With over 580 farmed species (FAO, 2016), a large variety of different production systems exists both onshore and offshore varying largely between industrialized operators and smallholder producers. The production value of aquatic stock depends on the species and production system in terms of areal and volumetric density of stock, water loading (closed systems), exchange rate of water, hydraulic detention time and cumulative oxygen consumption (Colt, 1991). Therefore, the same aquatic species can generate different yields in function of the production environment.

Farming aquatic species is highly complex with exposure to natural perils and diseases in a sector where frequently new aquatic species are introduced, and where aquatic stock is moved over large distances. Although aquaculture insurance has been trying to mitigate production risks through different products, insurance penetrations remain generally low. The fast-growing aquaculture sector is facing multiple challenges that include inherent production and financial risks. Compared to other food production sectors, aquaculture is often seen to be a high-risk activity with higher variability in yields and revenues (Flaten et al., 2011). This is due to aquaculture farmers having lower control over the production process -as the growth of aquatic organisms is highly sensitive to changes in environmental conditions- and the immaturity of the technology used by most producers relative to agricultural and livestock producers.

Generally, the main risks for aquaculture producers include: i) pathogen risks where harmful pathogens from imported aquatic stock, feed, or equipment spread as diseases in the domestic stock, ii) food safety and public health risks which result from new pathogens, iii) ecological risks including escapes and spread of diseases from non-native species into the natural environment, iv) genetic risks through the use of genetic methods to improve aquatic stocks that can lead to loss of local adaptation and introgression of new genetics by native species, v) environmental risks through contaminated water and ecosystems, vi) regulatory risks, vii) financial risks related to price volatility, changes in production costs, and input supplies and viii) production risks with reduced yield or mass mortality due to environmental conditions and diseases (Arthur et al., 2009). From a risk transfer point of view, risks in aquaculture can be classified into financial risks and production risks.

Climate change is expected to significantly impact fisheries and aquaculture production through changes in abiotic conditions including sea temperature and a change in oxygen levels, salinity, acidity, and changes in the intensity and frequency of extreme weather events; and in biotic conditions affecting distributional patterns, growth, and sizes (Barange et al., 2018). Key measures for adaptation to climate change on aquaculture rearing systems and farms include i) controlling the environment to mitigate weather- and climate-related risks, ii) reducing risk through timing and selecting rearing environments, iii) enhancing resilience by increasing diversity, nurturing resources, and increasing the tolerance of reared aquatic species, and iv) capacity building (Lebel et al., 2020).

While indemnity-based insurance products remain are the most common covers to transfer aquaculture risks, index-based covers are growing in importance. Index-based insurance products can be differentiated into i) weather index covers, where meteorological variables are directly used to quantify the indemnity, and ii) revenue insurance which provides indemnity in the case prices of aquaculture products and/or costs of feed components change significantly. With only 40 years of experience, aquaculture is a relatively new and highly specialized industry with a large range of different aquatic species (~580 species) farmed under very diverse structural, technical, and managerial approaches and a concentration of production in some key producing markets.

From an insurance standpoint, aquaculture risks are probably the most complex risks of agricultural insurance to underwrite, model and price. Although aquaculture has a large potential, the insurance penetration defined as the ratio between the insurance premium volume (2017) and the total value of aquaculture (2018), was only 0.06% in 2018. In 2017, the global aquaculture insurance premium reached USD 161 million, which represents only 0.5% of the global agricultural premium of USD 30.7 billion (Hohl, 2019). In 2017, the 10 largest aquaculture producing countries generated 82% (USD 132 million) of the global aquaculture insurance premium. With 0.54%, Norway shows the highest insurance penetration. Assuming an overall insurance level of 0.54%, the global market potential for aquaculture insurance is USD 1.35 billion, of which USD 782 would be generated by China alone. A significant insurance potential exists for aquaculture in Asia including India (USD 71 million), Indonesia (USD 65 million), Vietnam (USD 78 million) and Bangladesh (USD 32 million).

Smallholders produce most of the global aquaculture output and Asia is by far the largest market, generating 69% of all aquaculture produces in 2018 (FAO, 2020). Smallholders use basic equipment and management techniques. Additionally, smallholders often fail to keep consistent records and stock inventories; and to provide proof of losses that shows the size, number and value of stock lost has been challenging. The aquaculture insurance sector has been facing multiple challenges, making it one of the most difficult lines of agricultural insurance to price, model and transact with insurers being reluctant to provide coverage to this high-risk sector.

Industrialized aquaculture is highly concentrated, uses the most advance production techniques and has attracted large investments; while smallholders, representing most of the global production, have generally limited access to finance, technology, and markets. Although the insurance industry has been providing coverage for production risks through different products and for a variety of perils, species and production systems, the high degree of specialization and the complexity to assess and price risks has limited a wider uptake, particularly in smallholder production systems. As a result, insurance penetration remains low at 0.06% at global scale.

Lack of data, diversity of risk management practices, affordability, lack of technical know-how, regulation, moral hazard, and adverse selection are some of the major constraints in the development of aquaculture insurance market. A couple of options to mitigate some of these risks —particularly adverse selection and affordability— would be by way of bundling insurance with loans and using affinity groups such as farmer collectives.

From a product perspective, though index-based insurance seems to be attractive particularly in insuring smallholder aquaculture farmers more studies and pilot insurance programs are necessary to ensure the appropriateness of the product given the underlying risks (or perils) and production system. As aquaculture production is projected to further increase and risks are likely to grow through the introduction of new types of diseases and impacts of climate change, the insurance sector is prone to play a stronger role in transferring production risks.

To access the full summary version of the ‘Review of Aquaculture Insurance’ and read more on the subject, please donwload PDF attached to this entry. GIIF will be uploading the final report as soon as this is released.