5. The current state of aquaculture insurance in Europe

P.A.D. Secretan
Managing Director, AUMS

5.1 Introduction

Aquaculture insurance describes all the various types of insurance that would normally make up an insurance portfolio of an aquaculture business. For a reasonably large aquaculture company, this would typically include insurance protection for all buildings and equipment, employees, stock, livestock, liabilities, motor vehicles, vessels and divers, goods in transit, and any other insurable interests that are elements of almost every business insurance portfolio.

There are four challenging areas of insurable interests in the aquaculture portfolio - products liability, employers’ liability (especially on divers), certain marine insurances and livestock. Livestock, or more specifically, the aquatic animals (and plants) under culture, are the most difficult items for an aquaculture business operation to insure. Insuring aquaculture livestock presents many problems to the insurance industry, yet it is probably the most important insurable interest in any aquaculture operation. In addition to directly securing the value of livestock, other indirect benefits accrue to the owner who buys insurance, for example, improved access to capital, greater security for employees and stakeholders, and more reliable access to markets.

Aquaculture is a relatively new industry that has expanded extraordinarily rapidly. It mainly produces aquatic animals and plants as food for human consumption, but it also has sectors raising diverse aquatic products for jewellery, leathers, arts and crafts, cosmetics, tropical aquariums, medicines and drugs, and even medical research itself.

Aquaculture insurance has to be a profitable business or the insurers will not provide cover to aquaculturists. The industry’s diversity and impressive growth and value do not receive special treatment by the insurance industry: all insurance companies and underwriters are motivated by profit, but controlled in how they operate through national laws and regulations, and by the codes and conventions of their industry.

5.2 Short summary of aquaculture production in Europe^[5]

Aquaculture production in Europe increased between 1995 and 2004 from less than 1.6 million tonnes to 2.2 million tonnes. In 2004, Atlantic salmon, with a production of 781 000 tonnes, was the most cultured species in Europe. Since 1995 when the value of European aquaculture production was just under US$4 billion, the sector has seen a considerable and sustainable growth, reaching over US$5.5 billion in 2004. More than one-third of the total production value of European aquaculture was realized by Atlantic salmon.

5.2.1 France

France’s aquaculture production in 2004 was almost 244 000 tonnes, which is considerably less than the 281 000 tonnes in 1995. Over the last decade there was only one year, 2003, in which France’s aquaculture output in terms of volume was lower than in 2004. In 2004, 43 percent of the aquaculture output could be attributed to Pacific cupped oyster. The second most important product for the same year in terms of volume was blue mussel, with 56 000 tonnes.

The value of aquaculture production in France in 2004 was estimated at US$655 million. Some US$290 million of this amount was generated by Pacific cupped oyster and US$111 million by blue mussel culture. Rainbow trout and European seabass were the other main aquaculture commodities produced in 2004, with US$91 and US$31 million production values respectively.

In 2002, there were approximately 21 000 people involved in aquaculture and a total of 40 000 involved in the entire fisheries sector in the country. In 2004, the official employment figures presented by France for the fisheries sector as a whole totalled less than 18 000.

5.2.2 Italy

The aquaculture production of Italy in terms of volume reached some 118 000 tonnes in 2004: the most important species cultured were Mediterranean mussel, with 39 000 tonnes, and rainbow trout, with 30 000 tonnes. Other important aquaculture products in terms of volume were Japanese carpet shell, gilthead seabream and European seabass, with production volumes of almost 27 000, 5 000 and 5 000 tonnes, respectively. In 1995, the aquaculture production of Italy was around 214 000 tonnes; since then the production volume has fluctuated between 218 000 and 183 000 tonnes annually. In 2003, it was still 191 000 tonnes, but in 2004 a large decrease could be seen in Mediterranean mussel (60 000 tonnes less than in the year before), indicating that aquaculture production^[6] apparently decreased.

