2. Summary overview of the current state of aquaculture insurance in the world

Raymon van Anrooy
Fishery Planning Analyst, FAO

2.1 Introduction

This summary overview of the current state of aquaculture insurance in the world is based on findings from the regional overviews as presented in the next chapters and on the responses to the survey sent to the major underwriting organizations involved in recent years in fisheries and the aquaculture-related insurance business. The survey resulted in 17 responses from underwriting organizations, including Lloyd’s of London, and companies from Chile, China, France, Greece, India, the Republic of Korea, New Zealand, Norway, Poland, Spain, the United States and the United Kingdom.

2.2 Short summary of aquaculture production in the world^[2]

World aquaculture production continues to grow. In addition, from 2003 to 2004, a considerable growth could be noticed in volume terms. Estimated total annual production increased 4.4 million tonnes, from nearly 55.2 million tonnes in 2003 to 59.4 million tonnes in 2004. Compared to the 31.2 million tonnes in 1995, considerable progress in annual production was made in this decade. In 2004, China remained by far the main aquaculture producer country in volume terms; its production reached 41.3 million tonnes. In the same year, other Asian countries together produced an estimated 13.0 million tonnes of aquaculture products. This means that almost 75 percent of the world’s aquaculture production originated from Asian countries.

In value terms, a new height was reached in 2004 as well. The total value of world aquaculture production was estimated at US$70.3 billion. This means that the total annual value of aquaculture production increased by over 7 percent from 2003 to 2004. Considering that the estimated value of aquaculture production in 1995 was around US$44.1 billion, one can argue that aquaculture made a major leap forward in the last decade. China was also the leading country in value terms, with an estimated output value in 2004 of US$36 billion; grass carp, silver carp and Japanese carpet shell all reached production values higher than US$2 billion. The aquaculture production in Asia (excluding China) had an estimated value of US$20.8 billion in 2004. This means that 80 percent of the world aquaculture production in value terms was generated in Asia.

2.3 The insurance market

The supply side of the aquaculture reinsurance market includes insurers and reinsurers. To spread the risks, insurance companies often aim to reinsure a part of them. The insurance market is dominated by a few large reinsurance institutions, which include Lloyd’s of London, GE Insurance Solutions, Swiss Re and Munich Re. A great number of aquaculture policies are reinsured through these four institutions. Lloyd’s should not be considered an insurance company, but rather a market in itself.

The situation in the aquaculture insurance market can be discussed by using the Structure, Conduct and Performance (SCP) framework. The market structure (i.e. the number, size and diversity of participants at different levels) influences market conduct (i.e. the reliability or timeliness of activities, control or standardization of quality, regulatory mechanisms). Structure and conduct together determine the performance of the marketing system as a whole (i.e. the technical and allocative efficiency of the market, the degree of market integration, market price and margins, accuracy and adequacy of information flows, etc.).

With regard to the market structure, it is clear that there are less companies offering aquaculture insurance services than those offering other insurance services (e.g. life, health and car insurance). Often there are none, just one, or a very limited number of insurance companies offering aquaculture underwriting services that are active in a country. As a result, competition in most national markets is limited and individual aquaculture insurance underwriters have high market shares. It can be argued that there is a fairly high market concentration on the supply side, particularly at the national level in Asia, Africa, Oceania and Latin America.

One cannot speak of perfect competition in the aquaculture insurance market in any of the surveyed regions, not only because of the limited number of suppliers, but also as a result of non-homogeneous products. Aquaculture insurance policies differ according to species, growing systems and identified risks. In addition, market knowledge is far from perfect, which affects competition. Legal barriers at the national level, sometimes only allowing national or state-owned insurance companies to operate, currently affecting the market structure tremendously. Risks involved in aquaculture underwriting generally require economies of scale - including a network of branch offices to market the insurance products and the availability of reinsurance.

