Are Insurers Ready to Insure Organic Crops?

Organic farming is not only about healthy food, but also about using practices that make our agriculture sustainable and resistant to climate change for many generations to come. In this article, we take a closer look at the present and the future of organic farming, as well as the importance of crop insurance practices in helping with the transition to greener farming methods.

What is organic farming?

There are many explanations and definitions for organic agriculture, but all agree it is a practice that relies on ecosystem management rather than external agricultural inputs. It is a system that considers potential environmental and social impacts by eliminating the use of synthetic inputs, such as synthetic fertilizers and pesticides, veterinary drugs, genetically modified seeds and breeds, preservatives, additives, and irradiation. These are replaced with site-specific management practices that maintain and increase long-term soil fertility and prevent pests and diseases.

In general, the development of organic farming is driven by:

  • consumers: who are becoming more and more conscious about how their food is produced, processed, handled, and marketed.   
  • governments: aiming  to reduce groundwater pollution or create a more biologically diverse landscape.
  • farmers: who believe that conventional agriculture is unsustainable and have developed alternative modes of production to improve their family health, farm economies, self-reliance, and wealth (organic farming can also be much more beneficial, considering that prices for organic food are higher than those for conventional products). 

Organic Farming in the EU

TThe area under organic farming in the EU has increased by almost 66% in the last 10 years – from 8.3 million hectares in 2010 to 13.8 million hectares in 2019. It currently accounts for 8.5% of the EU’s total ‘utilised agricultural area’, but there is still lots of room for improvement.
A sustainable food system is at the heart of the European Green Deal. Under the Green Deal’s Farm to Fork strategy, the European Commission has set a target for at least 25% of the EU’s agricultural land to be organically farmed, and a significant increase in organic aquaculture by 2030. To achieve it the EU Commission has set out a comprehensive organic action plan. It is broken into three interlinked axes that reflect the structure of the food supply chain and the Green Deal’s sustainability objectives (Table 1).

Table 1. Summary of the action plan in the EU. Data source:

Is organic farming riskier than conventional farming?

Organic farming is often deemed as being more resilient to certain climate risks compared to conventional farming practices. USDA’s Risk Management Agency (RMA) recognises organic farming practices as good farming practices and continues to improve crop insurance coverage for certified organic producers and producers transitioning to certified organic production.

Organic farms tend to promote biodiversity by avoiding synthetic pesticides and encouraging the use of cover crops, crop rotation, and other practices that enhance ecological diversity. This diversity can make farms more resilient to changing weather patterns, as different crops have varying tolerance to climate conditions.  
In addition, there is a strong emphasis on soil health practices like composting and reduced tillage. Healthy soils can better retain water, which can be critical during periods of drought or irregular rainfall, helping to mitigate the impacts of climate change.  For example, during the very dry 2021 growing season, the farms in Canada with higher levels of soil organic matter produced an average of 8.2 more bushels of canola per acre than farms with lower levels of soil organic matter.  

Moreover, organic farming typically produces fewer greenhouse gas emissions compared to conventional farming, primarily due to the avoidance of synthetic fertilizers and pesticides. Therefore, it brings less exposure with regards to ESG transition risks.  

Insurance of organic farms

As a rule, insurance companies do offer insurance coverage specifically for organic crops. However, insurers and farmers face several problems related to crop insurance.  Organic farming can potentially lead to lower yields, due to the inability to use synthetic pesticides and fertilizers. It creates some controversy within classic crop insurance practices.  It is difficult to include more widely diversified organic farming in a crop insurance system that was largely built on insuring conventional types of field crops, and that largely defines success and failure in terms of crop yield and revenue. For organic farmers, by contrast, success also includes other values and goals, such as improving soil quality, increasing biodiversity, and enhancing the environment. In such a case, the level of insured yields is usually lower than for conventional farming.  For example, in the USA, if a farmer does not have an individual yield history for organic crops, they can be offered insurance for the area yield level for standard crops but reduced by 35%. 

Moreover, underwriters in insurance companies possess limited information regarding organic farming practices and how they are related to crop insurance.  Many agents of insurance companies do not know as much as they would like about organic production, and do not feel comfortable or well-prepared enough to work with organic growers. At the loss adjustment stage, the parties of the insurance contract may face the problem of interpreting good farming practices, violation of which is the reason for diminishing the insurance indemnity or even  decline in the compensation.  Clear cases of failure include things like using insufficient amounts of seed or fertilizer, grossly underwatering an irrigated crop, or allowing weeds to take over the field.  What this means is that insurance adjusters and outside experts decide if it is such a failure or not, and not the farmer.  However, there are many grey areas. The complexity and integrated nature of an organic production systems means it can be difficult for an adjuster to judge whether a given organic farm is using good farming practices, unless they are intimately familiar with the operation.

