Multiple risk insurance in Italy is barely old enough to go to school, having celebrated its sixth birthday this year. Compared with the ripe old age of the hail policy, its older sister, we could expect it to be barely able to walk alone and say a few words.
On the contrary, it has shown a surprising ability to learn fast, and grown by leaps and bounds and now has some important prospects before it.
BACKGROUND AND REFERENCE STANDARDS
If multiple risk insurance now shows accelerated growth, the gestation was, however, long and difficult. It took three years before the first policy came into the world.
The zero meridian of multiple risk in Italy is represented by art. 127 of law 388, enacted in 2000, which establishes the Reinsurance Fund at ISMEA, i.e., a reinsurance instrument financed with public funds.
That same law also specified the terms of public intervention in support of the payment of the premiums relative to “multiple risk and global policies on farm productions”.
The legislator moves in two directions: on the one hand, he sets the terms of public intervention in support of the agricultural entrepreneur who purchases the guarantee, on the other he constructs an instrument to safeguard the budgets of insurance companies willing to venture into a heretofore unexplored area of business.
Two years later, in 2002, a ministry decree established the operating methods of the Reinsurance Fund with the proviso that it must have as its first priority multi-risk coverage.
The intentions of the legislator at this point are very explicit: to support the birth and development of innovative forms of insurance for our country that would broaden the range of possibilities offered to the agricultural enterprise to protect its production against every type of damaging event, while at the same time bringing about a cultural transformation. It was a matter of changing from a subsidizing model, in which the government intervenes after an event to repair the damage caused by calamities, to a risk management model, where the entrepreneurial choices participate in a priori risk management.
The decree, that contains references to even more advanced forms of insurance such as those on revenues or income, also contains a definition of multiple risk insurance: “insurance contracts that cover the result of the production measured as quantity of product per crop area, taking account, if necessary, also of damage to the quality.”
It is a definition that contains the basic concept of the multiple risk policies and that will then be developed in the years to come, through the evolution of the insurance products.
Thus, in 2003 multiple risk policies first appeared on the Italian insurance market. It was a timid appearance, just 40 policies for less than a million euro of insured value, because the reinsurance fund would only receive the approval of the European commission in July of that year, and did not really become operational until 2004.
As soon as the companies on the market could count on an adequate reinsurance, the number of policies signed, and the volume of business, began to grow starting from almost 11 million insured value in 2004 to reach 305 million in 2008 .
At the end of 2007 there came another new boost, with the establishment of the Coreinsurance Consortium for Natural Calamities in Agriculture.
The activity performed by the Reinsurance Fund to encourage the spread of multiple risk policies came up against the limits of the fund’s financial endowment, which did not have the strength to satisfy a steadily growing demand, and the lack of expansion of the experience acquired by the individual insurance companies, which jointly might have been able to convince the insurance and reinsurance companies to extend their participation in the project.
Consequently, it was found desirable to create a structure that could accelerate the spread of multiple risk policies that, in the preceding years, had found interest on the part of the farmers and that, through the joint management of private insurers and reinsurers could guarantee on the one hand a greater underwriting capacity and, on the other, capitalize on the experience acquired on new risks, in terms of both product structuring and liquidating technique.
The by-laws of the consortium establish in these terms its institutional aims: “the Consortium is established for the purpose of promoting the introduction on the agricultural market of innovative insurance policies against natural calamities and atmospheric adversity as they relate to agriculture, through the division of the risks among the Consortium member companies, in order to offer the agricultural enterprises new insurance instruments to defend their production.”
More in particular, the Consortium pursues the aims of:
1. promoting the spread, in Italy, of innovative insurance policies against natural calamities and atmospheric adversities as they relate to agriculture, in accordance with the terms of the National Agricultural Insurance Plan, and reinsurable as foreseen by the Annual Agricultural Reinsurance Plan;
2. to establish the technical rules for management of the reinsurance of these policies;
3. to divide the risks insured with the aforementioned policies among the Consortium member companies.
4. to promote, through ISMEA, the exchange of information on the technical performance of the risks with similar organizations abroad;
Most of the Italian companies active in the hail sector, and 4 of the main international reinsurers, have joined the consortium, with the public Reinsurance Fund that holds the majority in the consortium .
Ismea, which has its offices at the Consortium headquarters and guarantees its operations through its own resources, presides over the consortium, while the two vice-presidents directly represent the market and the reinsurance sector.
THE MULTIPLE-RISK POLICY
Now that we have summarized the history of the development of this type of coverage on the Italian insurance market, it is time to describe the structure of the insurance product that we define as multiple-risk.
First, however, we must take a brief detour to illustrate how the Italian government contributes to payment of the insurance premium on behalf of the farmers, an aspect that has always played a fundamental role in the spread of the policies against atmospheric calamities in agriculture.
