Livestock Insurance: What do you need to know

Working with Nature as main business associate is a privilege, but also a hard job. Unpredicted circumstances occur in every business, and farming is not an exception. However, in farming, adding to all the “normal” unpredictions (fluctuations of market prices, inflation, financial crisis, world pandemics, etc.) we must add Nature’s unpredictability (adverse weather conditions, water, pasture, feed scarcity, crop failure, livestock death and disease outbreak…). That’s the beauty of working with Nature, it makes everything much more challenging.

This is where Insurances play an important role. In this article we will try to cover how and why to do a livestock insurance in your farm, looking on the livestock perspective.

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Livestock insurance: what is it?

Livestock insurance refers to a financial mechanism that allows to provide protection/security against accidents and unexpected events that may affect our animals. The primary purpose of livestock insurance is to offer financial security to farmers by covering their livestock's value against specified risks. Livestock insurance can be especially valuable in regions where extreme weather conditions or disease outbreaks frequently threaten livestock health and productivity, but it is a safety net for all situations especially as agriculture faces increasing volatility from climate change, disease outbreaks, and fluctuating markets. By providing compensation for losses, livestock insurance can reduce the financial burden on farmers and support the continuity of their farming activities. Livestock insurance is, or should be, a part of risk management for our farms, aiming to help in providing stability and resilience.

Types of insurances

Two main types of insurance are usually used: traditional indemnity-based insurance and index-based insurance. Each type serves different needs and has different advantages.

• “Traditional” Indemnity-Based Insurance: This insurance coverage is usually made according to the needs of the farmer. The type of coverage that is chosen will determine what the insurance company will reimburse in case of insurance activation. This livestock insurance usually covers losses based on direct assessments of damage. Like a car insurance, when a claim is filed, there is an assessment that evaluates the extent of the loss (that can come from a disease outbreak or an accident) and compensation is provided based on the value of the loss. This type of insurance is widely used and offers direct protection tailored to individual claims and according to the loss assessed. nevertheless, the process can be slow and costly due to the time required for assessments, and administrative costs may be high.
• Index-Based Insurance: this type of insurance is a newer approach that offers payouts based on indices like weather conditions (such as rainfall levels or temperature) that correlate with potential livestock losses. The insurance payoff occurs when the predetermined level of the index is undercut or exceeded. This model is mostly useful for insuring against climate risks, like drought, which can impact feed availability and/or livestock health. The main advantage of index-based insurance is that it does not require the need for loss assessment, hurrying up the payout process with less administrative costs. However, since it uses a proxy rather than direct assessment, it may not always match the actual losses experienced by farmers. A good example of this type of insurance can be seen in drought-prone areas of the USA, index-based livestock insurance helps cover forage and rangeland, providing farmers with timely payouts when weather conditions threaten feed availability.

In order to design a successful production index insurance, the underlying index should have a high explanatory power and should be independent, transparent and comprehensive.

Challenges

Livestock insurance is continually evolving to meet the needs of modern agriculture. Countries with differences in agricultural policies and farming structures and insurance companies are exploring ways to expand coverage, improve accessibility, and adapt to changing climate conditions. However, challenges remain, particularly in balancing affordability with adequate coverage and ensuring that insurance models reflect the diverse needs of farmers.

Take Home Messages

As agricultural risks grow due to climate variability and disease threats, livestock insurance is an essential tool for farmers looking for stability and resilience. By understanding the available options, subsidy support, and regional differences in insurance models, farmers can make informed choices that protect their operations and secure their livelihoods.

When deciding on livestock insurance, farmers should consider the following factors:

• Coverage Needs: Assess the specific risks to the operation. Is the farm a drought-prone or flood prone region, or does it face risks from disease outbreaks? This will help determine whether traditional indemnity-based insurance or index-based insurance is a better fit.
• Speed of Payouts: In cases of extreme weather, farmers may need quick compensation to maintain feed supplies or restock livestock. Index-based insurance offers faster payouts, which may be advantageous for those needing immediate support.
• Limitations of Index-Based Insurance: While convenient, index-based insurance may not always align with actual losses. For instance, a drought might trigger a payout based on low rainfall, but if other factors mitigate the impact (such as supplemental feed availability), the payout might not match actual needs.

References

Meuwissen, M.P.M., & Mey, Y. (2018). Prospects for agricultural insurance in Europe. Agricultural Finance Review Vol. 78, No. 2. pp. 174-182. DOI 10.1108/AFR-04-2018-093. Link 

Santeramo, F.G., & Ramsey, A.F. (2017). Crop Insurance in the EU: Lessons and Caution from the US. EuroChoices, DOI: 10.1111/1746-692X.12154. Link 

Lipińska, I. (2016). Crop and Livestock Insurance as Risk Management Instruments in Polish Agriculture Compared to the EU Regulations. EU Agrarian Law, Vol. 5, n.º2, pp 13-19. Link

Vroege, W., Dalhaus, T., & Finger, R. (2019). Index insurances for grasslands: A review for Europe and North-America. Agricultural Systems, Vol.168, pp 101-111, https://doi.org/10.1016/j.agsy.2018.10.009

Mäkiranta, J. (2024). Managing patterns of death: animal insurance and the changing hazards of farm animals in twentieth-century Finland. Agricultural History Review, Vol. 72, N.º 1, pp. 45-64(20). Link