One more problem is that insurance companies usually experience higher loss ratios from insuring organic farmers compared to standard clients. It can be explained by the lower participation of organic agriculture in crop insurance, hence, a higher adverse risk selection. Moreover, growing a more diverse selection of crops can bring additional risk of failure depending on the variety, hence, more potential losses to the insurance company.   And finally, organic farms have a higher produce yield than conventional farms, and horticulture and viticulture is more vulnerable to climate risks compared to field crops, that makes insurers increasingly reluctant to insure it. In addition, it is difficult to verify sums insured based on market prices from liquid markets of conventional crops. Organic food is more expensive; therefore, an insurance company should consider the higher price of crops.  Instead, its verification is often just to follow the contract price between a farmer and their buyer. It means, that the exposure (maximal loss) per one hectare in organic farming can also be higher.       

Conclusions: can insurance lead the transformation of farming practices?

The EU has an ambitious target to have 25% of land under organic farming by 2030. This is a big challenge for farmers who, despite economic and social motivation, and growing consumer demand, are struggling with difficulties in the transition phase. Insurance plays one of the most important roles in motivating farmers to switch from conventional methods to more environmentally friendly ones. Insurers are ready to insure organic crops but should continue to develop their expertise to ultimately ensure that organic farmers have the same access to crop insurance, on equal terms to conventional farmers. For this purpose, several methodological, educational and data availability problems need to be solved.

GrECo Group, as one of the leading specialist brokers in the CEE/SEE region, facilitates the development of solutions for organic farming by conducting crucial research in this area and creating tailor-made solutions for the insurance and agricultural industries.  We firmly believe insurance can play a major role in the transformation of agriculture from conventional practices to more ecological ones.  We just need to provide the farmers with the right incentives and solutions.

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Related Insights

New FOODprint Publication

In the latest edition of GrECo’s Food & Agri client magazine, FOODprint, we place our focus on a key challenge faced by this industry: the impacts of climate change.

Agriculture serves as a crucial foundation for the food supply chain in every society, playing a pivotal role in the subsequent processing and distribution of food.

In the latest edition of GrECo’s Food & Agri client magazine, FOODprint, we place our focus on a key challenge faced by this industry: the impacts of climate change. We delve into the forthcoming EU regulations, explore
advancements in the insurance sector, and observe alternative risk and insurance solutions.

Efficiency and effectiveness are paramount in ensuring the success of this industry. While digitalization offers numerous advantages, it is imperative to address the potential cyber exposures that arise from relying on this technology. Additionally, the risks of employee misconduct and third-party criminal activities can significantly impact the financial stability of any Food & Agriculture enterprise.

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Related News

New FOODprint Publication

In the latest edition of GrECo’s Food & Agri client magazine, FOODprint, we place our focus on a key challenge faced by this industry: the impacts of climate change

Read more …

Webinar “Climate risks in Food & Agri industry”

In our recent webinar “Climate Risks in Food & Agriculture: Compliance With New European Regulations, Risk Assessment, Mitigation and Alternative Risk Transfer” we shared information about the new EU regulations and requirements in the area.

GrECo Group and AXA Climate have conducted the first mutual webinar on climate risks concerning EU regulations, adaptation and insurance. More than 50 participants attended this event.

Hu-Ann Pham, who is the Head of Industry Adaptation at AXA Climate introduced current European regulations and requirements related to physical climate risks and talked about how to adapt industrial assets in food & agriculture to climate change.

Lucile Dauger, who is the Agri-Product Manager of AXA Climate, presented how companies in food & agriculture can be better prepared for ongoing and future climate changes.

Maksym Shylov, GrECo Group Practice Leader in food and agriculture, outlined the main ways to insure weather risks, and crop and parametric insurance in particular for agriculture and the whole food supply chain.

You can find the full webinar recording on our Youtube profile.

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Related News

When Will Climate Change Affect Insurance Products?

Even if we take extensive action immediately to limit our impact on the environment, climate change cannot be easily stopped. What does this impact mean for the food and agriculture industry and how should insurers prepare for it?

Every year, we see and feel the impact of climate change on ourselves and on our immediate surroundings.  Climate change isn’t new news.  Over the years many scientists have confirmed the impact humans are having on our environment in numerous scientific studies. One such study by the IPCC (Intergovernmental Panel on Climate Change), cites that the average temperature of the earth was 1.09 degrees Celsius higher between 2011-2022, than preindustrial times, between 1850-1900. All forecasts predict, regardless of actions taken, that the earth’s temperature will continue to rise until at least the middle of this century. This means that even if we take extensive action immediately to limit our impact on the environment, climate change cannot be easily stopped. What does this impact mean for the food and agriculture industry and how should insurers prepare for it?

