Vol.

9, No 2, 2013 ISSN 1822-3346 Economics and Rural Development

VIABILITY OF INSURANCE IN THE MANAGEMENT OF EXTREME

WEATHER RELATED RISKS IN AGRICULTURE: A METHODOLOGY
APPROACH

Lorant Anna1, Fekete Farkas Maria2

Szent Istvan University, Hungary

Climate change and its consequences pose a significant risk to economies and societies as well. This study is focusing on the insurance
industry as one of the major players in risk management. Its aim is to present a possible method to examine the potential for introducing a
new insurance product, namely, an agricultural flood insurance scheme. The investigation included the mapping of the current compensation
systems in Hungary and in the United Kingdom, the calculation of agricultural flood damage costs, and farmers’ interests in insurance. In
a small scale survey (2009), farmers with flood experience were asked about their willingness to pay (WTP) for flood insurance using a
contingent valuation method. Using statistical analysis, it was found that the insurance demand is positively correlated with the damage cost
predicted, and association is likely between farm types and WTP for insurance. Linear regression model suggests that the demand for flood
insurance is low amongst farmers in the present risk level. The findings of this research also highlight that agricultural compensation systems
have different aims in countries investigated, and state involvement is often necessary to provide suitable environment to companies to develop
agricultural insurance products covering extreme weather events.
Keywords: climate change, insurance, agriculture.
JEL classification: Q54, Q18

