ACADEMY OF ECONOMIC STUDIES IN BUCHAREST

FACULTY OF BUSINESS ADMINISTRATION

Comparative Analysis between

Agricultural and Environmental

Insurance Policies

Contents

Introduction

1. Agricultural insurance

Short History

1.1. Insurance of agricultural crops at ASTRA

1.2. Insurance of agricultural crops at GROUPAMA

1.3. Comparison between an ASTRA and GROUPAMA agricultural crop insurance

2. Environmental insurance

2.1. Pollution Legal Liability at AIG

2.2. Pollution Legal Liability at ACE

2.3. Comparison between an AIG and ACE pollution liability insurance

References

Introduction

One of the most basic and necessary human activities was agriculture, and there is a need for

practicing agricultural insurance.

Also, people who belonged to the upper social class were not greatly affected by damage and

thus, itwas not considered a necessary to have an insurance that would not create an extra value.

Meanwhile, natural disasters were considered by individuals as the punishment of the gods,

which held back the creation and adaptation of methods of protection against natural disasters.

Prior to the establishment of companies that meet specific characteristics of an insurance

company, was born the idea of self-help for people who hold a small portion of land. Although

the foundations were not yet strong, itmade farmers keep some of the harvest so that they can

help those of which whohad damages occurring. In these circumstances, owners affected by

various atmospheric phenomena, received aid in the form of seeds or food which partially

covered the losses that occurred.

The owners would have to show a lot more interest in ensuring against atmospheric phenomena,

especially since they cannot be caused intentionally as other types of insurance (such as life

insurance). However, prospective policyholders were more reserved because:

It was almost impossible to determine the size of the damage immediately after the event

occurred;

It was difficult to determine insurance premiums through mathematical calculations and

probabilities.

However, mutuality between peasants remained the only way of assistance in the middle Ages

since it was not possible to form an insurance company to cover these risks.

1. Agricultural insurance

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for

payment.

Risk is something inevitable but can be managed with regard to agricultural activity. Agricultural

production can vary greatly from year to year due to unforeseen weather conditions, disease,

insect infestation and causes fluctuations in the market price of raw materials and crops.

Short History

The first clues to the establishment of livestock insurance emerged in Spain in 1556, but they

were made in close connection with the provision of slaves on the one hand, and ensuring the

transport of animals by sea, on the other hand. Subsequently, in 1710, was established insurance

for horses in London, covering theft, natural death and disability insured animal. Around the

same period dates the first formal policy on ensuring animal deaths, illness, theft and accidents.

More specifically, they were completed in Hamburg, around the 1720s.

Between 1740-1750 there has been a significant increase in pet insurance need of local regions,

due to the occurrence of fever which occurred in the countries of Europe and led to the deaths of

millions of cattle. Due to lack of financial resources, most countries have left this issue on behalf

of private institutions, which in turn were overcome by the situation.Moreover, the foundation of

the first agricultural insurance companies were established by Frederick the Great which requires

all cattle owners to purchase such insurance policy.

Thus, damage to the liability was determined on each beef in part as follows: a steer - 10 plates, a

cow - 6 taels. Thanks very good recording results, this has led to the creation of similar

companies in Eastern friezes. Afterwards institutions were also established in Denmark (1774)

and Austria (1782).Given that these were mandatory agricultural insurance need to become more

pronounced with increasing land reform and agricultural culture. In Scotland took the form of

insurance against hail and were first practiced by landowners.

Simultaneously, were established in France two insurance companies against hail, one for corn

and one for cattle. Starter insurance company was Barrau Toulouse grain and required the use of

a fixed premium of 3%.

1.1. Insurance of agricultural crops at ASTRA

The comparison we chose was for an agricultural land of wheat, with a production of 6

tones per hectar.

What is insured for a typical crop insurance policy?

all agricultural crops;

cereal, technical plants, medicinal and aromatic plants, edible legumes, feed

plants, potato and vegetables, seedage, vineyard, fruit tree and hop products, fruit

trees, greenhouse crops, solariums, seed beds and tunnels, fruit tree and vineyard

farms, stock plantations.

What is insured in our situation?

the wheat crop

Insurance contract

The insurance contract may be concluded as such:

by March 1st, for the insured in the “Standard” risk group;

Insured amount

The insured amount is established by the Insured, which is the farmer together with the

Insurer, ASTRA and it stands for the total technological expenses, except for the harvest

expenses.In our example for a crop of wheat, the insured amount is 1200 euro.

Covered risks

late spring frost, pail, torrential rain, storm/heavy wind, fire, cultivated land slide

and crashes/cave-ins, early autumn frost, generically entitled “Standard” risks or

only: pail, torrential rain, storm/heavy wind, generally entitled Low standard

risks.