As mentioned above, legal and regulatory frameworks are strongly affecting the market conduct of the aquaculture insurance market. Foreign insurance companies were not allowed to do business in a number of the countries surveyed. Although it seems that market entry barriers are generally being lifted, they still exist in some countries. Moreover, some public (state-owned) insurance companies are not allowed to seek reinsurance in the international market according to national level regulations, which is hampering aquaculture insurance development.

When looking at the policy wording of aquaculture insurance policies, a fair amount of standardization can be found in terms of terminology, procedures and cover against perils. However, the great variety in species, growing systems and limited transparency in premium setting, risks assessments, policy conditions, product prices and compensation for claims make it difficult for aquaculturists to compare services from different insurance companies.

Market performance in the aquaculture stock insurance market can be measured by profits and marketing margins. Profits and losses are discussed in section 2.12 (underwriting experiences). Profit margins in aquaculture differ largely between species, culture systems and countries. The same is true for aquaculture insurance and reinsurance companies. The only stakeholders in the aquaculture insurance market that seem to have fairly stable margins are the insurance brokers. They generally get paid commission for finding the appropriate insurance companies to match the aquaculture companies’ demands.

The various regions covered in this survey are served by the world reinsurance market, but some regions are traditionally better served than others. Europe, North America and Oceania are generally better off in terms of aquaculture insurance coverage than the other regions. The history of aquaculture insurance in these three regions is longer as well, while aquaculture’s roots can be found in Asia, the region with the highest aquaculture production.

Aquaculture insurance in Asia started some 20 years ago, but while fisheries insurance soared, aquaculture insurance showed mixed results, and consequently, limited growth. Aquaculture insurance services in Asian countries are still often provided by state-owned insurance companies that are also involved in agriculture and fisheries insurance. Aquaculture insurance occasionally falls under agriculture insurance units or branches of general insurance companies, and as such the activity is generally not considered a priority area. Some reasons for this include the specific difficulties involved in aquaculture insurance and the limited profitability of aquaculture insurance pilot schemes. In the past, general insurance companies in Asia were sometimes ordered to provide aquaculture insurance services by law or decree, although knowledge of the sector was minimal, as was interest shown by the companies in setting up nationwide coverage. As a result, many aquaculture insurance schemes in Asian countries remained at a pilot scale, or insurance schemes were operational in theory but not operational anymore in practice. Unfortunately, this is still the case in some countries.

Europe can be considered the best served market in terms of aquaculture insurance. Aquaculture insurance services have been offered in this region from the early 1970s. A large number of the major insurance businesses have their headquarters in Europe, as well as Lloyd’s of London, which is regarded as an insurance market in itself. The European insurance market is heavily regulated and externally focused - i.e. the main players also provide services outside their country of origin. These services are often not just limited to the European countries, but address the international market. The major aquaculture-producing countries in Europe, including France, Italy, Norway, Spain and the United Kingdom, all have domestically-based underwriters who are active in providing insurance services to the sector. In many of the European countries, insurance brokers are actively bringing supply and demand together.

In North America, aquaculture insurance services have been available since the mid-1970s. The market in Canada is supplied from abroad because no national companies provide the service. The US aquaculturists are served by national and international underwriters, but aquaculture insurance has not yet established a firm base in the country. A fairly limited number of aquaculture establishments are insured at present in the United States. South America is not well served by aquaculture underwriting. In Chile, aquaculture insurance has been available for a little over one decade, while in Brazil and most of the other South American countries, no aquaculture insurance brokers or companies are active at present. Africa is the only survey region that is poorly served by the aquaculture insurance industry. Although in theory African aquaculture entrepreneurs can apply for coverage on the international aquaculture insurance market, the lack of brokerage services and unawareness of the insurance industry with aquaculture in Africa results in a very limited coverage. At present, South Africa is the only country reported to be served by aquaculture services in sub-Saharan Africa.

