RISK MANAGEMENT AND INSURANCE OPTIONS FOR FISHERIES

RESOURCES
INTRODUCTION
Risk pervades modern day fisheries management where uncertainty,
variability, scarcity and multiple objectives are common terms. Two
major drivers underlie this: the inability to predict the behaviour of
complex socio-ecological fishery systems (Charles 1998) and a
transition of ocean ecosystems away from frontier settings of
untouched and unlimited resources to scarce resources and conflicting
goals (Hanna 1997). In short, fisheries management is the business of
making trade-offs in a complex, unpredictable and variable world. Risk
management methods provide pragmatic means of navigating this
increasing complexity by systematically identifying and coping with
risk.
Fisheries science has reacted to the mounting challenges to successful
management, for example by making recommendations to incorporate
risk and uncertainty into the decision-making process (Ludwig et al.,
1993; Rosenberg and Restrepo 1994), however risk management as a
pragmatic and proactive framework remains underutilized.
Risk, risk management and the Fisheries/Aquaculture context
A first step in exploring risk management is to examine risk in fisheries and its causes.
Risk is an intuitive concept to humans; everyone deals with it on a daily basis in making
decisions. Any risk involves three underlying components (based on concepts from:
Athearn 1971; Crockford 1991; Rowe 1994; Kangas and Kangas 2004):
• a variable state of the world,
• imperfect knowledge on the state of the world, including in the future, and
• a desired state of the world.
In short, a risk entails the ideas of variability, uncertainty and loss, leading to the
following definition: a chance of adverse effects from deviations from expectations. Note
that a risk is a possibility of a bad thing happening, whereas a realized risk is an actuality,
i.e. an adverse outcome has transpired.
Using the definition suggested above, there are myriad risks in fisheries management and
their identification is of critical significance. Uncertainty is widely regarded to be
pervasive in fisheries (FAO 1995; Charles 1998; Weeks and Berkeley 2000; Harwood
and Stokes 2003), and risks can be identified simply by following the sources of
variability and uncertainty as these drive deviations from expectations. Table 1 outlines
some common risks affecting the functions of different parts of a fishery system. Multiple
risks can be associated with a function.
Table 1: A partial list of risks affecting the functions of components of a fishery system
Function Example Risks
Biological Biomass Production Stock depletion
resource Habitat provision Habitat degradation
Biodiversity, genetic diversity Pollution
storage Exotic species introductions
Nutrient/chemical cycling Climate change
Climate regulation Natural disasters
Recreational/cultural opportunity Disease
provision Genetic stock structure changes
Species interactions/ecosystem
effects,
e.g. trophic cascades
Management Regulate and allocate harvest Failure to achieve social
agencies Protect habitat benefits goals
Collect data and perform research through overly cautious harvest
Stock enhancement Failure to achieve conservation
Enforcement and compliance goals
through overly aggressive
harvest
Funding changes
Fishermen, fishing Harvest Catch fluctuation
communities, Process Price fluctuation
fishing Market Cost fluctuation
industry Changes in rights to resource
use
Personal injury
Equipment failure
Employment loss

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Risk management is a loose term for the general process of identifying, characterizing
and reacting to risk. Dorfman (2008) offered a straightforward definition, ‘the logical
development and implementation of a plan to deal with potential losses.’ Crockford
(1991) offered a more comprehensive definition, focused on corporate management, but
equally applicable to a natural resource system: ‘the identification, measurement, control
and financing of risks which threaten the existence, the assets, the earnings or the
personnel of an organization, or the services it provides.’ The focus in either case is the
pragmatic goal of minimizing the effects of unpredictable variability.
Risk management comprises two stages (Fig. 1). In the first, risks are identified and
characterized. Then in the treatment stage, they are dealt with (Crockford 1991;
Outreville 1998). The treatment phase can be broken down into three avenues for
handling risk:
• avoid,
• transfer or
• retain risk.
In avoidance, management decisions are made to forego risky prospects, for example by
deciding not to develop a new resource.