Preparing for climate change

By the end of the 21st century, we will have to, or rather our children and grandchildren will have to, struggle with temperature increases predicted to be, on average, two degrees Celsius higher than the pre-industrial era – that’s twice as high as today!  At the same time, due to heat capacity and inertia, the land will also heat-up until it is approximately one and a half times hotter than the oceans and seas. As the earth’s land mass is predominantly located in the northern hemisphere, this means Europe will acutely feel the rise in temperature.  This is going to cause headaches for the food and agriculture industry and their insurers alike.
In addition to rising temperatures, one must not forget other factors, such as the increasing cost of fuels for energy production and the search for greener, but more expensive, solutions to using these resources.  When these are considered, the desired goal of reducing the impact of industry on the climate is thrown off balance:  Some countries facing rising energy prices are questioning whether it is economically better to continue to overlook the environmental impact of generating energy from traditional, unecological sources to ensure their populations and industries are kept supplied, in lieu of using greener, more expensive solutions to minimise climate change.
Last summer, we saw the effects of climate change, with increasingly hotter summer days and nights, and extreme weather conditions. For holidaymakers, nice weather, and high temperatures are attractive. However, from the perspective of the economy and the impact on society, quite the opposite is true.  Here’s why: High temperatures often exceed the optimal conditions for factories’ production equipment, increasing the risk of failure, leading to downtime and the need to reduce production.  Offices and private homes using air conditioners put a strain on the power grid which results in increased energy consumption. Also, those industries in which it is necessary to maintain a constant temperature (e.g. cold stores, freezers etc.) incur increased operating costs. 
Living things are also not indifferent to high temperatures.  animals migrate searching for better conditions, thermophilic species appear in northern countries, and plants’ vegetation is reduced. 
Lack of rainfall resulting in drought maybe perceived as a mere annoyance for an ordinary citizen faced with restrictions on watering home gardens or washing vehicles.  However, for the food and agriculture industry it can spell disaster. Our rivers suffered greatly last summer, and they have not yet returned to average, safe levels.  This is having a massive knock-on effect on the agricultural industry and our economies as a whole.  Heat is not a critical phenomenon for plants unless it is long-lasting and accompanied by a lack of rainfall.  Unfortunately, last summer’s climatic situation caused prolonged periods of heat, accompanied by periods without rainfall causing agricultural drought, i.e., a state in which the lack of moisture in the soil threatens the vegetation of plants, spelling problems for food production and animal feed.  However, it is not just these obvious effects on the agriculture industry that we need to be aware of here.  Low water levels also affects the energy sector because it restricts the availability of a coolant, causing limitations in energy production.  This in turn impacts agriculture because at high temperatures, the energy industry may activate measures to protect transmission lines leading, for example, to switching off the energy supplied to a plant. This would mean, in the average production plant, that production is temporarily stopped, which would cause financial losses for the business. However, there are some businesses in the food and agriculture industry, especially those connected with livestock, where this scenario could be fatal because a constant energy supply is necessary for ventilation and supplying drinking water to the animals (e.g., poultry farming). If the operation of the plant is directly dependent on energy, and the lack of supply or a change in its parameters causes downtime or damage to the equipment, we are talking about damages that reach thousands of euros.
As if that wasn’t concern enough for the industry, a heatwave is usually accompanied by an equally great wave of fires, which generates large insurance losses regardless of other causes. With very dry soil and litter, it doesn’t take much to start a fire that destroys forests and crops and threatens homes and factories. Very often, such fires cannot be brought under control by local forces, and it is necessary to use the help of other regions or even neighbouring countries.
Higher temperatures also mean a greater risk and frequency of violent weather conditions. Hurricanes, hailstorms, torrential rains, and flash floods are already becoming more and more frequent causes of damage. Their effects on private buildings can often result in irreparable damage or complete destruction.  

Can we ensure against soaring temperatures and the risks they bring?

However, whether risks such as lack of energy due to a heatwave can be insured or not, remains to be seen. Currently, this risk is not commonly insured, additionally, the liability of the energy supplier is limited by the occurrence of force majeure. If we consider a phenomenon that could not be prevented as such, then the heat wave and the resulting lack of water in rivers, limiting production, meets these conditions.  Whilst we are talking about a risk that is not directly insurable, the solution may be index and parametric insurance. If we take specific weather conditions as a parameter, it seems possible to construct a product that meets the needs of customers. In the world, such solutions are becoming more and more common, but the question is, when will we see such solutions in our market?
In a nutshell, as the food and agricultural industry experiences greater challenges in the face of climate change, so too does the insurance industry, and we predict these will only become more challenging as climate change progresses.  The risk profile of individual activities is changing along with climate and environmental changes. In the case of agriculture and crop insurance, we have not had to deal for a long time with the catastrophic extent of damage from the negative effects of overwintering, as in 2012. However, the warming climate, as we have seen, is causing and will continue to cause more summer damage. In the case of industry, the risk of flooding and machine breakdowns is increasing and will continue to do so. Our insurance offer should, and will need to, adapt to these changes to ensure our clients are always fully insured.  Watch this space!