POLICIES WITH AND WITHOUT THRESHOLD
In accordance with the terms of the EU directive on the subject of government subsidies, the public contribution to payment of the insurance premium against atmospheric calamities in agriculture can be as high as 80% of the total if the policy applies the reimbursement mechanism only in case of damage equal to at least 30% of the value of the production insured.
This limit of 30% is called the threshold and is what makes it possible to equate hail to other catastrophic events.
If this is not the case, that is, if the policy does not contain any type of threshold for access to reimbursement, the public contribution may not exceed 50% of the insurance premium.
The basic risk unit, on which the percentage of damage, and thus the threshold, is calculated, starting this year, is the entire farm production for the municipality and product. This means that if, within the same municipality, the approximately 8000 territorial administrative units into which Italy is divided, the insured farm owns several fields planted with the same crop, even distant from one another, they are considered as a single risk unit.
Therefore, to obtain a public contribution of 80% of the insurance cost, the policy must specify two conditions: the first being that the repayment mechanism goes into action only when the damage exceeds 30%, and the second being that the minimum risk unit shall be the entire production of the farm per municipality and product.
In the absence of one of the two conditions, the public contribution may not exceed 50%.
As we shall see, there are multiple risk policies on the market with and without threshold.
SUBJECT OF THE INSURANCE
The article of the policy that defines the subject of the guarantee states:
“The insurance company indemnifies the loss or reduction of production of the insured crop and quality damage, if foreseen by the special conditions…….”
As we can see, the definition is taken directly from that contained in the Ministry Decree of 2002 and seems very generic. These are the definitions contained in the policy, that will enable us to understand more clearly exactly what is covered by the guarantee:
PRODUCTION The result (yield) of the entire farm enterprise, relative to the crop insured and grown on land in the same municipality
PRODUCT The individual botanical species or subspecies, as defined in item 1.1 of art 1 of M.D. 102,971 dated December 27, 2006, and specifically:
For multiple risk policies with fixed exemption with and without threshold:
Fruit: Kiwis, Apricots, Persimmons, Cherries, Apples, Nectarines, Pears, Peaches, Plums;
Wine grapes: the guarantee refers to the entire wine grape production of farms producing wine grapes labeled D.O.C., D.O.C.G., I.G.T. and common grapes. Clearly, for the reference yield per vineyard subject to the labeling (D.O.C, D.O.C.G. and I.G.T.), it will be necessary to consider the unit foreseen by the discipline.
Industrial tomatoes: this refers to all production intended for the canning industry (peeled tomatoes and tomato concentrate);
Corn: refers to the all production intended for meal, feed and sweet corn;
Grain (common and durum).
For multiple risk policies with scaled exemption and threshold:
Fruit: Kiwis, Apricots, Persimmons, Cherries, Apples, Nectarines, Pears, Peaches, Plums;
Wine grapes:the guarantee refers to the entire wine grape production of the farm enterprise for D.O.C., D.O.C.G., I.G.T. wine and common grapes. Clearly, for the reference yield per vineyard subject to the labeling discipline (D.O.C, D.O.C.G. and I.G.T.), it will be necessary to consider that foreseen by the discipline.
INSURED YIELD By insured yield is meant the mathematical product of the average farm production per hectare for the area declared. The average farm production is the average production obtained, by unit of area cultivated with crops in full production in the preceding three years, or on the average of the three-year production, calculated on the three preceding years excluding the one with the lowest and the one with the highest production.
In the absence of data from the farm enterprise, the municipal average per hectare in the last five years will be used, discarding the best and worst annual result obtained or, if not available, the same average of a neighboring municipality with similar production potential per unit.
This means that the multiple risk policy insures the historical output of the farm enterprise, for each species grown, in the entire municipal area, and reimburses both the quantitative and the qualitative loss where foreseen by the conditions of the policy.
The reference to historical output makes it possible to focus the coverage on extraordinary events, not on those that ordinarily occur to reduce or affect the size of the crop.
The reference to the entire municipal area aims at providing the guarantee when the event strikes a large area of the farm and thus has significant effects on its economy.
The same article that describes the extent of the coverage continues as follows:
“………..caused by the following atmospheric adversities: Hail, Freezing and Frost, Strong wind, Drought, Excess of rain, Flooding, Excess sunlight, Violent thermal excursion, Excess of snow and South winds, if these events are foreseen by the National Farm Insurance Plan as established in Legislative Decree no. 102/04 and subsequent amendments”
The text emphasizes two things. The first is the wide range of events covered, representing almost every type of adverse weather that can have negative effects on crops, and the second is the reference to the National Farm Insurance Plan.
This is a document to which all the organizations involved refer: the ministry, the regions, the insurance companies and the farmers’ representatives, and that defines the terms within which the government will provide aid, for example by defining which crops and which events will be subsidized.
Since they may differ from one region to another, reference is made to the document in the description of the coverage.
One of the difficulties encountered in defining the events insured, at least for some of them, is to provide objective, measurable elements that will enable the contracting parties but also the appraisers to make correct estimates of the damages, which must be identified with certainty and ascertain to what extent they are covered by the guarantee.