Introduction opportunities as well as their vulnerabilities to natural hazards

The efforts to confront the prospect and impacts of
anthropogenic climate change present human kind with one
of the major challenges. While it has several consequences
(including sea level rise and extreme weather events),
the scientific uncertainty attached to this phenomenon is
significant. Due to the complexity of climate system and the
linkage between the increase of GHG emissions and extreme
weather events, it is really difficult to predict the exact long-
term implications. However, the latest IPCC special report
on the risk management of extreme events and many other
statistics available suggest that the annual number of weather-
related disasters and their adverse economic and financial
impacts are increasing but with large interannual and regional
variability (IPCC, 2011). Focusing on the past six decades,
the average annual number of these major weather related
extreme events has increased worldwide from about 1.5 in
the 1950s to 3.7 over the past 10 years (CEA, 2008). During
2011, 820 natural disaster events were recorded and they
caused around USD 380 billion economic losses recorded
worldwide (Munich Re, 2012). Increased losses are associated
with increasing population densities and higher concentration
of values (The Geneva Association, 2009; CEA 2009). The
higher concentration of people in urban areas increases their
___________________________
1
PhD School of Management and Business Administration, 1 Pater Karoly utca, Godollo, Hungary, 2103
E-mail: anna.lorant@gmail.com
2
Institute of Economics and Methodology, 1 Pater Karoly utca, Godollo, Hungary, 2103
and climate change impacts in general (Djordjevic et al.,
2011). There is no country that is not affected. The earthquake
and tsunami in Japan, the floods in Australia and Thailand,
and the drought in Somalia are well-known events from 2011.
It is also true that extreme events have a great impact on
economic sectors in particular those with close link to climate,
for instance, agriculture, health, and tourism (IPCC, 2011).
Agriculture is extremely vulnerable to changing
climate, since it is directly affected by weather conditions.
The problem could be even more serious if one takes into
account the fact that agriculture plays a significant role in
food security and the likely increase in food consumption
suggested by the current population growth patterns. The two
often mentioned hazards in the context of agricultural sector
are drought and flood. Both of them are causing significant
damages in each year and according to the predictions they
will likely be more frequent in the future (IPCC, 2011).
However, farmlands could have a special role due to the
nature of flooding as natural hazard. Besides being negatively
affected, they could also contribute to flood defence, for
instance, by taking pressure off flood defences that protect
urban property and infrastructure (Morris et al., 2003). This
article puts a special focus on the complex relationship
between agricultural land and flooding.
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Economics and Rural Development
The knowledge of coherence between agriculture and
flood risk is necessary to determine the role of land use
management in flood defence and the potential losses in
agriculture associated with floods. The relationship between
agricultural land and flood risk can be analysed with the
Source – Pathway – Receptor (SPR) model. This framework
is based upon the linkages between cause (“source”) of the
environmental risk followed the route (“pathway”) to the
environmental entry (“receptor”) of flooding. As the most
recent OECD report about the issue describes agricultural
land, it is potentially important from three aspects (Morris and
Hess, 2008):
– agricultural land is a pathway as land management
practices play a significant role in mitigating flood
generation through determination both the amount of
water and the speed at which that occurs (Morris and
Hess, 2008);
– agricultural land located in floodplain areas is a receptor
as it is often exposed to flood risk. These lands can be
adapted to reduce risk;
– in agricultural land, flood water can be stored temporary,
thereby, mitigating the risk elsewhere.
For this reason, rural land could play a significant role in
the high-level strategic planning process that seeks policies for
sustainable flood risk management.
Insurance industry is a major player in risk management.
According to the report of the LMF (2009), climate change
presents the insurance industry with new challenges in two
different aspects: firstly, it is necessary to adapt the changing
weather patterns and other environmental effects which
generate risks. Secondly, insurance has a significant role in
the mitigation of climate change as it can put incentives to
their policymakers to reduce their carbon footprint.
It is clear that the insurance industry has a strong interest
in addressing the problems of climate change for different
sectors, households, and businesses. The report by The
Geneva Association (2009) highlights the need for effective
and integrated risk management taking into account the
different social, economic, and environmental factors. It also
emphasises that the transition towards a low-carbon economy
that could become reality in the medium-term future, will
change risks and opportunities for the insurance industry.
It involves the opportunity of a closer partnership between
governments and insurance companies in order to provide
better/more efficient safeguards to the society and businesses.
This study is focusing on the role of insurance in
agricultural flood risk management. It analyses the insurance
system in two countries (the UK and Hungary), and presents
a possible method to estimate the viability of climate change
insurance schemes.
Compensation schemes available in the UK
Different compensations schemes are available for
farmers, mainly from national and the EU sources. Their
common attribute is the voluntary measures, supported by
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Vol. 9, No 2, 2013 ISSN 1822-3346
economic incentives (Morris and Hess, 2008). Private sources
can appear in the forms of funds and insurances, while in the
UK, they are less developed from the view of agricultural
flood damage compensation. In the context of this study, those
below should be highlighted:
a) CAP – Single Payment Schemes: the objectives of the
Common Agricultural Policy have never contained flood
management policies but some elements of the current
Single Payment Scheme (SPS) related with the flood
risk management as secondary objectives. The scheme
refers to the phenomenon of cross compliance that means
that farmers have to meet three sets of requirements to
get financial compensation. The three types of cross
compliance are i) Good Agricultural and Environmental
Condition; ii) Soil Management and Protection; and
iii) Maintenance of Habitats and Landscape Features
(DEFRA, 2005). Therefore, SPS provides financial
