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Agricultural Insurance Schemes in EU

File attached: AgInsSchemes

 

 

This study highlights the high diversity of agricultural insurance systems in the EU. The level of risk is also very heterogeneous from country to country, from one farm type to another and from small to large farms. The development of agricultural insurances in each country is linked to the needs (risk level), but the MS policy to support the system is also a decisive factor. For non-systemic risks (hail), private sector offers suitable insurances, but for insurance products offering a wide coverage, there is a direct relationship between development and public support. The development of insurances in the livestock sector is generally lower than in the crop sector. Livestock risk management relies on sanitary assistance programs; major crises (diseases with high externalities) are covered by public aids.

Climatic risk analysis has been undertaken, but it still needs to be improved to derive solid conclusions at the appropriate scale (farm level or comparable geographical level).

The reader wishing to have more extended information can refer to the full report (JRC-DG AGRI, 2006).

The economic situation of farms can be subject to strong variability due to several reasons:

– Policy reforms, marked by trade agreements and market liberalization and the consequent reduction of prices paid to farmers;

– An unbalanced relationship between retailers, generally well organized to put a strong pressure on prices and farmers;

– Sanitary measures and risk of animal diseases;

– Climate change: There is a general perception that the frequency and intensity of extreme meteorological events is growing. Climatic risks are more important for crops and sanitary risks are more important for livestock, but none of them are exclusive: pests can have a considerable impact on crops and a bad climatology can make strong damages on livestock farming through the pastures or forage availability;

The study summarized in this document intends to give a contribution to the CAP efforts to enhance appropriate risk and crisis management strategies, providing an improved response to crises in the agricultural sector.

WTO issues

Public aids in agriculture have to comply with the WTO agreements, which classify aids into three boxes: Green, Blue and Amber.

The Blue Box contains aids for goods that have a production limitation (e.g. milk in the EU)

The Green Box defines other aids that do not distort trade: Income insurance and income safety-nets. Aid is admitted when the income loss (…) exceeds 30 per cent of average gross income or the equivalent in net income terms (…) in the preceding three-year period or a three-year average based on the preceding five-year period, excluding the highest and the lowest entry. The amount of such payments shall compensate for less than 70 per cent of the producer’s income loss in the year (…).

Programs based on farmers’ income are not frequent. Canada notified one program. Payments for relief from natural disasters (directly or by subsidies to crop insurance) also fall in the Green Box if there is a formal recognition by government authorities that a natural or like disaster ( ) with a production loss which exceeds 30 percent of the average of production in the preceding three-year period or a three-year average based on the preceding five-year period, excluding the highest and the lowest entry.

Agricultural insurances are mentioned, but mostly ad-hoc payments are notified.

The Amber Box contains other support measures to agriculture. Aids in the amber box which exceed the “de minimis” limits (5% of agricultural production for developed countries, 10% for developing countries) are subject to reduction commitments. Most of the subsidies to crop insurances have been notified within the Amber box.

One of the main reasons that make subsidies to insurance not eligible for the green box is that they do not follow a formal recognition by government authorities of the natural disaster. Such recognition is not operational in an insurance model managed by private companies. Other reasons often exist but do not apply to all types of insurance products (e.g. 30% threshold or being product-specific).

The definition of crisis and disaster is rather generic. More precise conditions can be found to authorize state aids in case of disaster or adverse climatic conditions. In general an official declaration of disaster is needed. At national level such a declaration by the government is usually quick. A potential EU-wide regulation should define the competent body to make a declaration of disaster.

Article 87 of the EC Treaty authorises certain State aids, more precisely defined in the “Community guidelines for state aid in the agriculture sector” (EC, 2000), generally followed by MS. These guidelines state that adverse weather conditions on agricultural production may be assimilated to natural disaster if the damage is more than 20% of normal production in the less-favoured areas and 30% in other areas. Aids in case of animal and plant diseases are permitted normally as a part of an appropriate programme for prevention, control or eradication. In general, all aids in these circumstances may be granted up to 100% of actual costs. Insurance premiums may be subsidized up to 80% when insurance covers natural disasters, or assimilated events. If the insurance covers other losses, the maximum aid is 50% of the premium.

New Commission Guidelines are under study with a new Regulation on the application of Articles 87 and 88 of the Treaty. The definitions adopted should be strongly shaped by the WTO Agreements. The main changes added by this draft Regulation in the field of risk management aids in agriculture, besides the fact of being a Regulation and not only Guidelines, can be summarised in the following:

– Regarding adverse climatic events (Art. 11): they can be assimilated to natural disasters when they exceed the threshold of 30%, but there is no more the 20% threshold for less favoured areas. The compensation cannot exceed 80% of the losses and 90% in less favoured areas (formerly 100%), what means that additional to the threshold there is a deductible.  It sets as a condition for losses suffered after 2010 in case of adverse climatic events: compensation must be reduced by 50% unless it is given to farmers who have taken out insurance covering at least 50% of there average annual production or production-related income and the statistically most frequent climatic risks in the Member State or region concerned.

