Who will foot the bill?

Bovine tuberculosis is a rising threat to the UK agricultural industry. Stephanie Denton reports on the reasons insurers are reluctant to cover this risk

In 2002, the UK agricultural community was overwhelmed by an outbreak of foot-and-mouth disease, which spread across the country rapidly and threatened to destroy parts of the farming industry. Farmers saw their livelihoods literally go up in smoke when livestock were killed and burnt, and, although the government provided compensation, many felt they received little support.

Now, three years on, another disease, bovine tuberculosis, is slowly attacking the farming community and government compensation is rapidly increasing. A new compensation scheme is being considered but many believe this will give farmers less money and push the problem onto the insurance market.

"Bovine TB is one of the most important issues facing farms at the moment," says David Murray Wells, executive chairman at the Agricultural Insurance Underwriting Agency. "It has been a problem in cattle for at least 10 years, originating in the South-west and then spreading across the country."

He explains that during the foot-and-mouth crisis, all TB testing stopped, and that in the two years it took to restart, farmers restocked to replace the culled cattle - unknowingly allowing TB to spread across the country.

Traditionally, the various political parties in power have tackled compensation for TB differently, and Nigel Collinson, director of loss adjuster Agrical, says this has affected the problem. "When the Conservative Party was in power, the compensation scheme that was in place paid farmers 75% of the monthly average market price for the infected animal (within a limit) and then insurance policies made the payment up to the full market value, which could be a significant payment," he explains.

"Insurers also paid 25% of the value of the cattle as compensation for restricted movement of cattle or loss of milk production."

However, soon after the Labour Party came into power, it changed the compensation to the full market value. This meant reduced risk for insurers, as they were able to drop shortfall payment and continued purely with the restricted movement compensation.

Increasing incidences

Mr Collinson adds that the incidence of outbreaks has risen 18% per year for the past 20 years and around 4000 cases of TB are expected in 2005 alone, meaning that the government is facing an increase economic burden. Because of this, the idea of private insurance to help solve the problem has been mooted.

Bill White, livestock broker for Heath Lambert, says: "The government spent £150m on TB-related compensation and eradication last year and it needs to address this. Ultimately, the taxpayer is paying for it, which means there is an incentive to link this to private insurance."

Dave Lamb, underwriting manager for agriculture at Norwich Union, acknowledges that this idea has been circulating for some time: "There has been some discussion in the European Union about natural catastrophes and how nation states should respond - one idea is to do what the UK wants and transfer costs to the private sector. The government would like to see insurers take on more issues but the insurance industry is resistant."

However, Dan Hackett, head of TB policy at the Department for Environment, Food and Rural Affairs, says the government will continue to pay compensation: "There is no intention to move compensation onto insurers but we are working on new proposals for the compensation scheme. Our intention is to provide compensation, which correlates to the market value of the animal in line with EU requirements. It is true that this may see some farmers getting less than before but it is up to farmers if they want to take out insurance cover. It is in their best interests to protect themselves but farmers are telling us insurance is not available."

This is true, with most insurers admitting that they no longer write new TB insurance policies, although most cover existing policies. Therefore, in some areas farmers have no insurance for TB at all because the problem was never in their geographical region before.

In order to tackle the problem, Defra has announced a roll-out of several cattle-based short-term measures to tighten surveillance and reduce the risk of TB spreading to new areas. These measures comprise a recalculation of routine testing intervals; livestock movement restrictions to be imposed when testing becomes overdue; a more systematic approach to identifying potential new hotspots; and the introduction of rigorous testing schedules for new and reformed herds.

However, farmers and insurers believe this is not enough to get the situation under control and that other areas need to be tackled, especially if insurers are to start writing new TB policies. Mr Murray Wells explains that routine testing for the disease is needed: "One of the problems is that testing is not done regularly enough. Animal testing is scientifically proved to bring down the level of TB, so we would want to see regular testing introduced."

However, he says there are problems with the current testing systems. "False positives are produced in up to 20% of cases. This means that animals are unnecessarily slaughtered and insurers are paying out for animals without the disease."

According to Mr Lamb, incidence figures would not necessarily have to return to the original level for Norwich Union to start writing new business, although he explains that the level must be sustainable and consistent.

Mr Hackett confirms that research is being undertaken by Defra: "We have developed a strategic framework to address the problems presented by TB and field research is being conducted into gamma testing that tests blood. There is also ongoing research into vaccines."