incentives to basic but widespread land management
practice changes that could deliver associated flood risk
benefits alongside other environmental benefits (DEFRA,
2005);
b) England Rural Development Programme (Environmental
Stewardship): it is the major national agri-environment
scheme in the UK (Natural England, 2009). Similar to
the SPS, it does not either contain flood risk management
as a first objective but actions promoted by the scheme
have flood management benefits such as creation of wet
grasslands (Higher Level Stewardship) or management
practices of drainages, cultivated lands, and uplands
(Entry Level Stewardship);
c) England Catchment Sensitive Farming Delivery
Initiative: it differs from the earlier schemes as it is
rather an advisory than a financial mechanism to deliver
land use changes; although, limited funds are available
for small scale works. Its primary purposes either do
not involve flood risk management but many of its
promoted activities have flood management benefits
(Environment Agency, 2008). However, it is worth to note
that the ECSFDI is voluntary based, thereby, farmers are
less likely to implement changes in long run unless it is
financially viable;
d) Government Flood Management Funding Structure:
current funding structure in the UK was designed to
provide financial sources to meet the purposes of the
flood management strategies. The current flood funding
structure applied in England is based on Exchequer-
origin sources (approximately 94% of total) and involves
many policies/activities. It is significant from agricultural
aspects because farmers are influenced directly/indirectly
by many activities funded by the government and the
contribution of agricultural sector in the form of drainage
charges and rates (DEFRA, 2009);
e) Insurances: there is a special situation in the UK
regarding the relationship between the insurance sector
and the agricultural risks. The United Kingdom has a
Vol. 9, No 2, 2013 ISSN 1822-3346
private non-subsidised agricultural insurance system with
one dominant company that covers 75% of the market
(Bielza and Conte, 2006). Coverage for flood risk is
available only for farm buildings and machinery but not
for growing crops. It might be a surprise, since 42000
hectares of agricultural field were affected by the serious
flooding in 2007, and the costs constituted about 1% of
the Gross Value Added of the agricultural industry in
England in 2007 (Posthumus and Morris, 2008).
Compensation schemes available in Hungary
The revision of the domestic agricultural risk management
system in Hungary was conducted during 2011, the new
system entered into force on 1 January 2012. Until 2011,
it was not obligatory to farmers to take out market-based
insurance policy; however, after 2008 as a minimum they had
to participate in the National Crop Damage Compensation
System (it was not obligatory only for primary producers)
that provided coverage against inland flood damages but not
flashfloods.
a) National Crop Damage Compensation System (NAR). The
Act LXXXVIII of 2006 laid down the principles of the
National Crop Damage Compensation System that started
its operation at the beginning of 2007. At the beginning,
it was a voluntary system and the principle of common
effort sharing was applied, which meant that the state
contribution to the fund was equal to the amount paid
by farmers who voluntary joined the fund. The volume
of compensation was not allowed to exceed the loss of
yield value.3 Risks covered by the fund included drought,
flood, inland waters, and frost. However, the system at
that time failed to provide enough financial resources
to cover damages after bigger/larger events. Already in
2007, after a serious spring frost in the Eastern-Hungary,
the government had to take extraordinary actions,
since there was no sufficient compensation available
from the national fund. In 2008, many changes were
introduced to increase the efficiency of the system;
however, they did not lead to significant improvements.
Estimations showed that 5 billion Hungarian forints
(around EUR 17 million) would be necessary for the
efficient functioning of the system. That would have
required 2.5 billion payments by the farmers and equal
amount of support by the government annually. The main
problem was the low participation rate, so the system
became obligatory for farmers after the revision of the
legislation in 2008 (Act CI of 2008) with the exception
of primary producers. At the same time number of risks
covered by the system also increased. Though, the
compensation available to farmers did not cover all the
losses of farmers (MOSZ, 2011).
b) Insurance system. Agricultural insurances are not
compulsory for farmers in Hungary. Currently, there are
___________________________
3
The calculation of yield value is done by comparing the actual yield of the year of damage with the average yields of the preceding three
years, and the loss of revenue is then quantified in HUF, using prices set in a separate provision
Economics and Rural Development
four dominant companies on the agricultural insurance
market that provide coverage for both flood and standing
water damages in arable and horticulture crops. According
to the latest available data of the Research Institute of
Agricultural Economics (Kemeny et al., 2010), the
proportion of insured farms among individual enterprises
is around 30% for horticulture and arable crops, while
this ratio is significantly lower (20.1%) for pastures.
Calculations also highlight that farmlands used by bigger
enterprises are more likely insured, for instance, the
proportion of insured cropland is almost 80% (Kemeny
et al., 2010). In principle, the reason behind relates with
the different nature of these enterprises. Generally, it is
true that bigger producers more often apply for credits
and in that case (application for some credits) agricultural
producers have to have agricultural insurance, although, as
it was highlighted earlier, there are no general obligations
in the country to conclude such insurances.
Changes introduced in 2012
The new legislation entered into force on 1 January 2012
with the aim of increasing the efficiency of farmers’ protection
against environmental damages. Natural disasters and extreme
weather events caused significant damages to the producers,
and as it was mentioned previously, those damages were
not covered sufficiently by the damage mitigation system.
After serious weather events, it often happened that the
government provided compensation from ad hoc funds even
to those farmers who had no insurance and did not participate
in the national compensation fund. Obviously, under those
circumstances, farmers had no real interest to pay any extra
money for risk management policies. This situation is often
referred as the lack of self-provision and it characterises the
Hungarian society in general (MABISZ, 2010).
The new system is built on a two-pillar risk management
approach. The first pillar is very similar to the above mentioned
damage mitigation system. Deposit paid by the farmers varies