3
 Figure 1: A risk management framework. Rounded boxes are entry and exit points into the risk
management process. Rectangles, diamonds and ovals denote actions, decisions and chance
events, respectively.
In transfer, risks can be shifted in whole or in part to another entity that is better able to
bear them, for example through insurance or by sharing risk over a pool of individuals. If
the decision is made to retain risk, several options are available. Risk control attempts to
reduce the likelihood and/or the magnitude of an adverse outcome. Note that some risks
are uncontrollable, such as natural disasters. Another option is to finance risk by making
preparations to absorb realized losses. Alternatively, a decision can be made to ‘do
nothing’ and absorb realized risks with no preparation. This encompasses cases where
extant risks go unidentified, or when no action is taken on identified risks citing a lack of
sufficient information to understand the problem. A final measure to handle retained risks
is risk recovery, where efforts are taken to improve the response time of a system after a
realized adverse outcome.

4
RISK MANAGEMENT AND INSURANCE OPTIONS FOR FISHERIES
RESOURCES
1). Avoiding risk: the Precautionary Principle
Perhaps, the most straightforward method of managing risk is to avoid it; prevention vs.
treatment. Sharing similar components with decision analysis and risk assessment, the
general process of risk avoidance involves identifying the risks associated with a
proposed action, followed by cost and benefit analysis. If potential costs outweigh the
benefits, then decide against the activity. Risk avoidance opportunities in fisheries
management are case-by-case specific. In some instances, risky activities can be spatially
or temporally separated.
It is usually difficult if not impossible to predict the true costs and benefits of a proposed
management action. The Precautionary Principle provides a guiding framework for
policy creation under risk avoidance. In its pure form, the Principle states that no action
should be taken until evidence demonstrates that it is harmless (Foster et al., 2000).
Taken too literally, it would result in failures to achieve socioeconomic goals of ocean
resource management by being overly conservative in foregoing catch and employment.
Paradoxically, by being too conservative in avoiding risks, the overall chance of
management failure increases and risk management is incomplete. This has led to a level-
headed practical implementation of the Principle, called the Precautionary Approach
(Garcia 1994; FAO 1995, 1996). Recognizing the balance between resource use and
conservation, the Approach maintains the heart of the Principle, but interprets it in a
manner that is open to some risks associated with resource use.

2). Managing risk through transfer

Successful fisheries management requires consideration not only of biological
sustainability, but also of economic sustainability for resource users (Hilborn 2006,
2007). Towards that end, insurance policies which transfer risk or the vulnerability to
environmental and economic variability away from individual producers provide a
business-oriented component to dealing with uncertainty in fishery systems.
Insurance can be defined as a financial arrangement that redistributes the costs of
unexpected losses (Dorfman 1978). The key idea is that risk can be transferred to

5
someone who is better able to bear it, moving towards Pareto efficiency (Ahsan et al.,
1982). Pareto efficiency is often used as an economic target for policy, describing a
situation where no one can be made better off without making someone else worse off.
The transfer of risk to another party comes with a payment for riskbearing services, an
insurance premium.
Risk management through insurance is not widespread in fisheries, however, three forms
have been implemented to varying degrees of success:
• personal health and safety,
• asset, and
• production and market insurance.
Insurance instruments for fisheries in developing countries are less common (Hotta
1999).
Individual insurance policies, where the financial arrangement concerns one insured and
an insurance body, are appropriate when loss events are randomly distributed throughout
a population. Alternatively, group insurance policies, where the financial arrangement
concerns a collection of insureds and an insurance body, provide opportunities for
managing risks that simultaneously affect an entire fishery, such as a weak salmon run.
Group risk management in fisheries is important due to the large scales at which
biological, environmental, and economics processes operate, including aggregated fish
populations, large water masses, and marketwide price changes, inter alia.
3). Controlling risk: diversification and the portfolio effect
The goal of risk management through diversification is to take advantage of probabilistic
properties to both reduce the likelihood and severity of a loss by constructing a bundle of
assets, a portfolio. The term asset is general and can refer to species, fish stocks, income
sources, or financial securities, inter alia. Portfolio theory focuses on the selection of
assets to create a bundle that provides the greatest expected performance, say catch or
annual income, at the least variation about the expected performance.
Diversification and portfolio theory rely on two phenomena: statistical averaging and
correlations amongst portfolio components. Statistical averaging is the effect that a sum
of random variables, such as catch value, has lower variance than the individual variables
themselves, contributing to portfolio performance stability (Doak et al., 1998; Tilman et

