Aquaculture insurers seek opportunities in China
Foreign aquaculture insurers are keen to sell to producers in China, where coverage remains limited. But a lot of challenges persist, explained Rui Gomes Ferreira, head of Longline Environment Ltd., a UK-based firm offering risk assessment and insurance surveys in China and Southeast Asia.
Aquaculture insurance covers the death of stocks due to a set of listed perils. A non-comprehensive list includes losses attributed to storm or typhoon damage, flooding or disease. While Asia accounts for 80 percent of global aquaculture output, “the lack of certain levels of expertise are not readily available in most countries outside of Europe, except for a select few such as the U.S., Chile and Canada,” said Gomes Ferreira.
Foreign insurers scoping the Chinese market include FP Marine Risks. While the bulk of the firm’s business comes from insuring cargo and ships, Jason Scott manages the aquaculture portfolio from London at FP Marine Risks, an accredited Lloyd’s broker with offices in Beijing and Hong Kong. “Our other offices do not have technical aquaculture skills as I co-ordinate the portfolio from London, at present,” said Scott.
Chinese insurance firms have shied away from aquaculture after taking heavy losses, partly because of an inability to assess risk. Local insurers Shanghai Anxin and PICC reported dreadful loss ratios in the 1990s with payouts 170 percent higher than premiums in some cases. By contrast, China Fishing Vessles Owners Mutual Association remains a successful mutual, non-profit insurance model.
Data from the China Insurance Regulatory Commission shows a surge in premiums for China’s insurance industry, as largely state-controlled local firms dominating the market modernize their operations with cash injections and expertise following stock listings. Agricultural premiums grew from RMB 500 million in 2003 to RMB 13.5 billion in total agri premiums in 2010. Of that, grain farming accounted for RMB 10.7 billion and fisheries and aquaculture made up the rest. Yet aquaculture dropped 27.8 percent premium in 2010, partly the results of a cost squeeze caused by a downturn in the seafood export trade.
Aside from storm damage from typhoons, Chinese producers have also suffered from outbreaks of white spot disease at shrimp farms, said Gomes Ferreira. Government and industry learned from disasters like Typhoon Chebi, which in 2001 devastated the Fujian coastline and cost seafood industry USD 270 million (only USD 600,000 of which was compensated by government payouts), according to Luo Ye and Ping Ying, researchers at the economics department of the Shanghai Fisheries University.
In a report for the UN’s Food and Agriculture Organization (FAO), Luo and Ping have pointed to several teething problems. One is talent, which means insurers have been relying on local government agencies for loss adjustment assistance. Also, while typically accepting policies on drought, fire and electrical breakdown terms, insurers have been unwilling to insure against diseases. Another huge challenge to insurers and the sector alike is the onset of red tides in China’s heavily industrial coastal belts.
Despite the obvious opportunities in Asia, aquaculture is challenged by cultural differences, local insurance legislation and a lack of awareness regarding the aquaculture insurance availability. There’s also an issue over the eligibility of local producers for coverage. Smaller Chinese operators, weak on stock control may be excluded, explained Gomes Ferreira. “Only the larger farms with good management practices are in a position to purchase stock or biomass protection, meaning many small-scale producers do not meet the minimum standards to purchase protection,” said Gomes Ferreira.
There’s a shortage of risk assessment skills and a reluctance of insurers to go beyond a select group of species with which their familiar. A lack of awareness is also caused by a lack of available product. The key factor is the distribution channel. Throughout China and Southeast Asia, “there are very few, if any local insurance companies offering this type of protection and only a few insurance brokers developing the business, meaning that producers from China to Indonesia are often unaware that they are easily able to insure their stock,” said Gomes Ferreira.
The opportunity to lift standards in the industry through aquaculture insurance will not have been lost on Chinese policymakers who have made a priority of improving rural incomes and spending. However, local restrictions limit foreign insurers from entering the market. As in many aspects of the Chinese economy, state-run giants control the most profitable business with marginal territory and difficult-to-reach prospects left to foreign players. While China’s insurance business is growing — USD 226 billion in overall premiums in 2011 compared to USD 170 billion in 2009 — foreign insurers control only 4.3 percent of the market, and that share has slipped from 6 percent in 2004. Foreign insurers like French based and agri-focused Groupama, however, have been prevented from building the kind of scale required to finance building branches necessary to service the geographically-spread aquaculture businesses.
On the other hand, as local players buy in more expertise, they’re more open to aquaculture insurance. The key challenge is finding a local insurance company to partner with “that is willing to work together with western insurance companies to market the product in China.” Gomes Ferreira believes one of the best ways to pass information to companies and producers is through local aquaculture associations as opposed to using direct distribution channels. “It is also important to be able to explain the product in a concise way to producers which again is a significant challenge,” said Gomes Ferreira.
FAO reports have highlighted the lack of knowledge of the benefits of insurance among producers and a lack of enthusiasm among reinsurers who have been hit with losses from algal blooms. Likewise, while governments have come to see the benefits of insurance and begun to offer policy support, a powerful state-dominated insurance lobby dominates the market in most Asian producer nations.
Still, Gomes Ferreira remains optimistic. “Once aquaculture insurance becomes more established in China, the demand will steadily increase. Even insuring a fraction of the Chinese aquaculture industry represents a very large premium income.”