Piggy in the middle

The growing number of cases of bovine TB in the UK has prompted talk of the insurance industry being asked to take on animal disease cover in place of the existing government compensation scheme.

A seminar at Warwick University last autumn highlighted the issues that would make such a move difficult for the Government and farmers and particularly for the insurance industry. Among the challenges would be the question of rapid but accurate testing, valuations, finding the source of an outbreak and handling related claims. Farms have faced several notable outbreaks of disease in recent years, including classical swine fever, Foot and Mouth, TB and BSE, all resulting in large amounts of compensation from the Government.

David Murray Wells, chairman of Agricultural Insurance Underwriting Agencies and also a farmer, says that it is a thorny political issue. The Government is looking for ways out of paying massive amounts of compensation but has to balance that with other lobbies. For example, many farmers blame badgers for the spread of Bovine TB and have been advocating a cull but this is opposed by environmentalists who believe the measure is too extreme and would not work anyway. The Government has ordered reports into the issue but, as yet, has not produced a clear policy.

Meanwhile Bovine TB numbers continue to rise and last year are reported to have cost the Government some £70m in compensation.

Testing the waters

Mr Murray Wells says that another key issue is testing. He says that, at the moment, there are too many false positives thrown up. Farmers are then restricted in moving their cattle and money is lost while they wait for more thorough investigations. If animals are culled after that, they are awarded compensation but not for loss of business while waiting for the results. If the tests finally prove negative, the farmer is out of pocket and out of luck in terms of compensation. The insurance industry would face the same dilemma because cover would be available for slaughtered animals but not necessarily for loss of business for those who do not lose their cattle.

Market cover

There is top-up cover already available in the market which takes account of ancillary losses and is based on the fact that the farmer will be compensated for the loss of the animal itself by the Government.

Until recently, farmers only received some 70% of the value of an animal but this was raised to 100%. Elaine Pyke, chief executive of FarmWeb, says: "There has been criticism that payments have been too generous" and she adds that this has fuelled government desire for a change to the system.

She says: "Our intelligence suggests that we may move towards a levy scheme with costs shared between farms and the Government and with insurers continuing to provide the top-up consequential loss cover as they do now."

But she says any such move is likely to face stiff resistance from farmers.

They argue that they cannot afford yet more costs - an argument they also use against the idea of insurance premiums.

One of the problems for farmers is that diseases are often well mapped.

Bovine TB, for example, is concentrated in the south and south-west so farmers in Scotland are unlikely to be interested in buying cover, while those in affected areas may find it difficult to get cover - or the price will be too high.

Other diseases such as Foot and Mouth happen relatively infrequently, so again it is a hard sell for insurers who agree with the farmers that risk prevention is almost impossible when it is the Government which sets the import/export rules and it has been importing animals that have brought such diseases with them in the past.

As Ms Pyke says: "The difficulty is that given that we are talking about notifiable diseases which affect the national stock, the Government will continue to have control of how any outbreak is managed, thus it will have all the power but none of the responsibility for paying for the results.

"I can't see this being tenable. Insurers would simply not wish to write the business unless there were a number of safeguards and the Government remained as a partner in the financial risk."

Her views are echoed by David Martin, corporate services director at Cunningham Lindsey UK, who says that co-ordination and control of an outbreak would be very difficult if insurers covered individual farmers.

"How could they stop the spread of the disease if they could not react until a claim was made? How could they have farmers working together, to maybe create a firebreak, if each farmer was insured with different firms? How would the claims work?"

Mr Martin also says that any move would make the whole issue far more litigious because insurers would want to trace an outbreak back to the originator and then reclaim costs from them.

He says that it would become a liability issue, lawyers would get involved and it would become complicated as well as costly. The recent Foot and Mouth crisis did not really result in many liability claims, although a few were made by tourism interests trying to recoup their losses.

Team work

Mr Martin, who will be speaking on this issue at the Risk and Insurance Managers Society conference in Philadelphia in April, says: "Ultimately, it should be about people working together and there would need to be better systems in place."

Nigel Collinson, head of livestock for Agrical, says that the Warwick conference certainly showed that, while each individual industry involved could cope with changes, ultimately everyone needed government involvement to make a system work effectively.

He calls for a clear policy from the Government over Bovine TB and says without such a policy it will be difficult for insurers to take over.

He points out that compensation levels have been steadily rising since the Government announced it would provide 100% compensation.

Getting fair market valuation for animals would prove an equal challenge for the insurance industry and rising claims would result in higher premiums, something that affected farmers would be ill able to afford.

Sue Weatherhead, underwriting manager at NFU Mutual, agrees that keeping a lid on compensation payments was a concern to the Government and is an issue that is adding to the pressure to move towards an insurance industry based solution.

But she says: "The problem with insurance is that it is very selective. There are not that many people providing disease covers. They know farmers in unaffected areas are unlikely to buy cover so it is a supply and demand thing. We will provide insurance at a cost but equally you need to have people who want to buy it.

"People will get interested if there is a whisper that a problem is on its way but generally these diseases are not perceived as risks."

She adds farmers would resist any sort of compulsory scheme, arguing that it is up to the Government to manage disease better. "They feel very restricted in what they can do now. There is a feeling the Government should do more."