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Related articles

Top Tips to Mitigate the Threat and Protect Against Ransomware Attacks

3.86 million USD is the global average cost of a cyberattack data breaches

Did you hear about the JBS ransomware attack in May 2021? It was one of the largest and most high-profile cyberattacks in recent history. JBS, the world’s largest meat supplier, was hit by a ransomware attack that affected its operations in North America and Australia. The attackers used a type of ransomware known as REvil, which encrypted the company’s data and demanded a ransom payment in exchange for the decryption key. Luckily, JBS, who supplies meat to retailers and restaurants worldwide, quickly took steps to isolate the affected systems and shut down its servers to prevent the spread of the attack and its knock-on effect on the global food supply chain.
So why is this relevant to you and your business? The JBS ransomware attack makes the growing threat of cybercrime and the need for organizations to take proactive steps to protect their data and systems real. If this case study isn’t enough of a warning for companies to prioritize cybersecurity as a critical component of their overall risk management strategy, then these other sobering statistics might just be:
Cybercrime is up 600% due to the Covid-19 pandemic. One of the reasons for this meteoric rise in cyberattacks is the trend of ‘working from home’.  This new norm has increased the average cost of a data breach for companies by $137,000 per company.

Sadly, ransomware, malware, and data theft have become part of our every-day vocabulary, yet businesses are seriously lagging: Over 77% of organizations do not have a cyber security incident response plan. Are you one of them?

It is essential that businesses are aware of the possible cyberattack threats and disruptions facing them; and the food and agriculture industry is no different. So how do we mitigate the threat for our businesses and protect them against ransomware attacks? All is not lost, besides insurance being an ultimate tool to mitigate a loss which has already occurred, there are preventative steps every organisation should take. Here are our top tips.

Top tips

Firstly, and perhaps the most obvious one, is to ensure your company data is regularly backed-up and that there are password protect backed-up copies offline. On average, only 5% of companies’ folders are properly protected.  It is essential to ensure copies of your critical data are not accessible for modification or deletion from the system where the data resides. In addition, your company should implement air gapping – the process of ensuring there are gaps when the business’ computer systems are not directly or indirectly connected to the internet.
Secondly, your organisation needs to actively think about what you will do if your systems go offline.  What are your critical functions?  How will you operate manually if it becomes necessary? How will you implement a recovery plan and what will it look like?  Your recovery plan should include maintaining and retaining multiple copies of sensitive or proprietary data, and that your servers are in a physically separate, segmented, and secure location, such as a hard drive, storage device or cloud.

Thirdly, limit who can do what on your systems and audit them regularly.  A whopping 95% of cybersecurity breaches are caused by human error, so this is not something to be overlooked.  Whether you are a large company or a small one, by requiring administrator credentials to install software, you are actively limiting the number of people who can expose your systems to a cyberattack. You should routinely audit those user accounts with administrative or elevated privileges and configure access controls with least privilege in mind.

Incredibly, 94% of malware is delivered via email; so, another simple step to reduce risks caused by your employees could be to disable all hyperlinks in received emails; to add an email banner to messages coming from outside your organisation; to regularly check that you have disabled all remote access/RDP ports; and that you are systematically monitoring remote access/RDP logs

Forewarned is forearmed

What is more, forewarned is forearmed. Through comprehensive cyber security awareness and training you can effectively ensure your staff are forewarned about the cyber risks and vulnerabilities facing your company, and forearm them with techniques and best practices to minimise the risks you are exposed to. For example, ensure all employees know only to use secure networks, and that when working outside the office they should not use public WiFi networks. One way of making this easier for your remote workers is to install a VPN or virtual private network. Employees need to be reminded to use strong passwords and to regularly change their passwords to network systems and accounts, adhering to the shortest acceptable timeframe for password changes. They should also be prevented from reusing passwords for multiple accounts and encouraged to use strong pass phrases wherever possible.

And finally, a basic but often disregarded step is to ensure your software and systems are up to date and that you have updated anti-virus and anti-malware software on all hosts.

With a little forethought, preparation, education, and investment in robust security measures organizations can reduce the risk of a cyberattack and minimize the impact of any incidents that do occur. You might not be able to completely prevent all cyberattacks, but you definitely can reduce their impact and make it harder for hackers to attack.

 Statistics taken from:

You are experiencing a cyber incident? Contact our colleagues from CERTAINITY:

+49 800 2378246
+43 664 888 44 686

The article is written by Stephan Eberlain and Maksym Shylov.

Anita Molitor

Operation Executive

T +43 664 962 40 08

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Related articles

How to Calculate Insurance Premiums for Loses Brought About by Drought?

For industries to remain properly insured, we must be able to quantify the severity of a drought.  Soil moisture data (‘ERA5 hourly data at single levels from 1959 to present day’) provided by the European Space Agency provides the best way to quantify and visualize drought.  