between different land-uses. The sum, thus, accumulated
from farmers’ deposits is supplemented by the government
in an equal amount from the budgetary sources. However,
only those producers will receive full damage compensation
under the new system which provides motivation for farmers
to become self-providers, who have acquired insurance
from a business insurer with regard to at least 50% of their
activities, while those with no insurance may receive only
50% of the maximum possible damage mitigation allowance
(Ministry of Rural Development, 2011).
The second pillar comprises a supported, private
agricultural insurance construction for those producers who
wish to decrease their production risks to a higher level than
the protection provided by the central damage mitigation
fund. Farmers can take out insurance policy on a voluntary
basis; however, as it was said earlier without insurance the
37
Economics and Rural Development
level of compensation that they can get from national fund is
significantly lower.
According to the plans of the government, support for
farmers (to pay their insurance premiums) will be available
from both national and the EU sources for up to 65% of the
insurance premiums. However, since the related regulation
has not yet been finalised, currently those are only plans and
not official numbers.
It is easy to see that the above mentioned two pillars are
closely connected. With the combined use of them, higher level
of protection will be available to more farmers, because of the
fact that affected farmers may receive both damage mitigation
support and insurance damage compensation payments with
regard to the same damage event.
Methodology
Different methodologies have been used in the two
countries. In both cases, literature review was the main source
to describe the current compensation systems; though, since
Hungarian farmers already have access to flood insurance, the
viability of a flood insurance scheme research was conducted
in the UK, where no such product exists for the purpose of
estimate.
There are two significant variables in the estimation of
demand for insurance: the risk of an undesirable weather
event and individuals’ willingness to pay (WTP) to cover
against that risk. Risk was defined as the probability of event
occurrence multiplied by the consequences (Penning-Rowsell
and Chatterton, 1977). Consequences or economic losses are
different in each case but using a general formula they can be
expressed as the loss in gross margins (total output less the
variable costs) plus additional – such as cleaning up – costs.
Combining these loss values with the probability of event
occurrence risk can be got. Individuals’ WTP for an insurance
product can be estimated by using contingent valuation (CV)
instrument. After the hypothetical market has been set up,
the elicitation method chosen respondents’ WTP bids can be
obtained through a survey (Garrod and Willis, 2001). Survey
as a method is often used because it provides a simple approach
to study the attitude; it is cheap and it can be carried out within
a relatively short time period (Robson, 2002). Although, the
dichotomous choice approach represents the preferred method
for CV (Sherrick and Barrey, 2001; Garrod and Willis, 2001),
open-ended questions were used in the present research, which
means no values were suggested to the respondents; yet, to
make it easier to state their bids the average damage costs
per year were represented in every case. Apart from the CV
instrument, questions on respondents’ (personal) background
and experiences associated with insurance and risks could be
very useful as they make it possible to examine variables that
might influence the individuals’ decisions. All participants were
affected by the floods in 2007, so they already had experience
with flooding. Survey on the agricultural flood insurance in the
UK had three main parts (1 - general information on farmers’
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Vol. 9, No 2, 2013 ISSN 1822-3346
background; 2 - risk attitude; 3 - insurance preferences). It was
sent out by post and self completed. The main limitations of the
research were related with: the respond rate was around 40%,
which made the statistical investigation of the data difficult.
The small number of responses probably is in association with
the timing of the survey as farmers had a busy period due to
the harvest. Apart from this, those who filled in the survey
did not answer all the questions in every case; thereby, the
sample size became smaller (final sample size is 13). During
the research, data analysis was done through both descriptive
(to show incidence) and analytical (to show relationships)
statistics. Descriptive data were going to be analysed by
frequency tables and percentages. It is a valuable method to
describe the sample characteristics – such as distribution of
different farm types, flood risk exposures, and use of fields
where flood is a subject.
Correlation and regression models were used to find
association and dependency between variables. Table 1
provides a summary on the analysis made. However, the most
difficult part was to estimate farmers’ WTP. As a statistically
significant correlation was found between WTP bids and
damage cost predicted, it was decided that a sample linear
regression was going to be conducted. As it was suggested
(Frew et al., 2001) that the use of positive WTP values only
in regression usually can yield better estimates than those
in which zeros are included, zero bids were excluded in
the regression analysis. Linear regression method requires
some assumptions; thus, the test of the variables was
necessary. This included the analysis of residuals in order
to investigate their performance - such as their distribution.
If some of their parameters are not matched with
the requirements (assumption column in the table)
transformation of the data will be necessary. After the
residual analysis, it was found that the application of box
cox transformation is required in order to reduce the number
of outliners and improve the distribution of residuals,
thereby, to get a better, more significant regression model
(Lewis and Mathieu, 1999).
Results
Estimation of flood damage costs
The theoretical background of agricultural flood loss
estimation (Penning-Rowsell and Chatterton, 1977) says that
the cost of an infrequent flood event can be defined as the loss
of gross margins adjusted by the savings, while costs could
be higher as the harvest is coming. As a conclusion, it can
be assumed that a flood event of high consequence but low
probability can have a similar risk value to a flood of low
consequence but high probability (Table 2). Table 3 is based
on gross margin calculations and shows the estimated flood
damage costs in different land uses. The magnitude of costs
is influenced by many factors; this is just a broad framework
of estimation with several limitations, thereby, it should be
treated with cautions.
Vol. 9, No 2, 2013 ISSN 1822-3346 Economics and Rural Development

