Unfreezing the confidence in the future

Unfreezing the confidence in the future GrECo Group Specialist Risk Management Insurance

Over the past 20 years, spring frost events have become increasingly destructive to the fruit and berry production in the CEE region. We decided to take a closer look at this risk and briefly describe the current situation with insurance solutions for this risk for horticulture.

Frost can be different

Low temperatures below the critical frost tolerance level are among the most important causes of yield loss in fruit orchards. There are several phenomena of low temperatures, such as frost and freeze.

These terms are often used interchangeably but refer to two different weather events. The term freeze is normally used to describe an invasion of a large, very cold air mass. This event is commonly called an advective or wind-borne freeze. Wind speeds during an advective freeze are usually more than 8 km/h (5 mph) and an additional wind speed of 5 km/h results in an additional temperature drop of 1 degree. Clouds are commonly present during the event and the air is usually quite dry (low dew points). Freeze protection systems are usually of limited value during this type of severe freeze.

A radiational frost, also called a radiational freeze, typically occurs when winds are calm (usually 0 to 5 km/h) and skies are clear. Under such conditions, an inversion (i.e. deviation of temperatures in ground and upper height) may form because of rapid radiational cooling at the surface.

Most people think of frosts as frozen moisture on plant surfaces. However, there are two types of frosts: a hoar or black frost and a white frost. Visible frost (forms small crystals) occurs when atmospheric moisture freezes on plants and other surfaces. Dew (free water) forms when air temperature drops below the dew point temperature. If temperatures continue dropping on cold nights, this dew may freeze (forms frost) by sunrise. When the air temperature is below the freezing point of water, ice crystals rather than dew forms and the frost is called white frost.

The temperature at which this occurs is called the frost point. When the dew point temperature is below the freezing temperature of the air, neither frost nor dew forms. Such a condition is called black frost. The development of frost depends on the dew point or frost point of the air. And the drier the air, the lower the dew point.

Temperature distributions are uneven even on farm level

When it comes to temperatures, not all farming sites are equal, even when located in the same general area. There are numerous factors that can affect minimum temperatures during freeze events.

Chart. Example of different temperature distribution on vineyard. Data source

For example, temperature differences in hilly terrain are quite common on cold nights. As air near the surface is cooled on radiational frost nights, it becomes denser and flows downhill to lower areas where it collects.

Within a given area of a farming region, the most elevated sites tend to be the warmest during freeze events. The trees on northern slopes are much more and severely damaged by the extremely cold and dry winds during advective winter/spring freeze events. Soil characteristics can exert a microclimate effect.

Moreover, the experience has clearly shown that orchards may become active a little earlier in late winter on heavier, clay type soils and/or darker coloured soils (such as reds and blacks) than on lighter coloured, sandy soils. Although the latter tends to warm up faster, but they reflect more heat during the day (trap less heat) and lose it faster during the night.

Human-induced impacts can also be significant. For example, large areas of paved roads, such as interstate highways release substantial heat on cold nights, and this combined with heat released by vehicles and air currents created by traffic, can sometimes provide a beneficial effect to several rows of trees located close to such highways.

Damage to fruit & berry yields, caused by low temperatures

Damage to floral structures may take many forms. Frost on flowers or fruit does not kill the tissue, but it can scar the skin of the fruit and possibly damage the flesh. The internal freezing of tissue of buds, flowers and fruits is what causes serious damage or death of the floral parts. When small floral structures such as flowers or fruits freeze, they may take on several forms of damage. Severe temperatures usually destroy the entire buds, flowers or ovules (immature seed) and ovaries comprising small fruits resulting in rapid abscission of the structure.

Damages from freezes depend on the development stage of the fruit crop. For example, apple trees, during the dormancy period, partial damage of flower buds may be possible, if the air temperature drops to -25 ⁰C, complete damage, if the air temperature drops to -35 ⁰C. The warm December phenomena keeping trees still vegetating creates big trouble for further winter frost tolerance for some types of berries and fruit trees.

Chart. Trend, that witnesses the second half of December is getting warmer and warmer in the South-Eastern part of Poland. Data source: GrECo Group analysis

After resumption of the vegetation temperature at which ground frosts lead to partial damage to apple trees is much higher, e.g. at full blossom stage is -2.9 ⁰C leading to partial loss and -4.7 leading to full loss.

Generally, the crop sensitivity to freezing temperature increases from first bloom to small-fruit stages, and this is when a crop is most likely to be damaged. Sensitivity is also higher when warm weather has preceded a freeze night than if the cold temperatures preceded the freeze.

