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Agricultural producers face a series of risks affecting the income and welfare of their households. These are mainly production risks related to weather conditions, pests and diseases, market conditions, etc. Consequently, the income stability of agricultural stakeholders can be also affected. In recent years the European Union has been considering a possible integration of risk management in the common agricultural policy and is analysing risk and crisis management strategies to provide an improved response to crises in the agricultural sector.
This report reviews the agricultural risk management systems in the EU (candidate countries Turkey and Croatia are also analysed) with a special focus on types of agricultural insurance, although no data could be collected for Malta. The most descriptive part of the study contains a collection of data on the realities and modalities of agricultural insurance in Europe. This information mainly comes from fact sheets filled in by experts or consultants from the different European countries and data from the European Committee of Insurers (CEA). Many of these data were unpublished because there is no obligation for the insurance companies to report to the EU institutions.
Description of the current situation of agricultural insurance in the EU
The EU has mostly classic insurance schemes (mainly single-risk and combined insurance, but also yield insurance), generally private except in Greece and Cyprus where insurance is public and compulsory. In many countries the market is in the hands of no more than two or three insurance companies. The level of development of agricultural insurance in each country is mainly linked to two decisive factors:
– the needs faced in each country (risk level);
– the economical support given by each Member State to the insurance systems.
The role of governments is analysed for each country. Some do offer or subsidise insurances while others provide aid ex post given on an ad hoc basis through compensation schemes, calamity funds or futures markets existing in Europe, which can be partially financed by the agricultural stakeholders on a voluntary or compulsory basis. The different existing risk management tools are presented, analysed and compared in the report. This helps to understand better the evolution of the insurance systems in Europe, since the development of the insurance system depends very strongly on the presence of other risk management tools and on the role of the public sector, in particular ad hoc aid measures.
Understanding and measuring the level of development of insurance
The report gives an analysis of the volume of insurance and the market penetration or participation rates (in relative terms). Several comparisons are studied and shown through maps to conclude that the percentage of insured area does not give a sufficient measure to understand the importance or development of insurance in a country: it needs to be combined with the cover offered by the insurance schemes and with the market penetration in terms of insured value.
Finally, we can point out that in Europe there is no comprehensive yield insurance without public support. For non-systemic risks, like hail, the private sector offers suitable insurances, but for insurance products offering a wide cover in yield reduction risk, there is a direct relationship between development of the system and public support. The amount of support provided by EU Member States to subsidise insurance premiums varies depending on the country’s policy to promote some particular type of cover.
Some technicalities, like reinsurance, triggers and deductibles, are described. Reinsurance is usually done in the international reinsurance market, mainly in the modalities of stop-loss and quota-share reinsurance.
Regulations, policies, State aid: towards a homogeneous system
The definitions of crisis and disaster eligible for public aid in EU Member States are examined and compared with the ‘Community guidelines for State aid in br>the agriculture sector (2000–06)’ (EC, 2000). New Commission guidelines (EC, 2006b) and a new regulation (EC, 2006a) on the application of Articles 87 and 88 of the Treaty were adopted in December 2006. The definitions assumed are strongly shaped by WTO agreements. National experts provided information on the Member States’ definitions for disasters and crises which are eligible for aid, as well as the definitions of insurable risks, when they exist. Some countries forbid State aid in the case of crisis or disaster if the risk could have been insured. This is the case for Austria, Greece, Italy, Portugal, Spain, Sweden and Turkey for subsidised insurable risks and for France if insurance has reached a significant diffusion level. The regulation will partially condition State aid to buying some type of insurance from 2010 on.
Most EU Member States follow the Community guidelines for State aid (EC, 2000) to decide when aid can be bestowed aid. We have classified the Member States in four groups according to their observance of the guidelines: some of them incorporate or explicitly mention the guideline definitions in their legislation; others just assume it without explicit mention; a third group have more restrictive definitions than those established in the guidelines, as it is the case for the calamity fund system in France.
Lastly, some States have less restrictive definitions than those in the guidelines.
