We looked into the strategies farmers adopt in managing their revenue risk due to drought. The prospects of managing the challenges of indemnity-based insurance with rainfall-index insurance were discussed. We established the relationship between yield (wheat) and cumulative standardized precipitation indices based on data from 1971 till 2010. The hedging efficiency of the product was analysed using Certainty Equivalence of Revenue, Conditional Tail Expectations and Mean Root Square Loss. The diversification prospect of the risk was captured with Loss Ratios. Previous studies assumed constant price but our analysis suggests that the inverse relationship between price and yield reduces the willingness to pay for insurance. Differences in hedging efficiency were observed between Queensland and Western Australia and methodology adopted. Farmers from locations with high rainfall variability were more willing to pay for the insurance. The results from the Loss Ratio Analysis showed that pooling insurance contracts reduced risk to the insurer. We concluded that other variables would have to be taken into consideration in order to design robust weather-index insurance. We noted that the current amendments to drought policy in Australia have traded efficiency for equity. Some necessary legal and regulatory requirements for a sustainable adaptation to drought through recent innovative insurance options in the Australian market were also enumerated with regards to anti-competition laws and insurable interests. It was recommended that stamp duties on agro-insurance be abolished and tax incentives on insurance premium would make farmers adjust their practices towards profitability and forestall rural debt.