Insurance against spring frost

Risk prevention measures that lead to the heating of the orchard or vineyard environment (propane heaters, wind machines, irrigation above and below trees, smoke, helicopters, etc.) are sometimes not accessible to farmers in time or do not function properly or fully under certain weather conditions. Therefore, the insurance policy still remains the final frontier to compensate financial outcomes, when frost impact mitigation measures do not work in full.

On the other hand, despite the fact that the government subsidizes crop insurance, such protection tools for fruit and berry crops are not accessible for farmers in many CEE countries. It is explained merely by two main reasons. Firstly, insurers are very cautious about such types of farming, as underwriters and loss adjusters are not well experienced in this area, hence, more focused on more understandable and basic field crops. Secondly, historical big losses and several bad years in a row have made insurance companies to reconsider crop insurance conditions by imposing higher deductibles, increasing insurance rates and bringing stricter underwriting and loss adjustment criterion (e.g. covering only late spring frosts in May).

In our view, stronger public-private partnership in agriculture should be needed, such as, educational horticulture programmes for insurance companies, participation of the government in reinsurance schemes, creating greater product awareness in the market through rural associations, linking with other types of financial support, etc., to regain insurers’ confidence in underwriting this type of risk as a sustainable and profitable business in the long term. In its turn, it will make insurance products more accessible and affordable to the segment of horticulture.

Parametric insurance as an alternative frost risk transfer

The parametric (index) spring frost insurance is an innovative way to financially protect owners of orchards, vineyards and fruit/berry processors against the consequences of bad frost years. In most cases, the parametric policy is offered as the only possible way to cover the risk, which is non-insured by a standard crop insurance policy.

With parametric insurance against frost, the event is insured if the minimum temperature within the risk period is below a certain temperature.

As long as such a minimal temperature condition occurs, the farmer gets the specified amount of insurance indemnity depending on the value of the actual temperature.

Despite advantages of parametric solutions, such as transparency, less paperwork and simplicity of insurance compensations, the insurance market faces the big challenges of basis risk and availability of suitable weather data to insure frosts.

Basis risk in parametric (index) insurance means when the index measurements do not match an individual insured’s actual losses. There are two major sources of basis risk in index insurance. One source of basis risk stems from a poorly designed model and the other from geographical elements.

The good frost parametric model should be based on accurate on-site weather data and consider at least, the fruit/berry development stage and the right frost tolerance parameters for specific types and varieties of crops. Additional factors like windspeed, temperature dewpoint and warm preceding days can be also considered in order to enforce the model. However, regardless of the final perfect model, the basis risk cannot be eliminated.

Conclusion

Frost is a big challenge to the resilience of the horticulture supply chain. There are ways to mitigate partially its impact on yields and compensate financial losses thanks to crop and parametric insurance. On the other hand, a lot of work should be done by professional agricultural insurance experts to design the robust insurance scheme, suitable to the farmer’s and fruit/berry processor’s needs.

Used data sources:
Frzweather
Fao.org
Fao.org
Index Insurance Forum

Related Insights

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Knock on wood

Interesting facts about forests, the risks associated with them, and a little about how to insure them

Forestry insurance is still undervalued but can be a really good tool to reduce losses in the wood-processing supply chain. This year, it has become relevant especially for tourism in some countries where wildfires have created activity restrictions in specific areas.

Forest world

It is estimated that nearly 1/3 of the global population depends on forest goods and services for livelihoods, food security and nutrition. Tree stands outside forests contribute to the four dimensions of food security (i.e. availability, access, utilization and stability) by providing income, employment, energy, ecosystem services and nutritious foods.

Globally, about 1.15 billion ha of forest are managed primarily to produce wood and non-wood forest products. In addition, 749 million ha are designated for multiple use, which often include the production. Forestry is an integral part of the wood-processing industry. There is less and less natural forest on earth. On the other hand, the growing new plantations are developing very well. Many big wood-processing companies started doing vertical integration of their traditional facilities with forestry in order not to be fully dependent on external suppliers.

Source: Global Forest Resources Assessment 2020 – Key findings. Rome: FAO. 2020.

Source: Global Forest Resources Assessment 2020 – Key findings. Rome: FAO. 2020.

The area of naturally regenerating forests has decreased since 1990 (at a declining rate of loss), but the area of planted forests has increased by 123 million ha.

Forests cover nearly 1/3 of land globally. That is 4.06 billion hectares. In other words, there is around 0.52 ha forest for every person on the planet. More than half (54%) of the world’s forests are in just five countries: the Russian Federation, Brazil, Canada, the United States of America and China. 93% of the world’s forest area consists of naturally regenerating forests and 7% is planted.