EXCESS OF RAIN: Excessive and/or prolonged precipitation with respect to the averages for the period (over 80mm of rainfall in 72 hours), causing damage to the crops insured. The effects of this event must be encountered by a number of farms and/or adjoining or nearby crops, within a radius of 3 km, and impinging in zones having similar orographic features.
DROUGHT: Extraordinary shortage of precipitation, equal to at least one third of the normal amount for the period, causing a reduction of the water content of the soil below the critical moisture limit and/or impoverishment of the sources of irrigation that make it impossible to come to the aid of the crops. This event must cause decisive effects on the physiology of the plants insured, thereby jeopardizing the insured production. The effects of this event must be encountered by a number of farms and/or adjoining or nearby crops, within a radius of 3 km, and impinging in zones having similar orographic and pedoclimatic features.
We have tried to define parameters that refer to the intensity of the event measured, 80 mm of rain, the reduction by at least one third of precipitation, as well as its amplitude, with effects visible within 3 km of the insured crops.
Just as important as the list of events covered is the list of events excluded, which delineate the perimeter of the insurance clearly and unequivocally. The following events are excluded:
a) damage caused by earthquakes, tidal waves, bradyseismic activity, volcanic eruptions, landslides, earthfall or mudslides, snowslides and rockslides unless the contracting or insured party can demonstrate that the damage has nothing to do with these events;
b) creek formation;
c) elevation of the water table;
d) lowering of the water table causing a saline wedge phenomenon;
f) damages caused by any other event not covered by the guarantee that precedes, accompanies or follows an insured event;
g) damages caused by improper agronomic or cultivation practices;
h) damages due to malfunctions or breakdowns of the irrigation system;
i) damages due to crop diseases;
j) damages caused by any type of environmental pollution;
k) growing crops on floodplains, meaning by this land located between the riverbank and the artificial embankment, i.e. that portion of the riverbed that is only covered by water during flood tides;
l) untimely harvesting of the crop for any reason (weather, market reasons, unavailability of commission harvesting machinery, etc.);
m) damages due to physiological causes and/or normal rotation of crop production.
EXEMPTIONS AND LIMITS OF INDEMNITY
A policy that covers such a broad range of risks must necessarily require some participation in the risk by the insured party and thus presents exemptions and limits of indemnity, which are usually higher than those typical of simple hail insurance.
They vary depending on whether the policies are with or without threshold and depending on the product insured.
There is also the possibility, limited to certain products, of acquiring a scalable exemption, that decreases, for example, as the percentage of damage increases.
In addition to the loss of output, all crops insured, with the sole exception of grain, also cover quality damage, though limited to certain events, and specifically:
- wine grapes: hail, excess rain, south winds and excess heat;
- fruit: all events;
- industrial tomatoes, corn and rice: hail.
“every thousand-mile journey starts with one small step”
With this presentation I hope I have succeeded in describing the not always linear, simple process by which the multiple risk insurance policy joined the other options that Italian agricultural enterprises can exercise to safeguard their income from atmospheric calamities.
The sometimes different goals of the various players involved in this process made it necessary to proceed one step at a time, and it was not easy.
The agricultural enterprise is still linked to a hypersecure model of insurance, heavily subsidized in terms of cost and with minimum limitations of exemption and threshold, still a long way from the model of coverage to safeguard the company GMP or income that, in the long run, is the natural goal of the multiple risk policy.
The insurance or reinsurance companies eye with suspicion all the guarantees against the effects of those climatic events that have been increasing in frequency in recent years and have a negative effect on the corporate balance sheet.
The government, attentive to the limits imposed by national and international laws and the cost of allocations in support of the agricultural enterprises, has gradually attempted to amend the instruments of aid going from economic subsidies to structural and legislative improvements.
We are all aware, however, that the progress toward an insurance model that covers only damages that have an effect on the business economy of the farm, leaving the lesser damages for the account of the farmers, but also extending the insurance coverage to most of the calamities to which they are exposed, is the most advanced model today of partnership between agricultural enterprises, insurance companies and the government.
The data show us an increasing spread, in both geographical terms and in terms of crops insured, of these policies that, over the years, have also expanded to extend coverage to an increasing number of adverse events.
However we are still a long way from stabilization of the technical results, that are still affected by the relatively small portfolio, the scarcity of a statistical base and liquidative experience, while the success of the format is still hampered by the competition of more experimental policies like the single risk hail policy or the plural risk, but in particular, it will have to overcome the resistance of that multitude of farmers who still do not protect their production with insurance policies, as they have been unable to find satisfactory responses from the products traditionally offered.
So we certainly still have a great deal to do, but we are firmly convinced of the potential we can express with this new insurance instrument. It will be up to us now to create the conditions for our infant multiple risk policy to grow up.
Author: Dr. Luigi Avagliano, Direttore Centrale, FATA Assicurazioni, Rome