
Chris Walsh concluded: “We want to support dairy farmers meet the ever-evolving challenges they face. This is why we’re developing innovative forward-thinking products, utilising new technology and responding to climate challenges.”

NFU Mutual’s Heat Stress (Dairy Supply Chain) Insurance is being trialled from May 2023. As part of the new service customers will receive a tailored climate summary report for their operating area.

*NFU Mutual survey with 153 respondent dairy farmers from 1-30 September 2021.