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Risk and Crisis Management in Eu - presentation at Madrid conference (2006)

Author: J. BENSTED-SMITH Directorate G : Economic analyses and evaluation, DG Agriculture and Rural Development European Commission
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Lins to source: www.mapa.es

 

Risk and Crisis Management in the EU

Outline:

  • Risk Management in the CAP : context
  • The 2005 communication
  • The situation of insurance in the Member States

I.  Risk Management in the CAP : context

1. The role of the CAP

Risk management is not a new subject in EU. One of the objectives of the CAP (Treaty) is stabilisation of income. Before 1992 the Member states used market stabilisation tools + price support. EU introduced several reforms to improve risk management practice:

– 1992 : direct payments

– 2003 : decoupling production and price support.

The link between production and payment disappears: adaptation to the market with a more efficient income support.

CAP becomes more sustainable but the farmers are now responsible for managing the risks (in the past taken by market and price support policies). The new framework established more market liberalisation to increase competition and possibly price variability.

2.   The current instruments

To respond to the natural disasters and catastrophic events the Member States (MS) can use emergency aid, compensation of losses, restoration of agricultural and forestry potential. EU introduced the framework for state aids, ad hoc derogations in CMOs (drought in 2005), rural development and EU Solidarity Fund.

Sanitary Crises

– MS: primarily responsible, compensation possible

– EU: Veterinary Fund, exceptional market support (EAGGF)

Economic Crises

– EU: Common Market Organisations

 

Recent measures

For managing Localised Crises the Member States apply de minimis rules for state aids : 3 000 ? / 0.3 % of production, meaning that the states can provide support without EU approval.

The losses caused by Sanitary Crises can be co-financed through exceptional market support measures.

3. The agenda

January 2001: EU Commission presented an analysis on risk and crisis management tools in the CAP.

26 June 2003 : political compromise on the reform on the CAP – annex 11 :

“The Commission will examine specific measures to address risks, crises and national disasters in Agriculture. A report accompanied by appropriate proposals will be presented to the Council before the end of 2004.

The Commission will analyse in particular the financing of these measures through the one percentage point of modulation directly re-distributed to Member States as well as the inclusion, in each common market organisation, of an article empowering the Commission to act, in the case of a Community-wide crisis, along the lines established for such cases in the common market organisation for beef.”

December 2003 : Council conclusions (Italian Presidency)

To lead the debate on risk management tools in agriculture + provide an updated inventory of risk management tools available in Member States;

To examine the advantages and disadvantages of different risk management options – Possible new instruments to replace, if appropriate, current measures should be taken into account and examined on the understanding that distortions of competition must be avoided, WTO rules must be observed and the financing of any new measures must be in keeping with the financial commitments already in place;

To assess the opportunities provided by the Community guidelines for State aids in the agricultural sector and if necessary to suggest adaptations.

March 2005 : Commission’s Communication

 

II. The 2005 communication

1.  Extension of beef clause

Article 38 of Reg. (EC) No 1254/1999

“When a substantial rise or fall in prices is recorded on the Community market … the necessary measures may be taken.”

“Detailed rules for the application of this article shall be adopted by the Commission …”

No generalisation of beef clause!

CAP reform: most CMO safety net provisions remain available. Single farm payment provides income stability. For other CMOs (fruit & vegetables, wine, pigs and poultry) no new justification to introduce safety net, but Commission might look at specific needs based on case by case analysis( wine and fruit and vegetable sectors).

2.   Financing through modulation funds

Mandate of the 2003 reform compromise (annex 11): 1% of modulation. Modulation must be used for rural development measures – WTO green box compatibility.

New   measures   should   improve   competitiveness   -“Priority Axis 1”. New Member States -no modulation available so the new members should find another solution. The Member States must comply with the principle of budget annuality.

3. The 3 Options

– Insurance against natural disasters

– Mutual funds

– Basic income coverage

and…improve the  know-how about risk management tools: training and information.