Oceania is well served by the international insurance market. While national agriculture underwriters in Australia generally do not provide aquaculture underwriting services, insurance brokers provide the necessary linkages between international insurers and aquaculture enterprises in Australia. Aquaculture insurance is still not very widespread among aquaculture enterprises in Australia. In contrast, some 90 percent of New Zealand’s salmon production is covered by insurance services provided by both national and international underwriters.

2.4 Demand and supply issues

FAO estimated that the number of people employed worldwide in aquaculture production in 2002 at 9.8 million (FAO, 2004). Since some 9.5 million of them are found in Asia and Asian aquaculture industry continued to grow between 2002 and 2004 - with nearly 7 million tonnes, representing an increase in value of around US$6.5 billion - it is foreseen that the estimated numbers of people employed in aquaculture have increased further. The total aquaculture production in the world in 2004 was estimated at 59.4 million tonnes, which represented a value of US$70.3 billion. A simple calculation, using a non-confirmed fairly conservative estimate of ten million people employed in aquaculture in 2004, shows that, on average, each employed person produced almost six tonnes, with an average value of just over US$7 000 per person. One can argue that the demand for aquaculture insurance has never been as high as it is now, taking in consideration the above impressive growth figures in the sector.

But is this truly the case? Here availability and access issues come into the picture. A large majority of aquaculture in Asia, Africa and Latin America is practised by small-scale farmers who often do not have access to modern means of communication, and in many cases practice low-risk, low-investment, low-input, low-output aquaculture. Many of these farmers do not have access to extension and financial services. Therefore, although these services are being provided at the national level, the individual aquaculturist cannot access them for a variety of reasons.

Concerning aquaculture extension and microfinance and credit services in support of aquaculture, insurance services for aquaculture enterprises are often available in theory within many countries, while in practice they are not for a large part of the sector. Availability of aquaculture insurance services is often limited to certain areas and most of the aquaculture underwriters show limited interest in providing them to small-scale aquaculturists located in distant areas from the capital. This means that often only subsidiaries of multi-national aquaculture enterprises and the largest domestic enterprises are served by aquaculture underwriters, and that the availability of the insurance service for the great majority of aquaculturists is limited.

In general, before entering the aquaculture insurance business in a country, insurance companies carry out needs or demand assessments. Such assessments provide excellent information to these companies, but are often considered confidential, even if a company decides not to enter the business after all. Therefore, no accurate information on the specific demand for aquaculture insurance in certain regions and countries could be presented here. It is reasonable, however, to expect that there is a large demand for aquaculture insurance as producers seek competitive cover for economically viable premiums, appropriately designed application forms and arrangement procedures, well drafted, comprehensive, and simple-to-understand policy wording, and effective claim handling and payment procedures.

Apart from the above-mentioned sectoral growth and the availability and access constraints, there are a number of current trends that seem to positively affect the demand:

• increasing recognition within governments of the socio-economic importance of aquaculture and accordingly, the drive for sustainable practices in which insurance services could play a role;

• increasing willingness of governments, particularly in Asia, to produce enabling policy and regulatory frameworks for agriculture, aquaculture and fisheries insurance;

• increasing investments in aquaculture technologies and advanced production systems that involve higher financial risks for aquaculture entrepreneurs;

• increasing influence of markets, trade and consumption in relation to fisheries products;

• increased awareness on insurance among aquaculturists through services from life and health insurance companies that do seem to reach the rural population in many developing countries;

• the boost in coverage of modern communication technologies such as internet and cell phones, which increases availability of information and decreases the costs of communicating with policy-holders.

As detailed in the section 2.3, the supply side of the aquaculture insurance market is dominated by a small number of international and national underwriters and reinsurance companies. At the national level, generally aquaculturists have little choice between aquaculture insurance suppliers since there are often just one or a few active in a country. Negative underwriting experiences in the last decades have caused a number of players to withdraw from offering aquaculture insurance services. Others have entered the sector, but overall the number of aquaculture insurance underwriters has remained stable or possibly even decreased in the last decade. The limited information on the sector and the production processes used in aquaculture, the lack of policy and regulatory frameworks on aquaculture insurance, and the underwriting experiences in the recent past were among the causes for this reluctance among insurers to enter the aquaculture insurance business.