In some parts of Europe 2022 was a record breaker – it was one of the driest, hottest years in history! However, with soaring temperatures comes dire consequences, especially for the agriculture, energy, logistics and forestry sectors.  Last year Hungary’s corn yield decreased by 30%; Italy suffered massive livestock deaths; the UK, France, Spain, Germany, and Portugal all experienced huge water shortages which affected hydropower in Spain, nuclear power plants in France, agriculture in Britain, and shipping in Germany.  What is more at the end of August 2022, forest fires caused by extreme temperatures were responsible for 735,000 ha of burnt, or burning, forests in EU countries – that’s 2.3 times more than the annual average between 2006 and 2021 when compared year-on-year. Seemingly, nowhere in Europe was spared some form of drought-induced disaster.  And this isn’t a freak occurrence.  It’s not a problem that is going to go away.

So, the burning question is: how do we calculate insurance premiums to cover such risks?  First, we have to understand why drought is on the rise.  The simple answer is global warming due to intense human activity, especially over the last 50 years, is the cause.  Greenhouse gases are currently 30% higher than during the 1950s, and agricultural deforestation has seen us lose 40% of the earth’s forests.  This has led to a shift in the average temperature by 1°C compared to the pre-industrial era, and thus resulted in drastic changes in the weather. We’re experiencing more extreme temperatures, heat waves, higher wind speeds, more hail, and uneven distribution of rainfall throughout the year, meaning no rain when plants need it or destructive heavy rains and floods that destroy crops and properties at other times.

Tools to quantify the severity of drought

For industries to remain properly insured, we must be able to quantify the severity of a drought.  Soil moisture data (‘ERA5 hourly data at single levels from 1959 to present day’) provided by the European Space Agency provides the best way to quantify and visualize drought.  The satellite soil moisture index provides the best parameter to insure against drought for a variety of reasons.  The soil’s moisture has a direct impact on crop development and the quantity and quality of food production.  The data, which is independent of parties to the insurance contract, can be verified by the farmer or food processor themselves and requires no field inspections or paperwork to indemnify the loss, resulting in a faster insurance pay-out.

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Related articles

Knowing and Talking About Climate Change – New Challenges in Corporate Reporting Standards

50,000 companies will now have to comply with new rules – are you one of them?

EU policymakers reached an agreement on the Corporate Sustainability Reporting Directive (CSRD) which came into force in January this year. Sustainability reporting is now, for the first time ever, as important as financial reporting.  So, what does this mean for companies in the food and agriculture sector, and what do you need to do to meet the requirements?  Essentially, any company under the scope of CSRD must report on how sustainable it is, and how this affects the company’s development, performance, and position. Companies who are already within the scope of NFRD are obliged to apply CSRD regulations from 1 January 2024; all other large companies from 1 January 2025; and listed SMEs (with the possibility of a waiver during the first two years) from 1 January 2026.

What new risks are we facing?  A helping-hand for businesses.

As with anything related to sustainability, environmental factors are key.  To help businesses the Task Force on Climate-related Financial Disclosures (TCFD) created a methodology in late 2015 to enable companies to assess their climate-related risks. In other words, risks that have a direct impact on a company’s assets, and risks that are a result of the decarbonization of the company’s activity (scope 1, scope 2 and scope 3), as well as the overall decarbonization of the economy on a macrolevel. 
To help spell out more specifically what these risks may include the TCFD provided several examples of climate-related risks and segregated them into two groups – transition risks and physical risks.  Let’s initially look at some physical risks which may affect your business.  Physical climate-related risks are increasing rapidly as we see giant shifts in climate change. Included in the TCFD guidelines are acute risks such as the increased severity of extreme weather events, for example cyclone and floods; to chronic risks such as changes in precipitation patterns, extreme variability in weather patterns, rising mean temperatures, and rising sea levels.

The TCFD’s guidance goes on to pinpoint examples of transition risks which fall into three categories – policy and legal, technology, and reputation.  Firstly, let’s consider policy and legal concerns which may be relevant to businesses in the food and agriculture sector.  The TCFD highlights: increased pricing of GHG emissions, enhanced emission reporting obligations, mandates on and regulation of existing products and services, and exposure to litigation.  Under the technology banner, according to the guidelines, your business may need to substitute existing products and services with those with lower emissions.  Whilst other risks could include the unsuccessful investment in new technologies, and the cost of transitioning to lower emissions technology.  Lastly, the TCFD provides examples of reputational risks: Businesses need to be aware of shifts in consumer preferences, the stigmatization of the sector, and increased stakeholder concern / negative stakeholder feedback.

Why are the TCFD’s guidelines relevant to my business?