6
al., 1998). The effect can operate both with statistically independent or correlated assets.
The second component of diversification plays out when assets’ performances are not
independent. Discrepancies in correlations amongst asset returns are exploited to reduce
variability about an expected performance. This is the effect taken advantage of by a fish
farmer who stocks a mix of warm- and cool water adapted fish to stabilize harvest in the
face of unpredictable weather.
4). Controlling risk: price risk management
Price variability is a primary component of revenue variability, a major source of risk for
fishery participants and the broader fishing industry. This form of variability is also
termed marketing risk, where the transformation of production activities to financial
reward occurs under uncertainty (RMA 1997). Marketing risk can make operating a
business difficult and can negatively affect inter-temporal resource allocation decisions
(Larson et al., 1998), for example the financing of new fishing gear or processing
facilities.
To see the relationship between price and revenue risk, consider the following simple
relationship in log space:
V (ln R ) = V (ln P.Q) = V (ln P ) + V (ln Q) + 2Cov(ln P, ln Q)
where V() is variance, Cov() is covariance, and R, P, and Q, are revenue, price and catch.
In cases where production has a strong effect on prices, called an elastic price response,
some natural buffering of price variability occurs where low (high) production results in
higher (lower) prices, or the covariance term is negative. Natural buffering is not a given,
however, as price is a complex function of both endogenous and exogenous factors, such
as the supply of substitutes. Local fisheries are often price takers, i.e. local catch is too
small relative to total market supply to move prices.
Several price risk management strategies are applicable to fisheries:
(i) marketing timing strategies,
(ii) forward contracting and futures, and
(iii) enterprise integration.
i). Marketing timing: strategies involve spreading out the sale of products on cash
markets over time, providing a natural buffer against price variability.

7
ii). Forward contracting and futures are a means for buyers and sellers of fish to remove
price uncertainty by locking into an agreement to sell or buy at a given price at a later
time. A future is a standardized, tradable contract to deliver agreed upon quantities of
graded product at a later date for a specified price. They can be used to manage price risk
in two ways. First off, future contracts held to delivery provide a means of reducing price
uncertainty to zero, however, with some possibility of one side of the exchange not
fulfilling their end of the bargain, or counter party risk. Second, futures provide a method
of hedging price movements in the case where contracts are not held until delivery.
Hedging is taking a position in two or more markets such that a loss in one market can be
offset by a gain in another.
iii). Enterprise integration takes two forms: vertical and horizontal. Vertical integration
internalizes different production stages such as catching and processing fish in one
operation. By internalizing transactions within an operation, the vertically integrated
producer avoids some market transactions and their associated price uncertainty.
Horizontal integration entails the consolidation or cooperation of many similar firms at
the same stage of production, for example the formation of a marketing cooperative for
salmon harvesters.
5). Risk financing: buffers
A risk that is not avoided, transferred or controlled is then retained. Two options exist for
retained risks: do nothing, or prepare to bear a possible loss, i.e. to finance the risk, as it
is termed in business. Risk financing typically refers to financial preparedness, but it can
include any investment to absorb losses from realized risks such as foregoing some catch
to maintain conservative harvest limits. Importantly, risks that go unidentified are by
default retained. A successfully managed fishery might not identify an oil spill as a risk;
however, if shipping occurs in the area, the risk still exists. Given the prevalence of
uncertainty and variability in fisheries and the difficulty in identifying all risks that need
management, financing is an important strategy to deal with unexpected events, or
surprises.
Buffers are the primary tool to finance risk in fisheries management. They may take
several forms: (i) harvest-related buffers that prescribe conservative catch or effort
restrictions that can accommodate unexpected biological shocks, (ii) area or temporal

