Aquaculture insurance – Is it worth it? - Coverage of operational risks linked to strict conditions

EM2 18 AQ insurance1One of every two fish sold on the world’s markets already comes from aquaculture and this share will continue to grow in the coming years. New farming projects are added almost every day. Not all of them succeed at the first attempt for aquaculture is very susceptible to disturbances and damages. So far, however, only very few companies are insured against losses. Too expensive, too complicated, or simply not interested?
Insurance companies don’t have a very good image. They are sometimes scorned for lending out umbrellas but immediately reclaiming them when the first drops of rain fall. Nearly everyone can relate examples of how skilfully insurance companies will evade their obligations when things get really tight for the insured party. Nevertheless, interest in insuring aquaculture projects has never been greater than it is today. The gap between this increase in demand and the available offers of aquaculture insurance is getting wider and wider. More than ten years ago FAO experts estimated the number of insurance policies taken out at around 8,000, and even if this number is likely to have increased by a few thousand since then it is still negligible compared to the total number of large and small aquaculture companies which amounts to several hundred thousand! It is striking that a large share of existing insurance policies is concluded in western industrialised countries while other regions, such as large parts of Asia, which accounts for around 80 per cent of global aquaculture production, are much less represented. What are the causes of this unsatisfactory situation? Do insurance companies simply shy away from the eff ort and cost of auditing farms or, in general, from the risks of fish farming? Or is it because fish farmers fear the costs of insurance and underestimate the benefits of insurance cover? Another noticeable feature of aquaculture insurance is that many insurers only offer products for a few species and production methods: mainly for salmon and shrimps. It is much more difficult to find useful offers for new species and innovative methods. This is understandable, because insurers need a broad database and industry-specific standards in order to realistically assess the risks of aquaculture production and calculate the resulting premiums. What has long been routine in car insurance, because there are detailed time series on the type, frequency and severity of possible damage that can even be grouped regionally and for specific car types, is still very difficult in aquaculture. The diversity of species and methods can hardly be forced into uniform, universally applicable standards.

Production is carried out on land, in rivers and lakes, near the coast and off shore, in ponds and tanks, raceways and net enclosures. For this reason alone, standardised insurance solutions in aquaculture are currently an exception. Almost every aquaculture enterprise has to be audited separately. Each company is unique and has its own risk profile, and the owners have different financial scope. The structures and processes involved in aquaculture operations, their risk management and the respective market strategies have to be assessed individually at great expense in order to calculate the costs of risk coverage. This is the only way to ensure that the insurance policy is tailored precisely to the requirements and needs of the aquaculture company so that it covers the operational risks of the location. But this already poses a problem: individual audits are only worthwhile for the insurer if the production volume is large enough for the resulting costs to be justified by the subsequent premiums. This makes it difficult for small or new companies and particularly start-ups to protect their investments against material and financial loss risks. It is not clear from which size an aquaculture company becomes interesting for insurers. As a rule, insurance premiums start in the range of several thousand euros. If the prospects for the insurance company are lower they are often not prepared to go through the process of detailed auditing.

Aquaculture insurances are a promising market
However, insurance companies, too, are aware of the dynamic developments in aquaculture and the sector’s importance for food supply to the world’s population. The number of insurers involved in this field is growing. Some offer their products only locally or regionally, others across continents and sometimes even globally. At present, they are mainly interested in highly developed aquaculture companies. Multinational companies with locations in different countries tend to have much better chances of insurance coverage of their risks than small producers. Browsing the internet it is today possible to find a growing number of insurance companies with offers for aquaculture, and some of them are even specialised exclusively in this area. This group includes well-known insurance companies such as Mitchell McConnell Insurance, Global Aquaculture Insurance, Aquaculture Insurance Exchange, Swiss Re, Oriental Insurance, True Blue Aqua, XL Catlin, Sunderland Marine, Thomas Smith Insurance Brokers and Willis Towers Watson. There are no “off-the-peg” aquaculture insurances, although (or because) almost everything can be insured. In most cases, those seeking insurance are particularly concerned about protecting buildings, gear and equipment from damage, breakdowns and theft. Boats, berths and transport vehicles are also high on the list. A typical feature of aquaculture insurance, however, is the protection of biomass, be it fish stocks, shrimps, mussels or algae. Anyone willing to pay appropriate insurance premiums can insure their portfolio against almost any risk: drought, tidal waves, earthquakes and storms, lightning, diseases and water pollution, lack of oxygen, hypothermia and freezing, sudden salinity fluctuations, breakdowns of machines and electrical systems, and even explosions. The market leaders in the insurance business cooperate closely with their clients to develop tailor-made packages that ensure the best possible protection for their specific requirements. With some companies it is even possible to insure oneself against the damages resulting from recall actions, for example costs incurred for overtime, loss of income or the “rehabilitation” of products. Only insurance against consequential damages or profit loss is usually excluded.