Fast forward to 2023 and many food and agricultural companies may be asking, how is this relevant to my business? These have never been concerns for my company before, so why now?  The simple answer is the new Corporate Sustainability Reporting Directive is making these factors relevant to many more businesses in the sector than in previous years.  The TCFD’s 2021 implementation guidance stresses that processors, such as food, beverage, and fiber processors (e.g., paper), are likely to be impacted less by direct GHG emissions (Scope 1), but more by indirect GHG emissions (Scope 3) arising from their supply and distribution chains.  Processors will now have to pay attention to water and waste risks and opportunities, to a similar degree as producers do.

Take for example a beverage production or paper production company.  They depend on access to significant water resources and, in the case of beverage production, high-quality water resources at that. The new
CSRD will mean these companies have to take the risks and opportunities around waste into account when reporting on the business’s sustainability, including residual materials such as paper and wood waste, wastewater, and post-processing animal byproducts.

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Related articles

Food Price Inflation in CEE and SEE Countries – Its Impact on Insurance and the Future

According to the International Monetary Fund food and energy are the main drivers of today’s inflation. That is obvious to each of us as we pay more for both food and energy these days.

This article compares the food price inflation in the countries of Central and Eastern Europe where GrECo Group operates. How did these differences in prices come about and what are the consequences for insurance?  

How food price inflation is measured

The United Nations’ Food and Agriculture Organization uses the Food Price Index (FFPI) to track and monitor price changes in international markets for key basic foodstuffs. The reference period from 2014 to 2016 serves as the FFPI base value, this being 100. For example, if in July 2005 the FFPI in Austria was 76.4, this means that the main basket of food products cost 23.6% less in July 2005 than the average basket in 2014-2016yy. If the FFPI, let’s say, in June 2022 was at 121.1, the food inflation was 21.1% compared to 2014-2016yy.

Food Supply Chain

Different rates of food price inflation in Europe

We analysed the food price indices in CEE/SEE countries, which are split into 3 groups:

  • EU countries using the Euro as an official currency
  • EU countries using their own national currency
  • Non-EU countries

The analysis shows that the increase in food prices in EU countries follows the same course, i.e. the dynamics from 2020 are very high compared to the previous 20 years (2000-2019yy). This proves that the economies of EU countries are interconnected. 
Looking at countries outside the EU, we see that prices have risen in different ways at different times. For example, an interesting fact about Ukraine is the sharp increase in prices in 2013-2014, which can be attributed to the destabilisation of the economic situation during the Maidan Revolution, followed by the first Russian occupation and the subsequent large devaluation of the local currency.
A more interesting trend can be seen if we take a closer look at the period 2020-2022, primarily related to COVID and Russia’s invasion of Ukraine.

  • Among the six Euro area countries we analysed, Austria showed the lowest FFPI increase and Lithuania the highest.
  • Among the five EU countries that use national currencies, the highest inflation was recorded in Hungary, and the lowest in the Czech Republic.
  • Among the four non-EU countries, Ukraine suffered a much higher FFPI than in the period 2014-2016. Serbia, however, is the most stable in this respect.

A look at increasing food prices during 2020-2022

The table below clearly illustrates the differences between countries. It allows for a better comparison of FFPI values at different points in time during recent periods. For example, the column 2022vs2020 shows the percentage increase in food prices on July 1, 2022 as compared to July 1, 2020.

table food prices

The table also shows that inflation in the period 2022-2022yy was twice as high as in the period 2020-2015yy in almost every country. Prices started to increase drastically as from the third and fourth quarter of 2021. We therefore believe that the root cause was the post-COVID food and energy supply chain crisis.

Why is food price inflation so high in 2020-2022?

One of the root causes of any inflation is the scarcity of goods, eithertheir total lack or their availability in only insufficient quantities. This happened in the post-COVID recovery phase, when deferred demand for energy resources collided with supply chain constraints. At the same time, in 2021, we witnessed a sharp increase in the prices of cereal and oilseed raw materials. We also saw the first forecasts of increasing food prices. Soon thereafter, Russia’s invasion of Ukraine led to a new problem in the food supply chain, a problem that continues to this day.
Another cause of inflation is excess demand, be it due to the government printing extra money, the acceleration of the money multiplier, new demand created by GDP growth or due to the inflow of new foreign capital. For example, according to Forbes the consistent monetary stimulus on a massive scale, unprecedented since World War II, turned the flywheel even further in 2020-2022.
On top of that, the negative expectations of enterprises and consumers add even more fuel to the fire. Today, nobody is willing to take a risk by selling goods without hedging against the risk of higher production costs in the future. Already, manufacturers are increasing their prices in order to transfer the risk to their consumers. There is also the theory, that big corporations and monopolists (e.g. in the energy segment or food retail) merely squeeze out more profit by driving prices up. Therefore, it will be interesting to see what the final 2022 balance sheets and ESG reports will look like in 2023.

