Who should carry agricultural risk?
The weather and epidemic disease are farmers’ biggest exposures, yet insurance for these risks is often costly. Should European governments subsidize coverage in a US-style model of assistance?
Farming is too risky for insurers and reinsurers to cover alone. That was the message from the International Cooperative and Mutual Insurance Federation’s 16th meeting of reinsurance officials in Athens at the end of May, when delegates said government help is needed to provide adequate cover for European farmers. The high risk nature of agricultural production means insurance is too expensive for farm budgets, yet producers’ exposures are too high without it. Consequently, leading reinsurance industry figures believe governments should subsidize coverage to help EU farmers compete with their wealthier US counterparts.
William Dick, Partner Re’s head of agricultural services, says: “Agricultural risks are problematic because of the exposure to some catastrophic risks, notably drought, epidemic disease and flood. The private insurance and reinsurance industry is unlikely to be able or willing to provide cover without some assistance from government.”
Exposed to the elements
When natural catastrophes, such as drought, floods or windstorm hit, many European farmers have insufficient means of compensation. In comparison, US farmers are well covered by a federally-funded agricultural insurance scheme. The ideal solution for European farmers is assistance from the government, says Dick: “A partnership between private and public sectors in agricultural risks can be structured through the provision of high level catastrophe reinsurance protection, or through premium subsidy.”
Munich Re’s head of agricultural reinsurance, Karl Murr, agrees. He believes European farmers simply do not have sufficient risk management tools and are losing out to their US competitors. “Prices are very poor and production costs are increasing year by year for European farmers so they need support from their governments. If a European farmer wants to be covered in the same way as his competitor in the US, he has to get covered for additional perils, but he cannot pay this additional premium out of his normal farm income,” says Murr. “There are some areas – even in Italy or Germany – where farmers pay more than a 10% risk rate just for hail insurance.”
UK farmers have been hit particularly hard in recent years. First, cattle were fed BSE-infected foodstuffs, leading to a fatal condition that can be passed to humans as variant Creutzfeldt-Jacob Disease (vCJD), commonly known as ‘mad cow disease’. Many countries banned British beef as a result in the late 1990s. Severe floods in autumn/winter 2000 ruined crops, and fields were waterlogged for months.
“The outbreak of foot-and-mouth disease in Great Britain and mad cow disease in various countries in Europe were the most significant events in agricultural insurance in recent years,” says Murr. “Farmers and their union representatives now recognize there is no adequate cover available.” Lack of insurance for the disease prompted the British government to compensate farmers whose livelihoods were devastated when around four million animals – some infected with foot-and-mouth disease, some not – were destroyed on government orders.
Lack of cover
It had been so long since the last outbreak of the disease that fewer than 10% of UK farmers affected were believed to be insured. Many insurers and reinsurers were reluctant to cover epidemic diseases anyway – and they are more reluctant than ever.
“We are very cautious on the epidemic side,” says Dr Karl Schneider, manager of agricultural reinsurance for GE Frankona Re, based in its Centre of Excellence in Winterthur, Switzerland. “But foot-and-mouth disease did not have a huge effect on the (reinsurance and insurance) industry because there was little insurance cover in place and very little reinsurance cover. The UK’s National Farmers’ Union stopped buying reinsurance for this disease in 1992.”
“The government role now is to clearly define the precautions they are taking in case of another outbreak. They need to be clear about who is responsible for what – governments must be accountable,” says Schneider.
There are various European-level discussions within governments and inside the farming industry about the best way to cover farmers against outbreaks of epidemic diseases.
“There are two main streams of thought,” says Murr. “There is a so-called ‘epidemic disease reimbursement system’ where farmers receive compensation for the value of the livestock that has to be killed according to governmental quarantine measures. One suggestion is that the compensation under this scheme is extended. But the flaw with this is that it is based on a lump sum value, so it does not cover individual losses.”
“There are discussions in Brussels about multi-peril insurance for epidemic disease that covers individual losses of each farm. A similar system to the one used to cover US crops is being suggested for European livestock,” adds Murr.
Weather – the greatest risk
Epidemic diseases may strike fear into the hearts of farmers, and the insurance industry may balk at the prospect of accepting them, but the greatest single exposure in agriculture is the weather. And crops are particularly at risk. High premiums reflect the level of this exposure.
Premiums for primary insurance are commonly set at 5%-8% of the total sum insured with deductibles of 25%. These high rates are why it is argued subsidies are needed to achieve sufficient market penetration and the necessary spread of coverage. The private insurance sector has traditionally offered hail cover for all types of produce, including everything from cereals to special crops such as tobacco or vineyards. It is still by far the most popular cover because of the high exposure. “Hail or frost damage can cause local, but severe damage,” notes Dick.
This coverage has expanded over the years to include extended hail cover, other natural perils and even business interruption and liability cover. Farmers who are becoming increasingly risk-aware are embracing multiple peril policies to cover their crops. Under such policies, drought, flooding, windstorm, frost and disease are insured against. But recurrent ‘freak’ weather events mean insurers and reinsurers are unlikely to take on the risk without some form of government backstop.
The US federal government provides an array of insurance schemes covering farmers’ crop yields and revenues. Premiums, administrative costs and reinsurance are all subsidized. For catastrophic cover, the federal government pays 55% of the established price of the crop if losses are over 50%. The government pays the premium and the farmer pays a $60 administration fee for each crop insured in each county. The fee can be waived for farmers with limited resources.
US farmers may insure between 50% and 75% of their yield under a multiple peril policy, including drought, excessive moisture, hail, wind, frost, insect infestation and disease. The farmer must select a percentage of the predicted price he wishes to insure – that is between 55% and 100% of the crop price established annually by the government’s Risk Management Agency.
Should the harvest be less than the amount covered, the insured will receive an indemnity based on the difference. Other policies available to US farmers include the group risk plan, crop revenue coverage, income protection, revenue assurance, group revenue insurance policy, dollar plan and adjusted gross revenue, which includes cover for a small amount of livestock revenue.
“The consequence for the European farmer is that he cannot compete on the world market with the Americans, so the Americans dominate the world market,” comments Murr. “The latest agricultural policies from Brussels want to increase competition and open European agricultural policies to make them more global. So they have to support European farmers by granting them the same instruments to be competitive.”
Munich Re has had frequent contact with the European Commission about the creation of state-sponsored insurance schemes across the EU. It believes such schemes could provide a reliable backstop for European farmers, just as the US federal government provides some coverage for its farmers.
Munich Re advocates a system where the nation state designs the insurance scheme, which could cover crop and livestock. The state would assume part of the peak risk to enable particularly exposed farms or regions to have insurance.
The product would be marketed using the distribution system and expertise of the private insurance industry, which would administer the policies and adjust the losses. The insurance industry would carry most of the liability. Schneider says: “There are some countries where the governments are already heavily involved – Portugal, Spain and Italy. In Portugal premiums are subsidised by between 40% and 80%, depending on many factors. In Spain the government will subsidise premiums up to 50% and covers the costs of organising insurance. In Italy there is a subsidy of up to 50% of the premium and there are also subsidies in Austria.”
Period of change
Securing government backing is not the only problem insurers face: agriculture is going through a period of great change, and they need to keep up. The growing use of technology in agriculture poses new challenges for the insurance industry. The use of genetic engineering presents agricultural producers with new opportunities, but it remains to be seen whether agricultural insurance will cover the associated risks. But one thing is certain: without adequate government intervention to provide insurance cover, certain countries will find that farming becomes even tougher.
Source – http://www.lloyd’s.com/