Italy’s aquaculture production value was estimated at US$365 million in 2004. In 1995 the production value was estimated at US$419 million, thus showing a considerable decrease. Japanese carpet shell and rainbow trout were the most important commodities in terms of value generated, with a production value in 2004 of US$106 and US$79 million, respectively.

While the number of people employed in aquaculture in Italy is unknown, the total number working in the fisheries sector as whole was estimated at around 39 million in 2004.

5.2.3 Norway

Aquaculture production in Norway increased from nearly 278 000 tonnes in 1995 to 638 000 tonnes in 2004. The main aquaculture product from 1995 to 2004 was Atlantic salmon. In 2004, the Atlantic salmon production of Norway was estimated at 566 000 tonnes, followed by rainbow trout with 63 000 tonnes. While salmon continued to grow over the last years, some fluctuation can be observed in trout production figures. In 2002 trout production in the country reached almost 84 000 tonnes. In 2004, the production of Atlantic cod reached 3 000 tonnes for the first time, making it the third most important aquaculture product of the country.

The value of Norway’s aquaculture production in 2004 was estimated at nearly US$1.7 billion. More than US$1.4 billion was generated by Atlantic salmon culture alone. Rainbow trout generated US$118 million and Atlantic cod, over US$10 million. As the value of aquaculture production in 1995 was about US$1 billion, there has been a considerable increase since then.

It is estimated that the number of persons employed in the Norwegian aquaculture production in 2004 was almost 4 300.

5.2.4 Spain

Spain’s aquaculture production showed an increasing trend over the last decade. In 1995, total production was estimated at 224 000 tonnes, which increased to 363 000 tonnes in 2004. In 2004, the blue mussel harvest was very good, reaching 295 000 tonnes. Other important aquaculture products in 2004 were rainbow trout and gilthead seabream, with production volumes of 31 000 and 14 000 tonnes, respectively. Gilthead seabream production increased considerably over the last years, as have bluefin tuna and European seabass production, reaching volumes in 2004of 6 400 and 4 500 tonnes, respectively.

The value of aquaculture production in Spain increased from US$250 million in 1995 to US$432 million in 2004. Blue mussel culture alone generated over US$103 million in 2004, while Atlantic bluefin tuna generated US$96 million in the same year. Other important commodities that year were gilthead seabream and rainbow trout, which reported values of US$69 and US$68 million, respectively, while European seabass and turbot production values were estimated at around 31 million each.

5.2.5 The United Kingdom

In the United Kingdom, the aquaculture sector’s production increased from 94 000 tonnes in 1995 to 207 000 tonnes in 2004. Atlantic salmon is the main commodity produced, with 158 000 tonnes in 2004. Other important aquaculture products of the United Kingdom are blue mussel, with almost 31 000 tonnes, and rainbow trout, with almost 14 000 tonnes. Blue mussel production has recently increased rapidly, from 11 000 tonnes in 2000.

In 2004, the United Kingdom’s aquaculture sector generated an output that was estimated at a value of US$593 million. A major share of this output originated from Atlantic salmon culture, with an estimated value of US$474 million. Blue mussel, with US$56 million, and rainbow trout, with US$41 million production values were the other main aquaculture commodities in 2004. In value terms, since 1995 the annual value of aquaculture production in the United Kingdom has more than doubled. In 1995, the value of aquaculture production was estimated at around US$265 million.

5.3 The insurance market

The insurance industry is a very flexible market, international in scope. Insurance cover is purchased on the international market through one or a combination of three groups of key participants in the market, namely reinsurance companies, insurance companies (often referred to as underwriters), and insurance brokers. Buyers purchase cover either directly from insurance companies or indirectly through an insurance broker.

Insurance companies and underwriters make up the supply-side of the industry and are motivated by profit. There are different kinds of insurance companies but their purpose and objectives are the same - to spread risk.

Lloyd’s of London is an important component of the international insurance market, standing in a different and unique category. It is not an insurance company per se, but an insurance market in its own right, made up of different underwriting organizations known as "syndicates". It is in effect a market within the market, but its objective is also to spread risk.

