Issues of Food Security and Insurance

Thursday, February 13, 2014, 11:50 am to 1:30 pm EST

The opinions expressed and the material provided are those of TTG. MSO has not validated any representations made as to data, or any other information presented herein.

Welcome

Jan Scites, CEO & President, MSO

• TTG Vendor partner with MSO • Survey on Green and Sustainability 2013 • Webinar terrific response • MSO national footprint • MSO committed to providing education to the

insurance industry

Welcome

• Transitioning to Green, LLC – Help organizations determine where they are, where they want to

go and how they can get there in the green economy

– We do this through, consulting, training and LeaderShip for Sustainability.

• Our promise is simple… by applying “holistic sustainability” business practices, we assist every organization we touch to simultaneously and synergistically:

– Engage your People

– Sustain Our Planet

– Optimize your Profitability 3

Jeana Wirtenberg, President & CEO, Transitioning to Green

Today’s Presenters

• Bill Russell, Principal, Transitioning to Green, LLC – Chemical Engineer, MBA-Finance – Hazardous waste site investigator / engineer – Former US environmental practice leader of

PwC • Expert witness on Superfund and Asbestos

Litigation • Advisor to insurance industry on new

environmental risk products • Advisor to industry on Sustainable Enterprise

practices

– Professor, Green Accounting Columbia University

4

• Linda Kelley, Principal, Transitioning to Green, LLC – Enterprise Ecologist

– Artist and naturalist

– Practitioner of whole systems approach to strategy, innovation, leadership , collaboration, and learning

– Consultant to business and government

– Pioneer in virtual technologies for collaborative learning

Transitioning to Green MSO Webinars

• High level perspective of sustainability related to insurance risks

• Highlighting the nexus between traditional insurance interests and the emerging nexus of energy, water and food

• A series of three webinars that address concerns and interests expressed by insurance professionals in the MSO Survey in the Spring of 2013

– Hydraulic Fracking and Insurance – Insurance Risks and Water Quality – Issues of Food Security and Insurance

Top Industry Risks Related to Greening, continued

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4. How important are risks related to water and energy quality and reliability?

12. How important is quantifying economic impacts and financial value of "green" risks?

7. How important are risk issues related to air pollution, smog and indoor air quality?

8. How important are risk issues related to wetlands preservation, biodiversity and ecosystem conservation?

Important + Critical = 39%

Important + Critical = 48%

Important + Critical = 46%

Important + Critical = 40%

Top Industry Risks Related to Greening

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6. How important are risk issues related to climate change and extreme weather events?

Important + Critical = 74%

Important + Critical = 61%

Important + Critical = 58%

Important + Critical = 57%

5. How important are risks related to food quality and security?

9. How important are business interruption insurance implications from "green"/sustainability risks (e.g. more time and/or costs to rebuild a green building after a fire or flood)?

2. How important are green building technology innovation performance claims (e.g., energy efficiency, ability of windows or roofs to withstand high winds)?

Agenda

• Introduction - issues and concerns • Food-Water-Energy Nexus • Food Security • Food Safety • Why is food security and safety an insurance issue? • Who are the stakeholders in this chain of value? • Q & A • Overview of issues and risks related to insurance product liabilities, and

litigations, with examples • Review of precedents, including examples and case studies • Risk analysis of categories that relate to food security and safety • Damage claims • Conclusion

– Examples shared by participants from their own claims experiences

• Actions going forward and follow up

World Economic Forum The Global Risks Report 2014

Water-Food-Energy nexus

Water, food and energy are inexorably interconnected

Food Security

In between the obvious risks from crop failures and livestock epidemics, and food contamination at the retail level, are food security issues and risks that run through the entire food supply chain. Because there are so many interconnected threads in food security, it is important for insurers to have a grasp of the entire picture.

In this webinar we will give an overview of food

security and safety that includes operational, regulatory, and environmental liabilities. We will use actual cases as examples.