On the supply side, aquaculture insurance companies are increasing diversity in insurance products, albeit slowly, in order to better address the needs of aquaculturists. Demand-led aquaculture insurance is slowly developing, although some subsectors (e.g. catfish culture in the United States and coastal shrimp culture in many Asian countries) are still not offered services that fit their needs and conditions. The modern aquaculture techniques and the implementation of better management practices tend to decrease the risks involved in aquaculture production processes. The increasing knowledge of insurance companies on the risks involved, together with the improvements in and adoption of risk management practices by aquaculture enterprises reduce uncertainties for aquaculture underwriters. The supply of aquaculture services might be positively affected by these developments in the future.

2.5 Policies currently in force

The number of aquaculture enterprises insured by the insurance companies who replied to the survey (see also Annex 1) is in excess of 3 000. A few companies provided apparently accurate figures, while others provided ranges, such as "300 to 400".

On the basis of responses received, over 2 000 farms, sometimes including several establishments of the same aquaculture enterprises, may currently be insured in Europe, Africa, North and South America.

In addition, in Oceania there are at least 25 salmon aquaculture establishments currently covered by insurance and a similar number of aquaculture enterprises may possibly be receiving some cover in Australia.

In China and other Asian countries, the total number of policies in force is a big question mark. Information from the main countries covered in the regional syntheses showed that in 2004, in Viet Nam and China together, there were at least some 2 000 aquaculture insurance policies in force. In the same year in Japan, it is roughly estimated that at least 3 000 aquaculture establishments were covered by insurance. A few hundred policies were estimated to be in force in the other Asian countries.

A conservative estimate of the total number of aquaculture policies in force globally would be between 7 500 and 8 000.

2.6 Perils covered

In the major aquaculture producer countries in Asia, the aquaculture insurance policies in force are "named perils", which means that the policies cover the policy-holders only for the risks named in the policy documents. The named perils often listed in the policies differ largely, but the following named perils are commonly included in standard policies:

For onshore systems:

• pollution from external sources;
• aircraft and other aerial devices or articles dropped from the sky;
• malicious acts;
• predation;
• floods, inundations and tidal waves;
• storm damage (including hurricanes, cyclones and typhoons);
• landslides, earthquakes and volcanic eruptions;
• structural failures (e.g. of dykes), breakage or blockage of any part of the water supply system;
• drought, fire, lightning, explosion;
• freezing, frost damage, frazil ice;
• mechanical breakdown or accidental damage to machinery and other installations;
• electrical breakdown, failure or interruption of the electricity supply, and electrocution;

• de-oxygenation and other changes in the concentration of the normal chemical constituents of the water that cause damage.

For offshore systems:

• pollution from external sources;

• aircraft and other aerial devices or articles dropped from the sky;

• malicious acts;

• predation or physical damage by predators or other aquatic organisms

  (excluding by sea lice or other ectoparasites);

• storm, lightning, tidal waves and collision;

• sudden and unforeseen structural failure of equipment;

• freezing, super-cooling, ice damage;

• de-oxygenation due to competing biological activity or to changes in the physical or chemical conditions of the water, including upwelling and high water temperatures;

• other changes in the concentration of the normal chemical constituents of the water, including pH or salinity.

Insurance policies with additional cover for diseases, such as shell disease, vibriosis, celidas and parasitical diseases, and for damage caused by red tides can often be arranged as well.

Theft, riots, strike, war and similar disturbances are generally not covered, nor is damage caused by negligence of the policy-holder.

