Demand for fresh, fast, diverse food options is boosting innovation, but also unseen risks throughout the supply chain. In response comes a new age of insurance

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Food delivery giant Ocado’s CEO Tim Steiner wants to deliver fresh produce from farm to fork within an hour of picking. To achieve that ambition, the business has invested some £17m in firms that design and operate so-called “vertical” farms – warehouses in which crops are grown on stacked trays under artificial light.

Why? Controlled conditions in the farms pretty much guarantee a predictable output of fruit and veg – and the farms can be located anywhere. Steiner thinks locating these farms next to its distribution centres could be the future.

“We believe that our investments today in vertical farming will allow us to address fundamental consumer concerns on freshness and sustainability, and build on new technologies that will revolutionise the way customers access fresh produce,” he says.

Vulnerable to outages

But Swiss Re Corporate Solutions’ food and agriculture expert, Oleksandr Artiushyn, warns that these advancements do bring significant risks.

He points to the example of land-based aquafarms, giant silos that can play home to thousands of fish.

“Let’s just say you don’t have electricity for a couple of days, or even just a few hours, there is a good chance that all fish will die very quickly,” Artiushyn says.

For investors in these indoor farms that depend on constant electrical supplies, he warns of the severe losses that a power cut or natural catastrophe could bring.

More choice, more complexity

Nevertheless, Artiushyn is aware that these developments are necessary. He says that a growing population, and increased incomes in some parts of the world, are having an effect on diets.

“People want to buy safer food of higher quality,” he says. “And this means not only an increase in the supply of food, but also a diversification in the food that is offered.”

This has been seen in the UK where supermarket giant Sainsbury’s, for example, has tested the market by doing everything from stocking insect snacks – crickets in this case – to opening a pop-up vegan butcher.

When the food comes from a supermarket, it is important to make sure that all elements of the supply chain are working perfectly to ensure the safety and quality of the end product 

But that carries a risk of its own, Artiushyn says. “When companies develop new products, there is a certain chance of a mistake, for instance, with human error.”

And the reason for that, Artiushyn argues, is that the supply chain is getting more complicated.

“There are more varieties of food, and there are more new technologies coming into place,” he says.

“When the food comes from a supermarket, it is important to make sure that all elements of the supply chain are working perfectly to ensure the safety and quality of the end product – as well as sustainable revenue and peace of mind of the food manufacturers.”

Covering unseen risks

And that has changed the scope of Artiushyn’s role. Rather than just covering physical events, as in the past, insurers are now covering so-called “non-damage business interruption”, revenue protection even when a firm hasn’t suffered a physical loss, like a fire or a flood.

“The climate on earth is changing and the frequency and severity of natural catastrophes, as well as extreme weather events, is growing,” he explains.

In turn, that is creating volatility in the supply chain, and that can have a significant impact, not just on farmers, but on every link in the supply chain, from manufacturer to packager to shop.

This has ushered in a new age of insurance that requires a whole new set of terms and conditions to accommodate the ‘intangible risk’. These tend to depend on parametric triggers – pre-agreed events that, if they occur, will trigger a pay-out from the insurer. This can be anything from a drop in revenues due to low market prices and bad crops to an earthquake of a certain magnitude in a certain location.

“We can cover different perils based on third-party data to make sure that companies have sufficient protections of their revenue and cash flow in case of catastrophic events,” Artiushyn says.