Table 1. Summary of data analysis used during the research

Variables Purpose Method used Assumption of the method

Risk tolerance, farm Determine the sample Descriptive -
type, land uses, flood characteristics statistics, frequency
frequencies tables
Summer and winter Determine any Paired t test the variables are paired or match each other
risk tolerance significant difference someway
WTP, damage cost Identify any Bivariate correlation normally distributed variables
association (Pearson)
WTP, damage cost Investigate how Simple linear 1) the errors of the observations are independent
well damage cost regression 2) errors are normally distributed
(independent variable) 3) the mean of the distribution of the errors is 0,
predicts farmers’ that implies: y=ß0+ß1x1, where y is the
WTP bids (dependent dependent variable, x is the independent and ß is
variable) the constant
4) the variance of the errors is equal to a constant
for all independent values (x)
Source: based upon Morgen et al., 2007; Marques de Sa, 2007

Table 2. Flood risk levels

Flood frequency Flood damage rate4

(number of floods per 0.01 0.1 0.2 0.5 0.7 1
year)
0.01 0.0001 0.001 0.002 0.005 0.007 0.01
0.05 0.0005 0.005 0.01 0.025 0.035 0.05
0.1 0.001 0.01 0.02 0.05 0.07 0.1
0.2 0.002 0.02 0.04 0.1 0.14 0.2
1 0.01 0.1 0.2 0.5 0.7 1

Table 3. Gross margins (GBP/ha) for selected crops to estimate the flood damages in different land uses

Crops
£, 2009 values
Oilseed Potatoes Grassland Grassland Horticulture
Winter cereal
rape (grazing) (silage)
Yield t/ha 8.25 3.25 42 10 10
Price GBP/t 135 300 121 47 47
Output GBP/ha 1113.75 975 5445 470 470
Straw by product GBP/ ha 40 0 0 0 0 0
Gross output GBP/ha 1153.75 975 5445 470 470 5735
Variable cost GBP/ha 511 465 3010 343 50 1466
Other crop cost GBP/ha 2,7 0 0 0 0 0
Total variable cost GBP/ha 513,7 465 3010 343 50 1466
Gross margin GBP/ha 640.05 510 2435 127 420 4269
Source: based upon Nix, 2008

___________________________
4
Flood damage rate expresses the severity of impacts. For instance if the damage rate is equal to 0.1, it means that 10% of the crops
are completely damaged/lost