 

1. Insurance against natural disasters

Insurance could help to reduce ad hoc compensation payments. The farmers who buy insurance get premium subsidy (of max. 50%). Compensation is paid when loss is more than 30% of average production value in reference period. It is advised that the countries use reference period for yield insurance – 3 years or “Olympic average” (5 years excluding the best and worst years). For quality crop insurance programs the countries need a system of reliable reference data.

Compensation to producers can not be more than 100% of the loss. Besides, compensation must not specify the type or quantity of future production.

Alternative to premium subsidies is public system of reinsurance. The Member States can reinsure a share of agricultural risks underwritten by private insurance companies participating in crop insurance program.

2. Mutual Funds

Mutual Funds could help encourage farmers to share risk among producer groups. The system of mutual funds can provide temporary and degressive support for administrative operations. The farmers participating in the mutual fund can get support (grant, etc.) from the government though the Fund must be recognised by Member State. Green box compatibility should be assessed individually by each Member State.

3. Basic Income Coverage

The program of basic income coverage was inspired by Canadian model (the only country in the world with acceptable safety net system) and WTO green box provisions. The focus of this program should be on income: increase producers’ liquidity in case of income crisis. The program must be open to all farmers. 3 years or “Olympic average” reference periods should be used. The system of reference data needed.

Compensation must be triggered when loss is more than 30% of average agricultural income in reference period. The administering bodies have to determine the income indicator for this insurance program. Compensation solely related to income must be less than 70% of income loss.

Follow-up…

30 May 2005 – Agricultural Council debate

No clear mandate for legal proposals

No generalisation of beef clause but case by case approach

If modulation is used, it must be green box compatible

Possible new measures shall not interfere with existing systems

 

20 June 2005 – expert hearing in European Parliament

Autumn 2005 : adoption of European Parliament and Economic and Social Committee reports

2006 – Review of CMOs for fruit and vegetables and wine

2006 – Study on technical aspects of insurance systems

2005/2008 – Research project on income variability and stabilisation (Wageningen)

 

III. The situation of insurances in the MS

1. The study launched by DG Agri

DG Agri launched a study in 2005 with the Joint Research Centre (JRC) of ISPRA on insurance schemes in EU 27. The final study results are expected by the end 2006. The main objectives of the study are:

– updated inventory of risk management tools available in Member States;

– analysis of the technicalities of agricultural insurance;

– assessment of the possibility for an EU wide instrument.

2.   The situation in the MS

Risk coverage

Single risk insurance (hail) is available in all MS.

Multi or combined risks insurance, calamity funds and ad hoc aids are available in the majority of MS.

Some products are not well developed:

– Yield insurance (Aust, Fr, It, Lux, Sp);

–  Indirect-index insurance (Sp);

–  whole farm yield insurance (Fr);

– stabilisation accounts (Sp, Sw, Finl).

There are pilot projects on income/revenue insurance in France and Luxemburg.

 

Public/private schemes and subsidies

Calamity funds and ad hoc aids are always public schemes. Except in Greece and Cyprus, insurances schemes operate through private companies.

There are very few market players per country in the agricultural insurance sector.

The agricultural insurance market is evaluated at more than 1,5 billion EURO of insurance premiums in EU25 per annum.

Public involvement at EU level:

– 14 countries

– Insurance subsidies: around 500 M?

– Ad hoc and funds payments around 1bn ?/year

 

The next steps…

It is necessary to continue the analysis on the subject (both on insurance and income stabilisation). EU will take advantage of other experiences (US, Aus, Can…) designing the new risk management framework for European Community.

Simplification, efficiency and control issues to be taken into account.

 Further information:

Communication: COM (2005) 74 final

Working Document: SEC (2005) 320

http://europa.eu.int/comm/agriculture/public/communications/risk/index en.htm

 

The document was prepared for publication by www.agroinsurance.com