Avian Influenza compensation failures leaving producers out of pocket

Published on : 29 Oct 2022

Steven Smout, head of agriculture at McLarens

The insurance sector is shouldering the brunt of a huge increase in claims against AI cover and as a result, agriculture loss adjusters are warning that claims will be costly for insurers as government compensation fails to hit the mark.

Steven Smout, head of agriculture at McLarens global loss adjusters told The Ranger that insurance is “100% necessary”, because the stringent eradication policies are not sufficiently covered by government compensation.

He points out that as with control of TB and BSE (Mad Cow Disease), one of the measures the government takes is to “destroy everything” as soon as an infection is detected, which he feels is “the right thing to do”.

The issue that remains is compensation.

Smout said; “The government will pay compensation for the value of the remaining, living hens, but do not compensate for the full revenue impact.”

He explained that poultry units are an investment of “a minimum of £5m to £10m in plant and equipment. Plus there is the cost of cleaning and disinfecting (C&D) the units to accepted EU standards to be considered”.

If the government will pay out for example £200,000 when a loss might actually be closer to £1.5m, the insurance industry has to pick up the shortfall”

“The issue we are going to have is that revenue losses will likely increase year on year. Egg production is a capital-intensive business. With issues like the war in Ukraine, we are seeing agricultural inflation at unprecedented levels. Rates of 100% for fertiliser and 50% for seeds are not uncommon. It’s a very challenging environment at the moment.”

Smout predicts that the Government will cull a “large number” of birds and though “they’ll provide some form of compensation” insurance cover has a key role to play in ensuring that the potential financial risk is adequately managed. That said, farmers looking for insurance may find it difficult. “It’s a very specialist area” requiring specialist broking and underwriters, and there is limited capacity in the market, particularly as claims become more frequent and costly.

He urged that egg producers should still seek to take out cover as they “risk having no income for a minimum of 8 to 9 months” in the event of an outbreak.

Business safeguards crucial

Ed Davey, director at Dallas Scott Davey who broker AI cover and handle claims, said farmers were increasingly concerned about the exposure their businesses faced, especially as we head into winter.

"It is difficult to predict where we are going to be. The situation is compounded by agri-inflation and the increased financial risk the poultry and ancillary industries now face," Mr Davey explained.

Producers need to undertake due diligence and ensure that risk management is a priority. There is a collective responsibility to mitigate risk. This is a complex cover to place in a very narrow market, and terms are hard to nail down because the situation is constantly evolving and changing.

Underwriters need confidence in producers’ expertise in managing their business. We need to analyse every aspect of the business in detail, and this can take months. Producers need to demonstrate a clear understanding of their financials, the production process and maintain high standards of biosecurity, as well as having contingency plans in place. They need to then obtain approval of their plans from the Animal and Plant Health Agency (APHA).

He added that “with the extent of avian influenza claims this year, a number of insurers were looking at re-rating their books.
“This is a bespoke line of cover and individual situations vary. Producers need to check their policy wording carefully to ensure compliance, otherwise policies could be invalidated in the event of a claim.

With a combination of up-front financial planning upon which the underwriting hinges, and a clear understanding of the level of biosecurity measures adopted, individually tailored insurance cover is available."

Delays impacting cover

Ed Nottingham, Insurance Director at Scrutton Bland Insurance Brokers Ltd commented:
“Premiums are increasing across the board, but individual situations will vary depending on management and geography. Underwriters have been overrun with claims including the two key players, Apollo, who tend to build around the business impact and Markel, who focus more on the material loss of the birds, paying per head of flock lost”.

It has been apparent that whilst existing cover holders have been offered renewals, some farmers have struggled to get their specific premium rates confirmed in a timely way, leaving them vulnerable should a restriction order be issued, which would then preclude them getting cover.

Delays in farm visits by an overstretch APHA are resulting in flocks being decimated before compensation values can be estimated. As Nottingham explained: “AI spreads very rapidly and it doesn’t take long for a flock to be wiped out.”

Be prepared

Nottingham stressed that: “Understanding the potential cost of a claim will provide underwriters with a realistic evaluation of the risk, avoiding the need to overestimate and hence can help to lower premiums. Be accurate, be transparent and understand your projections.” Risk management is vital: “doing nothing is not an option”.

“Have a contingency plan in place”, he added “We are finding that if you present APHA with a credible plan, they will let you get on with it!”

There have been a couple of claims this year in excess of £1 million plus per claim. As a result, cover has been pared back to limit exposure. Losing hens means losing egg production, so loss assessors could look at forecasts for expected income, plot a graph and replicate that projected income. This might include loss of income from the inability to sell off spent poultry litter as fertilisers, packaging wastage and the cost of cleaning and disinfection.

Sustainable solution sought

An NFU spokesperson told The Ranger
“The Noble Foods Producers Insurance Scheme, which was introduced in Summer 2021, was very well received and provided three key areas of cover – Avian Influenza, Salmonella and ‘Poultry all-risks’ in partnership with NFU Mutual.

Over the past year, the UK and Europe have suffered the biggest outbreak of Avian Influenza on record. Last week (early October) saw the announcement of an Avian Influenza Prevention Zone across England, Scotland and Wales to help protect flocks in what is expected to the worst winter outbreak on record.

We understand these outbreaks have been devastating for the industry and we are pleased that our Avian influenza Insurance Policy has been able to financially help those that benefited from it when affected by an outbreak on their site. We have been working with our partners against a rapidly changing picture to provide a sustainable long-term insurance solution to offer financial protection against this disease for existing customers who meet our partners' risk criteria.

Any existing customers who are affected by an outbreak are encouraged to contact us as per their policy schedule so that we can support them with their claim.

We advise egg producers to ensure that they are operating to the highest standards of biosecurity and complying with any enhanced measures as imposed by DEFRA under the national AI Prevention Zone and any of the regional or local zones currently in place to control the disease.

We will continue to monitor the situation and remain committed to supporting our customers and providing them with the best outcomes available”.