All insurance companies, including Lloyd’s of London, are controlled in the ways they operate and act by the applicable insurance laws and regulations of their country of incorporation, as well as by those of the countries in which they do business.

The job of the insurance broker is to represent insurance buyers in the insurance market, first by finding insurance companies to take on their business, then by helping them through the insurance policy compliance processes, and finally by supporting their interests in claim situations. In the aquaculture industry, the role of the insurance broker is probably one of the most important in the whole insurance process. This is because the insurance market for the difficult parts of the aquaculture insurance portfolio is small, the insuring terms and conditions are restricted, and insurance policy compliance requirements can be onerous. Under such circumstances, policy-holders need the advice of specialist representatives.

Underwriting the risks involved in aquaculture stocks is a technically challenging task. For most domestic insurers, the lack of experience of the problems and difficulties involved make it very difficult to manage the business, so they routinely look to the international markets for experienced support.

The international market for aquaculture insurance is complex. The largest part of the market is located in Europe, with London, a global insurance centre, forming the largest component. There are large reinsurance markets in Switzerland, Germany, and France. It should be noted, however, that significant insurance and reinsurance centres outside Europe can also be found in the United States, Australia, New Zealand, India and Japan.

5.3.1 France

A number of French companies have provided aquaculture insurance in the past; however, it would appear that all or at least most of them have withdrawn from the class. However, one French insurance company, Groupama, provides aquaculture insurance services in some Asian countries (including Viet Nam and China). French reinsurance companies may still be involved, but on a very small basis and possibly only to favoured primary insurers.

5.3.2 Italy

Italian insurance companies have been involved in aquaculture insurance, both directly and as reinsurers, for many years. However, only a very small number of Italian farms appear to be insured, and most of them directly through the London market.

5.3.3 Norway

Norway has a well-developed market for aquaculture insurance. While in most countries aquaculture insurance is only available through the international market and local insurance companies know little or nothing about this class of insurance,Norway has one of the most specialist markets for aquaculture insurance. Norway produces some 700 000 tonnes of aquaculture products annually. A group of Norwegian insurance companies has specialized in the aquaculture insurance since salmon farming began in the early 1970s. The insurance companies have as much knowledge and experience of underwriting the specialist risks of aquaculture as can be found anywhere in the world. However, although these insurers underwrite some non-Norwegian business, their primary commitment is to Norwegian producers and their international interests. This is an example of how what appears to be domestic insurance arrangements in a country may in fact be nothing of the sort. Norwegian fish farming companies have interests all over the world, but the fact that one of their subsidiary companies in a particular country is fully insured does not mean that aquaculture insurance is generally available to all producers in that country. Local aquaculture producers in a country may also be insured, but that does not mean that there is a specialist aquaculture insurance market at home.

5.3.4 Spain

Aquaculture stock insurance in Spain is handled by the Spanish Insurance Group for Multi-Peril Crop Insurance. This is a pool of approximately 40 insurance companies together with the Consortium for Compensation of Insurance, a governmental agency funded by the Ministry of Finance, which is also the official reinsurer.

Every company within the pool is able to underwrite aquaculture policies, subject to strict parameters of rates terms and conditions. Premium are subsidized by the Ministry of Agriculture, Fisheries and Nutrition in various proportions. Private companies are not allowed to insure the same perils as those provided by the pool, but they may provide protection against the perils that the pool does not cover. For example, the pool only covers the crop (biomass) and will not insure building, equipment and special structures.

5.3.5 The United Kingdom

The London insurance market is the largest and most flexible insurance market in the world. Aquaculture insurance was first conceived in London in the early 1970s, where three of the key players in today’s aquaculture insurance market are located (Sunderland Marine Mutual Insurance Company Ltd, Aquarius Insurance Services/Royal & SunAlliance, and SBJ Nelson Steavenson Ltd). The UK industry is therefore very well served by aquaculture specialists.