Impact of the inflation on the insurance markets

In our opinion, inflation impacts negatively on insurance consumption and insurance premiums. On the positive side, greater financial uncertainty and changes in the spending behaviour (increased share of spending on inflexible goods and utilities) make households and enterprises rethink their insurance spending.
To further curb price increases, central banks significantly raised base rates. Together with inflation expectations and the calculation of an additional risk premium for uncertainty, such actions lead to a significant increase in the cost of capital. This means that investors in the insurance industry are increasingly making outrageous demands.
Thus, we have already witnessed a lack of capacity following the first wave of investor capital outflow from international insurance markets. As a result, insurers are not only starting to optimise their portfolios, they are also becoming increasingly risk averse. Some of the conventional property risks are very difficult to renew and additional limits in e.g. the meat industry, in agricultural insurance, and in other sectors can hardly be obtained. Markets are thus hardening again.

What can we expect in the near future and what will save us from the abyss?

Food and energy supply chain constraints pushed up prices post-COVID. Aggressive government monetary policies, negative expectations and further supply chain disruptions caused by Russia’s invasion of Ukraine exacerbated the situation. This has affected the countries of the CEE/SEE region in different ways, yet what they have in common is that prices in 2021-2022 have soared at an unprecedented rate. The insurance market, in turn, is entering a phase of portfolio optimisation due to the growing lack of investor capital.
So, what does the future have in store for us?
A similar scale of inflation (as shown in the graph below) took place in the 1970s when price increases were associated with oil shocks in 1973 and in 1979-80. That said, prior to these shocks, monetary policy was focused on keeping interest rates low to maintain employment levels and pour more money into an economy that resembles ours today. Further policy tightening resulted in a deep economic crisis in the early 1980s.

food price index

However, there are two important differences between the current situation and the 1970s:

  • The magnitude of commodity price jumps today is smaller than in the 1970s.
  • A paradigm shift in monetary policy frameworks took place since the 1970s, i.e. central banks in advanced economies now have clear mandates for price stability, which is expressed as an explicit inflation target.

According to The Centre for Economic Policy Research (CEPR) “beyond the near term, inflation is expected to decline, but the experience of the 1970s suggests some material risks to this inflation outlook”. CEPR considers risks to be material if the following events do not occur: ”1. global production lines and logistics adjust, 2. inflation expectations are likely to remain well anchored over the medium term, 3. the structural forces that depressed inflation before the pandemic persist”.
In addition, we believe that increasing economic activity towards the reconstruction of Ukraine and new investments in technologies leading to the decarbonisation of economies will additionally inject economic growth, which will in turn, result in a stabilisation of prices.
Sources consulted: )

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Related Insights

Supply Chain Risk Management in the Food and Agriculture Sector – Keeping Flexibility and Financial Resilience

Supply Chain Risk Management in the Food and Agriculture Sector - Keeping Flexibility and Financial Resilience

One of the key questions nowadays is how to stay agile in an ever-changing supplier and customer environment? In other words: How to get the right product to the right customer at the right time in the right place while continuing to be profitable, environmentally and socially compliant?

COVID, the war in Ukraine, the gas crisis and more have exposed the fragility of many industries.  Our food supply chain is no exception. What does the future hold for us and are we ready to successfully face new challenges? The more immediate question we have to ask ourselves is: “How can we increase flexibility and financial resilience in an ever-changing economical and geopolitical environment?” Let’s take a closer look at this issue and how to better deal with it:

Sustainability in the Food Supply Chain

The Food and Agriculture Organization of the United Nations defines the food supply chain as consisting of all stakeholders who participate in the coordinated production and value-adding activities that are needed to make food products.

Food Supply Chain

Source of the chart:

The food supply chain covers agricultural upstream and downstream sectors from the supply of agricultural inputs (such as seeds, fertilisers, feeds, medicines or equipment) to production, post-harvest handling, processing, transportation, marketing, distribution, and retailing.  
A sustainable food supply chain:

  • should be profitable throughout all its stages (economic sustainability),
  • has broad-based benefits for society (social sustainability),
  • has a positive or neutral impact on the natural environment (environmental sustainability).

Spotlight on Supply Chain Disruption Risk Management

The recent agitation in societies caused by COVID-19, Russia’s aggression in Ukraine, the gas crises, climate change, etc., have prompted governments and corporations to pay more attention to supply chain disruption risk management. This is due to its obvious negative consequences, such as loss of net profit and increased costs for restoring supplies to normal.

The complexity of the supply chain requires that risks be grouped as follows:

  • Supply Risks: Impacts inbound supply, implying that a supply chain cannot meet the demand in terms of quantity and quality of parts and finished goods (supply disruption).  
  • Demand Risks: Impacts elements of the outbound supply chain where the extent or the fluctuation of the demand is unexpected (demand disruption).  
  • Operational Risks: Impacts elements within a supply chain, impairing its ability to supply services, parts, or finished goods within the standard requirements of time, cost, and quality. Transportation disruptions are one of the most considerable operational risks.
Risk in global supply chains

Source of the chart:

In order to effectively manage the risk of disruptions in the supply chain, special risk management procedures should be implemented in companies:

Step 1: Assess the risks (suppliers, buyers, weather-related events, foreign economic instability, raw material shortages, blackouts, military actions, actions of the government, social unrest, etc.)