These different attitudes of the Member States existed while the guidelines were only ‘advisory’. A few examples of definitions for disaster are shown below.
(a) EU States with a more restrictive definition: France: crop losses above a higher threshold: 42 % of the production value of the damaged crop and 14 % of the whole farm gross revenue; also requires that no efficient preventive technique be available. Austria: disaster is defined by the public authorities related to the occasion; no aid for insurable risks. Portugal: damage on crop production of at least 50 % (…) of the yields usually obtained in the region. The Netherlands, Sweden and the UK: no aid is given for climatic risks on crops, only for livestock diseases.
(b) EU States with a less restrictive definition: The Czech Republic: more detailed specification of defined risks called as ‘natural disasters’. Hungary: more risks defined as ‘natural disasters’; lower triggers, 15 % or 20 %, applying for some kind of support, like preferential credit or tax and lease reduction and cancellation.
With the coming into force of the 2006 regulation this situation should change towards more homogeneous rules.
Risk level: geographical analysis
The variability of production and income is far from uniform across the EU: in some regions and sectors they are relatively stable, while in other regions or sectors they are highly unstable. Mapping the variability level has a twofold interest for the assessment of agricultural insurance: better understanding as for which geographical areas and sectors stabilisation is more important, and tuning the extrapolation of the premium rates in a hypothetical EU-wide system. The data required for analysing the variability of climatic risks, yield and income come from several sources:
– meteorological databases and agrometeorological parameters computed by CGMS (crop growth monitoring system), which is the kernel of the JRC yield forecasting system for the EU; CGMS allows an analysis to be made at pan-European level of the status of the crops and on the harvest prospective and in this report it was used to develop climatic risk maps;
– vegetation indexes computed on satellite images;
– Eurostat’s REGIO database on yield of main crops;
– the farm accountancy data network (FADN).
Agricultural insurance systems in other countries
The agricultural insurance systems existing in the world are reviewed. In Canada, the USA and other non-EU countries, some insurance instruments, such as index insurance, area insurance, whole farm insurance or revenue insurance, have been developed which are not developed in EU. In the United Kingdom there was a private revenue insurance product but it was soon removed from the market.
In Canada and the USA there is yield insurance. In both countries, there is a basic cover for yield insurance which covers only for losses above the 50 % of the average yield (it is called catastrophic cover). It is highly subsidised by the government (almost entirely in the USA — where farmers pay only an administrative fee — and 50 % in Canada).
The USA is currently the only country where revenue and income insurance exists; the report presents it in depth. In Canada there was an income insurance named Gross Revenue Insurance Plan which failed and now there is an income stabilisation programme, which is described in the report.
The Canadian system is mainly led by public insurance agencies, from the provincial governments. It profits from subsidies, both from the federal and the provincial governments, which total EUR 425.5 million and which amount to 66 % of the premiums. Besides yield insurance products similar to those in the USA, it has an important income programme, Canadian agricultural income stabilisation (CAIS), which consists of stabilisation accounts. The stabilisation accounts are individual accounts where farmers put an amount of money every year, which they can withdraw in a year of big losses. They can be based on yields, revenues or other indices.
Livestock sanitary and risk crises
The report also reviews several studies made in the past few years to analyse the costs and impact of recent epidemic livestock outbreaks in Europe. We discuss the potential of livestock insurance to cover animal diseases and more general animal risks. Livestock epidemics can result in substantial losses for governments, farmers and all the other partakers involved in the livestock production chain.
National governments and European institutions generally support the largest part of the direct losses, such as the value of destroyed animals and organisational costs.
Consequential losses, such as losses resulting from empty buildings and movement standstills, are almost always completely borne by the farmers themselves if not insured privately. Few private insurance systems exist in Europe to cover the consequential losses due to livestock epidemics (e.g. they exist in Germany, Italy, Sweden, the Netherlands and the United Kingdom). Most general livestock insurance schemes cover death and emergency slaughter because of illness.