Food Security Two Separate Meanings

1. Access to sufficient food (USDA) a. Physical, availability

b. Economic, means to obtain

2. Prevention of tampering, or malicious, criminal or terrorist actions (FDA)

a. Management

b. Supervision

c. Investigation

d. Recall strategy

Threats to Food Security

• Severe weather, volatility and long-term negative weather patterns

• Water scarcity and chronic water shortage

• Disease

• Soil degradation

• Increased concentrations of population

• Land use conflicts

Farm to Table Do you know where your food comes from?

Farm Table

Science on Sustainability

FAOSTAT

Global Food Producing Regions The food, water, population growth dilemma

The Standardised Precipitation-Evapotranspiration Index (SPEI)

Severe drought (Western US)

• California

• Texas

• Colorado

• Wyoming

• Idaho

Abnormally dry

Connecticut

Massachusetts (Central)

New York (Southern)

Pennsylvania (Central)

Update on Hydrofracking and Water Use

https://www.ceres.org/resources/reports/hydraulic-fracturing-water-stress-water-demand-by-the-numbers/view

Winter is supposed to be the Wet Season California Ranchers cut herds in drought

November 9, 2008. California's worst drought in decades is forcing the state's cattle ranchers to downsize their herds because two years of poor rainfall has ravaged millions of acres of rangeland used to feed their cows and calves. The parched, yellow pastures on Joe Gonzales' cattle ranch attest to the severity of a dry spell that is devastating the economic fortunes of many of the state's beef producers.

January 27, 2014 “Look at it out there, they ain’t nothing for ‘em to bite, they’re wearing their teeth out trying to get at it.” Jim Gates, Nevada County Free Range Beef

Winter wheat production is down

• US stockpiles were smaller before the 2013 harvest

• 3% less hard red winter wheat planted in the US in 2014 (used in bread)

• 16% less soft wheat in 2014 (used in cakes and cookies)

• Contamination – Heavy metals

– Petroleum/oil/methane

– Mineral salt concentrations

• Nutrient and mineral depletion

• Sterility

Disease

• Bacterial wilt

• Fungus

• Plant viruses

• Bird flu

• Mad cow

• Honey bee die off

Agriculture Land Use Conflicts

• Agriculture vs. energy production – Hydrofracking – Oil drilling – Hydropower

• Agriculture vs. urban expansion

• Agriculture vs. environmental preservation

Central Resorvoir, Willits, Mendocino CountyCA. February, 2014

Brazil, rainforest destruction for soy farming

Problem: people without secure access to food 5.8 million American households are ½ mi + away, with no car

Solutions

I. COMMODITIES

II. CONSERVATION

III. TRADE

IV. NUTRITION

V. CREDIT

VI. RURAL DEVELOPMENT

VII. RESEARCH, EXTENSION, AND RELATED MATTERS

VIII. FORESTRY

IX. ENERGY

X. HORTICULTURE

XI. CROP INSURANCE

The Agriculture Act of 2014 USDA

TITLE XI—CROP INSURANCE • Sec. 11001. Information sharing.

• Sec. 11002. Publication of information on violations of prohibition on premium adjustments.

• Sec. 11003. Supplemental coverage option.

• Sec. 11004. Crop margin coverage option.

• Sec. 11005. Premium amounts for catastrophic risk protection.

• Sec. 11006. Permanent enterprise unit subsidy.

• Sec. 11007. Enterprise units for irrigated and nonirrigated crops.

• Sec. 11008. Data collection.

• Sec. 11009. Adjustment in actual production history to establish insurable yields.

• Sec. 11010. Submission of policies and Board review and approval.

• Sec. 11011. Consultation.

• Sec. 11012. Budget limitations on renegotiation of the standard reinsurance agreement.

• Sec. 11013. Test weight for corn.

• Sec. 11014. Crop production on native sod.

• Sec. 11015. Coverage levels by practice.

• Sec. 11016. Beginning farmer and rancher provisions.

• Sec. 11017. Stacked income protection plan for producers of upland cotton.

• Sec. 11018. Peanut revenue crop insurance.

• Sec. 11019. Authority to correct errors.