– Regarding the aids towards the payment of insurance premiums (Art. 12), there are no changes. Member States keep several types of positions of on State Aids for exceptional climatic events:

– Most of the countries apply the Agriculture Guidelines, with explicit mention in their legislation (Belgium, Cyprus, Estonia, Greece, Italy, Latvia, Lithuania, Slovenia), or without explicit mention (Finland, Germany, Ireland, Luxembourg, Spain);

– Other MS have more restrictive criteria: Austria, France, Portugal, Romania;

– Bulgaria, Czech Republic and Hungary seem to have a broader definition;

– Some countries simply do not give any aids to agriculture for climatic events, but have compensation programs for livestock diseases (Netherlands, Sweden, UK)

Some of the countries have the constraint to aids given in case of crisis or disaster that it must not be due to an insurable risk. If a common EU definition for natural disaster were to be applied to all member countries, it could consider:

– Exceptional character of the climatic phenomenon;

– Minimal number of farms or surface should be affected, and thresholds for losses at crop level and/or at farm level (already existing in the Guidelines);

– A fast procedure for an official declaration;

  – Exclusion if efficient preventive techniques or developed insurances are available.

The most widely extended crop insurance in the EU is hail insurance, which often includes other scattered risks such as fire (single risk insurance). In many countries this is nearly the only existing type of crop insurance.

Some kind of insurance policies cover also the risk of frost or a limited number of meteorological events.

These are known as combined risk insurance.

We call “yield insurance” the type of policy that covers yield losses for a given crop due to any meteorological event. The meteorological origin of the damage has to be identifiable to avoid moral hazard and adverse selection. In general all the fields of a farm with the same crop have to be insured. We avoid here the term “multi-risk” or “multi-peril crop insurance (MPCI)” because it is sometimes applied to combined insurances and sometimes to yield insurances.

Whole-farm yield insurance refers to all the crops produced by the farm. A yield reduction in one crop will not be compensated by the insurer if the global production reduction of the farm does not reach the trigger.

Revenue insurance combines yield and price insurance. The farmer is paid if the total value of his production falls below a threshold. Income insurance takes also into account the costs of production; it is only applied in USA.

All the former types of insurance are based on the results of the individual farms and losses are adjusted measured on the field. However, index insurances are based on an index common for an area. In area-yield insurance, the compensation paid to the farmer (and the trigger) depend on the statistical yield for the year in a predefined area, usually an administrative unit. Area-revenue insurance is based on the area yield multiplied by the area price. If the average yield/revenue in that area is below a certain threshold, all the farmers in the area insured for that crop are compensated. Indirect-index insurance does not refer to the average yield in an area but to a meteorological indicator or satellite images. Weather derivatives can be included in this category of insurances.

The main type of risk in the livestock sector is the sanitary risk, but catastrophic climatic events can also have a direct impact on the animals (floods, etc.) and other weather events can affect pasture and forage availability and therefore on the economic sustainability of the farm. On a minor extent, DG SANCO has undertaken an indepth study on the risk management tools for livestock sanitary crisis. In the main report of this study we give a summary of the conclusions reached and explore some insurance on risk indexes of pasture and fodder production.

Livestock epidemics can result in substantial losses for governments, farmers and all the other participants in the livestock production chain involved. Member states are obliged to apply the control measures established in EU directives if an outbreak of ‘List diseases’ arises (Office International des Epizooties, 1998). Recently, the European Commission (EC, 2006b) has approved a financial package of ?193 million to support programmes to eradicate, control and monitor animal diseases during the year 2007. The 155 programs which were selected for EU funding will deal with animal diseases that impact both human and animal health. The large EU contribution towards these programmes reflects the high level of importance attached to disease eradication measures, for the protection of both animal and public health.

In the livestock sector, there is a different treatment for direct losses and for consequential losses. MS Governments and European Institutions generally support the largest part of the direct losses due to mortality or morbidity, such as the value of destroyed animals. Some member states finance the non-EU compensated direct losses from the national budget (Denmark, Finland, France, Ireland, Italy, Luxembourg, Portugal, Spain, Sweden, and United Kingdom). Other member states have set up some form of statutory system to co-finance the direct losses. These Public-Private financing schemes have a compulsory fund structure in which all farmers pay a tax (Austria, Belgium, Germany, Greece, The Netherlands).

Consequential losses, such as losses resulting from empty buildings and movement standstills, are most often completely borne by the farmers themselves. Some EU member states partly compensate consequential losses in a form of ad-hoc relief program (Austria, Belgium, Ireland, etc) or by compensating above the value of the animals which are forcibly slaughtered to cover part of the consequential losses. In some other EU member states the absence of public assistance has led to the creation of private insurance schemes for some types of livestock production (Germany, Netherlands, Sweden, Spain, United Kingdom, and Italy). There are also some forms of public-private partnership in which the government acts either as an insurer or a reinsurer of a subsidised consequential loss insurance policy (Greece, Spain). Producers do not commonly take up private policies that are specifically designed to cover sequential losses. Only the German “Ertragsschadenversicherung” has a relative high level of participation.

