Author: Reto J. Schneider, Swiss Reinsurance Company Ltd.
Europe provides its population and the farming sector with a sophisticated framework of prevention and protection measures for animal diseases. This publication deals mainly with this aspect of the livestock insurance sector in Europe.
The European Union regulates the principles which are implemented on a national level. Different bodies are responsible for this process. Generally, there is a private – public partnership approach in many countries where the state deals with the contagious diseases, the prevention and the eradication as well as related costs. The private sector deals with supplementary cover as, for example, business interruption following a disease event. Although the insurance system covers the farmer for losses not covered by public funds, the penetration rates are relatively low and no substantial growth can be observed over the last few years. This is even more astonishing bearing in mind the major disease outbreaks we have seen since 2001 including foot and mouth disease, swine fever, avian influenza but also the BSE crisis. Reason for the limited penetration are the perceived high premiums for additional coverage but even more the limited financial resources of farmers in Europe. Focus is on investments to increase productivity, modernisation of machinery, buildings and farm expansion projects following the structural change. However structural change is also an opportunity for the insurance sector. Farms getting bigger and bigger, more specialized and external financing (private or public) becomes more important. As banks are more reluctant concerning special risks like diseases, an insurance policy can improve the farmer’s risk profile as loans are backed and the business continuation is assured in case of a calamity.
Risk management solutions in Europe based on European Law
Europe with its many states has a wide range of solutions in terms of public support and solutions to deal with livestock insurance and risk management. Overall, the European Union has a defined regulatory framework which is applicable in all member states and has also been more or less taken over by neighbouring non-EU states. The framework deals with the protection of public health and consequently defines how to prevent and to handle outbreaks of contagious animal diseases.
The Animal Health Strategy (2007-2013) lives the principle “prevention is better than cure”. The Community Animal Health Policy (CAHP) covers the health of all animals in the EU kept for food, farming, sport, companionship, entertainment and in zoos. It also covers wild animals and animals used in research where there is a risk of them transmitting disease to other animals or to humans.
It is strongly linked to the EU’s obligations under the Sanitary and Phytosanitary (SPS) Agreement adopted in 1994 in the context of the World Trade Organisation (WTO). This Agreement is aimed at minimising the negative effects of unjustified health barriers on international trade. Implementation of EU regulation is up to the member states.
There are different types of indemnification solutions in Europe. Parastatal solutions are amended with private supplementary cover. Private solutions often follow decisions taken by the public veterinary services and work as an amendment to public payments.
Partial financing of certain public sector costs with Animal health funds or similar setups
Such funds exist in Germany (Tierseuchenkassen), Belgium, Austria, Switzerland, Greece, Netherlands. They are regulated under public law and funded by ex-ante levies from the producers, marketing revenues and/or direct public support. They fund prevention programs and fighting strategies and indemnify for losses following contagious diseases as well as costs for vaccination programs. The scope of the funds is defined in the respective acts and contingency reserves are built up as an important feature for the sustainability of such a fund.
Compulsory financing of certain private sector costs via special bodies (production levy foundation in Denmark, Groupement de Defense Sanitaire in France)
Livestock farmers contribute with levies to the system but the system does not have contingency reserves. Levies are paid by the animal and livestock keepers and programs can be declared compulsory either by the producer associations (e.g. in Denmark) or the central government (e.g. in France)
Supplementary Mortality cover (e.g. following disease) by private insurance sector
Companies in some states offer a supplementary mortality cover for livestock (herds, single animals) following diseases in addition to the indemnification from the state. This is practiced in the Czech Republic, Slovak Republic and Lithuania to name a few countries. Reason for this supplementary cover is the need of the farmers for a higher indemnification as foreseen by the law which compensates them for part of the business interruption loss. This insurance is currently subsidized in
the three countries with 15-30% of the premium and covers mortality (disease, elementary perils but also overheating) but can also be extended to uncovered costs for disinfection and removal. In Switzerland, some companies offer as well such additional disease cover (unsubsidized) and there is also sector cover (e.g. for poultry) in place.
