With a predicted increase in extreme weather events expected to add to the many difficulties already faced by farmers, how can the insurance industry better support the beleaguered sector?
A casual observer could be forgiven for concluding the average farmer’s lot is not a particularly happy one. Having long been severely handicapped by European Union legislation, blighted by foot‑and‑mouth disease and stigmatised by modest incomes and high suicide rates, the farming community now increasingly finds itself the victim of adverse weather incidents.
NFU Mutual, which insures more than 70% of UK farmers, reports last December’s floods and storms resulted in it dealing with 4000 claims. It estimates the total claims bill is likely to be in excess of £40m. Surprisingly, windstorm damage has been an even greater problem than flooding, as farms tend to be built on high ground and situated in isolated areas away from streams and rivers.
While NFU Mutual is not expecting the December 2013 claims to directly impact on premiums, as they should fall within the scope of money set aside by insurers for weather-related events, this latest round of devastation is merely one part of a worrying pattern that has been manifesting itself over a number of years. Few comparative statistics are available, but insurers are adamant the exceptional snowfall in Scotland and northern England in 2010 and the devastating floods in England in 2007 proved very costly.
2012, although not such a bad year for insurers – due to a lack of any great flood or storm damage – was still a very difficult one for farmers because of prolonged wet weather, which continued even during the summer. This affected livestock as well as crops, because of poor grass growth and the inability to harvest crops of silage and hay. However, most of the damage fell outside the scope of insurance.
Philippa Spackman, spokeswoman for farming charity the Royal Agricultural Benevolent Institution, says: “Extreme weather contributed to making 2012 and 2013 the most challenging years for farming since the foot‑and‑mouth epidemic and floods of 2007 and the foot-and-mouth epidemic of 2001.”
The RABI, which helps families of farmers with financial difficulties, received around 1000 new enquiries and referrals in 2013 – two-thirds more than in 2012. These included requests for help from farmers affected by flooding but whose losses weren’t covered by insurance. Even more of a concern was the news that some of these farmers did not even have insurance, as they felt they could no longer afford the premiums.
Spackman points out the weather damage must be seen in the context of other issues affecting farmers’ incomes. For example, she highlights the Department for Environment, Food & Rural Affairs’ claim that the EU Common Agricultural Policy regime will result in English farm incomes falling by 4% in 2014 and by 7% in 2015. This is on top of a 30% year-on-year income decrease reported by Defra in 2012/2013.
She continues: “Farmers are tremendously resilient, and they understand only too well how the weather is just one of many things over which they have no control that affect their businesses. But it does seem we are seeing increasingly extreme weather events, which are pushing people to the limit of their endurance.”
These figures are even more alarming in light of the fact that farming families tend to develop considerable expertise in combating adverse weather conditions in a way that a modern business park would not, thanks to farms (and farming knowledge) generally being passed down from generation to generation.
However, newer knowledge in areas such as technology could be set to help combat the impact of extreme weather. Sonya Bryson, divisional director at NIG Farm Web, says: “The industry now has access to specialist and sophisticated mapping technology that, when combined with insurers’ underwriting processes, can accurately predict flood and storm damage based on the geography and topography of the farm. Machinery or livestock may, for example, be moved to different parts of the farm to minimise loss or damage.”
Insurers using technology to underwrite more effectively have undoubtedly been proving their worth, by using technology to respond speedily to last December’s crises and by making immediate payouts to enable farming families to satisfy basic standard‑of‑living requirements before their claims have even been assessed. But could the insurance industry be doing more to help farmers?
Bryson points out one of the key issues facing insurers is making sure farmers opt for adequate sums insured, because underinsurance is rife. But this is only part of the problem. Although UK farm policies tend to provide a broad range of options, there is one crucial omission – namely that they offer virtually no cover for crops still growing in the field. This is an area where opportunities lie for insurers to up their game.
Some UK insurers will cover live crops for fire or hailstorm damage, while some Lloyd’s players offer specialist cover such as failure of germination. But no insurers cover other weather‑related events. Flooding can kill crops or make them more sensitive to drought and disease, and it can also make land less accessible to heavy machinery for crop maintenance and spraying, so this is a real problem.
Livestock cover is also something of an issue. Although widely available, it tends to have low take-up rates because farmers consider the more comprehensive formats too expensive. David Orrell, executive director of Agrical, part of McLarens loss adjusters, says: “Normally livestock wouldn’t be covered for flooding damage, but intensive risks like boiler chickens and intensive pig rearing may well have flood cover arranged on a revenue basis.