The main risk management tools in Europe are Calamities Funds, Mutual Funds and Insurances. Ad-hoc aids are generally given when no other tools are available. Aid is often organised in the form of ompensation schemes, or funds, partially financed by the agricultural sector, either on a voluntary or on a compulsory basis (in 7 the form of levies, etc.). There are often public subsidies and/or support to reinsurance, either in the direct provision of insurance or of a public security net (the case in Greece and Cyprus).

Risk management tools like mutual funds, calamity funds or ad-hoc payments exist in most countries.

Agricultural insurances are fostered in countries where the law forbids that ad-hoc measures or disaster funds compensate damages that could have been insured. In Spain, Austria, Portugal, Greece and Sweden there are no public fund payments if insurances are available. In France payments include damages for which there is no insurance at all or that insurance has not reached yet a significant diffusion level. In Italy only subsidized risks are excluded from public ad-hoc payments after natural disasters. In Romania public payments are given to farmers if they have insured “standard risks” like hail. In other countries it seems that there are no explicit regulations.

The total amount of premiums in the EU agricultural insurances is around 1.5 B? with a public subsidy of approximately 500 M?. The average amount of compensations for losses by farmers is close to 1.1 B?. The total amount of ad-hoc aids for which we could collect data is slightly above 900 M?, but many countries did not provide data on ad-hoc aids for livestock. Therefore this figure is probably strongly underestimated.

Some hypothetical scenarios of EU-wide insurances have been quantified, but the level of uncertainty is very high. Some feedback on the possible EU decisions is necessary to reduce the uncertainty.

The amount of support provided by EU Member States to subsidize insurance premiums varies depending on the country’s policy to promote some particular type of coverage, to help some agricultural sub-sector or to facilitate some types of farms. Some countries have integrated it as an essential agricultural policy instrument for the stabilisation of agriculture income.

Subsidies per country, where available:

– Italy: around 67% of total premium; 64% for the multi-peril yield-type product;

– Spain: around 49% including the regional subsidies;

– Austria: around 46% of total premium including regional subsidies; 50% for hail and frost;

– France: The 2.5% average of three years is due to a majority of non-subsidised single-risk insurance. Since 2005 new yield products have been launched with subsidies of 35% (40% for young farmers);

– Portugal: around 68% of total premium; subsidies vary from 35% to 75%;

– Czech Republic: Subsidies from 15% for livestock to 30% for crop insurance;

– Slovenia: Subsidies for crop insurance given the first time in 2006. 30% to 50% for the basic risk coverage (hail, fire and thunderstorm);

– Latvia and Lithuania: 50% subsidy, but still very low penetration of insurance;

– Cyprus: 50% for all insurable risks in the compulsory scheme;

-Luxembourg: 50% for all insurable risks. The annual subsidies to agricultural insurance in EU25 are around 497 M? (32% of premiums). The average amount of ad-hoc aids in EU25 is 904 M? (it does not include all aids given for livestock);

– Croatia: 25% since 2003;

– Turkey: 50% since 2006.

Risk management tools available in the MS could be developed further to improve sustainability of farms. However, given the big differences in the agricultural risks, legal, social and economic backgrounds in EU countries, an EU-wide system of agricultural insurances can be debatable. Alternatives to a common scheme based on existing systems could be easier to manage and control by the EU administration. An alternative to a proper EU-wide scheme can be a set of actions to foster national systems by:

– Facilitating/subsidizing the composition of yield/income databases, at a detailed level (farm): The use of databases can be considered as a basis for improving the premium rating, although some of these databases have important limitations due to confidentiality rules.

– Reinsuring: Public re-insurance exists in some MS and in the US. Budgetary uncertainty may be the strongest limitation to a hypothetical public participation of the EU in reinsurance.

– Clarifying the framework. The draft of “Commission Regulation (EC) No …/… on the application of Articles 87 and 88 of the EC Treaty to state aid to small and medium-sized enterprises active in the production of agricultural products and amending Regulation (EC) 70/2001” is a significant step forward.

To be mentioned in particular that, from 2010 onwards, aid to compensate bad weather losses shall only be exempted if the farmer has also taken out insurance for at least 50% of his average annual production (EC, 2006).

– Partially subsidizing national systems which are within the framework: This option would stimulate MS to enhance risk management tools, while keeping a flexibility to adapt better the needs in each country.

A clear role of the EU institutions is setting up a regulatory framework, which includes technical criteria such as eligible risks, minimum deductibles or reference product prices allowed, etc. There is also a role on the control of the approved regulations. A question more open to debate is whether agricultural insurances should be subsidized by the CAP. One of the elements of this debate is the feasibility of purely private agricultural insurances with a wide coverage of risks. There are examples of totally private insurance in agriculture, covering in particular hail damage. Most other insurance schemes are provided under subsidized governmental schemes because the risks being covered are, in fact, not insurable in the sense that a market determined premium would be too high. In countries, such as Spain, Austria and Italy, with a strong public support to agricultural insurance, systemic risks tend to become insurable.

See more information in the file attached.