• Sec. 11020. Implementation.

• Sec. 11021. Crop insurance fraud.

• Sec. 11022. Research and development priorities.

• Sec. 11023. Crop insurance for organic crops.

• Sec. 11024. Program compliance partnerships.

• Sec. 11025. Pilot programs.

• Sec. 11026. Index-based weather insurance pilot program.

• Sec. 11027. Enhancing producer self-help through farm financial benchmarking.

• Sec. 11028. Technical amendments.

Trans Pacific Partnership (TPP)

• TPP negotiations are being conducted with a great deal of secrecy

• Complete text of TPP provisions is not publicly available

• Leaks of worrisome content by Congressional Representatives regarding both intellectual property and food safety, indicate that adequate protections are lacking

• TPP conditions as related would impose restrictions on US government policies that keep our food safe and not require the country of origin of the food to meet current US inspection standards for import (claiming equivalence)

from Food Safety News

Members of Congress Ask That Seafood Safety Be Part of TPP Negotiation BY NEWS DESK | NOVEMBER 30, 2012Congresswoman Rosa DeLauro (D-CT), Senator Mary Landrieu (D-LA) and Congressman Walter Jones (R-N.C.) sent a letter to the Obama Administration Thursday asking that public health be a focus during the negotiations for the Trans-Pacific Partnership (TPP) Free Trade Agreement. The lawmakers are concerned that, as result of expanded trade with Vietnam and Malaysia – two of the countries included in TPP – the United States could see an influx of imported contaminated seafood. Currently, around 90 percent of the seafood consumed is imported.

Food Safety

• Growing

• Handling

• Additives – Nutritional supplements

– Fillers

– Preservatives

• Contamination – Toxins

– Disease and pandemics

USDA Identifies Some Retailers in Massive Beef Recall

WASHINGTON, Feb. 8, 2014 – Rancho Feeding Corporation, a Petaluma, Calif. establishment, is recalling approximately 8,742,700 pounds, because it processed diseased and unsound animals and carried out these activities without the benefit or full benefit of federal inspection.

Some Food Producers and Distributors located in NJ

• Large food companies

• Specialty foods and markets

What is a Food?

Functionally, food is: nutritional support for life that

• Produces energy

• Maintains life

• Supports growth

Legally, “food,” in the US, means (21 U.S. Code § 321)

• Articles used for food or drink for man or other animals

• Chewing gum

• Articles used for components of any such article

Designer Plants and Animals

• People select sets of seeds, and animal parentage to get traits they want in plants and stock

• Artificial cross pollination

• Grafting of trees and shrubs for tasty fruits with strong roots

• Animal breeding

• Genetic Modification of the Organism (GMO)

Left to right: plantains, Red, Latundan, Cavendish

Sheep bred for wool

Sheep bred for meat

Designed Alternative Farming Hydroponics, tunnel farms, roof and wall farms

Zero Carbon Food, UK. Greens grown hydroponically in an old bomb shelter tunnel under London

Green Spirit Farms (GSF) outside Scranton, PA. An industrial racking system of four to five levels capable of 17 million plants in total

The Eagle Street Rooftop Farm, Brooklyn, NY, is showcased internationally as a pioneer in the urban farming movement.

Redesigning the Food System Fast Company 50 Most Innovative Companies, 2014

AgLocal •Exclusive, hard to find products •Easy online ordering •Trustworthy customer service •Customer delivery soon

Beyond Meat Our vision is to become the market leader in the development and introduction of new plant protein products. It’s at the cutting edge of plant protein research and development

BrightFarms. BrightFarms works with the big stores to grow lettuce, tomatoes, and herbs on-site (or nearby) in large hydroponic greenhouses

Farmland LP Converting conventional farmland to organic, sustainable farmland. Farmland LP is giving farmers an easier option for scaling up—land leasing.

HarvestPower has nearly 40 plants across North America and produces 65,000 megawatt hours of power and 29 million bags of soil, mulch, and fertilizer, which it sells to farmers and landscapers.

Stakeholders in food security?