Business interruption cover following mortality offered by private insurance sector
This is the most sophisticated insurance product in livestock production dealing with the consequential loss following mortality of the stock. Indemnification can be pre-defined or based on effective lost gross margin. Business interruption completes the risk management of German farmers as an amendment to their (compulsory) participation in the animal health fund dealing with the pure animal loss. Penetration is 20% (pigs) and 30% (cattle), poultry even less (estimated 15%). In Sweden, up to 85% of farmers take up supplementary cover from private insurers.
The currently used reinsurance capacity is rather limited compared to property but also crop insurance. Exposure for the peril hail is far more than what reinsurers have at stake for livestock insurance. Reason for this is not the limited appetite but the lack of need for reinsurance capacity. Most privately offered products do not have a contagious disease exposure, exposure remains therefore limited to single animals or single risks (stable). Real cat exposure exists only in markets with business interruption cover following contagious diseases like in Germany and markets with contagious disease cover as an add-on to public indemnification like in Eastern Europe in the Czech Republic, Slovak Republic and Lithuania. International reinsurance capacity is available for country/companies with a sound and transparent disease prevention and fighting strategy and process as well as a solid payout mechanism and well working public veterinary services. Consequently, without healthy stocks and good farming practices as well as traceable livestock traffic, international reinsurance will be reluctant to accept a risk transfer from the public to private risk carriers.
Tight situation of producers
The situation of the producers remains tight. The lack of available income for supplementary risk management measures is seen as the major obstacle for increasing penetration. Livestock farmers are suffering due to the steep increase of their main costs like fodder but also energy and labour. On the other hand, producer prices are stagnating or even shrinking under the current market situation with a handful of large retailers having the negotiation power on producer prices on their side.
One may argue that the presented risk management solutions should lead to a high penetration of livestock disease cover. Unfortunately this is not the case. Major differences in penetration can be observed in the European countries.
Even major disease outbreaks in the past like FMD in the UK/France (2001), swine fever in Germany (2006, 2008), the Slovak Republic (2008), avian influenza H5N1 (Europe 2005 and continuing) and the BSE crisis did not influence penetration substantially. Although insurance uptake rises after a large event, sales drop again after a certain period of time.
Penetration for specific livestock insurance products vary between up to 30% in Germany (depending on animal species and region) and more than 80% in Spain and Sweden. Reason for this situation:
• Payments made from levy funded organization (amended with EU co-financing) in case of contagious diseases assist the farmer with minimum support in any case. There is no real need for more cover except for highly vulnerable producers w/o diversification possibilities or producers needing financing which requires an insurance policy (e.g. for the BI) as a loan backup. In some states, the level of protection provided by animal health funds or the like is therefore limiting the private insurance offering.
• Farms are getting bigger and bigger. This trend is continuing. Bigger farms producing with multiple locations are better spread and insurance need is shrinking from a corporate point of view.
• The income situation of (family run) farms is tight all over Europe and the available gross margin is shrinking. Other expenses may be more important than insurance to keep the operation running.
Development of Livestock insurance premium in different European countries
A big part of livestock premium is hidden within the property business as stocks are insured against fire to a large extent. This type of product can in many countries not be isolated from general property business as it is treated like content. The product is also not specific for livestock. The livestock premiums dealing with disease related or livestock specific issues is however much smaller and only in case of these specific issues also reinsured separately. Livestock premiums as per the attached graph include cattle, pigs, poultry, sheep and goats but not bloodstock and no levies for animal health funds or the like.
Livestock insurance premium in selected European countries
A way out of this stagnation in most countries apart from Spain is currently not easy to identify. Improving consumer requirements e.g. quality, animal health and welfare and environmental issues together with increasing feed prices on one hand and stagnating producer prices compared to the cost side drive the margin of livestock producers further down. Consequence is the continuing structural change to release economies of scale. This reduces the client base for insurance companies.
However, with more corporate and commercial types of management and more external financing, proper risk management includes not only prevention and mitigation but also insurance as a major pillar. These professional buyers will be a challenge for the insurance industry and products will need to be amended to reflect the need of a corporate operation which is different from a diversified family type of operation. The differences between European countries in terms of subsidies distort the competition. But from a risk transfer point of view, increasing subsidies can improve the penetration and as more capacity will be required, it may assist in the shift of the risk transfer towards private organizations.
FFSA Etudes 2007 et 2008