Animal instincts

The farming sector has been one of the hardest hit of all segments of the UK economy over the last few years.

Severe pressures on farm incomes, driven by economic factors such as the strong pound, reduced EU subsidies and the minimum wage - which has affected casual and seasonal labour - coupled with external influences such as the rate of inflation in the retail price of food compared with the rate of growth in farm prices, bovine spongiform encephalopathy, foot-and-mouth disease, tuberculosis and livestock movement limitations, red tape and legislation, have all led to major financial cutbacks. Yet, things are finally looking up for UK farmers.

Following the exodus of a large number of farmers who opted out by selling their businesses for non-farming purposes, those electing to remain in the industry are optimistic about their futures. In recent years, casualties within this industry have been high and the challenges have been tough.

British farmers and growers have been waging a constant war against the ongoing recession that has affected the agriculture industry for the last six years. However, the industry has battled on to demonstrate new levels of determination and innovation and, while the general trading climate remains tough, things are finally looking up for UK farmers. Having climbed out of a relatively soft market three years ago, insurance premiums have now risen to more realistic and sustainable levels and the market in general has stabilised.

A loyal market

Successful farmers today increasingly operate as businessmen who use accountants, solicitors and seek professional insurance and risk management advice. The farm market is traditionally a loyal market in which personal service and relationships are valued. Brokers who specialise in this highly complex niche market must have the necessary insurance expertise and appreciation of the business to provide such a service. Their experience in this market offers a unique understanding of the insurance implications related to the different types of farming such as arable, dairy, beef, sheep, pigs and, of course, the diseases that can affect livestock. They are able to supply specialist farming expertise and a strong local knowledge and identity that is essential when dealing with farmers and others involved in the agriculture industry.

Most brokers have some farm business but specialisation is necessary in order to grow their farm book successfully in the long term. Farming is a niche market where there is a need for a tailored product. The farm often serves as home, office and workshop all in one, and cover must encompass both commercial and personal lines insurance such as that to cover farming machinery and equipment, livestock, produce, engineering cover, personal accident benefits, revenue cover, home and motor insurances.

Fewer insurers are now active in this market. Only those with the critical mass of accounts have the ability to manage the business effectively.

Along with local broker expertise, which is essential in this sector, the important factors are a specialist insurance product, expert underwriters and an understanding of risk management issues.

Alongside the traditional risks, such as fires caused by long, hot summers or theft from property, brokers need to keep up to date with new legislation, health and safety issues, methods of working, employee management, control of pollution and other environmental issues, to name but a few. The litigious trend in the UK has spread from town to country, with employers' liability and professional liability claims rising as a result.

Changing environment

The most radical change has been the enlargement of the EU and Common Agricultural Policy, the reform of the subsidy regime that will hit the industry, although the effect will vary according to size and type of farm.

As a result, there will be a continuing move towards fewer, but larger, farms; the growth of 'brands' to compete against supermarket dominance; growth of farmers' markets, where farmers sell their produce directly to customers; a move towards niche, or alternative markets such as organic produce; diversification; and the development of co-operative ventures where farms group together to sidestep the power of the supermarkets and pool resources to market their products directly.

The UK has played a major negotiating role in reforming the CAP. The new CAP breaks the link between production and subsidies that will free the farming industry and allow them to respond to the demands of the market place. This will give UK farmers the flexibility to be able to base their management decisions on customers' requirements as opposed to those of the support system.

On the flip side of the coin, it will put even more pressure on farmers to keep in line with EU legislation on environmental issues, animal welfare and public health issues. It has become increasingly complex and expensive to comply with legislation. For example, farmers have to minimise pollution by using bunded tanks to curb and contain spillages, maintain better animal husbandry (for example, pigs now have to be kept in pens of a certain size to allow more free movement and a better quality of life) and they have to use livestock identification such as tagging and passports, all of which add to farmers' costs.

The theory is that, by removing direct payment of subsidies for animals or crops, it removes the incentive for farmers to maximise their production of any one resource stream. This can only have a positive impact on the environment by reducing the need for intensive farming methods and pesticide, herbicide and fertilizer use. Production will instead be realigned to meet market demands; eventually a return to the old free market system of supply and demand with all the new opportunities this brings. Farmers will be able to decide which markets to target and the most cost-effective means of getting there.