• Farmers and ranchers • Food production and processing companies • Food packaging, storing and transportation

companies and their suppliers • Food retailers; institutions that serve meals • Importers, and exporters • Government regulatory agencies • Food researchers • Food industry associations • Insurance companies

Q & A

Food Safety, Security and Insurance

• Food safety risks and insurance implications

• Food security and insurance implications

• Food insurance risk financing

Food Safety Risks and Insurance

• Food safety – Farm liability

– Restaurant and food service liability

– Food packaging and storage

• Food bourne diseases and food poisoning claims

• Adulterations and mislabeling

• Extreme weather

• Other

Food Safety

• Food safety is a scientific discipline describing handling, preparation, and storage of food in ways that prevent foodborne illness.

• This includes a number of routines that should be followed to avoid potentially severe health hazards.

• The tracks within this line of thought are safety between industry and the market and then between the market and the consumer.

Food Safety

• In considering industry to market practices, food safety considerations include: – the origins of food including the practices relating to food labeling,

– food hygiene,

– food additives and pesticide residues, as well as

– policies on biotechnology and food and

– guidelines for the management of governmental import and export inspection and certification systems for foods.

• In considering market to consumer practices, the usual thought is that food ought to be safe in the market and the concern is safe delivery and preparation of the food for the consumer.

Food Safety – Labeling Natural? GMO vs. Non-GMO

• Barbara’s Bakery, owned by Weetabix – “Natural" hasn't been legally defined. – FDA has chosen to not address whether natural products can legally

contain GMOs. – More than 80 percent of all commodity corn, soy and sugar beet crops

grown in the United States are GMO-based. – Settled out of court for USD $4 million

• Barbara’s – Changed its packaging to remove the phrase all-natural – Moving quickly to remove GMO ingredients from its products – Achieving certification from the Non-GMO Project Verified label.

“From a legal perspective, we weren’t doing anything wrong," Frederico Meade, VP Marketing at Barbara’s.

Barbara’s Bakery not an isolated incident.

• Naked Juice, owned by PepsiCo, settled a similar lawsuit for $9 million;

• Cargill’s Truvia stevia-based sweetener settled a “deceptive marketing" lawsuit for $5 million.

• Other companies fighting all-natural lawsuits over GMO ingredients include:

–Smuckers for its Crisco vegetable oil,

–PepsiCo for its Frito-Lay chips, and

–Gruma Corp. for its Mission corn chips.

Food Safety – Labeling Natural? GMO vs. Non-GMO

Food Safety - Labeling California’s Proposition 65

• Specific labeling requirements on products sold in the state

• If the product contains chemicals listed by the state as carcinogens or reproductive toxicants, including lead, above specified limits.

• Failure to provide such warnings can result in action by the California attorney general or by “any person in the public interest."

Food Safety - Labeling California’s Proposition 65

• Since 2010, around 300 Prop 65 notices on lead were filed – Settlement costs in 2012 totaled nearly

$1 million by midyear,

– The average cost of each settlement amounted to about $48,000—not including legal expenses incurred by the companies receiving these notices.

Food Safety - Food-Borne Illness

Bakers Dozen of Cruise Ship Norovirus Outbreaks Posted By Drew Falkenstein on February 4, 2014 1. Royal Caribbean Cruise Line Current number sick: 626 2. Celebrity Cruises, Mercury (February 2010) Total sick: 443 3. Celebrity Cruises, Mercury (March 2010) 419 4. Princess Cruises, Crown Princess (January 2010) 396 5. Princess Cruises, Crown Princess (February 2012) 363 6. Celebrity Cruise Lines (September 2013) 335 7. Fred Olsen Cruise Lines (January 2010) 310 8. Princess Cruises (March 2013) 276 9. Princess Cruises (February 2009) 271 10. Carnival Cruise Line (April 2009) 265 11. Royal Caribbean Cruise Line (January 2012) 259 12. Cunard Line (December 2012) 220

Food Safety - Food-Borne Illness

CDC’s FoodNet reported rates of infection per 100,000 people as follows:

Salmonella: 14.81 Campylobacter: 12.71 Shigella: 6.09 Cryptosporidium: 1.91 E. coli O157:H7: 1.31 non-O157:H7 STEC: .46 Yersinia: .35 Vibrio: .34 Listeria: .31 Clycolspora: .09

Food-Borne Illness Litigation

175 foodborne pathogen jury verdicts were reviewed • Only 31.4% of cases resulted in compensation • The median award was $25,560 (1998 $) • Legal incentives tend to work better in outbreaks • Identification and documentation of outbreaks is

improving • Outbreaks not only have greater potential for

financial damage, but also cause reputational damage

Insurance and Food-Borne Illness

• Widespread cost-shifting reduces incentives for ill individuals to seek compensation

⁻ Health insurance and employee benefits cover some of the costs

• Food-borne illness claims made under product liability law • Most all defendants have some form of liability insurance • Claims have high transaction and information costs • Insurers reach confidential settlements • Producers never receive economic signals to invest in greater

product safety

Food Security

• Food security is a condition related to the ongoing availability of food.

• Yet it was only at the 1974 World Food Conference that the term 'food security' was established as a formal concept. – Originally, food security was understood to apply at the national level,

with a state being food secure when there was sufficient food to "sustain a steady expansion of food consumption and to offset fluctuations in production and prices".

• A new definition emerged at 1996 World Food Summit; this time with the emphasis being on individuals enjoying food security, rather than the nation.

• According to the Food and Agriculture Organization (FAO), food security "exists when all people, at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life".

Food Security

• Household food security exists when all members, at all times, have access to enough food for an active, healthy life.

• Individuals who are food secure do not live in hunger or fear of starvation.

• Food insecurity, on the other hand, is a situation of "limited or uncertain availability of nutritionally adequate and safe foods or limited or uncertain ability to acquire acceptable foods in socially acceptable ways", according to the United States Department of Agriculture (USDA).

Food Security

• Food security incorporates a measure of resilience to future disruption or unavailability of critical food supply due to various risk factors including droughts, shipping disruptions, fuel shortages, economic instability, and wars. In the years 2011-2013, an estimated 842 million people were suffering from chronic hunger.

• The FAO identified the four pillars of food security as availability, access, utilization, and stability.

• The United Nations (UN) recognized the Right to food in the Declaration of Human Rights in 1948, and has since noted that it is vital for the enjoyment of all other rights.

• The 1996 World Summit on Food Security noted that "food should not be used as an instrument for political and economic pressure".

Food Security Risks

According to the International Centre for Trade and Sustainable Development, • Failed agriculture market regulation and the lack of anti-dumping

mechanisms engenders much of the world's food scarcity and malnutrition.

• As of late 2007, export restrictions and panic buying, • US Dollar Depreciation, • Increased farming for use in biofuels, • World oil prices at more than $100 a barrel, • Global population growth, • Climate change, • Loss of agricultural land to residential and industrial development,

and • Growing consumer demand in China and India

Food Security - Crop Insurance

• Purchased by agricultural producers, including farmers and ranchers to protect against the loss of their crops due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural commodities.

• The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance.

Crop Yield Insurance

• Crop-hail insurance: Provided by private insurers.

– Hail is a narrow peril that occurs in a limited place and

– Its accumulated losses tend not to overwhelm the capital reserves of private insurers.

Crop Yield Insurance

• Multi-peril crop insurance (MPCI): Usually offered by a government

insurer.

– Offers hail, excessive rain and drought in a combined package.

– Sometimes, additional risks such as insect or bacteria-related diseases are also offered.

– Premiums are usually partially subsidized by the government.

– The problem with the multi-peril crop insurance is the possibility of a large scale event. Such an event can cause significant losses beyond the insurer's financial capacity.

– Federal Crop Insurance Corporation manages multi-peril insurance program.

– Since 1996, The Risk Management Agency (RMA) calculates the premiums based on individual risk factors .

Crop-revenue Insurance

Crop-revenue = Crop-yield x the crop price • Based on deviation from the mean revenue.