Insurance Premium

The altitude of premium rates in crop insurance depends on:

• The frequency of risks in time and on area

• The type of risk (e.g. hail as a very local risk, drought as a large area risk)

• The sensitiveness of crops

• The number of risks covered (single- risk, multi- risk insurance)

• The number of insured, to spread the risks

• Other technicalities like deductibles

The annual premium would be somewhere around 36 euros per hectare to an insured sum of

1,200 euros (we considered a production of 6 tonnes of wheat per hectare the current average

price of 200 euros per tonne).

In the following table we can see some common risks encountered in agriculture:

Agricultural Risks

Climate frost, drought, flood, wind, fire, snow, ice

Sanitary Plagues and diseases Controllable

Uncontrollable

Geological earthquakes, volcanic eruptions

Market Fluctuating market prices and changes in quality standards

Man Made War, financial crisis Controllable

Uncontrollable

These changes in yields and output prices generate large changes in farmers' income. Thus, the

uncertainty of future revenue production so difficult in the short term and long term planning to

expand or reduce production, to invest in the purchase of fixed and mobile assets or remain in

agriculture or to redirect to another domain.

Given that these changes significantly reduce the proceeds in the short term there may be serious

repercussions in the absence of effective tools for risk management, especially when these

changes are systemic shocks of the entire sector.

To mitigate common risks in agriculture, farm owners must use a range of strategies and

techniques for managing them, such as:

crop diversification;

maintaining financial reserves;

hiring production;

buying futures or options contracts;

end a lease with specific characteristics;

1.2. Insurance of agricultural crops at GROUPAMA

The same as in the ASTRA insurance policy, the insured item is the same.

What is insured in our situation?

the wheat crop

Insured amount

The insured amount is established by the Insured, which is the farmer together with the

Insurer, and is the same as for ASTRA, having the insured amount at 1200 euro.

Covered risks

Agricultural insurance covers the following risks:

hail

fire (from any cause)

storm / hurricane

heavy rain

collapsing / sliding of cultivated land

late spring frost and early autumn frost.

Insurance Premium

The premium can be paid in installments.

The annual premium higher than for ASTRA, of around45 euro per hectare to an insured sum of

1,200 euros, which means 900 euro in total.

1.3. Comparison between an ASTRA and GROUPAMA agricultural crop insurance

ASTRA GROUPAMA

What is insured The wheat crop The wheat crop

Insured amount 1,200 euro 1,200 euro

Covered risks spring frost, pail, torrential

rain, storm/heavy wind,

fire, cultivated land slide

and crashes/cave-ins, early

autumn frost, pail,

torrential rain,

storm/heavy wind,

generally entitled Low

standard risks.

heavy rain, storm, hail,

early and late frosts, fire,

landslides

Insurance Premium 36 euro/ha, 720 euro in

total, paid on an yearly

basis

45 euro per hectare, 900

euro in total paid on an

yearly basis.

Deductibles in agricultural insurances

The higher the risk, the higher the deductibles. This can mean that the risk is high (high

frequency in time or on area) or the products are covered have a high sensitiveness (e.g. fruits,

vegetables).

• To create individual insurance schemes tailored to the demands of customers, there are

different deductibles used, so it’s on the farmers’ judgment to choose a higher deductible and

paying less of the premium.

• General new insurance products with less on experience have higher deductibles.

Loss assessment

Usually the loss assessment is done by loss adjusters in the field. To estimate the loss they use

standardized directives developed for different crops. Thus it can be assumed,that loss

assessment for single risk insurance is international comparable

There are two different approaches for the assessment of loss.

1. Based on loss:

In the single risk insurance, the loss adjuster estimates a percentage of the loss. For this

procedure they take samples in the field and use standardized directives for different crops.

The estimated percentage minimized with the deductible is the result for the indemnity, as a

percentage of the insured value (sum insured).

2. Based on yield:

The loss adjuster estimates the yield by taking some samples in the field or in another way for

example in indirect index based insurances (e.g. meteorological trigger, vegetation index). The

estimated yield will be referred to an average yield in time on farm or on arealevel.

2. Environmental insurance

Environmental insurance is a specialist form of insurance providing cover against losses that

could be incurred as a result of third party and regulatoryaction arising from pollution or

contamination. It is increasingly used as aneffective mechanism to transfer environmental

liabilities associated withcorporate and property transactions as well as ongoing operations.

Environmental insurance is a risk management tool for project financers and sponsors to transfer

their risk to the insurer (insurance company) for potential cleanup costs or liability related to

environmental conditions at a property or project.

Types of environmental insurance

There are two common types of environmental insurance – Cost Cap and Pollution Legal

Liability.

Pollution Legal Liability

The comparison we decided to do in terms of Environmental Insurance policy, is between a an

AIG policy and an ACE pollution liability policy. The company seeking insurance is a

corporation.