The main reason for public concern is that certain diseases can be a large potential hazard for the economy and the health of the population; therefore public reaction is normally covered by legislation and there is less room for private insurance. Besides, forecasting high risks events is very difficult and insurers are reluctant to insure against ‘any disease’. Strategies of the public sector are rather focused on efficient risk-reducing behaviour, in particular through preventive measures. It seems possible to build a cost-sharing scheme only for covering losses caused by diseases with low or no externalities.
Main figures of crop insurances at country level
Approximately 23 % of crop value was insured in 2004 in the EU-27.
Premiums amounted to EUR 1 583 million, i.e. 4 % of the insured value. Spain is generally considered as the country with the most developed systems and accounted for EUR 564 million although only 5.86 million ha were insured, showing relatively low market penetration (26 % of the cultivated area). In Germany, market penetration is higher (7.26 million ha, i.e. 43 % of the cultivated area), and the average amount of premiums accounted for EUR 129 million. This fact can be explained by considering that in Germany the insurance usually covers only a single risk (hail). On the other hand, the high value for Spain can be explained by the higher number of perils covered and the potentially higher risks there.
Total subsidies amounted to EUR 497 million or 32 % of the premiums. Between countries, the amounts of subsidies to the premium are very different. We find the highest subsidy rates in Europe are in Italy and Portugal, for example the 80 % subsidy in Italy for yield insurance. In other countries, as in the UK, there is no subsidy at all.
Average loss ratios — total claims paid by insurance companies during a certain number of years, divided by the total premiums of the same period — range from 60 % to 70 %.
Feasibility of an EU-wide system of agricultural insurance
We assess the feasibility of several scenarios with different types of insurances: single-risk insurance, yield insurance, index insurance, revenue/income insurance, etc. We consider socioeconomic criteria (related to decisions of the private sector: insurers, reinsurers and farmers) and technical criteria (cost/affordability, asymmetric information, easiness to control). Political criteria are essential, but beyond the scope of this report.
The rough costs estimation of some of them indicates that a 50 % subsidy to the national premiums of all the countries, assuming an insurance demand of 40 %, would be approximately of the order of magnitude of EUR 1 billion for income insurance, EUR 0.5 billion to EUR 0.6 billion for yield insurance on arable crops, EUR 0.23 billion to EUR 0.37 billion for area index insurance for cereals and of EUR 0.20 billion to EUR 0.40 billion for fruits. The calculations were made assuming that the average premium rates would remain in a more developed system equal to current rates. However, these estimations require more in-depth analysis, because this assumption may be too strong.
In the current situation, with very heterogeneous positions of Member States and very different levels of risk, it seems difficult to propose a common homogeneous insurance system, but some types could be of some interest:
– revenue insurance: more expensive, but more efficient as income stabiliser;
– indirect index insurance: cheaper and easier to manage and control, but usually less correlated with farmers’ income.
Alternatives to a common agriculture insurance system
A series of alternatives to a common system have been proposed and analysed; these should be simple to manage by the EU administration and easy to control. An alternative to a proper EU-wide insurance scheme could be a set of actions to foster national systems by:
– facilitating/subsidising the composition of databases, preferably at farm level, in order to limit to the minimum any malfunctioning due to asymmetric information that leads to adverse selection and, to some extent, moral hazard;
– reinsuring (many agricultural risks are considered non-insurable in most countries because they are too systemic); insurers and reinsurers are not willing to take this type of risk — the situation could change if there is strong public participation in the reinsurance scheme (USA and Spain);
– clarifying the framework (in order to achieve a greater homogeneity of the national systems); this has been partly achieved with the new regulation (EC, 2006a);
– partially subsidising national systems which are within the framework (this could be either insurance models, funds or other risk management tools — in any case, they should be within a common legal framework, establishing some control criteria and a common financing scheme).
Maria Bielza Diaz-Caneja, Costanza Giulia Conte, Christoph Dittmann, Francisco Javier Gallego Pinilla, Josef Stroblmair