8
closures, or (iii) more directly related to livelihoods, financial reserves. In addition to
calling for conservative harvest limits, the FAO’s statement of the Precautionary
Approach for the management of capture fisheries calls for marine reserves as buffers,
quoting ‘to limit risks to the resource and the environment, use area closures, which are
relatively quick to implement and are easily enforceable (FAO 1996).
NEED FOR FISHERIES AND AQUACULTURE INSURANCE: ADVANTAGES
AND CHALLENGES FOR DEVELOPING COUNTRIES
Problems and Constraints
Fish production is an inherently risky business, in which fishermen and fish-farmers face
a variety of risks associated with weather and natural phenomena, variations in
production, prices and income, human-error, mechanical failure and accidents from a
variety of causes beyond their control. Fishing differs from other types of economic
activity in a greater dependence on nature than is the case for other businesses. Fishing
must face difficulties arising from weather phenomena, sea conditions, and currents,
while disease, parasites, salinity levels and water quality affect aquaculture production.
The volume of catches is strongly affected by the state of fish stocks and their migration,
in the case of pelagic species. Production costs, such as fuel and other inputs, interest
rates, etc. can also fluctuate. In addition to production risks, fishermen also face uncertain
market conditions, including dramatic declines in the price of fish when catches are
abundant. Being a highly dangerous occupation, the health and personal safety of those
engaging in fishing is frequently at risk.
The high level of risk and above average repayment problems associated with fisheries,
compared to other branches of economic activity, make financial institutions reluctant to
lend for fisheries.
The prevalence of risk in fisheries is not new and fishermen, fish-farmers, fisheries co-
operatives, and banking institutions have developed mechanisms adapted to local
conditions for coping with such problems. These traditional mechanisms of risk
management are in some cases still adequate.
Governments also often intervene by providing emergency assistance and tax relief to
fishing communities in the wake of natural disasters. Such relief can be provided on an

9
emergency basis, but is not feasible, either financially or politically, on a long-term basis,
since preferential treatment for fisheries is unlikely to be acceptable to other sectors.
Fisheries insurance can promote the sustainability of the productive capacity of fishermen
and fish farmers without provoking criticism of this type. Relatively small premiums can
provide fishermen and fish-farmers with the compensation they need to cover the loss of
and damage to vessels, gear and production or catch. In some cases governments find it
worthwhile to provide partial subsidies for premiums and for administrative costs of
insurance programmes; some governments also support re- insurance schemes.
The major risks confronting fishermen can be divided into two categories:
a) Asset risks, production and management risks, and market risks: Asset risks
include loss of or damage to fishing vessels, equipment, and gear and aquaculture
installations, as a result of natural disasters. Production and management risks involve the
loss of catch, production failure and fish disease. Market risks relate to changes in the
prices of outputs and inputs, as well as increases in interest rates.
b) Personal and health risks: Personal and health risks include accidents at sea and
death and job related illnesses.
In some countries the goal of insurance programmes is not merely to provide coverage
for insurable risks, but also to foster mutual assistance and co-operation. Small-scale
fishermen and fish-farmers are more likely to be reached by programmes of this type,
although the financial viability of the schemes may be less certain. In other cases
providing insurance is left entirely to the private sector, limiting coverage to those groups
better able to support the full cost of programme operation.
A number of difficulties and problems often arise with respect to the introduction of
fisheries insurance. The most important of these are the following:
1) Limited financial resources;
2) Exclusion of small-scale fishermen and fish-farmers from insurance;
3) Lack of well-established village institutions, such as co-operatives, to act as
insurance agents;
4) Lack of legal framework for fisheries insurance;
5) Difficulty in promoting insurance policies, designing sustainable insurance
programmes and co-ordinating the work of the agencies concerned;

