Q&A with Rui Gomes Ferreira, CEO of Longline Environment Ltd.
Rui Gomes Ferreira is CEO of London-based Longline Environment Ltd. and an expert on the challenges and trends in expanding insurance coverage to aquaculture operations worldwide.
The absence of insurance coverage is one of the key challenges to the improvement of aquaculture in China, mainly because small-scale producers are discouraged from investing more in quality and don't have money to replace seedlings after disasters such as bad weather events. Aquaculture premiums totals are estimated to be around USD 120 million (EUR 115 million) globally, a figure that appears small in the context of the value of global aquaculture output.
SeafoodSource: Why is insurance coverage still so low for aquaculture, particularly in Asia?
Gomes Ferreira: Insurance cover is still low at a global scale for aquaculture due to asymmetries between demand and supply. Larger commercial aquaculture operations usually have a lower average cost of insuring, whereas the opposite is true for smaller operations. The development of insurance cover into both species and geographically has by and large continued to under-perform, and will likely be a long-term requirement for aquaculture insurance to become a mature product. On the demand side, aquaculture producers often fail to acknowledge the non-linearity of loss events, which makes probabilistic assessment of losses and frequency difficult to assess, as events are by definition disruptive and unpredictable. The recent algal blooms events in the east Pacific are an excellent example of the non-linearity of risks.
Aquaculture margins can be tight, and depending on the management philosophy, this could make an increased case for insuring, rather than against it, as the ability to absorb losses through self-insurance may not be the best strategy to maximize shareholder value. On the supply side, aquaculture insurers effectively benchmark global insuring cost against the loss record of the salmon market, which chokes development into other species and countries, that would allow adequate spread of risk, and lower the average cost of insuring. The supply side needs sustained positive feedback loops (good loss record) in order to make the product mainstream.
In Asia, the disparity between the demand and supply factors are even greater than in other continents, due to market structure, species selection, cultural disparities, that further distance producers and insurers from each other. As aquaculture insurance develops a balanced portfolio approach, with significant spread between species and geographic separation, the average cost of insuring will likely decrease, as a result of underwriting portfolio improvement. It is likely that once a sustained range of rates is obtained across the board, the Asian farms could undergo a shift into insuring aquaculture biomass.
SeafoodSource: In China, the continuing comparative absence of insurance cover for aquaculture appears to be connected to the highly fragmented nature of the sector as well as land ownership issues and the state-owned nature of the insurance industry. Are these factors common across many territories where you work?
Gomes Ferreira: China is special due to the fragmented nature of the aquaculture business, and that there are state-owned insurance companies that provide some form of catastrophe protection for farmers when non-linear or disproportionate events occur. Chinese insurance companies have gained a large amount of knowledge transfer from international insurers, which often assists Chinese insurance companies in offering the product locally. Specialist insurance classes development are broker-driven, and whilst China is the largest aquaculture market, brokers often prefer to concentrate their efforts in other territories.
SeafoodSource: Can you elaborate on how Chinese companies have achieved knowledge transfer and what kind of products have they localized in the aquaculture/fisheries sector?
Gomes Ferreira: Chinese insurance companies have achieved knowledge transfer in other agricultural insurance products, such as terrestrial livestock and related insurance products. We do not have knowledge of specific cases in the aquaculture and fisheries industries, however pilot trials are thought to have gone ahead.
SeafoodSource: Has scarcity and related price increases for many seafood species made producers keener to insure?
Gomes Ferreira: I don't believe that increased seafood prices have made producers keener to insure. Production costs across the supply chain are also likely to have increased, with recent spikes in the price of fish meal and other inputs. The increased involvement of financing entities and financial institutions that lend or invest in aquaculture companies, whom are volatility averse, are keen to obtain a degree of certainty in the business environment, have been driving the requirement for farms to insure their biomass.
SeafoodSource: You refer to the flexibility that the private sector requires – can you elaborate on this?
Gomes Ferreira: A number of government insurance programs have reduced flexibility in the structure of the insurance programs, with pre-set deductibles or excesses and additional terms and conditions that may not account for differences in needs across species, and risk-transfer appetite. By contrast the private sector allows a tailor made approach to aquaculture insurance, whereby clients can determine the level of coverage that is desired.
SeafoodSource: Can you give any example of where government and aquaculture producers have worked well to increase insurance cover?
Gomes Ferreira: Governments usually implement subsidized insurance programmes, which makes insuring more affordable to the aquaculture sector. Government programs often have a specific structure and lack flexibility that the private sector operators require. Some of the more successful programmes include Tarsim in Turkey and Aquiseguro in Spain, however, often aquaculture producers seek cover from the international market.
SeafoodSource: Have you seen much innovation from the insurance companies in catering products for aquaculture?
Gomes Ferreira: Most existing aquaculture insurance providers operate an indemnity-based product, whereby the physical animal is insured. A number of products are being developed, which allow aquaculture companies to insure against events that act as a proxy for the animal loss, such as wind speed or wave height, over an agreed time period. This type of cover is known as parametric insurance, however it also comes with its own set of challenges, including the requirement for independent data in order to determine event occurrence.
SeafoodSource: Can you give us an example of parametric insurance in the context of aquaculture?
Gomes Ferreira: A parametric cover is a financial instrument, similar to other instruments used to hedge financial exposures. The determining factors is whether a loss can be correlated with specific environmental conditions. The parametric cover consists of choosing an event that acts as a trigger, such as wave height at sea, which is used as a proxy to estimate conditions under which a farm might have a loss. A time-period is chosen, such as 24 hours, and an indemnity value is determined. Parties agreeing to base the product on independent verifiable third-party monitoring stations, and should the trigger conditions (wave height and time-frame) be met, then clients are paid the insurance indemnity irrespective of whether the farm sustained a loss.