Step 2: Quantify the risks (likelihood and severity, risk mapping)

Step 3:  Build a response plan to contingencies (“If X happens, then we will respond with Y.”) and define roles and responsibilities in this action plan.

Step 4: Develop a supply chain continuity plan (determine critical and major suppliers and logistics routes, qualify alternative suppliers and shipments)

Step 5: Further monitor supply chain risks, carry out supply chain continuity plan modifications and reporting

The vessel, blocking the Suez Canal in 2021

The vessel, blocking the Suez Canal in 2021

Stay Agile in the Food Supply Chain   

One of the key questions nowadays is how to stay agile in an ever-changing supplier and customer environment? In other words: How to get the right product to the right customer at the right time in the right place while continuing to be profitable, environmentally and socially compliant?

Here are some practical key points and ideas for increasing the flexibility of the food supply chains:

  • Go digital wherever possible: collect, process and display in-time data
  • Ensure optimum levels of visibility and transparency across the organization by providing more information to optimise operations 
  • Automate the less time-consuming manual processes
  • Hold extra inventory
  • Make shorter-term plans 
  • Reduce the variety of products
  • Switch to new packaging – smart packaging, large multi-serving formats, modular packaging solutions
  • Buy from domestic or local suppliers where possible to increase the ability to transport goods in an efficient and cost-effective manner
  • Establish and foster solid relationships with strategic suppliers.

Insurance – Key Element to Counteract Food Supply Chain Disruptions  

Insurance is a tool that limits financial losses when a risk has become reality and has disrupted the supply chain, resulting in a loss of net profit, an increase in its mitigation costs and contractual penalties.
As a rule, standard property insurance covers business interruptions, caused by physical damage to the enterprise or physical damage to its suppliers or buyers (extended coverage).   In any case, it should also contain an “on-site element”, i.e. the damage should arise at the site of the party specified in the insurance contract.
In order to partially fill this gap, clients are advised to consider investing in special tailor-made solutions, such as combined stock-throughput and trade disruption coverage or parametric insurance.
Combined stock-throughput and trade disruption covers the entire value chain: from the delivery of goods from suppliers, through their processing at the insured party’s premises, to their delivery to buyers, including both transit and storage periods. A stock-throughput placement provides compensation for material damage to the transported or stored property.
The additional trade disruption insurance covers loss of net profit, increased expenses and contractual penalties resulting from direct damage to property and unexpected events that impacted on logistics and/or happened to goods along the way (fire, lightning or explosion, natural disasters, blockage of waterways, harbours, airport, roads or railways; breakdown of a vessel; confiscation, expropriation, deprivation, embargoes; sanctions; political interference; strikes, riots and civil commotion, terrorism border closures; or other triggers subject to the agreement of underwriters). 
Parametric insurance insures a specific weather or statistical parameter, which should correlate well with the quantity or quality of the goods one buys or sells. For example, to produce a planned amount of vegetable oil, an oil-crushing plant needs seeds to be processed. The factory relies on farmers who grow such crops. In the event of a drought, there will be a shortage of harvested seeds, which, in turn, results in a reduced production of vegetable oil. To mitigate and balance such losses, the oil crushing plant will be insured against soil moisture deficiency (drought index) or an area yield index. The insurance contract is triggered when the insured index reaches a certain value.

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Chojnacki Jacek

Jacek Chojnacki

Dyrektor Regionu Food & Agri
Broker Ubezpieczeniowy

T  +48 609 600 960

Related Insights

Webinar “Cyber risks in Food & Agri industry”

Cyber risks in agriculture

In our recent webinar “Cyber risks in Food & Agri industry” we shared information about the role of cyber insurance, case study examples of claims handling and Security Operation Center (SOC) as a service.

The food and agriculture industry has adopted the use of smart technology, such as automated farming techniques or automated high-bay warehouses. In addition, the industry is highly dependent on automation to keep prices low and distribution running smoothly. With all the benefits of digitalization, it is important to address the cyber exposures that come with this technology reliance.

In our recent webinar “Cyber risks in Food & Agri industry” we shared information about the role of cyber insurance, case study examples of claims handling and Security Operation Center (SOC) as a service. With more than 70 internal and external participants, we dived into the topics of cyber risks in the food and agriculture industry with a desire to show the importance of proper cyber insurance solutions for clients in this industry.

Speakers included Stephan Eberlein, GrECo Group Practice Leader in Liability & Financial Lines, Rob Lloyd, Director ASL, and Alexandra Rusnakova, Cyber security analyst at AXENTA CyberSOC.

You can find the full webinar recording on our Youtube profile.

Related News

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211