39
Economics and Rural Development
Source: based upon Nix, 2008
Fig. 1. Agricultural flood damages cost estimated for selected crops and flood frequencies
The highest gross margins can be found in horticultural
cropping and vegetables (potatoes) that forecasts that the
highest losses can be expected in these land types. Figure 1
combines the gross margin values with different flood
frequency levels and demonstrates the estimated cost of
agricultural damages in some cases. Curves demonstrate
the costs of total damages (100% loss in gross margins)
at the flood frequency given, while the area under the
curves demonstrates the risks of flooding in different
land uses and flood frequencies. It can be seen that costs
are proportionately lower for grassland, winter wheat, and
oilseed rape than for horticulture and potatoes. It might
influence the farmers’ land management practices as if they
are growing potatoes on a field where flood is more frequent;
they can suffer higher losses than if that field would be used
for wheat production or as pasture (grass).
It is essential to analyse both the supply and demand side
to better understand the reasons behind the less developed
agricultural system. The interest of insurance companies
is to make profit. They offer insurances in those situations
where the conditions of insurability (Skees, 1999) are met and
the risk /reward ratio is favourable for them. The interview
with the dominant insurance company highlighted the lack
of sufficiently large pool of risks and/or customers with the
propensity to buy insurance and the existence of adverse
selection. It was also confirmed that it is unlikely in the near
future that without the involvement of government profit-
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Vol. 9, No 2, 2013 ISSN 1822-3346
orientated insurance companies will provide wider flood
coverage to farmers.
Focusing on the other side of the market Gene (2011)
provides three explanations for low demand: 1) price;
2) liquidity constrains of farmers; and 3) lack of trust towards
insurance companies. Besides all these, the level of risk should
be also mentioned as the fourth reason. If the risk level is
lower than farmers’ risk tolerance, it is unlikely that they will
voluntary pay for any insurance products. Statistical analysis
was conducted to define this relationship between the risk
level (flood damage cost predicted) and farmers’ WTP. The
correlation between the variables was found to be positive
and significant at the 0.001 level which means that there
is usually a higher WTP at higher predicted damage costs
and vice versa. After the confirmation of association between
the variables, the next step was to investigate how well
damage costs predicted farmers’ WTP bids. Linear regression
was conducted to do this. Based on the outcome, positive
association between the expressed WTP and expected damage
cost was evident: R Square =0.4272, F = 33.556, p<.001
(Table 4). According to Cohen (1988), r square value
indicates a large or larger than typical effect. It means that,
although, damage cost is not the only factor that influences
farmers’ decisions, their WTP bids can be estimated quite
well from the loss values (it is consistent with the high
B value of the damage cost in the model). The equation
found is WTP = 0.0237 + 0.4255*Damage Cost (Figure 2).
Vol. 9, No 2, 2013 ISSN 1822-3346 Economics and Rural Development

Table 4. Results of the regression model of flood damage costs and farmers’ WTP for flood insurance

N = 47 Beta Std. Err. Of B Std. Err. Of B t(45) p-level

Beta
Intercept 7.1005 6.4632 1.0985 0.2777
Damage Cost 0.6558 0.1125 0.1039 0.01784 5.8277 0.000001

R = 0.65582 R square = 0.4301 Adjusted R square = 0.41744

F (1. 45) = 33.963 p<0.00000 Std. Error of estimate: 31.144

Scatterplot of WTP transformed against Damage Cost transformed

WTP transformed = 0,0237+0,4255*x, r square = 0.4272

3,2

3,0

2,8
WTP transformed (pounds per hectare)

2,6

2,4

2,2

2,0

1,8

1,6

1,4

1,2

1,0
3,0 3,5 4,0 4,5 5,0 5,5 6,0 6,5
Damage cost transformed (pounds per hectare)

Fig. 2. Relationship estimated between transformed flood damage costs and farmers’ transformed WTP for flood insurance