Source: Global Forest Resources Assessment 2020 – Key findings. Rome: FAO. 2020.

More and more damage to forests

Forests face many disturbances that can adversely affect their health and vitality and reduce their ability to provide a full range of goods and ecosystem services. For example, about 98 million ha of forest were affected by fires in 2015. Insects, diseases and severe weather events damaged about 40 million ha of forests in 2015, mainly in the temperate and boreal domains.

The world’s climate is changing. Increased temperatures and levels of atmospheric carbon dioxide as well as changes in precipitation and in the frequency and severity of extreme climatic events are just some of the consequences. These changes are having a remarkable impact on the world’s forests and the forestry sector, e.g. through longer growing seasons, shifting ranges of insect pests and an increase of forest fires.
For example, in 2019 in Europe and MENA regions fires of greater than 30ha were observed in 40 countries and a total burnt area of 789 730 ha was mapped, which is nearly four times more than in 2018.

More and more damage to forests

  • In 2020, Siberia experienced a record-breaking heat in early summer, up to 38°C, and 14°C above normal; this exceptional climate situation has increased fire activity north of the Arctic Circle.
  • In July 2018 in Greece, several fires started around Athens during high fire danger conditions (i.e., hot, dry, windy weather). With flames reaching 30 meters high, fires spread fast and reached settlements, taking the population by surprise. 100 people died, 1650 homes were destroyed, and nearly 1,500 hectares were burnt.
  • In 2017, lightning-caused fires sparked in Portugal during severe fire danger conditions, burning over 500,000 hectares. 120 people died, many trapped in their cars while trying to drive away from the fast-spreading fires.
  • In 2018, unusually warm and dry conditions favoured the spread of fire across Scandinavia. Sweden was particularly impacted, with 25,000 hectares burned, mostly forests, in a country where timber is major source of revenue, and between 300-500 people were evacuated
  • In 2020, wildfires in the exclusion zone of Chernobyl in Ukraine, burned nearly 50,000 hectares.
  • In Poland in 2020, during prolonged drought conditions, human-caused fires spread through the Biebrza National Park, the largest protected area in the country. Fires burned nearly 6,000 hectares, or 10% of the park, which is home to exceptional biodiversity.

    The latest data on massive fires in 2021 can be summarized in the graphic below.
Source: Wildfires ravaging forestlands in many parts of globe

Source: Wildfires ravaging forestlands in many parts of globe

Stormy seasons
Climate change is not only associated with dry days and high temperatures, but also with more catastrophic wind speeds. The main losses are therefore damage to timber, pulp and logging, restoration costs and the loss of production capacity on forest land.

Source: Biggest windthrow volumes

There are various scenarios of damage after the storm:

  • Trees that are completely overturned but with part of their root system still in the ground may survive for a considerable period – little loss.
  • Trees that are partly overturned and are left leaning will continue to grow but may produce significant quantities of reaction wood in subsequent years.
  • The most harmful is breakage of wood <10 m. Stem breakage is more common on frozen soils or sites with deeper soil, and therefore better anchorage, especially forest brown soils or deep littoral soils.
  • If the degree of damage is less than 10%, no immediate management action may be required; if it is 10-30%, removal of the damaged wood must begin before it is damaged; and if the degree of damage is 30-40%, foresters usually clear the entire site.

Secondary losses resulted by storms:

  • Hail may cause big losses in nurseries and during the period immediately after planting out in the plantation; one consequence is a temporary impairment of growth;
  • Snow – the weight of snow has produced few claims in the past;
  • Ice is more devastating than snow weight; rare but can be widespread (e.g. Eastern Canada 1999);
  • Flood – Flood risk depends on location (floodplains) and vulnerability to water intrusion.

Forestry insurance

As for insurance, 2/3 of forests are insured under property policies, 1/3 of forests are insured under forest policies. The premium volume is estimated at around USD 150 million. The insurance cover is about 10% of all plantings

Source: SwissRe forestry presentation (agriinsurance conference in Istambul 2018)

The main risks that are covered by standard forestry “damage-base” insurance is fire, lightening and windstorm. Additionally, hail, ice, snow, flood and earthquake can be insured. Pests & diseases are main exceptions from the coverage but can be additionally indirectly insured via parametric insurance if there is strong correlation between the weather factor and the occurrence of higher pest populations and the spread of diseases.