Farm land is now physically shrinking due to green-belt development and the pressure on the government to provide more affordable property. There are now approximately 200,000 registered farm holdings in the UK. Twenty years ago, registered farm holdings exceeded 240,000. The overriding trend in today's farming sector is towards consolidation as smaller holdings are unable to achieve sufficient economies of scale to remain economically viable and many are struggling to survive in the climate of constant change.

Consequently, farming businesses are becoming larger and therefore stronger.

Larger neighbours are buying more land to lower their cost base, achieving greater economies of scale and more bargaining power. These include co-operatives, marketing groups, branding and farmers' markets.

Supermarkets dominate the supply chain, demanding uniformity of product (which adds to the cost) and suppressing 'farm gate' prices. As the buying power of the big supermarkets increases and the consumer demands ever more varied, high-quality food, more pressure is being put on farmers to cut costs, sometimes with devastating consequences. The price a farmer receives per litre of milk, for example, has put some smaller farms out of business, as it was simply not viable for them to produce milk so inexpensively.

While the farmer bears the cost of UK animal welfare regulations, he finds his produce competing against less-expensive foreign imports where these rules do not apply. Farmers have little influence on the end-price of their product.

Diversification to survive

In a move to supplement farm incomes, many farmers are now involved in diversification. Along with growing different crops and rearing different animals, this includes other non-traditional farming activities, which maximise use of the land. This can mean bed-and-breakfast accommodation, shops, golf-driving ranges, off-road all-terrain vehicle driving, caravan sites, open farms, training farms and holiday farming. Clearly, from an insurance viewpoint, some are higher risk than others and require careful underwriting.

Quad biking or clay-pigeon shooting are considerably higher insurance risks than straightforward guest-house operations. Farm covers have therefore become much more far-reaching and varied and, these days, can incorporate an element of retail insurance (the farm shop) and leisure (outdoor pursuits, caravan sites, permits for anglers).

As farmers diversify into other non-farming areas, such as B&Bs and sports or adventure holidays, they need to assess the risks involved in close consultation with their broker and tailor their insurance cover accordingly.

They also need to understand the changing profile of the farm to ensure there are no loopholes in cover, which provides new opportunities for brokers to do more cross-selling. Where the diversification becomes so extreme that the agriculture business is the minority source of income, it can change the risk completely. As always, brokers need to know as much as they can about their customers to ensure that insurers can create the right level of bespoke cover to fit diverse requirements.

The farmer is affected in many ways when new UK and EU legislation is introduced. For example, the 'right to roam' gives walkers and hikers greater access to the countryside with the associated risks of sheep worrying, with many ewes and lambs being killed or injured by straying dogs; walkers being attacked by cows with calves at foot; and escape of livestock due to gates being left open. This has placed a greater responsibility on the farmer towards members of the public in terms of health and safety and the associated costs involved such as maintenance of footpaths, stiles and gates on their land. Groups such as the animal rights activists and the anti-genetically modified food political groups will continue to heap pressure on farmers.

These changes will have a major impact on the farmer and their risk profile for insurers, who are demanding greater levels of expertise to help control exposures.

Spreading the risk

A thorough and professional approach to risk management is a key area for the future of farming insurance, and brokers and insurers alike must judge each risk on its individual merits. A well-managed farm must be exactly that and include in its approach such aspects as: does the employer embrace health and safety measures to protect employees? Are the premises properly managed and maintained? Are hazardous chemicals, veterinary medicines or potentially dangerous machinery properly used and stored? Is the farmer aware of how his activities can affect the surrounding environment, such as spillages into local watercourses?

As well as the personal and human cost of accidents, the costs to a business in purely financial terms are high. These can include sickness payments and training costs for replacement staff, loss of revenue, damage to machinery and produce, and insurance and legal costs. There are also the losses that are difficult to assess, such as damage to the farmer's reputation and resulting loss of customers, which, if not managed, can still put a farm out of business even if the essential insurances were in place.

To be effective in the farm insurance sector, brokers should be able to work with their insurer for support in every aspect of risk management.

Those contemplating entry into the farming market need to understand that it is a complex area that requires specific knowledge and expertise of the subject, given the huge diversity of risks.