5.4 Demand and supply issues

High premium levels are the most common reason given by aquaculture producers for not buying insurance. Prices for some of the main species cultured in Europe (e.g. Atlantic salmon, Rainbow trout, Sea bream and African catfish) have dropped considerably and the industry is under continuous financial pressure. While public companies buy insurance to protect shareholders’ assets, as do companies with outstanding bank loans and obligations to feed companies, in many cases private companies choose to be self-insured.

The London insurance market has been the centre of world insurance for well over 100 years, during which time it has established contacts in every corner of the world. Access to aquaculture insurance is therefore comparatively easily achieved by contacting the brokers and insurers found in the financial centres of most countries, which will almost certainly have connections to the London market.

5.5 Policies currently in force

The number of policies in effect in Europe or in any individual country is unknown. Answers to questions on numbers of policy-holders (Annex 1), indicate that in total, approximately 2 000 commercial aquaculture enterprises are insured around the world. It is probable that around 60 percent of these enterprises, i.e. around 1 200, are located in Europe.

5.6 Perils covered

The cover offered by insurers to aquaculture entrepreneurs is generally available to European producers. They have a choice of "all risks" or "named perils" terms and conditions, with rates, self-insurance factors and excluded perils, structured to meet the physical location, design and management standards of each individual aquaculture establishment. As is the case in all regions, individual perils (such as certain diseases, flash floods, typhoons and hurricanes) assume a higher profile than others, and insurers structure their policy terms and conditions accordingly.

5.7 Species insured

All the species in husbandry in Europe can be currently insured. The following species are believed to be insured in Europe at present:

5.8 Growing systems insured

All the systems in use in Europe can be insured. The following are the most common growing systems that are currently insured:

5.9 Underwriting

Insurers require extensive information on every production operation to be insured. Applicants for insurance services are required to complete specialist application forms as part of the insurance process. Properly completed, when combined with underwriting and risk management surveys, these will analyse the relevant risks and hazards. Insurers adjust their underwriting approach accordingly.

5.10 Risk management surveys

Risk management surveys are regularly carried out by insurers, who use local aquaculture experts and/or experienced general insurance surveyors to inspect sites. Risk management surveys include surveys of electrical and mechanical systems, marine systems, and general health and husbandry conditions.

5.11 Claims handling

Insurers deal with claims from policy-holders in aquaculture in Europe just as they deal with them in all other regions. Aquaculture claims have to be handled with special care. Insurers put considerable effort into responding to potential losses quickly and effectively. Policy-holders are required to report any event that might lead to a claim in order to respond to incidents as fast as possible, before problems become established or any situation goes beyond remediation. Insurers who take on business in Europe undoubtedly make arrangements with local adjusters in order to respond to loss reports promptly. Insurers are also prepared to call in experts to assist with technical problems when they determine that the nature of the problem and the amount at risk justifies doing so.

5.12 Underwriting experience

The European loss experience, characterized by poor early experience, is probably the most detailed anywhere, since aquaculture insurance has been available in Europe for several decades now. Subsequently, the aquaculture insurance industry went through a very steep learning curve in the 1970s and 1980s, with frequent outbreaks of new diseases and periodic extreme climatic events and plankton blooms.

The commercial sensitivities of the insurers in the market make it virtually impossible to obtain detailed loss statistics for the industry. Based on a simple "very bad" to "very good" range, the European experience would appear to be of marginal profitability to insurers.

5.13 Conclusions

As far as insurance of aquaculture stock is concerned, Europe is the best served region in the world. Almost all countries reviewed have sophisticated insurance markets and good support infrastructures of brokers, loss adjusters and technical experts in aquaculture.

In view of the above, it should also be mentioned that stock cover presents the most difficult challenge for the insurance market. There is a small international market for stock insurance, mainly in Europe and principally in London. It is backed by reinsurance available from specialist companies in a number of countries. Insurance is available in almost every country of the world through this market, either through policies issued by London companies or by local companies that call on the expertise of the London market and available reinsurance capacities.

