Risk management in agriculture and horticulture, with the focus on insurance

Joeri Deuninck, Koen Carels, Leen Bas, Dirk Van Gijseghem

January 2008

On the one hand, agriculture and horticulture remain subject to important production risks as a result of climate conditions and animal and plant diseases and, on the other hand, they are increasingly being faced with price risks as a result of the reduction of market and price support and the liberalisation of trade. As a result, the need for a number of (new) risk management instruments, with emphasis on more producer responsibility, has increased. The aim of the study was, firstly, to make an inventory of risks and risk management instruments for a number of (sub)sectors of agriculture and horticulture in Flanders. The second aim was to study the need for and the potential of insurance/mutual funds for risks resulting from climate conditions and animal and plant diseases, and the role of the Flemish authorities in this, taking into account the preconditions defined by the European Union legislation.

The literature study revealed six types of risk: product risks, market and price risks, institutional risks, personal risks, responsibility risks and financial risks. Several risk management instruments are available: internal measures, contracts, futures market, insurance, mutual funds and government instruments. Besides developing their own instruments, the authorities can complement or support other risk management instruments.

What are the risks and risk management instruments for some (sub)sectors?

Horticulture and arable farming: The importance of climate-related risks is increasing. The main climate-related risks in fruit growing are, in the first place, hail, followed by frost and drought (especially for soft fruit). For outdoor vegetable growing climate-related risks are generally described as more relevant than for fruit growing. Especially the risk of damage caused by rain (flooding) and drought is emphasised (more) strongly. Frost and hail are also important, although hail constitutes a relatively smaller risk than for fruit growing. In arable farming climate-related risks generally have a smaller impact than for outdoor fruit and vegetables, where – besides the loss of production – the loss of quality is a more important factor. The main risks are drought, followed by rain, wind/storm and, to a slightly lesser extent, hail. Frost is less significant. The risk depends strongly on regional and local circumstances (geography and soil) and on the crop. Especially potatoes, but also rapeseed and flax are high-risk crops. Beets and cereal are relatively less risky. As for outdoor vegetables, wildlife damage is indicated as a significant (and growing) risk.

Internal risk management instruments are extremely important. These include, for instance, spray irrigation against drought, a hail net or control gun in fruit growing concentration areas, and fine spray irrigation to prevent frost damage. In a number of cases support can be obtained from the Flemish Agricultural Investment Fund (VLIF). In addition, the disaster fund contributes to the costs, although not for hail damage. Moreover, this contribution is rather limited, and it is relatively more frequent in arable farming and vegetable growing than in fruit growing. Hail insurance is common especially in fruit growing. However, this is perceived as expensive. There are growers who cannot afford it.

Climate-related risks are less relevant for protected crops than for open crops. Glass (plastic) partitions that contain the technical installations and the crops are vulnerable to wind/storm and, to a lesser extent, hail. The damage can be considerable, but the possibility of damage is rather small. Damage to glass partitions and installations as a result of wind/storm and hail can be insured, just like water damage. In greenhouse horticulture additional crop insurance is available. For protected crops the price of energy is also considered a highly relevant risk.

In horticulture, and especially for fruit, hail insurance is considered most necessary. Frost is slightly less important. Currently there is not so much interest in new insurance policies and mutual funds to cover climate-related risks; farmers have adopted a cautious attitude. In arable farming there is no urgent need for insurance policies and mutual funds either, especially with the contribution from the disaster fund. The main bottleneck is the affordability of insurance. An exact estimation of the customer base among farmers and horticulturalists for specific insurance products requires further market research via extensive discussion groups or surveys among producers.

Pig breeding: Climate-related risks are not relevant in pig breeding. Animal diseases are. Internal instruments are extremely important here. However, the possibility of getting involved in the control of a contagious disease, or the consequences of this, can hardly be avoided. Therefore, in addition to internal instruments, the health fund is of crucial importance. The health fund only compensates for direct damage resulting from animal diseases that can legally be controlled.

Also because of the co-financing by the European Union, alternatives to the health fund are not considered appropriate right now. There is hardly any interest in insurance or mutual funds, and the authorities receive few inquiries in this respect, not even concerning more common economic diseases which do not fall under the health fund. The insurance premiums are generally felt to be too high. In the case of a voluntary mutual fund, obtaining sufficient participation is a problem. Farmers are often only prepared to participate once they have suffered damage. In addition, building up the fund in the initial period is problematic.

Cattle breeding: Climate-related risks resulting from drought and rain are quite relevant for roughage crops (grass and maize), and heat stress is for dairy cows. Moreover, the importance of these risks is increasing. Internal feed management is an important risk management instrument. Another instrument is the disaster fund (feed crops). However, this does not contribute to the costs very often.

