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Livestock Insurance- Agreed or Market Value?

  • By: Farm Tender "Prime"
  • Sep 05, 2017

By David Mathieson

Livestock insurance is often a cover that is either overlooked or not correctly set up in many farm insurance programs. Although it may seem like a simple cover to arrange, it can be far more complex and just as important to get right than any other fixed asset insurance.

Options for livestock insurance include;

 *   Farm Property- Defined Events such as fire, lightning strike, malicious damage etc.
 *   Full Mortality- Defined Events plus illness/disease and accidental damage
 *   Stud Stock- Individual insured animals for Defined Events, illness/disease and full loss of use

Unlike farm infrastructure, the problem with livestock is that potential market fluctuations need to be considered when reviewing the sum insured along with peak numbers during high risk periods.

Market Value:

A "market value" policy sounds like a good option as the basis of settlement is paid on the market value at the time of the loss, however there can be significant problems around this method of reinstatement. A "market value" policy will still require a total value to be declared at the commencement of the policy and it's important the declared values factor in peak livestock numbers and values during the highest risk periods. Although a "market value" policy will provide cover for the value of the livestock immediately prior to the loss, the timing of the loss during the production cycle can impact the farms potential profit margin, for example;

Livestock Insured:

Insured value at policy renewal/inception in February

*    Insured Livestock- "Angus cows $1,000,000"
*    Total loss of livestock in December with an assessed market value of $1,500 per head= $750,000
*    Claim settlement based on market value at time of loss = $750,000
*    Estimated value of cattle at proposed sale date in January $2,000 per head= $1,000,000

Loss of livestock margin of $250,000

Agreed Value:

An "agreed value" cover can be provided by some farm insurers and on occasions has been seen to be written into some ISR policies. It can help to eliminate any potential market value disagreements, speed up the assessment and claim settlement. Another advantage of an agreed value policy is that profit margins can be protected should a loss occur 6 months prior to cattle being sold. The agreed value can be designed to provide protection of this profit gap, for example;

Insured value at policy renewal/inception in February

*    Insured Livestock- "500 head of Angus cows @ $2,000 per head" (budget price at time of sale)= $1,000,000
*    Total loss of livestock in December with an agreed value of $2,000 per head= $1,000,000
*    Estimated value of cattle at proposed sale date in January $2,000 per head= $1,000,000

Loss of livestock margin of $0

Business Interruption:

With either a "market value" or "agreed value" on livestock, it is still vital for a farm to consider insuring Gross Profits insurance and Increased Cost of Working Cover for continuation expenses. Consider a fire loss to a high value Wagyu herd that has taken years to breed and build consumer demand. The "market value" on this herd could be hard to establish and there would be considerable costs and time involved until the herd could be rebuilt and the farm is back trading at the same level prior to the loss.

Some insurers may not provide an agreed value cover option on livestock and in these situations it is more important to consider a loss of gross profits cover to ensure livestock profit margins are protected along with continuation costs to help rebuild the herd.

See more - information on business interruption insurance for agriculture

With any agricultural business it's important that you deal with an insurer who takes time to understand your farming business. Every farm will have a different livestock value chain and without knowledge on how each farm operates, the insurance policy will fail to provide adequate cover in the event of a loss.