• RMA uses the futures prices on harvest-times listed in the commodity exchange markets, to determined the prices.

• Combining the future price with farmer's average production gives the estimated revenue of the farmer.

• Accessing the futures market offers enables revenue protection even before the crop planted.

• There is a single guarantee for a certain number of dollars. The policy pays an indemnity if the combination of the actual yield and the cash settlement price in the futures market is less than the guarantee.

• Covers the decline in price that occurs during the crop's growing season.

• Does not cover declines from one growing season to another.

Crop-risks Weather Insurance

• Weather events that impact crop yields are often spatially correlated, thus creating problems for traditional insurance, which is designed to pool a large number of small, uncorrelated risks rather than widespread systemic losses (Miranda and Glauber, 1997).

• An emerging trend has been the development of new financial instruments (catastrophe options, catastrophe bonds) that allow insurers to securitize correlated risks and circumvent the limitations of traditional insurance markets.

Crop-risk Index Insurance

Food Insurance Risk Financing

1 a : the business of insuring persons or property b : coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril c : the sum for which something is insured 2: a means of guaranteeing protection or safety <the contract is your insurance against price changes>

1in·sur·ance

Transfer Of Risk The underlying tenet behind insurance transactions. The purpose of this action is to take a specific risk, which is detailed in the insurance contract, and pass it from one party who does not wish to have this risk (the insured) to a party who is willing to take on the risk for a fee, or premium (the insurer). In today's financial marketplace, insurance instruments have grown more and more intricate and complex, but the transfer of risk is the one requirement that is always met in any insurance contract.

Investopedia explains 'Transfer Of Risk'

Food Insurance Risk Financing

Cost of Risk (COR) • Quantitative measure of the total direct and indirect

expenditures dedicated to mitigating the risk exposures confronting an organization in pursuit of its business objectives.

• Typically interpreted to capture only those costs arising out of

insurance activities (i.e. retained losses, risk control costs, insurance premiums, and administration expenses)

Food Insurance Risk Financing

Cost of Risk (COR) True COR captures expenditures (risk spend) from all of the following major areas:

• External risk transfer [insurance premiums, credit/counterparty transfers, financial (hedging) instruments] • Retained / self-insured losses [including indirect costs such as reduced productivity] • Risk mitigation programs [environmental health and safety, emergency planning, regulatory compliance] • External consultancy fees [legal, actuarial, modeling, analytics] • Internal program administration [salaries, benefits, overhead] • Collateral costs [LOC’s, trust accounts, pledged securities] • Missed opportunity costs

Food Insurance Risk Financing

• Agricultural insurance has been offered to farmers in many different countries in many different forms since at least the 1920s.

• The current U.S. agricultural insurance program, for example, is a mix of 22 different types of program (including area yield and revenue programs and rainfall and vegetation index based products as well as multiple peril revenue and yield products for individual farms) covering over 130 different crops.

• The US program is often cited as a model for other countries because of high participation by farmers.

• In 2008, the program achieved a record participation rate of just over 80 percent of the planted area eligible for insurance, about ten percent higher than in 2007 (Goodwin and Smith, 2009)

Food Insurance Risk Financing

US Crop Insurance Model Not Replicable • Farmers did not have to pay any of the administration costs of the

program (the loading factor is zero) and

• Also had to pay only 40 percent of what were intended to be actuarially fair premium rates.

• In 2008, to be eligible for U.S. crop disaster program payments, producers had to purchase agricultural insurance for all economically significant crops.

• As a result, agricultural insurance subsidy payments to U.S. farmers and crop insurance companies increased to almost $6 billion.

• Developing country governments cannot afford to provide this type of program to their countries’ farm households.

Food Insurance Risk Financing

Water-Food-Energy nexus

Water, food and energy are inexorably interconnected

Conclusion

• Claims examples from participants?

• Actions going forward. What will you do with what you have learned today?

• Follow-up: please let us know what other leading edge topical webinars you would want?

• Evaluation survey via email

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