New farming risks and their insurance implications

Many farmers are yet to get back on their feet following the flooding that devastated the north of England, Scotland and Wales last winter. In the face of this, new technologies and the wider opportunities of diversification offer a ray of hope, however, these also bring new risks that must be managed and protected against, if farmers don't want to jeopardise their already fragile operations.

"The income crisis is the first item on the lips of any farmer you talk to," says Tim Price, rural affairs specialist at NFU Mutual.

"The latest crisis has involved almost every field-based farming activity, from cereals to dairy, to sheep and beef farming," he notes. "For the past two years we've been working hard to help farmers get through the difficult times by keeping premiums down wherever possible [and] we've done other things to ease the burden, such as providing interest-free payment by instalments on our farm insurance policies."

Ian Barclay, managing director at Rural Insurance, says the stagnation of traditional farming is forcing increasing numbers of farmers to find new and interesting ways to generate a return from their assets.

Branching out
"Farmers are diversifying in lots of ways. Some are moving towards biofuels and other renewable energy. Others are taking more of the supply chain right the way through to customers, going from producing the goods to running a farm shop, or producing crisps or other produce, rather than being the supplier for someone else. Then you have the use of farmland for things like tourism and glamping."

This kind of diversification can provide a vital alternative revenue stream but it changes the nature of the risk and consequently the insurance needs of the farm in question. "Most farms would need property cover, potentially employers' liability and public liability cover and, in some cases, cover for machinery. If they start to diversify, they might also need cover for the shop, or for their retail parks or tourism and various other things," Barclay explains.

Understanding the insurance implications of branching into new areas can be a minefield for an inexperienced farmer, which is why specialist agricultural brokers still have "a significant role to play in helping the customer to understand the changing risk profile", he adds.

According to Graham Plaister, a loss adjuster with Agrical and practising farmer, one area where farmers can come undone is through inadequate preparation for the increase in people coming on to the farm.

"With your traditional farm, very few people will come on to the farm but, if they do, they are likely to be the neighbouring farmer, or people familiar to the farming environment. The biggest risk is having the general public coming on to a farm, curious and running around, and the farm not being set up for that."

He adds improper management of these risks can result in sizable claims. "I'm aware of a gate that had been leant up against a wall and fallen on a child, and a stack of hay not being secure and someone wandering around in the wrong place and the bale falling on them. Large bales are very heavy and can cause a seriously injury."

Creating a safe environment
Proper signage and securing entrances and exits can help to avoid such incidents but he says the bottom line is that farmers must ensure that it is a safe environment that they're inviting the public into.

Along with the risk management aspect, farmers can get caught out by underinsurance if diversification happens in a rapid and unplanned way, Plaister warns.

"Diversification can happen by accident. Someone could come on to the farm and say: ‘Have you got a spare barn I could rent for some storage?' And you say yes and collect the rent but haven't notified the insurer that there's been a change of use for that building. We've had some situations where the insurer hasn't been notified and there's been a fire in that barn and the policy could be void because of non-disclosure."

While diversification presents one set of challenges, the continued march of technology presents another. Robotics are already used heavily in milking and cleaning farm buildings and are starting to play a role in ploughing and harvesting. "Robotics are being developed very quickly. This kit is obviously expensive and at risk of damage out on the field, or being stolen, so this is an area where we've introduced cover," Price says.

And while fully robotic field operations are "still some way away" in Price's view, NFU Mutual is already looking at "how that will need to be insured and what the risks will be of tractors going around a field without a driver".

Some of these debates, such as where liability lies in the case of a malfunction are the same ones that have dominated industry debates around driverless cars for the past few years. But given the size of these vehicles and their usage, the sums insured and any potential loss could be significantly higher.

"These are all issues that need to be addressed as robotic farming becomes possible and slowly gets into UK agriculture," Price says.

Traditional risks
On top of these new risks, farmers are still battling two older risks, which show no signs of abating, in the form of bovine tuberculosis and extreme weather events.

Recent government figures showed that bovine TB costs £100m annually. But while the cattle disease has always been a problem in the Southwest and in Gloucestershire, the last five years have seen cases arising around the UK in locations where it had previously been non-existent.

Although the recent cases have tended to be "smaller, short-lived claims", according to Plaister, they are still "a major headache". In 2015 alone, 28,000 cattle had to be slaughtered to control the disease.

"It can be very difficult for a beef farm where they sell store cattle and they have to start selling to a beef finishing unit, where they sell straight to the abattoir," he explains.