Pollution Legal Liability environmental insurance can be used to:

replace an escrow for the unexpected cost of remediation, which would insure against:

the chance of discovering new contamination;

third party lawsuits/claims; and/or

the environmental legacy of the operation.

provide protection from costs that could destabilize your business or municipal budget

due to unexpected cleanup;

provide a tool to establish financial stability for estimated clean-up costs

2.1. Pollution Legal Liability at AIG

Targeted Policy Holder

Large Corporation

Coverage Explanation

Third party claims for cleanup, bodily injury, and property damage

First party claims for bodily injury and property damage

Defense costs

Optional: Contractual liability, Business Interruption, Extra expense, and Non-owned

disposal site

Key Exclusions

Owned property (i.e., property owned, leased, or operated by the policy holder)

Contractual liability

Certain types of indoor air pollution

Periods

1 to 10 years

Premiums

More than 5,000 euro, paid on an yearly basis

Features & Benefits of the Pollution Legal Liability policy

The Commercial Pollution Legal Liability insuring agreements provide coverage for

clean-up costs resulting from the discovery of pollution conditions on sites owned or

operated by the insured at inception date or added to the policy, as well as third-party

claims for bodily injury, property damage or clean-up costs that result from pollution

conditions for which the insured is legally obligated.

Coverage tailored to a broad range of target classes including but not limited to higher

education institutions, municipalities and healthcare facilities

No retroactive date, except for waste disposal activities

Emergency response costs included in coverage

Coverage provided for legal liability resulting from pollution conditions with no site

scheduling required

Options for expanded coverage for microbial matter, legionella pneumophila, clean-up

costs for viruses and bacteria, Crisis Response and crisis management

2.2. Pollution Legal Liability at ACE

Targeted Policy Holder

Large Corporation

Coverage

Business interruption and soft costs by endorsement

Known conditions by endorsement

Liabilities encountered in mergers and acquisitions

Acquired and divested properties by endorsement

Available for natural resource damages claims

Available for mold-related and legionella claims

Available  for Illicit Abandonment

Available for claims arising from non-owned disposal sites

Available during the transportation of wastes or products

Available for Products Pollution

Available for Catastrophe Management

Periods

1 to 10 years

Premiums

More than 10,000 euro, paid on an yearly basis

1.3. Comparison between AIG and POLLUTION LEGAL LIABILITY INSURANCE

AIG

Coverage

Explanation

Third party claims for

cleanup, bodily injury,

and property damage

First party claims for

bodily injury and property

damage

Defense costs

Optional: Contractual

liability, Business

Interruption, Extra

expense, and Non-owned

disposal site

Business interruption and

soft costs by endorsement

Liabilities encountered in

mergers and acquisitions

Acquired and divested

properties by endorsement

Available for natural

resource damages claims

Available for mold-related

and legionella claims

Available during the

transportation of wastes or

products

Available for Products

Pollution

Available for Catastrophe

Management

Key Exclusions Owned property (i.e.,

property owned,

leased, or operated by

the policy holder)

Contractual liability

Certain types of

indoor air pollution

-

Periods 1 to 10 years 1 to 10 years

Premiums More than 5,000 euro,

paid on an yearly basis

More than 10,000

euro, paid on an

yearly basis

References

1. Dumitru G. Badea- “Insurance & Reinsurance”, Bucuresti: EdituraEconomica, 20032. http://www.basis.wisc.edu/live/rfc/cs_03b.pdf

3. http://en.wikipedia.org/wiki/Insurance 4. http://www.epa.ohio.gov/portals/30/vap/docs/VAP%20INS/What%20is

%20Environmental%20Insurance.pdf5. http://www.microinsurancecentre.org/resources/documents/doc_download/330-trends-in-

agricultural-insurance-in-the-european-union.html6. http://www.google.ro/url?sa=t&rct=j&q=agricultural

%20insurance&source=web&cd=3&ved=0CDUQFjAC&url=http%3A%2F%2Fen.wikipedia.org%2Fwiki%2FCategory%3AAgricultural_insurance&ei=J7l7UaFYfS4QS7h4HYAg&usg=AFQjCNFOnzHMFF8Du_vvn2mX9jd1IxHksw&bvm=bv.45645796,d.ZWU

7. https://www.astrasig.ro/en/insurances/corporate/agricultural-insurance 8. http://ec.europa.eu/agriculture/analysis/external/insurance/ 9. http://www.aig.com/Environmental_3171_416861.html 10. http://www.epa.gov/brownfields/insurance/ei_insurance_coverage_012405.pdf 11. http://www.dldins.com/files/Environmental%20Insurance%20Products.pdf 12. http://www.aon.com/risk-services/environmental.jsp 13. http://en.wikipedia.org/wiki/Insurance#Other_types 14. http://www.allianztiriac.ro/asigurari-persoane-juridice/asigurare-culturi-agricole-si-

animale.aspx15. http://www.studentie.ro/campus/asigurari_agricole___polite_de_asigurare_agricola/c-

847-a-4711316. http://www.groupama.ro/produse/persoane-juridice/asigurari-agricole/asigurari-agricole-@/

article.jspz?id=1923117. http://www.aig.com/Pollution-Legal-Liability_3171_417738.html