There is an ongoing discussion on insurance/mutual funds as an alternative to the health fund. Every time an incident occurs, thought is given to insurance and mutual funds – without much result. Every now and then something is included in the health fund. For instance, following the dioxin crisis, there was talk of creating a calamity fund, but finally dioxin and PCB contamination was included in the health fund. Voluntary solidarity funds are complicated due to the individualistic mentality. There is not really an urgent need for (new) insurance policies. Currently, the disaster fund and the health fund are available. Moreover, questions arise with respect to affordability. However, what is under discussion is a kind of income-stabilising mechanism, given the great volatility of prices (via cooperative solidarity, taxes, insurance, etc.).

In addition to drawing up an inventory, a number of risk management instruments have been studied in detail: the agricultural disaster fund, the health fund, the Agriculture and Fisheries Fund, the VLIF, taxes and insurance.

The agricultural disaster fund covers natural risks 1) of exceptional scale, i.e. damage amounting to more than 1.24 million Euros, 2) of exceptional frequency, i.e. which have not occurred for 20 years and 3) if the damage exceeds a certain threshold, i.e. more than 30% (20% in problem areas). The agricultural disaster fund is a public fund with only state funding and is a federal competence. The main climate-related risks that have occurred and qualified for recognition as agricultural disasters have been exceptional or excessive rain, drought and, to a lesser extent, severe or late frost. The disaster fund does not cover risks that can be insured privately, such as hail. Storms are covered via the natural disaster fund. Mainly damages resulting from rain and drought have been recognised as agricultural disasters in the past. Generally speaking, the compensation is relatively limited, both where frequency and total budget are concerned.

Two types of health funds exist: the animal health fund and the plant fund. These are also a federal competence. The plant fund is largely limited to potatoes. The potato fund compensates for direct damage resulting from brown rot and ring rot. The potato fund’s revenue consists of obligatory contributions from producers. The animal health fund only compensates for direct losses and the management of diseases whose control is regulated by law (i.e. contagious animal diseases and diseases for which there are extermination or control programmes). Indirect losses and losses due to unregulated industrial diseases (economic or commercial diseases) are not compensated for. The fund is built up via obligatory sector-dependent contributions. The European Union globally contributes 50%. The federal authorities do not compensate for direct damage, but they do pay for the operational costs involved in the control of animal diseases. With the permission of the European Commission, Flanders can compensate for indirect damages via state support (see the Agriculture and Fisheries Fund and the Flemish Agricultural Investment Fund).

After the regionalisation the Agriculture and Fisheries Fund has continued the management and the specific duties of the former federal Funds for Plant Production and Animal Health and Animal Quality. The fund falls under the competence of the Flemish Minister for Agriculture Policy and Sea Fisheries. Under certain circumstances the fund can compensate for economic damage. The contributions come solely from within the sector. There is no mechanism for automatic co-financing by the European Union. The fund recently participated in the compensation for economic damage as a result of the threat of bird flu in the autumn of 2005 and the spring of 2006.

The Flemish Agricultural Investment Fund (VLIF) supports internal risk management instruments via investment support (interest subsidy and/or capital subsidy) for, for instance, hail protection, spray irrigation, sanitary measures, etc. In addition, support is possible as compensation for damages suffered. This support is financed exclusively with Flemish funds. Support can be granted for damages resulting from unforeseen circumstances such as natural disasters, unfavourable weather conditions or the outbreak of animal or plant diseases. For cases of damage caused by natural disasters and exceptional weather conditions the regulations do not provide for an immediate practical solution. In the spring of 2003 support measures were in place to compensate for the damage resulting from the bird flu. Concretely, there were two measures: support in the form of a bridging loan and support in the form of a capital subsidy. There were approved applications only for the latter measure. Furthermore, the Flemish Agricultural Investment Fund can lend support to businesses with financial difficulties (regional support). In 2004, as a result of the energy crisis in horticulture, a regional guarantee on bridging loans and support in the form of bridging loans were granted. The amount of support is equated with that of an interest subsidy over three years on a loan amount. In case of a severe crisis the role of the financial institutions (banks) is also important, e.g. via a review of debt.

Where taxes are concerned, if there is loss of production as a result of climate conditions or plant or animal diseases and the standard return is not used, this loss is accounted for via income tax. In addition, the costs of professional insurance can be deducted as part of one’s professional expenses. If the standard return is used, a number of other individual deductions can be included, starting from the ‘semi-gross profit’. Individual deductions comprise losses of crops and death of animals, veterinary fees and medicines. Insurance contributions towards a guaranteed income can also be deducted from the semi-gross profit.

