Examination of Witnesses (Questions 920-937)
JOHN DRAKEFORD AND GARY HUTCHINGS
WEDNESDAY 1 MAY 2002
920. To take another concrete example, the ABI, the Association of British Insurers, are currently lobbying for an increase in flood defences in this country, so that they can continue with flood protection insurance at the domestic level. There is a very close relationship between the national policy and funding framework for insurance products to be viable.
(Mr Hutchings) Yes.
921. I was just puzzled that when I read the report, which was interesting, I saw no reference to any of those sorts of issues within it. We only received the abridged version, so perhaps there was a stronger set of references elsewhere.
(Mr Hutchings) It is 100 pages and we did not think you would want the whole lot.
922. Did it cover those sorts of issues somewhere?
(Mr Hutchings) Not in the detail you are talking about there. To be honest this is the beginning of a programme. When you get into product development, which we will do, and discussions, that is when you have those sorts of discussions and recognise what things are required.
923. You have opened the door, have you not?
(Mr Hutchings) Absolutely.
924. You have had some discussions with government already and you will have seen in the Curry report some encouragement of the possibility of insurance product development being a way forward. What sort of reaction do you think you have had so far?
(Mr Hutchings) Generally speaking there is universal support for the concept amongst the people we have had discussions with. There is little doubt about the validity of the concept. There are several hurdles which we still have to get over.
925. When are you going to start jumping the hurdles?
(Mr Hutchings) We are starting now. The type of process we are doing today highlights the issues. Also the Spanish Presidency of the Commission have a conference on 13-14 May in Madrid specifically to look at this issue. They are looking to try to find ways of moving the European Union as a whole toward looking and managing this process. What we are hearing generally speaking is that to be able to be successful we are going to have to produce bespoke products for individual Member States. It is not something we cannot impose at the centre and push down and say you have to buy one of these. They have to be specific to the individual farming risk. Historically we have been working in this area in commercial organisations.
(Mr Drakeford) We had also started to establish initiatives for new product development in a number of territories, looking at opportunities. Believe it or not we have had meetings in Poland both with representatives of the Polish insurance industry as well as with international re-insurers to look at the potential product design for Poland.
926. No, I am not at all surprised you had a discussion in Poland, because it is a very large agricultural economy and one with exciting prospects. The other area is currency risk which has not been touched on and which farmers are particularly prone to. Any thoughts in that area?
(Mr Hutchings) When you start looking at currency, you are looking at market really, then we are looking at revenue. Products in the US have been significantly developed now and I suppose a large proportion are now revenue-based products. That is not the case in Europe. One of the issues, as you recognise, is that the European agricultural market has a currency influence, doubly so in the UK. Many of our reference markets are dollar based, therefore many of our risk management tools, particularly market tools like the futures and options market or the market in Europe, are in a currency which is non-dollar based. There are facilities in Europe where you might be able to do that. It is getting that relationship with the currency and trying to find tools which can manage that risk at the same time which is going to make the whole process more complicated than it would otherwise be.
927. From your initial analysis of this you would recognise some government funding would be necessary, at least to launch these products; whether to sustain them in the long term one does not know, but to launch them. What sort of scale of funding do you think we might be talking about from government sources to provide sufficient incentive for both product development and also product sale? That is a real finger-in-the-air question.
(Mr Hutchings) There are two aspects to that. To be honest, that is really a question for the primary insurers. The initial funding is about continuing the process, helping the development, getting the partners, talking to the right people. You are talking hundreds of thousands of pounds, dollars, euros, rather than millions.
928. That is all research and pump priming.
(Mr Drakeford) It is research and developing relationships and establishing an infrastructure.
929. Then there is a market launch in which you need to have some demandside support essentially to make it easier for someone to buy.
(Mr Drakeford) Yes, and that is a difficult question for both of us to answer at this point.
(Mr Hutchings) It is at this time.
930. On the demand side, what do you think the UK agricultural market could sustain in terms of pricing of insurance products of this kind, bearing in mind that some farmers already are insured to some extent. The NFU has a sizeable operation and dominates that sector. It does not sell nothing; they are selling insurance products. What do you think the market might sustain in terms of products to cover the sort of risks we have discussed?
(Mr Hutchings) If you take our experience thus far in the UK market, when a commercial organisation was quite heavily involved in this area, the sorts of premiums which were being talked about were in the order of the 3 per cent level.
931. 3 per cent of turnover.
(Mr Hutchings) Yes.
(Mr Drakeford) That was the upper end.
(Mr Hutchings) Yes. 2 to 3 per cent. That is in a fairly low risk environment.
932. Would that be an all-inclusive insurance product?
(Mr Hutchings) No.
(Mr Drakeford) No, that was a specific crop insurance product which was an area yield product which also included an element of commodity price risk. The large part of that pricing was for the commodity price risk.
(Mr Hutchings) It is the only experience we have. In talking to the organisations about that, certainly that order of magnitude was not seen to be unmanageable. If you look at the US, the premiums there. . .?
(Mr Drakeford) The average rate for US multiple peril crop insurance policy is around 6.7 per cent, part of which is subsidised by the Federal Government.
933. How much of it is subsidised?
(Mr Drakeford) On average it is going to be around 30 to 40 per cent of that.
934. So roughly 1.5 to 2 per cent.
(Mr Drakeford) It would be about 4 per cent net. That is a combination of multi-peril and also of commodity price risk as well.
935. The Government is attracted to an insurance provision on foot and mouth. How much would it cost the British agricultural industry each year to insure against foot and mouth disaster?
(Mr Drakeford) I am not in a position to be able to answer that question. That is a question which would have to be addressed in conjunction with insurers.
(Mr Hutchings) It depends, as well. It is the way you structure these products. If the Government take on excess loss, the disaster bit of the loss as opposed to all of it, which was what the Government did this time round, then it is a different debate. The way the product is structured would then answer that question. It is very difficult to do it.
(Mr Drakeford) We come back to what I said earlier. There would need to be a greater degree of interaction between the insurance sector and the Government to come up with appropriate product and product design and that can be built around a budget or a price the department would pay.
936. That has not been done. The Government are asking us to buy a pig in a poke.
(Mr Drakeford) I am sorry. I did not understand that.
937. That interaction, assessment, discussion between the industry and Government has not happened.
(Mr Drakeford) No.
(Mr Hutchings) No, that is right.
(Mr Drakeford) Absolutely. There have been several aborted attempts at that but it has never actually gone past first base.
Chairman: Gentlemen, it seems to me yours is yet another sector where climate changewe are all told we are going to get much wetter winters and much drier summerswill mean that people's minds might turn to insurance even more than they do at the moment. Thank you very much indeed for coming today. If there are further thoughts you want to let us have, then we should be very grateful to receive them. We may wish to contact you to clarify something before we draw up our report. Thank you very much indeed.