10
 6) Difficulty of covering credit projects under insurance schemes;
7) High cost of premiums and providing appropriate levels of benefits;
8) Speed and transparency of claims settlement;
9) Lack of trained personnel;
10) Lack of understanding of the value of insurance; and
11) Lack of reliable actuarial data for establishing premium rates.
Advantages and Benefits
The advantages and benefits provided by fisheries insurance vary from scheme to
scheme.
However, in general, the principal benefits of fisheries insurance are:
1) Protecting fishermen and fish-farmers against accidents and natural hazards
beyond their control;
2) Providing basic compensation for the loss of or damage to fishing vessels, gear
and catch (or harvest), thus contributing to stabilisation of incomes within the
fisheries sector;
3) Reducing the risk to financial institutions, which providing credit to fishermen
and fishfarmers, in relation to fisheries credit;
4) Reducing the risk for fishermen and fish-farmers in investing their own
resources in the adoption of new technologies and acquiring improved equipment;
5) Fostering mutual assistance and co-operation among fishermen, fish-farmers
and their organisations;
6) Reducing the unpredictable burden on government of providing emergency
assistance in the wake of natural disasters;
7) Promoting stability in fishery enterprises and contributing to the general
welfare of fisheries communities;
8) Stabilising the contribution of the fisheries sector to national economy.
PLANNING AND PRACTICES OF FISHERIES AND AQUACULTURE
INSURANCE
Fisheries insurance programmes can be either voluntary or compulsory. Which
alternative is best for achieving high levels of participation and adequate coverage of
risks at reasonable costs depends on the social, economic, and cultural orientation of the

11
communities the programmes are designed to serve. For a scheme to be compulsory,
some level of government involvement is necessary.
Compulsory schemes have a number of advantages:
(i) A high degree of participation, a key requirement for the success of insurance
schemes, is essential;
(ii) Administrative costs can be pro-rated over a larger number of policies, thus reducing
the cost of the system to users and of subsidies to government.
There are a number of steps in the establishment of a compulsory system. Legislation
must be enacted, as a pre-condition for making the system mandatory. It is necessary to
create awareness, on the part of fishermen and fish-farmers, of the benefits and
obligations of the system and to take their views into account in designing and
implementing the system. Financial institutions can also help encourage greater use of
insurance by requiring that fisheries assets (and the lives and health of fishermen) be
insured as a condition for providing loans. Linking a compulsory system to credit or
marketing operations can be an effective tool for assuring compliance with mandatory
coverage. When the production is relatively stable, objections to a compulsory system
may be reduced, since premiums are likely to be low and thus not be a major burden on
the payment capacity of fishermen, which is often low. Under this scenario, participation
in a voluntary scheme might be rather low.
Government Involvement and Private Sector Insurance
Government intervention can be justified on the following grounds:
(a) Potential losses are difficult to estimate with any degree of precision to allow for
coverage under a private insurance scheme;
(b) Monetary losses due to uncertainty in the volume of catch or production and in the
price of fish sold would have a serious impact on the well-being of small fishermen with
no alternative sources of income.
Private sector insurance works well with large commercial fisheries companies and
aquaculture producers of high value species. However, such schemes do not provide for
the needs of many of prospective customers almost always requires some degree of
financial support from government.
Criteria for Determining Insurance Coverage

12
Fisheries insurance does not have to cover all elements of fishing or fish-production.
During the initial years of operation, an insurance programme may limit coverage to
those areas most critical to the success or failure of the types of enterprises participating.
Coverage can later be expanded gradually to cover other areas as the agency
implementing the programme acquires the skills and the experience needed to expand
coverage to items of lesser importance to these enterprises or to areas which will
encourage participation by enterprises not initially targeted by the programme.
The choice of particular insurance items to cover varies from one locality to the next even
within the same country. In general terms, the choice of items for coverage should be
guided by certain criteria, the most important of which are the following:
(i) Coverage of an item should contribute to improving food security or nutrition.
(ii) It should contribute to the overall viability of fisheries or aquaculture production and
enhance national economic and social stability.
(iii) Programme design should be such that it does not preclude or discourage
participation by a wide range of small-scale fishermen and fish-farmers.
(iv) Actuarial data on losses and casualties covering a sufficient period of years should be
available to allow accurate establishment of appropriate rates for premiums.
(v) Availability of the infrastructure necessary to keep damages and losses in production,
marketing and credit to a minimum.
(vi) A high percentage of fishermen and fish-farmers should have access to and be using
credit.
(vii) The losses resulting from items to be covered should have a significant impact on
the income of fishermen and fish-farmers.
DESIGN OF FISHERIES AND AQUACULTURE INSURANCE SCHEMES
Premium Standards
Premiums should be based on sound actuarial calculations, using available records on
incomes, damages and losses on insured fishermen and fish-farmers. Premiums should be
set at high enough levels to cover average indemnities, administration costs and, where
appropriate, a contribution towards building up financial reserves.
In order to be actuarially sound, a fishery insurance programme should be based on a
large volume of comparable statistical data regarding incomes of potential policyholders,