The majority of insurance policies (with the highest degree of participation) are insurance policies covering certain personal and responsibility risks (private insurance, agri-business support). The principal insurance companies allow considerable coverage of buildings and their contents via fire insurance and related policies (storm, natural disasters, etc.). There is no insurance for market and price risks, and insurance for production risks is scarce. The coverage of plant production in the field and animals is limited. For plant production there is hail insurance, but participation remains rather low (except for certain sub-sectors of horticulture). The cost is felt to be rather high and a number of businesses, especially smaller ones, cannot afford it. In greenhouse horticulture there is a very common crop damage insurance. In animal production valuable (breeding) cattle are insured individually against diseases or accidents. Some insurers offer insurance for cattle as a group, concretely for dairy cattle enterprises, in which case a compensation is paid in case of death or emergency slaughtering following a disease or accident. In no case, however, will animal insurance cover damage resulting from diseases that can legally be controlled. In pig and poultry breeding there is insurance for damage resulting from climate changes and growth factors.

What risk management instruments exist in Europe, the United States and Canada?

In the European Union Member States damage caused by natural disasters and climate-related risks is compensated for via ad hoc government aid or public funds. In addition, insurance policies are available for a number of risks and products. Insurance systems vary considerably as to organisation, coverage, complexity and government support. In most Member States a few limited private insurance products are available, the most common of which is hail insurance. In some (mainly Southern European) Member States more extensive insurance policies have been developed with substantial public support. Where animal diseases are concerned, the European Union contributes to the costs of extermination and control programmes for a number of diseases (globally 50%). Furthermore, direct losses in case of an outbreak of a contagious animal disease are partly compensated for by the European Union’s Veterinary Fund (globally 50%). In exceptional circumstances ad hoc market support is possible as well. The remaining part of the direct losses is compensated for at the national and/or regional level via public and/or obligatory private systems (funds). Generally speaking, there is no public support for indirect losses. Indirect losses are only covered partly. Obligatory private and non-obligatory private systems (insurance/mutual funds) are not widespread. Private insurance usually covers death and loss of production as a result of accidents and (some) non-epidemic diseases. More often than not, epidemic diseases are excluded. Global policies for more common industrial diseases are also rare. Finally, private funds generally only include a limited number of specific diseases.

In the Netherlands, hail, wind and storm can be insured privately. Additionally, there is rain insurance (2003) and frost damage insurance for fruit growing (2007), which receives government support via non-proportional reinsurance. In 2006 747 businesses took out rain insurance. The total insured amount was 140 million Euros.

Insuring indirect damage resulting from animal diseases is only possible in some European Union Member States. However, in Germany private insurers are prepared to insure against indirect losses as a result of contagious animal diseases, even those caused by a standstill (interruption of business activity and losses in restriction zones), without any kind of government support. The degree of participation is relatively high.

The harvest insurance (with premium subsidy) in France originally comprised only the classical hail insurance for vegetables and fruit. In 2002 this experiment was extended to more crops and more risks (hail and frost for orchards and vineyards, multi-risk insurance for cereal and oil and protein crops). From 2005 onwards new multi-risk/multi-crop policies have been offered. The support to the premium amounts to 35% (40% for young farmers). This requires the obligatory inclusion of four risks (hail, drought, flooding and frost). Various crops can be insured (vineyards, orchards, cereal, industrial oil and protein crops and vegetable growing). Two types of insurance are possible: insurance per crop and insurance per company. In 2006 there were 65,925 contracts, only 369 of which insured per company; the support involved amounted to 21 million Euros. Approximately 24% of the surface is insured, although mainly in arable farming.

Spain has a complex system and a long tradition of developing insurance products with substantial government support (up to 50%) via premium subsidies and reinsurance. Besides the classical and most common harvest insurance, there are a number of recent initiatives: crop yield insurance in potato growing and comprehensive insurance against natural risks at company level. In 2005 500,000 policies were signed (50% of farmers). Between 1980 and 2005, on average, 120 million Euros of support was granted (218 million Euros in 2005).Which risks are covered and the extent of the government contribution depends on the type of insurance and the crop/production. Plant production can be insured against heavy hail, fire, frost, wind, flooding, drought, siroccos, heat waves, torrential and continued rains, diseases caused by climate conditions and the impossibility to harvest due to climate conditions. Animal production can be insured against accidents, death or emergency slaughtering, attacks by wild animals, floods, forest fires, complications during births, the birth of dead calves, economic consequences of certain diseases such as tuberculosis, BSE, brucellosis or peripneumony, and, finally, death as a result of certain diseases.

