Choosing the right risk management strategy in Food & Agriculture

Risk Mapping analysis performed by a young man

The most challenging thing about risk mapping is risk assessment. For example, how to determine the maximum loss from a crop shortfall? Risk mapping is a good starting point for implementing a holistic approach to risk management for any company and a suitable guiding star for optimizing insurance costs for maximum efficiency.

In the ocean of uncertainty

Risk managers often ask themselves what to insure first. Between cost and potential benefit, what should we choose? Depending on the combination of frequency and severity, the enterprise decides:

  • Transfer the risk to, for example, an insurance company
  • Retain the occurred loss
  • Avoid the risk
  • Reduce the frequency of losses.

Food & Agriculture customers use the methodology developed by us to map 100 insurance risks, divided into 12 categories:

  • Commercial property;
  • Property in construction;
  • Stock;
  • Software;
  • Money;
  • Business Interruption;
  • Crops;
  • Livestock;
  • Transport;
  • Transport Liability;
  • The other liabilities;
  • Personnel.

A Risk Map is a graphical depiction of a select number of a company’s risks designed to illustrate the impact or risk’s significance on one axis and the likelihood or frequency on the other. Risk mapping assists in identifying, prioritizing, and quantifying risks to an organization. This representation often takes the form of a two-dimensional grid with frequency (or likelihood of occurrence) on one axis and severity (or degree of financial impact) on the other axis; the risks that fall in the high-frequency/high-severity quadrant get priority risk management attention.

For each category, we analyze risks as follows:

  • Frequency level;
  • Severity;
  • Insured or not;
  • If you plan to insure within 12 months:
  • Estimated maximum loss.

    There are five organizational steps to making a risk map:
  • Appoint a risk committee / responsible team;
  • Define risk;
  • Identify the risks;
  • Assessing risks;
  • Prioritization matrix.

The most challenging thing about risk mapping is risk assessment. For example, how to determine the maximum loss from a crop shortfall? Do we need to account for one growing season with poor productivity, or do we account for a 3-5 year cycle during which we need to estimate the total yield loss? How do we account for the inverse correlation between crop yields and agricultural commodities prices, which is high for crops in some regions? What about a negative global warming trend, on the one hand, but improving agricultural technology and productivity, on the other? Estimating the frequency and severity of losses is also challenging for cyber risks. How can we assess the loss in the event of business interruption for non-property damage? Sometimes it takes time for a company and its consultants to develop the correct methodology and gather enough information.
Risk mapping is a good starting point for implementing a holistic approach to risk management for any company and a suitable guiding star for optimizing insurance costs for maximum efficiency.

This article is a part of our Foodprint publication focusing on issues and risks facing the Food & Agriculture industry. Read the publication and learn more about insurance solutions and the growing importance of risk management and alternative solutions like parametric insurance.

Related Insights

Johannes Vogl

General Manager GrECo Risk Engineering

T +43 5 040411160

How to feed the world and save the planet?

Food insecurity and Food insurance

Tackling the challenge of feeding the world, while solving environmental problems and preventing further global warming is not an easy task. The latter implies curbing and reducing the intensification of agriculture.

Half of the world’s GDP is tied to nature, be it food production or water supplies. The United Nations estimates that 840 million people will be affected by hunger by 2030. How can we feed the 7.9 billion people without exceeding the limits of our planet?

Climate change is just as evident. The intensification of agriculture, which has resulted in high nitrogen emissions, exacerbates the problem. It accounts for nearly 11% of the greenhouse gas emissions in the world. Particularly concerning are nitrous oxide emissions from over-fertilization of land, which is 300 times more potent than carbon dioxide, causing global warming.

Tackling the challenge of feeding the world, while solving environmental problems and preventing further global warming is not an easy task. The latter implies curbing and reducing the intensification of agriculture.
Curbing agriculture may lead to a reduction of land used for agricultural purposes, less protection of crops, and, as a result, less crop production. At the same time, this spurs outside-the-box thinking to find a compromise that could solve the dilemma. New ways of more efficient agriculture, producing healthier pesticide-free products in smaller areas well protected from production risks (pests, diseases, natural disasters, etc.) could be the solution.