There are several approaches to assessing the sum insured:

  • Establish a value of the timber per ha. This should reflect the tree species, age & yield class.
  • Cost approach. The total costs actually incurred to date for the establishment and maintenance of the forest (in the case of very young forest stands)
  • The purchase value of a forest stand. It values a forest at the value at which it would be sold if it were harvested at that time, e.g. stumpage method or fair value (standard IFRS 13)
  • Simply define (first) loss limits per m3 or ha. It is agreed that in the case of a loss the forest owner gets a maximum or fixed amount per m3 timber. Advantage: fast pay-out after a loss event.

Parametric forest insurance

Hurricane and forest fire risks can also be insured with parametric policies. Storm data are usually provided in the form of wind speed maps by independent private data providers. Based on this, the insured area will be divided into different speed zones. For each speed zone, a certain fixed indemnity is determined according to the insurance contract.

Regarding parametric fire insurance, data on burned-out areas can be provided from satellites (MODIS, Sentinel, etc.), based on the actual value of the insurance index is determined. The trigger for this policy is the minimum burn-out area.

Related Insights

Creating confidence in livestock production and supply-chain

The livestock supply-chain is one of the three major concerns and areas of activity of the Food & Agriculture Organization of the United Nations (FAO), aimed at increasing resilience in respect of threats and crises that affect agriculture, food and nutrition.

Epizootics are the global concern

So called epizootics – animal diseases – are of more and more concern not only for the farming society, but also for whole countries and regions, as they even can cause problems to human health. Therefore, this topic has become part of the general food protection policy.

The need to fight against animal diseases at global level led to the creation of the Office International des Epizooties through the international Agreement signed on January 25th, 1924. In May 2003, the Office became the World Organization for Animal Health, but kept its historical acronym OIE.

One of the main missions of the OIE is to collect information from its member countries on the presence and distribution of animal diseases and the methods used to control them, the purpose being to avoid the spread of epizootic diseases at international level.

At the moment 16 diseases are monitored monthly and contained in the o called OIE List A, namely:

  • Foot and mouth disease
  • Swine vesicular disease
  • Peste des petits ruminants
  • Lumpy skin disease
  • Bluetongue
  • African horse sickness
  • Classical swine fever
  • Newcastle disease
  • Vesicular stomatitis
  • Rinderpest
  • Contagious bovine pleuropneumonia
  • Rift Valley fever
  • Sheep pox and goat pox
  • African swine fever (ASF)
  • Highly pathogenic avian influenza

These are classified as “Transmissible diseases that have the potential for very serious and rapid spread, irrespective of national borders, that are of serious socio-economic or public health consequence and that are of major importance in the international trade of animals and animal products.”

Development of African Swine Fever and avian influenza during last decade

The best-known epidemics, that are treated in plenty of mass media, are African Swine Fever and Avian Influenza (“Bird Flue”). For example, a massive outbreak in China wiped out at least 40% of China’s pigs in 2019. In some countries of Central and Eastern Europe ASF has been present since 2014 and is not over yet, as the human factor and the presence of infected wild boars spread this disease significantly.

African swine fever (ASF) is a devastating infectious disease of pigs, usually deadly. No vaccine exists to combat this virus. It does not affect humans nor does it affect other animal species other than pigs and wild boars. It can be transmitted either via direct animal contact or via dissemination of contaminated food (e.g. sausages or uncooked meat).

The ASF virus spread to Europe for the first time in 2007 through the Trans Caucasus Countries and the Russian Federation. The next massive outbreak occurred in 2014 affecting Russia, Ukraine and Baltic countries and is lasting until now and moving to the West of Europe.

Dynamics of number of ASF on farms in some countries of Europe (data from the EU Animal Disease Notification System).

20142015201620172018201920202021(till Feb.21)
Bulgaria14419
Estonia18613
Greece1
Italy40162317101
Latvia3210381013
Lithuania613193051193
Moldova2
Poland21208110948103
Serbia18161
Romania2116317241053112
Slovakia1117
Ukraine12410542231

In addition to the cases mentioned above, ASF was found in wild boars in Germany, Belgium, Hungary and Czechia.

Avian Influenza (AI) or “Bird Flu” is a highly contagious viral infection which can affect all species of birds and can manifest itself in different ways depending mainly on the ability of the virus to cause disease (pathogenicity) and on the species affected.

Influenza infections in birds are divided into two groups based on their pathogenicity:

  • Highly Pathogenic Avian Influenza (HPAI): spreads rapidly causing serious disease with high mortality (up to 100% within 48 hours) in most poultry species (except domestic waterfowl)
  • Low Pathogenic Avian Influenza (LPAI): causing generally a mild disease, may easily go undetected

While the risk from Asian H5N1 is low for most people, sporadic human infections with Asian H5N1 virus have occurred in some Asian countries. Most human infections with Asian H5N1 viruses in other countries have occurred after prolonged and close contact with infected sick or dead birds.

