Nine out of ten farmers were caught without foot-and-mouth cover during the recent crisis. This has limited the burden on insurers, says Kathryn McCarthy, but increased that on the countryside

Three months into the foot-and-mouth crisis, it is clear that the disease has had a massive effect not only on farming, but on associated industries, such as tourism, too. The Centre for Economic and Business Research (CEBR) estimates that the total economic impact of foot-and-mouth could be in the region of £9bn, and will knock economic growth for 2001 down from 3% to 2%. In addition, the Treasury is estimated to lose £2.7bn in tax receipts next year.

In the farming industry, costs will reach around £3.6bn in 2001, according to the CEBR. Total payments from the government under both the compensation and the livestock welfare disposal schemes should be about £350m.

For those farmers whose livestock has been culled and who have received compensation from the government, the clean-up operation is now beginning. But it could be six months before they are able to re-stock with new animals. Many of them will have to survive the next few months without insurance payouts, as it has emerged that only 10% of livestock farmers have foot-and-mouth cover – which in any case takes the form of a consequential loss policy.

Business interruption
It is precisely because of this low level of cover that, in spite of the grim statistics elsewhere, the insurance industry is likely to emerge relatively unscathed from the epidemic. Losses are estimated to be in the region of £50m, according to ratings agency Standard & Poor's (S&P).

“The maximum insured loss looks set to remain below £50m for all exposures,” comments Rowena Potter, the managing director of S&P's insurance ratings. “It will come largely from business interruption policies triggered by denial of access, cancellation of events and some specialist foot-and-mouth cover,”

Potter does warn that if the disease continues and leads to a recession in the rural economy, related fraud could significantly increase the level of insured losses. However, with the government's fight against the disease finally starting to have some effect, it is impossible to predict that this situation will actually transpire.

In the meantime, it is worth investigating why the level of insurance cover for this outbreak turned out to be so low.

The main reason appears to be money-related. The farming industry has been hit by several high-profile disasters, which have caused serious financial difficulty. And because the last outbreak of foot-and-mouth was more than 30 years ago, no one seemed to consider there was a risk of such an epidemic occurring on this scale, if at all.

“The fact that it has been such a long time since the last outbreak, and that farm incomes are in crisis, (has) led to a decline in foot-and-mouth insurance,” says Tim Price of NFU Mutual, the country's leading rural insurer. “For those farmers who have cover, the insurance doesn't give them a complete financial solution, but it helps them stay in business and re-stock.”

Broking arrangements
A relatively recent change in the broking arrangements for agricultural insurance has also limited farmer's foot-and-mouth cover. The disease and other covers have become optional add-ons, to help make policies more affordable for cash-strapped farmers.

It remains to be seen whether the outbreak will lead to a change in the way policies are priced and sold, and whether renewal terms will be imposed and premiums increased for foot-and-mouth sections.

Price feels it is too early to predict what will happen to premiums at renewal. “We can't say if premiums will rise until we can see the total cost of the outbreak and if there is a potential for further outbreaks.”

Although the turmoil in this sector is likely to have little impact on the largest insurance providers, smaller companies may be forced to retreat.

“New entrants could also be put off the agricultural sector, which is in decline,” says Andrew Bell, commercial director of Agricultural Insurance Underwriting Agencies. “From our point of view it is strategically important to remain in this sector in the long term, but the present crisis will put off those providers that want to dip in and out.”

Bell says that non-motor rates have remained soft in this market segment, because the farmers simply can't afford rate increases. “It is a sensitive area, because we don't want to be seen to be adding insult to injury. The prospect of rate increases is, therefore, minimal.

“On the positive side, we are inviting renewals for foot-and-mouth where it currently exists, as we feel it is morally right to do so. But we are not increasing our exposure by taking on new foot-and-mouth policies. We are not turning our policyholders away, we're not putting our rates up, and there are no knee-jerk reactions.”

Knock-on effect
The tourism industry – particularly rural tourism – has also been hit hard by the effects of foot-and-mouth disease. According to the British Tourist Authority, the industry looks set to lose up to £2.5bn this year in inbound tourism.

The early weeks of the crisis set the tone, as people stayed away from the countryside, hoping to prevent the disease spreading through inadvertent transmission from one area to another. But while these well intentioned actions helped when the problem was being sized up at the outset, they have left a confusing message about the nature and extent of the disease.

The media coverage of the outbreak in the UK and abroad has led to a reticence to visit the countryside. This has had a devastating effect on rural communities that depend on tourists, sporting events and agricultural shows. Smaller businesses have been hit the hardest by the fall in trade, but few, if any, will be able to claim for business interruption because of foot-and-mouth, according to the Association of British Insurers. In addition, payouts under travel insurance for policyholders who voluntarily cancel a trip to the countryside will be limited, depending on the policy wording.

It will be some time before the full cost of the foot-and-mouth outbreak on the insurance industry is known, but even now it appears that the losses will be dwarfed by the wider economic impact. However, for rural communities both in and away from affected areas, insurance will not provide any significant financial safety net in the coming months.