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26.07.2010 Studies
 
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  • Risk management and agricultural insurance schemes in Europe

Risk management and agricultural insurance schemes in Europe

Bielza et al. (2009)

Content

  • Stocktaking of EU and international risk management policies, and examination of future EU risk management options.

Findings

  • Without public subsidies, private insurance markets tend to cover only selected risks (hail, fire). Very high subsidies are required to extend the coverage (72%/32% of insurance premiums are financed by subsidies in the US/EU).
  • In most member states, competition in the market for agricultural insurance is very weak, with one or two dominating companies. It is thus important to enhance competition on the insurance market.
  • Risk management policies vary considerably across the EU (level of subsidization, compulsory/non-compulsory insurance, delivery through governmental agencies/private companies, eligibility for disaster relief, compulsory contributions by farmers to disaster relief funds).
  • EU-wide public expenditure on risk management (ad hoc and insurance) amounts to €900 million on average per year – but due to a lack of data this is a significant underestimate.
  • An alternative to farm-based insurance would be insurance based on a regional index. In such a case, farmers would receive money if certain meteorological conditions were met or if regional yields fell below a certain threshold (e.g. 30% below their regional long-term average). Such regional insurance products would be less targeted at farmers’ individual income/yield volatility but much cheaper (lower administrative costs and no moral hazard, i.e. increased risk taking by insured farmers). A technical problem that still needs to be overcome is the heterogeneity of climates and geography in many member states, requiring the modeling of smaller regions than, e.g., in the US cornbelt.

Comment

  • Subsidizing insurance products directly is excessively costly. There are good reasons why farmers buy only selective insurance on private markets: administrative costs and moral hazard problems are limiting factors. Rather than being a market failure, low insurance coverage appears to be an efficient market outcome.
  • Governments should limit their role to 1) assisting farmers to handle private risk management tools; 2) helping with the development of insurance products based on regional indices by providing improved data; 3) increasing competition on the insurance market (possibly by removing barriers within the internal market and against non-EU providers).