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5 January 2023

Comprehensive climate insurance: benefits and limits

The new French comprehensive climate insurance

On January 1, 2023, in France, a new climate insurance scheme was launched for farmers. This so-called “Omnibus” scheme envisages a comprehensive climate insurance subsidized at 70%, with a trigger point fixed at 20% and a deductible at 20%. In the case of higher damages, farmers also benefit from national solidarity, with a trigger point at a minimum of 50% damage and a payment by the State of 90% of the financial compensation paid to the insured. As for the insurance companies, they are obliged to be part of a co-reinsurance pool destined to ensure the overall sustainability of the scheme.

Sainte-Croix lake (12/11/2022)

This new system aims at giving a larger access to insurance, as the participation rate of farmers was, until then, of less than 20%, with great disparity among various sub-sectors. It is to be juster and is expected to mobilize a financial support twice of what it was before - 600 million euros [read in French] -, but modest compared to the total aid to agriculture in France which is of around 9 billion euros annually [see graph]. This scheme is compliant with the European norm.

The main French farmers’ union, La Fédération nationale des syndicats d’exploitants agricoles (FNSEA), with more than 200,000 members, welcomed this new programme that, for them, is “at the heart of the arrangement” for risk management and of “the conditions required to succeed in this transition”. The conditions for “this transition” further include combatting soils artificialization, water storage and irrigation, innovation (unspecified), the development of renewable energies [read], making trade agreements, the supply of food and information to consumers, farmers’ income and a territorial approach [read in French].

Growing climate risks

The implementation of this new insurance scheme follows the increase of climate-related damage, such as the impact of the late frost in spring 2021 which devastated 105,000 hectares of vineyards and 20,000 hectares of sugar beets.

The consequence of the growing number of climatic events made that the amount of agricultural compensation has become higher by 9% than the total insurance premiums paid. In 2021, Groupama insurance claims to have suffered a net loss of 200 million euros [read in French]. In an interview [listen, in French, particularly after 2′ 40], in September 2022, the director-general of this company, also the president of the association of mutual insurers, stressed the skyrocketing of total disaster damage costs. For him, there has been “a change of gear since 2016”, as the average cost of climatic disasters has virtually doubled, rising from 2 billion euros to 3.5 billion euros in 5 years. The increase continued in 2022 as there had already been more than 5 billion euros damage only for the first semester, or “three times the norm”, mainly due to hail.

These facts demonstrate the unsustainable condition of the preexisting insurance system, while acceleration of climate change suggests further degradation of the situation.

Benefits of insurance

The new scheme, which is rather similar to that which has been used in the US for a few years [read], should reduce the scale and duration of the impact of disasters, and improve resilience and speed of recovery of farm businesses [read]. It could thus also reorient resources mobilization towards more strategic and often more efficient approaches [read], in particular with the view to adapt to climate change and cut GHG (greenhouse gas) emissions.

Limits of insurance

The advantages of insurance may, however, suffer from a number of limits, for several reasons.

The first limit is related to the scale of participation in the insurance. If only a minority of producers participate in the scheme - basically those who can cope with the trigger point and can afford to pay the insurance premium as it remains relatively costly despite subsidies and because of the increase of damage caused by disasters -, it could actually increase inequalities between large and small farmers, and orient a bigger part of state support to the former. In a way, it would contribute to make poorer farmers bear a disproportionate share of the consequences of climate change. Insurance as a source of inequalities had already been emphasized in another context by economist J. Stiglitz ten years ago, when he was criticizing the new US agricultural policy that was giving an accrued importance to insurance subsidy, to the detriment of direct support to farmers [read].

The second limit is that subsidized insurance may diminish the will of agents to reduce risks. Experience shows that insurance can improve resilience and adaptation provided it is part of a larger strategy aiming at making agriculture less vulnerable to meteorological events [read]. When it stands alone, on the contrary, insurance can be considered by producers as an alternative to adaptation and becomes a disincentive for change. This, of course, is a recipe for disaster [read here and here]. This danger is also emphasized by the IPCC [read] and illustrated by the very conservative programme of the FNSEA which, instead of envisaging a movement of diversification towards new and more adapted activities, seeks at all cost to preserve the agricultural system as it is [read in French], including by the use of highly criticized approaches such as agricultural water tanks that have been a topic of controversy in 2022 [read in French].

In this context, it is interesting to note that the more a farm is diversified and involved in a greater variety of crops and other activities, the less it is likely to take up an insurance, as diversification of activities reduced risks to some extent, by itself, particularly when pests and diseases are concerned, but also for drought

[read].

Conclusion

From this brief review, it appears that comprehensive climate insurance can be beneficial to farmers and to adaptation of agriculture to climate change provided it is made accessible to all producers and if it is part of an overall strategy and programme for making agriculture more sustainable and climate-friendly.

In absence of these characteristic, it may increase inequalities among farmers and act as a disincentive for change.

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To know more :

1. •Ministère de l’agriculture et de la souveraineté alimentaire, Dossier de presse - Projet de loi portant réforme des outils de gestion des risques climatiques en agriculture, 2021 (in French).
   

2. •FNSEA, Les conditions pour réussir cette transition, Fédération Nationale des Syndicats d’Exploitants Agricoles, (online) (in French).
   

3. •Meuwissen, M.P.M. et al., Prospects for agricultural insurance in Europe, Agricultural Finance Review, 2018.
   

4. •Linnerooth-Bayer, J, et al., Financial instruments for disaster risk management and climate change adaptation, Climate Change, 2014.
   

5. •IPCC, Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation. A Special Report of Working Groups I and II of the Intergovernmental Panel on Climate Change, 2012.
   

Selection of past articles on hungerexplained.org related to the topic:

1. •Biogas, source of energy for small farmers in Asia, in the 1980s, has become a profitable commercial industry generating multiple risks, 2022.
   

2. •When dealing with complex and intertwined crises, mainstream economic solutions prove ineffective and generate more inequalities - The case of the climate crisis, 2022.
   

3. •Agriculture, food and economic development - Is penalizing food and agriculture a sustainable development option? 2022.
   

4. •The New US Farm Bill: more for the favoured, less for the poor? 2013.