However, it is worth to note that large part (around
41%) of farmers’ WTP bids were zero, which indicates
that farmers would not pay for insurance in almost half
of the cases (most likely when the damage costs were
below GBP 60), while their highest bid was GBP 200.
They are willing to pay GBP 20.03 on average. According
to farmers’ responses, the reason behind the low demand
relates with the low risk level compared with their risk
tolerance (see above). Respondents’ view is that following
good agricultural practices, some additional measures could
provide a sufficient protection against flood damages.
When farmers refer to low flood risk, it should be kept in
mind that until recent years floods seemed to be isolated
incidents in the UK (Guide to Floods, 2011).
Discussion
Experience above suggests that the reason behind the less
developed agricultural flood insurance system relates with
both the supply and demand sides of the market. Referring
back to the mitigation, potential of agricultural lands is also
necessary here. It should not be forgotten that farmlands can
play a significant role in mitigating the risk from the potentially
vulnerable urban areas where costs could be significantly
higher. Recently many studies focus on the use and benefits
of agricultural land in flood risk management (Morris and
Hess, 2008; Morris et al., 2008, Hess et al., 2004).
Studies also approved that farmers’ decisions on taking
out insurance policy were more likely influenced by factors
such as cultural attitude, credit availability than their
income. This is quite similar experience as it was in the UK.
However, the income and price factors in that context are still
relevant, and thereby, they should be taken into account.
Extreme weather events including floods cause significant
damages in agriculture at both national and global levels.
However, the agricultural sector is not only the “victim”
of these events but it also provides an opportunity to
temporary store flood water in agricultural land, thereby,
it becomes possible to mitigate the risk elsewhere, for
instance, from the more developed urban areas.

41
Economics and Rural Development
There are many different approaches and methods in
agricultural flood risk management. Even though in principle
it can be assumed that each system involves three different
stakeholder groups, namely, farmers, public sector, and
insurance companies, and relies on the collaboration among
them.
Current trends in the UK suggest an increasing focus on
the potential use of farmlands in flood risk management.
Flood risk threatening urban areas can be mitigated by the
flooding of agricultural land where potential damage is
usually lower than in the highly populated urban areas. This
tendency might provide an explanation why the agricultural
flood insurance companies play a less significant role in
the compensation of agricultural flood damages in the
country. However, it is also true that the current flood risk
level is still tolerated by farmers even though the recent
serious floods.
The new two-pillar risk management system has just
entered into force in Hungary. However, it can already
be seen that the mitigation potential of agricultural land
gets less attention compared with the situation in the
United Kingdom. The aim here is to develop more an
efficient compensation system with the fair contribution of
all stakeholders. The previous system failed in that context,
the new one has no time to demonstrate its ability, yet.
However, due to the special characteristics of the sector and
agricultural producers, it can be assumed that public sector
has a significant role in the compensation of extreme weather
related agricultural damages and state involvement is often
necessary to provide suitable environment to companies to
develop agricultural insurance products that cover damages
caused by extreme weather events.
Conclusions
Agriculture is one of the sectors that is highly affected
by the changing climate due to its vulnerability to weather
conditions. During the past decades, flooding proved
to be one of the major risks to farmland. Therefore,
the investigation of the insurance industry’s role (as
a key player in risk management) is essential and has
implications for the development of future agricultural risk
management practices.
The compensation of agricultural flood damages has
significance from two aspects: 1) floods can cause large
damages on farmlands, which might have adverse impact on
farmers’ income; 2) flood water can be stored on agricultural
land, mitigating the risk from urban areas, thus, farmers
provide public services.
The research outlined above highlighted that even though
insurance companies are considered as major players in risk
management, their role in the compensation of agricultural
flood damages is not that clear. Reasons behind that relate
with the economic situation of farmers (usually lower
income) and the complex relationship between flooding
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Vol. 9, No 2, 2013 ISSN 1822-3346
and farmland. As a consequence of that each country
whose agricultural sector is affected should develop its
own risk management system that might less involve
the insurance sector and put more emphasis on public
(flood defence) services by farmlands and compensated
by the governments through agri-environmental schemes
for instance.
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Acknowledgements
The authors would like to address special thanks to Professor Joe Morris and Simon Medaney (Crandfield University) for their
support and advice provided to this research.
The authors would also like to thank Dr Andrew Fieldsend for his suggestions and encouragement.
The authors are also really grateful to those two anonymous reviewers who provided useful comments and helped improve this
article.
The research outlined in this paper was supported by the TAMOP-4.2.1.B-11/2/KMR-2011-0003 project.
Economics and Rural Development
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43
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