“If a farmer has cover for fatal injury on their own premises it would pick up deaths caused by flooding, but not many farmers have this. More common is lower-cost cover, which pays out only if the animal dies off the farmer’s own land – but few claims are actually made on this.”
Furthermore, flooding in areas where animal carcasses have been buried is a potential disease risk, especially for anthrax, if the carcasses are contaminated.
Extreme weather may be more common in future thanks to climate change – but, surprisingly, flooding is not the number-one concern. In fact, climate experts’ predictions suggest drought may be a bigger problem than floods and storm damage. For example, according to Turn Down the Heat, a report released in November 2012 by the World Bank, the world is on a path to be four degrees warmer by the end of this century – and current greenhouse gas emission pledges will not reduce this by much. This could have an impact on livestock, as well as floods.
Sophie Dunkerley, livestock underwriter at Aegis London, says: “Heat stress in livestock is now emerging as a serious risk in the UK. According to the Met Office, last year’s summer was the sunniest, hottest and driest since 2006. Though there have been other exceptional heat waves in the UK, many farmers and producers are still caught off guard. They also lack the equipment and risk management processes to deal with these spikes in the weather.”
Climate change catalyst
Hans Feyen, head of the products centre for agriculture at Swiss Re, feels climate change could provide the catalyst for UK insurers to consider new covers for areas such as multi-purpose crop insurance or farm income. He points out crop insurance is available in many other European countries and accounts for an annual premium spend globally of $25bn (£15bn), and says the UK may soon follow suit in terms of taking out more specialist agricultural insurance.
“Up until now, the UK climate has been benign without severe droughts or frosts, so the need for crop insurance has not been as great as in places like France and Russia,” Feyen explains. “But with climate change, the UK will eventually have long periods with little rain. This could particularly affect large areas of grassland. We’ve been trying to interest UK insurers in wider insurance, but there’s been no real interest – until now.
“UK farmers with specialist crops like sugar beet and canola are, starting to approach us to ask for specialist covers, and we are providing these ourselves on a very small scale. UK agriculture has lost a lot of connection with the rest of Europe in terms of productivity. The demand for agricultural insurance could be boosted if the financial input into the sector were to improve.”
But any real progress in new product design in the UK would depend on the participation of the biggest player NFU Mutual, which shows little interest in playing the game. Tim Price, the company’s rural affairs spokesman, says: “We constantly review the insurance covers we provide, including the feasibility of flood insurance for growing crops. We don’t currently see it as a viable cover for us to offer – the risk of repeated claims in flood-vulnerable areas would make premiums unattractive.”
Other agricultural insurance providers do not appear to be spending too much time chewing the cud on this issue either, although NIG Farm Web is not ruling out new developments in the face of climate change becoming more of an issue.
Similarly, Rural Insurance chief operating officer Mike Ellis says his company is not currently thinking about providing weather cover for crops. He says it would not be cost-effective, adding that there have been very few occasions when customers have specifically requested crop insurance.
However, Ellis does foresee other possible policy changes across the industry, due to both monetary concerns and regulatory changes. “I anticipate some insurers will start to limit exposures to storms and floods in future by applying higher policy excesses,” he says. “This will result in other insurers coming in and offering excess protection, like they do in the motor insurance market for young drivers and other non-standard risks. Once Flood Re is in place, insurers may also see opportunities to offer alternative arrangements that could give formal flood protection.”
Flood Re, which is due to be implemented in summer next year, is still being debated in the House of Lords as part of the Water Bill. However, under current proposals it will not cover farms – although farmhouses should be covered as long as they are individually owned and insured.
Association of British Insurers spokesman Stephen Sobey explains: “Flood Re was designed to help people protect their homes from flooding and to make sure insurance remains affordable and available, regardless of flood risk. While there are some examples of businesses having difficulty accessing flood cover, neither the insurance industry nor the government has found evidence of widespread problems [in terms of businesses being able to secure flood cover].”
He continues: “Businesses are more likely to have personal relationships with their insurers or brokers, which makes it easier for property-level risk reduction to be taken into account. There is no one-size fits-all approach to business cover, and Flood Re would not work for businesses. In addition, it would not be fair to ask people living in small homes to have to subsidise flood cover for business premises, which is what would happen if businesses were included in Flood Re.”
Nevertheless, the British Insurance Brokers’ Association hasn’t entirely given up the fight to get farms included. Its head of technical services, Steve Foulsham, says: “Our lobbying point is that there are not a lot of differences between the alignment of small businesses and domestic properties. We feel the same issues apply and should be taken account of.”
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