Index-Based Insurance: A Way to Protect Agriculture and the Mining Industry

JAKARTADAILY.ID - The Indonesian General Insurance Association or AAUI's launch of plant insurance based on soil moisture index has paved the path for the growth of big data management as a reference index in calculating insurance risk, which can be applied in a wide range of industries including mining and maritime transportation.

According to Bisnis.com, Hastanto Sri Margi Widodo, the AAUI's General Chairman, noted that the new product protects against the possibility of soil moisture deficiency, which can lead to crop failure. The product's initial feature is protection against cocoa plants.

AAUI uses historical data on soil moisture as a basis in estimating risk in this product. Widodo claims that his group discovered a difference in rainfall in the early and second half of each year, resulting in a lack of soil moisture in May-July and excessive humidity in July-October.

He added that soil moisture could have an impact on cocoa farmers' yields, as well as the quality of their cocoa, and potentially cause crop failure. As a result, the utilization of soil moisture data and other data such as rainfall and weather can help insurance firms get a better picture of risk.

However, the insurance uses the data differently. Instead of paying the insured should a crop failure occur, the insurance firm pays when there is no crop failure. Widodo said that this would be critical for farmers' long-term viability because renting water pumps consumes 36 percent of capital, and farmers generally have minimal resources, leaving them unprepared in the case of a severe drought.

A similar approach, according to Widodo, can be constructed for a variety of insurance products, starting with the establishment of a big data system. Because the risk assessment is easily measurable, the technique may result in competitive pricing.

The creation of index-based insurance for commodities such as mining and seaweed agriculture is an agreeable step. Such insurance, Widodo said, might be beneficial for the production of ferronickel, one of Indonesia's primary mining commodities.

In order to respond to difficulties and provide inexpensive solutions, the AAUI and general insurance firms require immensely complex data. OJK also announced that it would assist the growth of index-based insurance from a regulatory standpoint through interaction with appropriate ministries and stakeholders.