13
and losses and damages experienced in the past. This is required for the calculation of
premium rates and indemnities to be paid. Ideally, such data should cover an extended
period of time, showing fisheries and aquaculture yields and their variation from season
to season and year to year. Data on damage and losses should be classified according to
the sources of the losses and damages, discriminating between the various sources, such
as those attributable to fishermen’s neglect on handling gear, fish-farmers’ poor
management of fish ponds, lack of proper fish handling, etc. Moreover, such data need to
be further broken down by types of fishing and aquaculture.
In many developing countries, inaccuracy, incomplete coverage or complete lack of such
statistical data is a serious problem. In some cases it may be necessary to delay
implementation of fishery insurance programmes until a reasonable volume of accurate
data has been accumulated. Even where the data is available, they need to be analysed for
insurance purposes. Many countries do have some sets of data which, though not entirely
satisfactory, can be useful in developing estimates of sufficient accuracy for the initial
planning of a pilot programme, with adjustments made during the course of initial
operations based on more accurate and more complete data.
Pilot Project Operation
There probably is no single best way to conduct an experiment of this type and no
standard timeframe for a pilot insurance programme. The best course is often to run the
experimental programme long enough to permit the drawing of meaningful conclusions
and to observe client reactions to its operations. The effects may emerge gradually,
whether they are positive or negative. The pilot project should be confined initially to a
single item; whichever one is most important to fishermen’s income and national
interests. This and other items selected for coverage should be those for which there are
reasonably good records for past production and losses, and which are relatively simple
to insure. It is also wise to conduct the pilot project in a limited geographical area, where
the conditions under which fishermen operate are as nearly homogeneous as possible.
Experience gained from pilot operations would provide highly relevant and reliable data
on which to expand the service the programme provides and to assist in the design of
larger scale operations to cover other areas of the country or to serve other types of
customers.

14
Awareness Building
Fisheries insurance, like other forms of insurance, is oriented towards the future. In most
cases it provides no immediate and tangible benefits unless and until, at some time in the
future, a covered loss occurs. For that reason, it is often difficult for fishermen and fish-
farmers to appreciate the value of a fishery insurance programme. They have difficulty in
understanding the promise of possible benefits at some uncertain future time in exchange
for immediate outlays of money and effort in the form of premiums and adherence to a
variety of conditions of coverage, some of which, such as carrying safety equipment on-
board, may require further expenditure. It is likely, therefore, that considerable time and
effort will have to be devoted to educational campaigns among the fishermen to achieve
their co-operation with an insurance programme. A variety of media should be used,
including public meetings at local and national levels, brochures, newspapers, radio,
television, and the Internet. Fishermen’s organisations can be useful in generating support
amongst their members and in encouraging them to participate in insurance schemes.
Fostering Trained Personnel
Fisheries insurance is a technical field. Its effective operation requires a thorough
understanding of the complexities of fisheries and aquaculture operations. The lack of
properly trained personnel, not only at village level, but also at provincial and national
levels, poses a serious problem. Different expertise is required at each level. At the top
administrative level, there is a need for expertise in the over-all design of the insurance
programmes, taking into account the integration of insurance components into national
fisheries development plans. At a technical level, terms and conditions of coverage need
to be established and actuarial aspects incorporated into programme design. At the local
level, there must be extension officers or personnel who can effectively explain the
insurance system to fishermen and fish-farmers and are able to make clear to an
unsophisticated audience the complexities of the claims settlement function.
Unfortunately, insurance matters are normally not dealt with by extension officers who
have direct contacts with fishermen and fish-farmers.
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