In the United States there is an extensive insurance system for plant production. The Government subsidises the premiums, grants subsidies for operational and administrative costs, and takes part in reinsurance programmes. About 60% of the total premium costs are government subsidies. Traditional production insurance contains both a ‘low-cost catastrophic (CAT) coverage level’ (i.e. a minimum coverage of catastrophes that includes insurance against serious losses, with premiums that are fully subsidised), and a ‘buy-up coverage level’ (i.e. higher coverage levels with partly subsidised premiums). Producers are insured against drops in production as a result of natural causes such as drought, excessive precipitation, hail, wind, frost, insects and diseases. Besides the traditional production insurance, crop yield insurance at product level is gaining importance (a share of 57% of the insured area including three quarters of the insured area of maize, soya and wheat). Finally, two smaller programmes are currently in place with respect to crop yield insurance at the company level.

Canada has a ‘Canadian Agriculture Income Stabilisation Program’ (CAIS), which integrates income stabilisation and disaster aid into one programme. In any given year, CAIS compensates for loss of income as a result of weather conditions, diseases and low market prices. Although it is not really an insurance policy, CAIS has several characteristics of a fully subsidised income insurance programme at the company level. In addition, there is a production insurance programme for plant production. The Federal Government participates in part of the premiums and administrative costs and provides for reinsurance. About 66% of the costs of the programme are government subsidies. Production losses caused by natural hazards such as drought, flooding, hail, frost, excessive precipitation and diseases and plagues are insured.

The report concludes with a number of policy recommendations.

The introduction of income or crop yield insurance at the company level in Flanders is (for now) not a priority (not feasible). Income insurance is all-risk insurance. It is the broadest kind of insurance available, which is why it is very complex and difficult to manage and maintain in the long term. It requires substantial support. The social acceptability of that support also plays a role. Currently, direct income support via Pillar I provides significant income stabilisation, even though this is not equal for all sectors due to the historical link. Income or crop yield insurance is an alternative income stabilisation instrument, but is preferably regulated at European Union level. There is currently no European legislative framework. This does not mean that Flanders cannot anticipate and prepare for possible developments on its own.

Income or crop yield insurance with a view to income stabilisation could be an instrument for the future, concretely for the financing period after 2013, and would imply a shift in the budget of Pillar I. The question arises whether it is a suitable instrument to stabilise the volatility of farmers’ incomes, given the high transaction costs, and to stabilise incomes under the guise of risk and crisis management. On the other hand, this instrument probably ‘fits’ into the current (and future?) WTO regulations.

There is a particular need for new production insurance in the plant sector, with emphasis on simplicity and with support via reinsurance and/or premium subsidies. In the plant sector the need is more pressing (given the community guidelines) and production insurance is easier to develop than for animal production. In animal production we must wait to see the concrete results of the Animal Health Strategy 2007–2013 and whether and how the community guidelines are adapted.

In the community guidelines and the new common market organisation (CMO) for vegetables and fruit the emphasis is on production losses as a result of natural risks. Flanders has no tradition of developing insurance products for the agricultural sector. International experience teaches us that it is best to start with production insurance per crop and, at a later stage, gradually move to more advanced systems. A complex insurance system is harder to develop and manage. Moreover, the management cost can be high (up to a third of the total cost).

The effective introduction of production insurance with government support can be (very) expensive, and more expensive than the current compensatory mechanisms (disaster funds). Here as well, social acceptance plays a role. The introduction of insurance policies requires a reduction of the disaster fund, leaving this for more exceptional, ‘real’ calamities (uninsurable risks). Government support via reinsurance (non-proportional reinsurance) has preference mainly in the case of systematic risks and large-scale disasters. For a number of risks, including hail and local flooding, premium subsidies or a combination of reinsurance and premium subsidies can be appropriate.

Production insurance is best introduced via de CMO for vegetables and fruit. Besides this, we should wait for the results of the Health Check. Options are hail for fruit and vegetables, frost for fruit, drought and rain for vegetables, or a broader concept in accordance with the guidelines. The co-financing by the European Union in the CMO for vegetables and fruit offers an opportunity. This does not mean that a number of other options in the plant sector cannot be explored in the meantime. The guideline condition that uninsured persons receive less compensation will only take effect from 2010.

Now, it is, in the first place, up to the agriculture and horticulture sector and the insurance companies to — in consultation with the authorities — look at the statistics and elaborate a number of scenarios for the cost of insurance and the budget to support it.

Original version:



Deuninck J., Carels K., Bas L. & Van Gijseghem D. (2007)
Risicobeheersing in de land- en tuinbouw met focus op verzekeringen
Beleidsdomein Landbouw en Visserij, Brussel.



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