EM2 18 AQ insurance2First step: the audit
Anyone wishing to take out insurance should be aware that it will entail much more than simply filling in the application form. There is usually a long (and detailed) list of preliminary work that has to be carried out by the applicant. It generally includes maps, site plans and photographs of the aquaculture facility, production plans, as well as substantiated data on expected sales, profits and distribution structures. Books and balance sheets must be disclosed and the establishment opened for inspection by insurance experts. Of particular importance are detailed records and accurate documentation of fish stocks. Everything must be accurately recorded every day and made available for controls on demand, for example stocking rates and stock biomasses, mortality and feed quantities. These can be precisely verified on the basis of purchasing quantities and stocks. Detailed records are beneficial for both sides. The insured person is more reliably covered in the event of a claim because he can prove his losses credibly and in meticulous detail. The insurance company, on the other hand, can calculate the premium more precisely and reduce the risk that policyholders obtain benefits through fraud. From this it can be seen that fish farmers at least in part give up their autonomy and entrepreneurial independence when they decide to take out an insurance. But how could it be otherwise? If the insurance company is to be held liable for risks it naturally wants – and needs – to be kept informed at all times and, where necessary, have a word to say in the matter. This begins practically at the moment when the insurance company accepts the application and finds it worth considering. In the next step a specialized risk management team from the insurance company usually visits the company of the insurance applicant. This team will inspect everything thoroughly and in the event that they agree to pursue the matter further the insurance company will usually make an initial offer that is then often subject to a number of conditions and constraints under which it would be willing to accept the applicant’s risks. As soon as the interested party has fulfilled all the rectification obligations demanded and accepted the insurance proposal, the contract generally comes into force upon payment of the first premium.

Examining the policy
Although the most important advice to prospective policyholders may seem trivial because everyone knows it, it is rarely followed: Read the entire policy carefully from beginning to end, including the small print! Ask until you understand everything completely! Never sign anything you have not understood, don’t want or can’t accept! This applies, of course, also – and perhaps even more so – to the requirements and conditions listed in the policy or its annex. (These are often referred to as “guarantees” by insurance companies in the contract). Their fulfilment is usually a mandatory prerequisite for insurance benefits in the event of a claim. A typical example would be the obligation of the insured person to improve his risk management or to install an alarm system within certain deadlines. Anyone who fails to comply with this condition by the specified date will be at a disadvantage in the event of damage. The insured person should always maintain close contact with his insurer and report any changes or incidents in the facility. Structural alterations or changes in operational routines, even if they improve the safety status of the aquaculture company, should be discussed in advance with the insurance company and added as a supplement to the policy. Otherwise there is a risk that the insurance company may refuse to pay financial compensation in the event of a claim because the original condition of the business (i.e. that which existed at the time the contract was concluded), is no longer given. Insurance companies usually calculate the compensation they will pay on the basis of the value they have agreed on with the policyholder and which is also listed in the policy. This value is usually based on the production costs and not on the selling price of the fish. The "fair value rule” applies: the compensation covers only those costs that would be necessary to replace the losses suffered with an equal or similar stock. For this reason alone, it is in the insured person’s fundamental interests to state the existing biomass in the company as accurately as possible. Anyone who exaggerates will end up paying more, because the insurance company will charge a higher premium than necessary. On the other hand, if too little is stated, the compensation will be correspondingly lower. As a rule, it is possible to adjust the sum insured up or down within the term of the policy with the insurer’s consent, which then results in a correction of the premium.