Preserving nature

The EU Green Deal developed in 2020 is a roadmap to more sustainable economies. It sets new targets for achieving greener agriculture over the next ten years by:

  • reducing the use of chemical and more hazardous pesticides by 50%,
  • reducing nutrient losses by at least 50%,
  • reducing fertilizer use by at least 20%, and
  • reducing the sale of antimicrobials for farmed animals and in aquaculture by 50%
  • helping the EU organic farming grow, aiming at 25% of total farmland by 2030.

New technologies for global problems

The development of digital technologies, precision farming and the use of artificial intelligence can help humankind to some extent to produce sufficient food while conserving natural resources. For example, artificial intelligence and nanotechnology can improve crop and soil yields while maintaining soil health and protecting the quality of the environment.

New risks in the transformation of the food and agriculture sector

How can we help farmers cope with crises while still providing a fair and reliable income base? How does the food industry adapt production and distribution processes to meet challenges of both climate change and government efforts aiming at making agriculture more environmentally friendly? Without a doubt, the food and agriculture sector is subject to changes and transformations. However, these very same changes also bring about new risks. The time has come to think ahead, identify risks, and prevent and reduce potential losses.

Management more exposed to claims under new rules

Increasingly, management decisions are guided by compliance with new rules, primarily related to preserving the environment and maintaining public health, i.e. in line with the EU Green Deal. As a result, the insurance industry will have to deal with potential new claims made against directors, government officers, shareholders and other stakeholders.

More cyber risks in the food and agriculture sector

More reliance on digitization means increased cyber threats. Modern and fully automated IT farms, for example, may suffer from business interruption and losses caused by cyber-attacks, software failures or human error.

Supply chain sustainability

Climate change creates new challenges for farmers and the food industry and may result in catastrophic losses.
It is prudent to plan and consider alternative resources, increased costs due to additional transport requirements or even a limited supply. In addition, one should not lose sight of the new risks of a pandemic. These can be substantial, as the COVID-19 crisis has shown since 2019. Various business sectors registered a serious shift in the structure of demand and experienced restricted labour mobility. Personnel in the health sector were hard hit, timely availability of basic resources was a challenge for farmers and the food sector, and different channel infrastructure was built to ensure food delivery. New biosafety requirements were set up, delays and disruptions in transport and logistics services became the order of the day, and the costs of international freight transport surged. Many of these consequences continue to affect businesses and human lives.

Business interruption coverage in the spotlight 

The insurance industry is set to increasingly focus on business interruption products.

Nowadays, livestock insurers opt for gross profit loss insurance rather than animal value insurance. At the same time, every hectare of land will have a higher value. Because they are subject to risks associated with reductions in inland areas, there is an increase in the industry capital intensity and its digitization. 

Moving from conventional to organic farming despite higher production risks

The sustainable yield performance of organic farming is still questionable. Historically, conventional agriculture provided better-guaranteed protection of yields against adverse perils. The rapid transformation of many areas from conventional to organic farming entails additional yield production risks. These should be taken into account and handled accordingly.  

Modification of agricultural resources and new farming methods leads to new liability risks

New crop varieties, chemicals and fertilizers will be created because of the increasing need to fight hunger and save the planet. Any modifications involve unknown risk factors for property damage and personal injury and, therefore, may lead to additional claims and costs of product recalls. As an example, there are specific concerns and doubts about the effects of genetically modified organisms (GMOs) on humans.

Several incidents cast a shadow on the safety of GMOs and, importantly, on the ability to control the spread of these organisms in food production and distribution networks, not to mention the environment in general. 

Increased risks due to a lack of water

Water, the world’s most precious resource, also plays a crucial role in solving agricultural problems. Water is one of the crucial factors in irrigation facilities deployment as more rainfed lands need to be irrigated due to desertification, resulting from global warming. Unfortunately, many natural water sources have also become unreliable, more polluted, or both.

PPP in agricultural insurance will gain in importance

Stepping up public-private partnerships by introducing new agricultural insurance products to better protect farmers against catastrophic risks, such as drought and epizootic diseases, will help improve the agricultural sector’s financial sustainability. Governments will be challenged to find ways to encourage farmers to buy more agricultural insurance. They may have to introduce compulsory baseline production insurance, tie prerequisite insurance policies to other government support, develop other measures to prevent the risk of crop and animal loss, and help farmers to define effective mechanisms to reduce losses. 