Insurance is mainly purchased by large, well-managed and well-financed producers in developed countries, which typically cover all their operations under one group insurance policy scheme. Access to cover is not as easy for small-scale, family-run businesses.

The aquaculture stock insurance market has generally developed very good insurance processes. Their business instruments include well-designed proposal forms and wording, and appropriate claim-handling procedures that recognize aquaculture realities. The processes are backed by survey and inspection systems, which are part of a valuable and comprehensive risk management approach.

The loss record of aquaculture stock insurance has not been good. As a result, the market’s existence is tenuous, subject to a turnover of insurers, and with a premium structure that some aquaculturists consider expensive.

In order to expand the aquaculture stock market and widen availability, insurers must be able to make profits from underwriting the risks of the industry.

5.14 Recommendations

Recommendations to the industry can be divided into two main categories: (i) education and outreach and (ii) the collection and analysis of global information.

5.14.1 Education and outreach

Credit schemes to encourage small and medium-scale farmers to participate in national aquaculture development in the emerging field of aquaculture were made successful in the late 1980s and 1990s by education and training courses, and workshops for loan portfolio managers and finance officers of national agricultural and rural development banks. These were organized through the cooperation of the United Nations and international development banks. Through such events, banking individuals at the grass-roots level were familiarized with the systems and practices of aquaculture, and their microfinance and credit programmes were responsible for an enormous investment in aquaculture. As a consequence, family-run subsistence farms transformed themselves into family-run business enterprises.

Now that aquaculture has become commercialized and continues to expand globally, it has to be protected from an increasing number of risks. This can be achieved through aquaculture insurance, which for the most part is available worldwide. However, its use is constrained by insurance individuals at the grassroots level who are unfamiliar with the systems and practices of aquaculture, and aquaculture producers who are unfamiliar with the management of risk and whose operations are not of a high enough standard for insurers to cover.

It is therefore recommended that the lessons learned be reviewed and the constraints removed through international programmes in education and outreach to increase the use of aquaculture insurance. The programme(s) should be a combination of traditional training courses and workshops, published materials and the use of modern information technology. The specific targets of the programme would be individuals in both the insurance industry and the aquaculture industry.

The goals of the programme should be:

• to create awareness and build capacities among "new" insurers in the basic principles and requirements of their national and local aquaculture sectors, with emphasis on training in on-farm risk analysis and management, and with the purpose of enabling them to understand and set standards for production operations to minimize risk and to underwrite appropriate business;

• to increase awareness and build capacities of producers and producer groups in the basic principles and requirements of aquaculture insurance, with emphasis on training in on-farm risk analysis and management, and with the purpose of elevating their production operations to standards acceptable by specialist insurers.

5.14.2 Collection and analysis of global information

Much more information needs to be gathered to provide a better picture of the underwriting experience throughout Europe. The aquaculture insurance market has been in existence for over 20 years, but very few individuals have benefited from its organizational history, practical experience, and statistics to help secure the future of the aquaculture industry.

It is recommended that serious efforts be made to collect and analyse information on the aquaculture insurance market as part of a risk management strategy to sustain an increasingly successful global aquaculture industry. The benefits of such information would be to provide: (i) a database of insurance experience, which will guide future risk avoidance in the industry; and (ii) the rapid distribution of this experience.

Experience is often a commercial commodity, however, and therefore obtaining information from the private sector about the aquaculture insurance market is difficult at best. Nonetheless, a project has begun in the United Kingdom and the United States for this very aim: the AquacultureRiskWatch project.^[7] This effort could be expanded and accelerated, particularly if an international organization such as FAO would act as an "honest broker", since the organization per se has no ulterior use for the information.

The approach would be to first work with the international reinsurers because they have a considerable stake in the aquaculture industry already, in view of their losses, and carry considerable weight with primary insurers, and then to follow up with the principle primary insurers themselves. The database may contain, for example, historic information on aquaculture insurance activities since 1990. Anonymity would have to be ensured together with the confidentiality of any raw data.