TABLE 1
Summary of aquaculture species insured

TABLE 2
Most commonly mentioned species

In the other regions of this review, the bulk of insurance policies in force are of the "all risks" type. Accordingly, a wide range of perils are covered as listed above, including: oxygen depletion due to competing biological activity; attacks by predators including seals, sharks, birds and jellyfish; storms, freeze and supercooling; electrical breakdown; changes in the normal chemical constituents of water including pH and salinity; disease; and toxic algal bloom.

Although it was not surveyed in detail, the major insurance companies offering aquaculture stock insurance also cover onshore aquaculture equipment, boats, and other transport and offshore equipment. Insurance coverage of related areas, which include property, public liability, employer’s liability (sometimes also for divers), market price declines, transport, product liability and marine liability are also available with other companies in the market. Aquaculture livestock in transit is also currently insured by some insurance companies.

2.7 Species insured

There is a large range of aquaculture species currently insured. The regional differences are large, however, as a number of species are only cultured in one or two regions. Aquaculture insurance cover is not limited to finfish species, but also includes molluscs, crustaceans and seaweeds. Table 1 gives a summary of the aquaculture species insured.

While the list looks impressive, it should be noted that to date many of the aquaculture insurance companies have limited their insurance activities to a small group of species with which they are most familiar. However, it seems that most insurance companies are prepared to insure species outside their current portfolio, provided that they obtain the required background information to carry out a proper analysis of the risks involved. A number of insurance companies stated that they are not prepared to cover shrimp production, and others are not prepared to insure tuna fattening in cages.

Insurance companies were also asked which aquaculture species they would be prepared to insure in the near future. Table 2 includes the most commonly mentioned species in response to the question.

2.8 Growing systems insured

The growing systems currently insured by the aquaculture insurance industry can be divided into offshore and onshore systems (Table 3). Most aquaculture insurance companies insure offshore cage culture and onshore culture in ponds, raceway systems and recirculation systems.

The respondents to the survey indicated that most intensive and semi-intensive culture systems will be considered for insurance. Extensive or improved extensive systems are less likely to be insured. Some improved-extensive pond production is insured, but only in Viet Nam.

Hatchery and nursery production is only insured on a very limited scale. Not many insurance companies are eager to step into shrimp hatchery production insurance.

TABLE 3
Growing systems currenrty insured

Offshore submersible and semi-submersible cages are considered culture systems that might be insured in the near future. At present, insurance companies have limited experience with offshore farms. The design of feasible moorings (cages and platforms) is considered insufficiently developed, at least against storms.

2.9 Underwriting

The underwriting capacities of the insurance companies according to responses in the survey were wide-ranging, from a net underwriting capacity of US$500 000, to a gross capacity, with reinsurance of US$80 million.

Underwriting per farm differs largely between regions as farming systems and investments also differ largely. In general, there is a maximum set by the insurance companies providing cover to aquaculture for individual farms as well as for the activity. For instance, in Australia and New Zealand, the maximum per farm at one location is US$250 000, retaining up to 50 percent of the risk. In China, reinsurance should be sought when the insured sum is higher than US$2.4 million.

Mutual insurance schemes are very rare in the aquaculture sector. Although mutual insurance schemes in marine capture fisheries are fairly common, similar schemes for aquaculture can still be considered at the pilot stage; mutual insurance schemes for aquaculture were identified in China and Japan only. It should be noted that in some other countries, particularly in Asia, possibilities for establishing mutual insurance schemes for aquaculture are being discussed and frameworks are being developed.

The multinational insurance companies involved in aquaculture insurance often provide services in more than one country. State-owned insurance companies, in contrast, generally do not underwrite business outside their own country.

2.10 Risk management

Aquaculture insurance is also used as a tool to increase cooperation between various aquaculture sector stakeholders (aquaculture entrepreneurs, financial institutions and government agencies), with the overall goal to reduce risks in both aquaculture production and the insurance service. Aquaculture insurance schemes are therefore generally designed to promote "good" behaviour, that is, aquaculturists should try to minimize the risks involved for themselves, the environment and their insurance companies.