Insurance specialization will intensify

The insurance sector is undergoing a significant change. Already, we are experiencing increasing digitization, ready-made basic solutions and artificial intelligence, which will ultimately automate the communication between the client and the insurer. However, the food and agriculture sector will continue to require highly professional advice from insurance experts who understand the industry, speak a common language, and can develop and tailor the right solutions.

In response to the increasing impact of climate change, the spread of epizootic diseases and the new impact of pandemic risks to humans, GrECo Holding has begun to offer new risk management programmes for clients active in food and agriculture sector.  

This article is a part of our Foodprint publication focusing on issues and risks facing the Food & Agriculture industry. Read the publication and learn more about insurance solutions and the growing importance of risk management and alternative solutions like parametric insurance.

Related Insights

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Feed the planet: FOODprint 2022

Couple reading FOODprint

Managing the risks in Food & Agriculture is particularly important as any business activities in this industry – from farmers, breeders and producers to suppliers, supermarkets, and restaurants – help maintain stability in our society. Their financial resilience is also key to the supply, processing, distribution, and protection of food.

In our new publication FOODprint, we address a variety of topics and insurance solutions and also highlight the growing importance of risk management and alternative solutions like parametric insurance.

Some of the highlights in this edition of the FOODprint include:

  • Epizootics are a global problem: Learn about the way to protect against risks and minimize losses for meat farmers and processors;
  • International vs Local Insurance: Find out how do Food & Agriculture companies insure their plants abroad;
  • How to insure the uninsurable – Take a look at practical applications of Parametric insurance;
  • In the ocean of uncertanity: Choosing the correct risk management strategy in Food & Agriculture is hard. Read about how we approach risk management.
Read the FOODprint 2022

Related News

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Crime Insurance: Insure Your Food & Agriculture Company

Secrets about Crime Insurance

Crime Insurance provides coverage for events not covered by most property or liability insurance policies.

Different Crime Insurance Clauses

There are several ways that businesses could be exposed to crime, both from within the organisation as a result of employee infidelity and from third parties. Crime Insurance provides coverage for events not covered by most property or liability insurance policies:

  • Clause 1 – Employee Infidelity: This clause protects the company from dishonest and fraudulent acts of the employees. This is the major source of all crimes committed against companies worldwide. The clause is very broad and covers almost any crime committed by an employee, whether alone or in collusion with others (both other employees and third parties such as crime gangs) which causes a loss to the company.
  •  Clauses 2 & 3 – Premises and Transit: This is the physical and stock cover for the company and will cover burglary and armed robbery by third parties. It can cover everything from machinery to stock to cash on-premises and has the benefit of covering valuables when in transit as well. Whilst not as effective as a cargo policy, this can provide contingent cover where a third party has a loss, and their insurance does not act.
  • Clauses 4-6 – Forgery and Counterfeiting: These clauses cover the forgery of documents holding a real value and are relied upon by the client for processing cash settlements or disbursement of cash.
  • Clause 7 – Damage due to any of the above clauses: If there is damage to any property as a result of a theft or robbery, then this can be added to the claim. A typical loss here is the destruction of a safe.
  • Additional extension on Computer Crime and Telephonic Crime: This covers the loss to the company by use of a computer or telephone and can have a very broad scope. It is in effect the cover for robbery or theft using a computer rather than a weapon or forced entry. These types of loss are rising due to the less severe penalties for being caught and the fact that they can be carried out remotely, thus lessening the chance of being caught. 

Nature of the Product to be Stolen

As with most businesses, there is a specific risk from the behaviour of employees and some of the causes are listed below. With Agribusiness there is the added threat that they deal in the most stolen goods worldwide accepting cash. There is a simple way of calculating the desirability of products and food that tends to meet all of the definitions to a high degree.

When looking at the product we must consider three themes and if the answer is yes to all three then it is an at-risk product:

  • Desirability – Do people want/need the product?
  • Portability – Is it easy to steal, especially in large volumes?
  • Saleability – Is it easy to sell, would it attract attention to the seller doing s

For example, in Poultry business we can see the following:

  • Desirability – Chicken is the most widely bought meat worldwide and so we can see that there is a demand for chicken products. 
  • Portability – Due to the nature and volume of sales it is surprisingly easy to steal poultry. A faked invoice or paying off the warehousemen or guards on the gates of the processing plant will allow a thief to drive right up to the plant and collect their haul.  
  • Saleability – People want poultry products, and whilst cheap poultry will raise a few eyebrows, it is unlikely that people will turn down the opportunity for cheap food. Selling on a market stall at a food market or arranging with a retailer to buy the products will make this easier, and the police are less likely to question the sale of chicken in this environment. 