Mr Collinson agrees that testing problems need to be addressed but warns that preventative measures are necessary too: "You will not eradicate the problem until you control outside influences as well."

Badgering opinions

This is one point farmers feel strongly about and Simon Edwards, chairman of the Herefordshire National Farmers Union, says: "We are hoping to see some decisions on pre-movement testing but because the disease is endemic in the wildlife, the government isn't willing to tackle this. We believe if we have to test the cattle then the wildlife should be tested too."

There is an ongoing debate, for example, about the influence badgers have on bovine TB, as Mr Lamb explains: "The opinions on badgers fall into two camps. Some people believe that badgers catch TB if it is in their area and others think that they spread it. There is no conclusive evidence either way and a long-term study is really needed."

Mr Murray Wells adds: "There has been some testing in Ireland, that suggests there is a link between TB in badgers and cattle but this does not confirm whether it originates in the badgers and is transferred to the cattle or the other way around. Farmers continue to feel that if badgers were removed then there would be a reduction in bovine TB."

Defra acknowledges the trial in the Republic of Ireland, called Four Areas Badger Culling, that concludes that badgers do affect the incidence of bovine TB in cattle. However, it says that the applicability to the UK needs to be addressed along with the issues of practicality, cost-effectiveness and the social acceptability of interventions. Ireland has decided against culling but is looking into vaccines for badgers.

This still leaves a problem. "Research in the market says that if there is disease in the badgers and they are culled, the disease can still survive in the environment without a live carrier," says Mr Collinson.

He says, therefore, that screening is needed for the soil and, if the government began to do this screening, more insurers may enter the market - but only if the live carriers were also culled.

Even if these problems were solved there is still some reluctance to re-enter the market because of the risks insurers would be exposing themselves to. "Some of the risks involved could be solvency threatening," explains Mr Lamb. "For example, if insurers had covered the foot-and-mouth crisis this would have been a huge exposure. If the way forward is for insurers to cover this, then the EU may have to provide some reinsurance cover or they may be forced to raise a levy from farmers or transfer the risk to the commercial market."

Mr Collinson supports this and adds that managing risk is not an option. "Insurers have no way of imposing situations on farmers - so they can't manage the risk," he says. "Also, you can't see the disease and you are just left with an indicative situation. For example, insurers need to know when you were last tested, if your cattle have had TB before and if there is any in the area. This is very imprecise data to underwrite on."

Insurers shy away from TB cover because they cannot spread their risk, as those most likely to want insurance are those most likely to make a claim and farmers that will not make a claim do not feel the need to have insurance. According to Sophie Dunkerley, deputy underwriter at Crowe Livestock: "At the moment, in certain areas, it would be like writing a blank cheque."

Mr White concurs but adds that there are ways around this. "Heath Lambert is still writing new risks but we are encouraging people to take out cover for the three diseases: TB, foot-and-mouth and Brucellosis," he says. "This spreads out the risk a bit more."

The farming community believes the responsibility to cover TB compensation should fall to the government. "Last month, in Herefordshire, we saw 100 cattle from one farm go down and insurers would not be willing to cover this," explains Mr Edwards. "There is not enough money in farming to get insurance for TB - the premiums are too high. We would consider it if we were forced to but what we really want to see is the government taking responsibility."

Ms Dunkerley believes joint schemes could be a way forward: "We are always interested in discussing a joint funding scheme but until the government has a control programme in place for TB, we would not be in a position to underwrite such a scheme."

Limited willingness

As David Martin, corporate service director for Cunningham Lindsey, explains, there is no need for a scheme at the moment: "There is a limited willingness of insurers to go beyond where they are now. There is reasonable compensation at the moment. If the replacement scheme comes in and is less generous, then demand for insurance will increase."

Mr White agrees: "The market is in limbo. Until Defra decides to change the compensation, there is no incentive for farmers to take out insurance. If they do implement a new scheme then there will be more exposure for insurers."

Ms Dunkerley believes that if exposure increases, the insurance industry would rise to the challenge: "What we need is drastic procedures in place to control the disease so that we can provide UK farmers with an insurance product, be those measures slaughter, movement restriction or business interruption following an outbreak of disease."

However, she concludes that there is a need for the government to make some serious decisions first: "We need the government to be far more open in discussions and start a consultation on proposals for controlling TB. We really need a strong driving force from the government with a person that understands the needs of the tax payer, the farmer and the insurance industry to get the bovine disease issue moving."

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