Several insurance companies involved in aquaculture insurance include preconditions before policies are issued and sometimes include best practices in their policies. Pre-conditions can include access to clean water sources for land-based ponds. Best practices listed may be the frequent monitoring of water quality, purchase of certified disease-free fingerlings, and farm record keeping.

Risk management surveys are generally not limited to risk assessment surveys. The latter are used by insurance companies to obtain more information in addition to the commonly used proposal forms that have to be filled by those who apply for aquaculture insurance. Risk management surveys include aquaculture site surveys, management and biological surveys.

Risk management surveys are regularly carried out by insurers everywhere. In most regions, insurance companies use local aquaculture experts and/or experienced general insurance surveyors to inspect fish farm sites. In the case of large or sophisticated operations, insurance companies may bring in surveyors from outside with particularly specialized experience. The aquaculture insurance companies in Oceania generally also have in-house expertise on risk management in aquaculture.

While in Asia risk management surveys of aquaculture insurance companies are generally carried out in collaboration with government agencies involved in or responsible for aquaculture development, management and promotion, this is not often the case in the other regions. In these other regions, private sector expertise is sought instead.

2.11 Claims handling

In most of the regions, independent loss adjusters are used for assessing claims against policies, following damage or losses. In some countries where aquaculture insurance is well established (e.g. the United Kingdom, Chile, Norway and New Zealand), the insurance companies often have in-house, experienced loss adjusters. National institutions are often contracted for disease diagnostics and specialized laboratory work.

In Asian countries, governmental fishery and aquaculture agencies and specialized universities are often asked by insurance companies to assist in loss adjustment, particularly in the case of larger disasters. These agencies assist the insurance company’s in-house loss adjusters. Aquaculturists in India and Bangladesh can also use the services of independent experts and aquaculture cooperatives and/or associations to assess the loss and the related size of the claims, and reporting to the insurance company.

Insurance companies in all regions consider it of utmost importance that damage to or losses of insured aquaculture stock are reported immediately to the insurance company. The policies often provide guidance on the reporting procedures. Generally, events that might result in losses must also be reported so that the insurance companies receive information before the losses occur. This greatly facilitates their loss adjustment and enables the insurance companie

2.12 Underwriting experiences

Underwriting experiences have differed tremendously over the last decade. Table 4 shows the responses of 17 insurance companies that provided some information on their experiences in aquaculture stock insurance. It should be noted that some of the companies that were active in aquaculture insurance in the 1990s have stopped offering the service due to unsatisfactory experiences. The table shows that in 2000, 2001 and 2003, more than 50 percent of the companies providing aquaculture insurance were making some profits from the activity. Of course, these are just three years over a period of ten years and most of the companies need some more good years before the earlier losses are compensated for. Nevertheless, the fact that three out of the four most recent years seem to have resulted in positive figures is a promising sign for the industry.

Experience of the respondents in the survey in the field of aquaculture insurance ranged from 3 years to up to 25 years.

In addition to the responses received in the survey, the general underwriting experiences seem to fluctuate largely between years. Overall, the experiences in the early 1990s were generally bad, while better performance has been achieved in the new millennium. Some of the companies that were active in the business in the late 1980s and early 1990s, particularly in Asia, have withdrawn from the business due to bad performance. Nevertheless, companies began providing aquaculture insurance have recently encountered start-up problems and generally show negative figures in the first few years.

The aquaculture stock underwriting experiences in Europe and North America have showed marginal profitability in recent years. Very bad years are followed by very good years and vice-versa. In Latin America, particularly in Chile, experiences in recent years are better than at the start of the new millennium. In Oceania, the aquaculture underwriting experiences were considered good or very good in seven years in the last decade, which suggests that the industry is progressing towards sustainability.

TABLE 4
Underwriting experience of aquaculture insurance companies between 1994 and 2003 (according to responses to the related survey question) (in percentages)