A deductible is agreed with the policyholder
Compensation is not paid for every fish that is lost. There is a certain natural mortality in all fish farms, however well-managed they may be. And insurance companies would have a very hard life if they had to compensate for every individual deceased animal. Especially since hardly any fish farmer would be prepared to pay the exorbitant premiums that would then be necessary. As with car insurances, there is thus a “deductible” for unavoidable losses that are not insured and for which the policyholder has to pay himself. The size of the deductible is agreed between the insurance partners but tends to be considerably higher than in other insurance areas. It is not uncommon for it to amount to 10 or 20, and in some cases even 30 per cent of the agreed amount at risk. The lower the deductible rate, the higher the insurance premium. Companies operating in the primary food industry, which include aquaculture companies, occasionally face cash flow problems. Money is often only available after the produced products have been sold. For this reason, some insurers allow payment in instalments for premiums. This has certain advantages for policyholders but can also mean that insurance coverage may be restricted or, in extreme cases, even discontinued if the instalments due are not paid on time.

EM2 18 AQ insurance3Types of insurance
Most aquaculture insurances can be assigned to one of two types of coverage, which are called “All Risks” or “Named Perils”. The title ”All Risks” is somewhat misleading, given the fact that no insurance company in the world covers all conceivable risks. Both formulations merely describe different concepts from which the insurance products are derived. “All Risks” is based on the hypothesis that all risks are initially covered, after which individual hazards are then gradually excluded. The premium is reduced with each excluded hazard. In the “Named Perils” approach, the reverse is true, because nothing is covered at the start and then, step by step, a concept for certain risks which the insurance company agrees to bear is developed. Depending on the type and scope of a policy, “All Risks” insurances are on average 10 to 15 per cent more expensive than “Named Perils”. As a third, still relatively new and comparatively inexpensive product, some insurances now offer “index coverage” to protect policy holders against precisely quantifiable forces of nature. This could be too much or too little precipitation, too high or too low water temperatures, the occurrence of plankton blooms, certain gale forces or wave heights and the like, insofar as they are possible causes of loss in animal populations. This type of insurance only requires independent and reliable weather and climate records at the location of the aquaculture facility. The insurance coverage provided is very detailed and based on historical data on the risks that are closely correlated with losses. The insured person makes a bet with the insurer as it were. For example, if on the site of the fish farm more than 20 cm of rain falls within 24 hours, the ponds overflow and fish losses occur as stated in the policy, the point would be reached where the fish farmer would have to be compensated… irrespective of the actual state of the fish farm. Of course, it is only possible to decide which of these three types of insurance is best for a company on a case-by-case basis.

Always act as if you were not insured
In the event of damages or loss that are covered by the insurance it is usually not sufficient to simply make a claim and hope for payment. Insurance companies examine very carefully whether the problems occurred suddenly, were really beyond the policy holder’s control, and whether the fish farmer took necessary countermeasures to avert the danger. Professional aquaculture insurers often employ qualified specialists who provide assistance and guidance to customers in the event of problems. Those who refuse this help are suspected of not having done everything humanly possible. As soon as problems become apparent in the fish stock it is safest to contact your insurance company immediately and follow their instructions. Every detail, every step taken, every event should be recorded precisely in this situation because, in case of doubt, the amount of compensation paid by the insurance company may ultimately depend on this. In the event of a crisis aquaculture insurance companies require the policyholders to act as if they were not insured. Anyone who can offer credible proof of their actions based on farm logbooks and meticulous records will have better cards, but whether this will be sufficient in the end for recognition of all demands nevertheless remains to be seen. After receipt of a claim notification, insurance companies usually appoint claims assessors to review and evaluate the claims on the basis of the insurance conditions. Claims assessors are usually professionally independent but they are paid for the assignment by the insurance company and so deliver their report there as well. This often makes it difficult for the insured person to read the report, because to do so they need the insurance company’s consent, which is not willingly given. However, one should insist in order to be able to examine the facts, arguments, figures and calculations contained therein oneself.