We can witness a new wave of Avian Influenza in Europe, which started at the end of December 2019 in the Netherlands and Poland and spread for the next 12-15 months over whole Europe.

Dynamics of spread can be seen on the pictures below (data from EU Animal Disease Notification System):

Risks in supply-chain and how they are managed

Usually, if an epizootic disease occurs in a part of the farm’s premises, all animals of the farm will die or will be slaughtered upon order by the state authorities. It leads to the total loss of animals on a farm. Moreover, besides material damage related to animals, the farm suffers losses caused by the interruption of activities, as it takes time to slaughter, transport and utilize animals, disinfect premises and keep them closed for enforced quarantine time (3-12 months), then implement an additional 1-3 month testing period and fill in the full production cycle. Therefore, business interruption loss of gross profit can be a much more substantial loss than just the loss of culled livestock.

Besides the risk of having the virus inside the farm, there is also the risk of government restrictions for animal transportation, if the farm is trapped into a risk control or surveillance zone, which can reach a radius of up to 20 km from the epicenter of the outbreak.

In addition, according to EU legislation, there is special zoning of infected areas, where additional limitations are imposed and its derogation requires some compliance with veterinary rules, if the farm wants to proceed transporting live pigs to non-affected areas of the same country or of another EU member state. Such necessary measures can lead to additional increased cost of working for a long period of time.

It can be said that in respect of epizootic scenarios slaughterhouses and meat processors are not the less vulnerable. On the one hand they are dependent on stable supply of live pigs or fresh meat, and on the other hand export markets can be unexpectedly closed as long as epizootics occur in the country where they are located. The latest story of this sort happened in Germany, when the Chinese government immediately closed the border for producers of German pork after the first infected wild boar was found on German territory. In terms of disruption of the supply-chain, the main sources of risk of a slaughterhouse and a meat processor are as follows:

  • Virus found on premises of a slaughterhouse or a meat processor.
  • Virus found on premises of a farming supplier.
  • A large number of farming suppliers are trapped in control or surveillance zones, which leads to constraints in the movements of finishers for slaughter and further processing.
  • The slaughterhouse or meat processor is trapped in control or surveillance zones.

Moreover, events associated with epizootic outbreaks can make farmers or slaughterhouses liable to compensate claims, brought against them as consequence of the 3rd party’s product recall and product contamination costs and direct damage to the contingents.

In order to prevent the spread of epizootic diseases and to compensate for the financial consequences of events occurred, governments deploy legislation in relation to:

  • basics of strict bio-security measures on farms;
  • measures taken by authorities regarding the destruction of affected or suspected animals and the prevention of further spread of the disease;
  • long-term zoning in order to regulate movement of livestock and meat products;
  • financial compensation for the value of killed and culled animals.

On a microlevel, the farmers and meat processors implement special bio-security audits, put additional investments into the improvement of bio-protection and prevention measures against the occurrence of diseases on farm premises, develop business continuity plans in order to be ready to react and modify their business model in the event of a disease. Based on the GrECo Food&Agri practice, our cooperation with farmers and breeders’ associations in several countries, we count about 100 factors of bio-security that can be analyzed and afterwards implemented in order to reduce this risk.

Insurance solutions to mitigate financial losses

The ultimate parachute each livestock breeder and meat processor should definitely possess is a livestock insurance policy. We can witness that even the modern farms, that invested a lot in biosecurity, have suffered the emergence of African swine fever or bird flu on their grounds.

When designing a livestock insurance program, one should take into account the following:

  • we need to avoid an overlap with government compensation of the value of the killed and culled livestock, which is usually financed by authorities (e.g. in EU);
  • on the other hand, in many countries the government usually does not fully compensate 100% of animal value;
  • for vertically integrated meat producers, it is recommended to consider business interruption insurance coverage rather than pure material damage;
  • meat processors can be offered a livestock contingency BI program, which covers loss of gross profit as a result of disruption of livestock supply.

GrECo works with up to 20 international markets who can offer standard or bespoke livestock insurance solutions. Unfortunately, livestock material damage coverage is getting harder and harder to be placed, as insurers’ appetites in respect of CEE/SEE regions are quite low. Insurance and reinsurance companies are aware of the ongoing epizootic situation in this area, especially regarding ASF and HPAI. However, some innovative solutions and schemes have been developed by our Food&Agri practice to partially overcome such challenges. One should also not forget that any insurance of exposed risks should go alongside with risk management services consisting of bio-security audits and business continuity plans, that can be provided by our special GrECo Risk engineering department.

Related Insights