A huge diversity of risk is attached to farming. Issues such as GM crops, economic hardship and foot-and-mouth disease mean the insurer should proceed with caution

Following 11 September and the subsequent war in Afghanistan, it is easy to forget that much of Britain was out of bounds this time last year.

The foot-and-mouth epidemic saw the slaughter of livestock on an unprecedented scale. By the time the disease was declared beaten, there had been 2,030 outbreaks, 12,400 farmers and farmworkers had lost their jobs and 4,045,000 livestock had been slaughtered.

While farmers received government compensation for the loss of their livestock, they received only 25% of the sum-insured value for contingent business losses - such as the loss of income from milk production.

According to sources close to the government, a change in legislation is being considered that would reduce the government's exposure to future epidemic losses.

Farming cover
Without the fall-back of government compensation, farmers would be left in the lurch, according to Heath Lambert broker Bill White.

He says since 11 September there has been a lack of appetite for farming risks from commercial insurers.

But now Heath Lambert is dipping its toe back in the water. White says that it is set to offer foot-and-mouth cover for farmers that will be underwritten at Lloyd's. White says other insurers are likely to follow suit in the summer, with NFU Mutual top of the list.

Norwich Union (NU) has as standard a commercial insurance product designed specifically for farmers. This can be extended to compensate the farmer for consequential losses resulting from the outbreak.

However, in accordance with standard market practice, such extensions are temporarily unavailable to new customers during the course of a disease outbreak. To be valid, extensions must be taken out before the disease becomes apparent.

In the case of foot-and-mouth, EU law requires the government to make payments equal to the market value of the animals slaughtered. And the Animal Health Act of 1981 means the government must compensate for any loss of stock resulting from an epidemic.

If measures for a foot-and-mouth vaccination could be enforced or if there were foolproof monitoring of all imported meat, we would have some solid reference points and would be better equipped to take action, says an NU spokesman.

Each of these measures opens up a whole debate of its own, which needs to be resolved.

Foot-and-mouth is just one of a number of concerns for farmers. Farming has been the hardest hit of all segments of the UK economy over the last few years. The average income of the farmer has plummeted by 90% in the last five years. According to a Deloitte & Touche report published prior to the foot-and-mouth crisis, an average farm of 200 hectares yielded an income of little over £8,000 compared to £80,000 five years earlier.

Careful underwriting
There is also the issue of genetically modified (GM) crops - still very much in the public spotlight - which may cause future disruption as government-backed trials continue.

Kevan Aubrey, product manager at NU, says that to supplement these falling farm incomes, there is a marked growth in diversification in terms of crops grown, animals reared and non-traditional farming activities such as bed and breakfast services, farm shops and adventure activities.

Aubrey adds that, from an insurance viewpoint, some are higher risk than others and require careful underwriting. Quadbiking or clay pigeon shooting, for example, are considerably higher insurance risks than straightforward guesthouse operations. Since the outbreak of foot-and-mouth on 20 February 2001, about 3,000 farmers have been forced into other jobs to make ends meet.

The recent crises have highlighted the low levels of relevant insurance cover among the long-suffering farming sector. Farmers, like many businesses, are always looking to reduce their expenses. And insurance premiums are an easy target. One easy option to reduce premiums may be to reduce cover; but there are always potential consequences of such action. Foot-and-mouth is a prime example, where 60% of farmers were insured following the 1960s outbreak, whereas today only 10% are insured, says Aubrey.

Critical area
A thorough and professional approach to risk management is a key area for the future of farming insurance and brokers and insurers alike must judge each risk on its individual merits.

Aubrey says a well-managed farm must be exactly that. Aspects to be considered are whether the employer embraces health and safety measures to protect employees and the quality of maintenance and management of the premises. Other risks include the storage of hazardous chemicals and veterinary medicines, safety procedures for dangerous machinery and the farmer's awareness of environmental concerns such as spillages into local watercourses.

Health and safety is a critical area for consideration. According to figures released by the Health and Safety Executive (HSE), 53 people died in agricultural accidents between

1 April 2000 and 31 March 2001, which represents an increase of nine deaths since the corresponding period the previous year .

As well as the personal and human cost of accidents, the costs to a business in purely financial terms are high. These can include sickness payments and training costs for replacement staff, loss of output, damage to machinery and products, and insurance and legal costs.

There are also the losses that are difficult to assess, such as the farmer's reputation and impact on customers which, if not managed, could still put a farm out of business even if the essential insurances were in place.

Farmers, as employers, have a duty to assess risks around their premises and also have an obligation to ensure the health, safety and welfare of their staff. With this in mind, NU has sponsored a guide, Farmwise, produced by the HSE to provide farmers with practical, in-depth advice on health and safety.

Specific knowledge
To be effective in farm insurance, brokers should be able to work with their insurers for support in every aspect of risk management. Insurers contemplating the farming market need to understand it is a complex area that requires specific knowledge and expertise of the subject, given the huge diversity of risks.

It is not all doom and gloom in the farming sector, although brokers are advised to proceed with caution. Dealing solely with reputable UK-wide insurers with a proven track record and steering clear of those without specialist farming products or expertise is advisable. The sector is too complex and the risks too great to enter it lightly. n