First there was BSE, now there is foot-and-mouth - the crisis in UK farming shows little sign of abating. But what will be the impact on the insurance industry? Yvette Essen reports.
Farmers may well feel they are spending ample time and money on their crops and animals. But this year few will actually reap the rewards.
The agricultural industry has certainly been plagued by bad luck, and in the past five years has been in a serious recession. According to Euler Trade Indemnity, since 1995 total agricultural income has fallen 64% from £5.3bn to £1.9bn in the year 2000.
In addition, between June 1998 and June 2000, about 51,000 people (nearly 10%) of the agricultural labour force left the industry.
The reasons for such a decline are numerous.
A few years ago, BSE made the headlines and sales of beef slumped, forcing farmers to sell their livestock at incredibly low prices.
Then, in February, came the final straw - the outbreak of foot-and-mouth disease. The mass slaughter of cattle caused damage not only to the balance sheets - some farmers were left devastated.
The NFU says nearly four million animals have been slaughtered during the current outbreak.
This figure includes animals already slaughtered plus those earmarked for slaughter, and it represents between 7% and 8% of the national herd in the UK. Average daily cases now number 11, compared with 43 a month ago.
So what effect will this have on insurance renewals?
The agricultural industry may only occupy a small share of the UK's national output (1.8%), but the knock-on impact of foot-and-mouth disease will shake up the whole insurance industry.
Andrew Cuthbertson, development manager of the Agricultural Insurance Underwriting Agencies (AIUA), believes the recent bad spell will result in more business for brokers and underwriters.
Cuthbertson says: "After the 1967 outbreak of foot-and-mouth, there was a period of time when farmers did purchase cover, but this has taken 30 years to decline.
"They have recently been looking to economise, since farm liability insurance cover, which provides protection for assets such as buildings and tractors, is compulsory.
"One way of economising in the last five years was by having no insurance for foot-and-mouth, which was seen as more of a luxury than a necessity. But farming has now become an opportunity for brokers and offers significant premiums."
Julian Lloyd, bloodstock underwriter for Hiscox and chairman of the Lloyd's Bloodstock Committee, explains why: "Foot-and-mouth is an area where farmers haven't traditionally bought very much insurance."
He says: "Most did not have cover, as this infection hasn't happened for a long time. But I think farmers will buy it now. We will have to provide a service that has not been used for the past ten years."
The National Farmers' Union Mutual, which provides insurance for farmers through agents, has renewed existing farmers' insurance at the same rate as "an act of good faith". But spokesman Tim Price predicts hardening rates for other people taking out policies.
"We are expecting to see a considerable interest after the outbreak," he says. "It is very hard to know at the moment what premiums will be necessary to protect farmers in the future, but it looks inevitable that there will be quite a considerable rise in premiums."
Since the outbreak of foot-and-mouth, the government has come under increasing pressure to help support farmers.
David Foreman, underwriting director of non-marine insurance and a director at Wellington, says: "Opportunities do not present themselves in the UK, so we tend to cover bigger combined commercial operations. Farmers are more susceptible to fluctuations in terms of climate, disease or general economic conditions.
"We are now looking for a product to provide them with a social service to give compensation. It is justifiable for farmers to expect from central government some form of national scheme."
Government involvement in agricultural compensation is not unusual in other countries around the world. There are federal corporation schemes in Mexico, Spain and the US.
"It is not inconceivable for the government to come up with a scheme," says Foreman. "And if it did design one, it could seek the expertise of the insurance industry.
"We would also look to provide reinsurance at a high level to cap its losses and provide some form of back-up."
The National Farmers' Union Mutual is now working with the Ministry of Agriculture Party to identify ways to provide financial help when diseases like foot-and-mouth or swine fever strike.
A working party was set up last year and was due to deliver its preliminary findings in February, but this was delayed by the outbreak of foot-and-mouth earlier that month.
The farming revolution
Experts are predicting the farming industry will be shaken up radically in the future.
"There has been a huge decline in agricultural income in the last few years and the number of people in the industry," says Price. "This is an acceleration of a trend going on for the last half century, and we are seeing a pattern of commercial farming.
"Many people in agriculture thought at the beginning of the year that things had started to turn the corner in the great trough of depression income, but foot-and-mouth put an end to those hopes. It is very bleak indeed.
"It is very hard to know what is going to happen, but it certainly is clear there is a long uphill struggle to return to reasonable levels of profitability and it is probably going to be several years before it is on an even keel. We will quite possibly see a revolution in the next decade."
Price believes there will now be many changes in the way farming operates in the UK, possibly with more organic produce lining supermarket shelves. Legislative control and restricted land movement of livestock to help prevent spreading of disease may also be on the cards.
"There are going to be fewer farmers," adds Cuthbertson. "In the past, sons would see succession on the farm as being their livelihood. But with the strong pound and problems with the Common Market, sons and daughters are looking for alternative careers.
"The average retiring age of a farmer is also around 60, when before it was 40 - so farmers are becoming older. It could take two years for them to get back and recover, so rather than struggle a number of farmers will take their compensation packages from the government and cease working."
This would lead to fewer farming units in the UK, but the remaining holdings would be bigger. Consolidation, however, will benefit the insurance industry, particularly the brokers.
"As the units get bigger, there will be a need for more specialist advice," explains Cuthbertson. "It is good news for brokers who are looking for an avenue, providing they are going to invest time there.
"Risk management and assessment of risk will be fundamental, so the specialist broker will play a huge part just by being able to give advice."
Price also believes that learning about the potential dangers of an agricultural unit can be more beneficial in the long run because, in the past, the farming industry has seen a large number of claims. The sector is currently regarded as the second most dangerous, as farmers suffer from long-term health difficulties and unfamiliar agricultural equipment can be hazardous when members of the public visit holdings.
"Losses are potentially great so insurance cannot provide the whole answer to the problems," says Price. "The way forward is by risk-management rather than letting insurance pick up the result. It is unsustainable to provide insurance without advice as well.
"As the number of people working in agriculture has fallen, farmers have to work longer hours across a number of specialist areas using electrical systems and driving machinery that increase the risk of an accident.
"There is also a lack of investment in equipment and a lot of old machinery is still being used which is dangerous."
Cuthbertson says certain specialist providers, such as the AIUA, currently run farm training courses for brokers. But because the agricultural sector is worth around £500m, he believes there is "definitely a place there for other players."