So we can see that the products are at real risk, employees working hand in hand with outside groups can cause large losses very quickly here. In the agriculture sector, we have seen numerous large losses worldwide, and usually in basic food such as milk, meat, bread and cereals rather than finished products.

Typical Crime Losses for Food & Agriculture

There are multiple different potential crime losses for Food & Agriculture companies.

  • Addiction Issues  – These individuals start not wanting to be frauds but rapidly turn into a problem for the employee. Typically, they will have a drug, alcohol or gambling issue and will ‘borrow’ money to rectify an immediate situation, always to pay the money back. Usually, the problem spirals out of control and they start taking more and more to fix the problem until they finally realise that they cannot do it and flee. Whilst not the largest losses they can reach some big figures and 1 Mio. EUR is not uncommon, although figures in the hundreds of thousands are more likely.
  • Blackmail   – A member of staff is found in a compromising situation and criminals find out. They use this to force the employee to carry out some tasks to either enable them to access the employer (electronically or physically) or to simply force them to steal themselves. It can be anyone in a company, and losses can be from around 50,000 EUR for a straightforward taking of cash from the safe to millions of Euros from granting access to the computer systems. We see simple ideas such as leaving a door open to targeted blackmail on employees who hold passcodes for payments etc. in this example.
  • Invoice Fraud  – A member of staff who has control of tendering or contracts will conspire with a supplier to inflate invoices. Usually, they will split the difference between the ‘real’ price and the stated price. This will mean that either poor quality services are supplied or overcharged services with reasonable quality are given. This can very quickly add up, and if the staff member is allowed a level of autonomy in this area it can be hard to detect as they will often receive fake quotes to cover the fraud.
  • Delivery Fraud – This often works for hand in hand with either blackmail or general corruption. A gang will find a suitable member of staff who has access to warehouses or other storage facilities and find a way to get them to aid them in their plans. This can be through a simple cut of the profits (Improper Financial Gain) or blackmail. Either way, the staff member will grant them access to the facility through either forged paperwork or being there themselves to open the door. Whole lorry loads of goods can be taken, and losses can mount up quickly. Only when the goods are not paid for, the loss is discovered, which can be some time down the line. Achieving security against this can be difficult as the papers to release the goods will be official and unlikely to be queried at the gate.
  • Bookkeeping Fraud – A simple fraud that involves transfers of money, payments and general accounts of the client. No real sophistication to it – just plain theft. 
  • Social Engineering / Fake Presidents – These are two differing frauds but have the same method at their heart. Both rely on a level of trust either built up over time or gained by electronic means. 

    Social Engineering can take the form of regular phone calls building up a rapport, targeted emails (finding out the hobbies of a member of staff and then sending them links – Spear Phishing), or even working on an out-of-work friendship which then turns into a request for help. All of these come under the Social Engineering banner. Once the trust is established, there will be a request to transfer funds, either for a legitimate-looking reason or for help to the person conducting the fraud. Once the money is transferred, the contact usually ceases immediately.
     Fake Presidents is where a call is made seemingly from the CEO or CFO, usually on a Friday afternoon, requesting an urgent fund transfer. Usually, the reason is that if the transfer does not go ahead, a deal will fall through harming the company. The call will seem to come from the senior staff members but will be the criminals. They can hack phone systems to present the phone number of the person they are impersonating, use email addresses which are one letter different to the person etc. A less sophisticated version is hijacking emails and changing bank details at the last minute, in a deal to the fraudster’s account. 

Conclusion about Crime Insurance in Food & Agriculture

As we can see from the described above cases, “non-tangible damage” (financial) losses, caused by infidelity of employees or third-party criminals, can bring quite a significant gap in the balance sheet of any Food & Agriculture enterprise. On the other hand, such losses are not covered by a standard property damage/business interruption insurance contract. Additional commercial crime insurance policies are recommended. The indemnity limit of 1 million EUR costs starts from 50,000 EUR, as a rule, with the same amount of deductible.

Related Insights

Brian Alexander, GrECo Group Practice Leader Financial Institutions

Brian Alexander

Group Practice Leader Financial Institutions

T +43 5 04 04 342

Shylov Maksym, GrECo Practice Leader Food & Agriculture

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Cyber-attack – the heart attack of the companies

From a cyber perspective, there are only two types of companies: those that have been hacked and those that will be hacked.

