UK farming: a changing environment

The weather in the UK is becoming more unpredictable and severe weather is now a regular occurrence, the heavy rainfall that resulted in the summer floods being a prime example. The damage those floods caused to growing crops in the UK was extensive and caused a great deal of suffering in the farming community.

In risk management the first thing to consider is whether you can eliminate or reduce the risks. With weather-related risks this is not easy because none of us can control the weather and in many cases it is not viable, or indeed possible, for a farmer to grow crops indoors to protect them from the elements. Despite this there are some risk management options that are available to farmers.

Mike Benishek is the risk manager at Sunripe Produce. Benishek is based in Florida, where extreme weather is common, and says that the most effective non-insurance risk management option he uses is geographical spread of risk to smooth out losses. Sunripe Produce farms on both the west and east coasts of the United States and also farms some crops in Mexico.

Although geographical spread of risk is an option for larger farming businesses, it is not an option for smaller players. However, crop diversification can also help smooth out losses. Benishek says Sunripe Produce has been growing a range of different crops since the 1930s when the founders of the company realised that 'tomatoes and citrus never had a bad year in the same year'.

Despite not relying entirely on insurance for risk management, Benishek also uses insurance to manage the risks to Sunrise Produce's growing crops. Crop insurance is available widely in the United States and protects growing crops against losses due to adverse weather, fire, insects, disease, and wildlife. There are three main types of insurance:

- CAT coverage, which pays 55% of the established price of the commodity if more than 50% of the crop is lost. The Federal Government pays for this cover and farmers pay a $100 administrative fee for each crop grown in each country.

- Yield-based (APH) coverage, which insures farmers against yield losses based on the historical production history of the farm.

- Revenue Insurance Plans, which provide either revenue protection or income protection. Revenue Insurance Plans can also protect the farmer against losses due to market fluctuations in the price of a commodity.

The UK is a major global insurance market that offers insurance for virtually every conceivable risk, yet the availability of insurance in the UK to cover growing crops against weather risks is extremely limited. There are a number of reasons for this.

Weather risks tend to be written as parametric insurance. This type of insurance does not indemnify the insured against their pure loss, but rather agrees to make a payment if a specified event triggers the policy. In the case of crop insurance, the trigger would be an extreme weather event.

Due to its nature, parametric insurance requires a different approach to underwriting, and there is a shortage of underwriters in the UK composite market that have the necessary skills. A different approach to claim handling is also required, particularly as the nature of this type of cover means that it is prone to fraud.

UK insurance companies do not have an incentive to invest in gaining the skills required because demand for weather-related insurance products is low. Tim Sydenham of County Insurance, a broker specialising in the agricultural sector, said that he offers cover for insurance against hail damage to growing crops, but "the take-up rate is not high because it is too expensive."

Howden Skimming of Giles Insurance also offers cover against hail damage. He said that the cover does not tend to be of interest to farmers in Scotland, but that he has seen "a spate of enquiries in the last six months from arable farmers in the East Midlands and Norfolk." He added: "Farmers do not tend to take up the cover due to price issues."

Some clients do buy hail cover. John Hare of Agrical, a loss adjuster specialising in the agricultural sector, said he has dealt with around 100 hail claims in the UK in the past five years. He says that most of these claims have tended to be in the £5,000 to £50,000 range, although he has seen a claim for £250,000.

The reason that price is more of an issue in the UK than it is in the United States is that, in the United States, crop insurance is heavily subsidised by the government. CAT coverage is provided to all farmers at virtually no cost and the wider covers that are available are also heavily subsidised. For every $1 that US insurers receive in premiums, they pay out £5.

Although UK farmers have very few options when it comes to insuring their growing crops against weather risks, Tim Sydenham said that they are currently showing considerable interest in insurance against storm and flood damage to grain in-store. He says that there has been a 30% to 50% increase in clients taking out this cover in recent months.