"Dairy farms can carry on selling milk if they're closed down with TB but they are restricted from moving cattle on and off their premises. Managing that can be quite difficult for them as they might not have enough buildings or land available."

Where farmers are forced to sell cattle, insurers have generally provided 25% of the sum received per animal in compensation, but depending on the indemnity period, some end up paying out far larger sums, Plaister says.

"If [animals on a farm] go down with TB, then you have a whole herd test. If there are animals that react, then the whole herd would be re-tested in 60 days' time. You carry on the cycle of being tested every 60 days until you have two consecutive clear tests.

"If you restrict payments to within the current policy, that will stop with the renewal or expiry of the policy. However, sometimes it is based on the TB breakdown, so if you're tested on the 1 January, that's your loss date and any claims developing from that date will be paid until the herd goes clear. It may go clear within the period of insurance but in some cases we've had farms that we've paid out on for 10 or 12 years."

Although the Department for Environment, Food and Rural Affairs issues risk management guidelines, such as securing food and drinking areas to prevent contamination by local wildlife, double fencing the boundaries with other farms, and pre-movement testing of cattle, the farming community is not convinced these measures are efficient.

Plaister points out: "Where the dense livestock areas are at the moment, we tend to have high areas of TB, except for Cumbria and Scotland. It seems to be spreading and what is worrying for the farmers is that there doesn't seem to be any way of stopping it."

Insurers continue to offer cover in high-risk areas but they have become "more sensitive to insuring those areas for TB since the early 2000s because it's seen as more of an inevitability than a risk", he adds.

The impact of weather
Another thing that remains uncertain is the weather. "Despite all the technology and modern developments in farming, weather is still the greatest influence on whether a crop or enterprise will be profitable or face a huge loss," Price says.

The destruction wrought by storms Desmond, Eva and Frank last December did nothing to assuage fears of extreme weather events becoming more frequent. The insured loss from the storms may not reach the £1.24bn estimate but this is scant comfort to the still recovering homeowners and SMEs whose properties remain at risk.

Barclays says the government's mooted proposal to strategically flood agricultural land as part of the flood defence system is a worrying development. "If that started happening to a greater extent, then that's something we would need to bear in mind because of the proximity that would have to the other assets we would be insuring for that farmer."

One potential boon for farmers and insurers is the now operational Flood Re scheme, which allows insurers to reinsure their flood risk and pass savings on to residents in high-risk areas.

Brendan McCafferty, CEO of Flood Re, says the scheme's introduction means farmers in flood-prone parts of the country will be able to access affordable flood insurance for their homes, some for the first time.

"Farmers should speak to their current home insurance provider and be prepared to shop around as the market is becoming increasingly competitive," he advises.

However, he acknowledges that Flood Re will not address the situation of SMEs or larger businesses. "While Flood Re covers residential properties, commercial premises are not eligible for the scheme."

Farmers looking for more information on exclusions should visit the Flood Re website or speak to their broker, McCafferty urges, noting the British Insurance Brokers' Association is expected to launch a scheme for SMEs later in the year.

Whether the oft-delayed Biba scheme will solve the problems faced by farming businesses remains to be seen, but it will at least offer something in a market where many farmers currently feel overlooked.

While most scientists are predicting that severe weather events like the 2015 floods will become more frequent, climate change is expected to result in a drier climate overall, and insurers may need to develop new cover to address this risk.

"We're looking to see how we can support farmers in those scenarios," Price says. "Farming patterns may change, possibly with arable crops moving into the west of the country that's now typically [used for] livestock farming and new drought-resistant crops may be needed for the eastern counties if they become much drier. New insurance may also be needed to protect farmers there against new disease threats."

As insurance tries to keep pace with the evolving risk climate, some of the old risks remain. Rural crime, especially tractor theft, is an ongoing problem and the last couple of years have seen a resurgence of livestock rustling, which led NFU Mutual to embark on a partnership with the police force to train officers on suspicious signs to look for when animals are being moved. Farm fires also remain a significant issue, and the replacement of local firefighting units by city brigades less familiar with the local terrain is posing new obstacles to fighting them, according to Price.

Brexit negotiations are a further element of uncertainty for farmers. As Barclay notes, it is unclear in the context of insurance what this might mean. But "the immediate concern for the agricultural sector was more around funding for farmers and whether that is protected, and also any changes to the allocation of that funding or regulations, rather than any impact on insurance".

What seems clear is that the pressure on farmers to diversify and use new technology is unlikely to lessen in the near future. Whether they are able to manage the new risks that accompany this diversification could be the difference between success and failure.