When an agricultural producer gets hit by a ransomware attack, it comes close to collapsing its business. The last two years of our lives will forever be marked as the years hardest hit by the global pandemic COVID-19. But this period has also brought us other threats, namely the digital pandemic in the form of the rise of Ransomware cyber-attacks.

What is Ransomware?

It was an ordinary morning for the agricultural company which is one of the main dairy products producers in the region. The director of the company arrived as usual some time before the workers came to the factory, turned on his business laptop and noticed a disturbing message: “You are under ransomware attack, please follow the link for further steps.”

Ransomware is a type of malicious software or encryption program, placed by a hacker, that works by encrypting data on a network. To regain access to the data, it asks you to pay a ransom in exchange for a decryption key. Some researches (Coveware) show that a minority of companies that choose the ransom payment route, end up being forced to make additional payments or never getting access to their data.

Ransomware attacks have been one of the most common threats in the last couple of years. Business interruption periods increased from an average of 15 days (2020), now to an average of 23 days (2021). It should be also noted that the business interruption costs sometimes are as high as the ransom payment, or even exceed the amount. IBM’s 2020 Cost of Data Breach Report shows us that it took around 280 days to even identify a breach in a system, which gives us an insight into the ability and power of hackers to move stealthily and silently through a victim’s system.

Cognyte company, the security analytics agency, claims that the Manufacturing and Financial Services industries are the leading targets for ransomware hit, followed with a Transportation, Technology and Legal and Human Resources industries. Some examples are:

  • In 2016, Delta Airlines faced a major network outage that lasted for five hours and cost the company 150 million USD.
  • In October 2016, there was a DDoS attack on Dyn, a company that administers a major element of the web, that took down widely used websites such as PayPal, Twitter, Netflix, Amazon, and others.
  • In 2017, Maersk, a Danish shipping company, faced a cyber-attack that disrupted operations for two weeks, resulting in a loss of about 300 million USD.

Weak point RDP

According to the UK security company Sophos, one of the most distinguished ways is the widespread use of Remote Desktop Protocol (RDP). RDP is a system which allows remote users to connect to the desktop of another computer via a network connection. Usually it is used by organizations to allow employees to gain access to their networks while they are working remotely. If the port, which an organization uses for RDP access, is exposed directly to the internet, it is easy for malicious actors to find it, where they then attempt to gain access to an organization’s computer systems.

After the hackers gain access to the system, the next step is to break into organization´s local administrator account. This means that the attackers are using a computer program trying to crack the passwords by trying various password combinations in quick series. The longer and more complex password, the more difficult the job will be for hackers to crack the system. Unfortunately, in our case, the local administrator´s account had a weak password combination. Additionally, the absence of Multi-factor authentication (MFA) for RDP access, allowed the hacker to gain access to the organization’s network without having to go through a second verification procedure, such as entering a verification code.

The production was blocked and unfortunately the company did not have offline back-up stored on an external storage that could be used to restore them. After the activation of the business incident plan and connection with the external incident response team, the company decided that a ransom will be paid. After the payment and receiving decryption key, the recovery was started. As the whole process was time-consuming, it took around 14 days for the system to get fully recovered.

The benefits of cyber insurance

Due to having a cyber insurance policy, the company was able to carry out the whole process of recovery of data and ransom payment with highly skilled IT professionals. The costs which were covered under this cyber-attack were, above mentioned ransom payment, business interruption losses, business incident response, forensic investigation costs, crisis PR, privacy liability, compliance with the data protection regulatory bodies (GDPR) under the law regulated time.

Some important statistics (Indusface)

  • Organizations saw a record 225% increase in losses from ransomware attacks in 2020;
  • 53% of attacked businesses stated that their brand and reputation were damaged after a successful attack;
  • Around 26% of enterprises had to shut down operations permanently because of a ransomware attack.

From a cyber perspective, there are only two types of companies: those that have been hacked and those that will be hacked.

If you are interested about the possible insurance offers and the level of vulnerability of your company to cyber threats, contact us and team of our specialists will provide you all necessary information about the further steps.

Related Insights

Stephan Eberlein

Group Practice Leader Financial Lines

T +43 664 962 40 60

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)

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