INSURANCE AND MORAL HAZARD IN SALMON AQUACULTURE  

The rapidly changing production processes in aquaculture has required large investments from fish framers, and over the last decades the demand for insurance to share and cover the risks involved has increased significantly within the aquaculture sector. On the other side, the availability of commercial aquaculture insurance is not widespread, and there is a widening gap between the demand for and supply of aquaculture insurance in the world. According to the insurance industry itself, asymmetric information, moral hazard and adverse selection are among the major constraints to undertake aquaculture insurance activities. However, to my knowledge little research has been done to investigated how insurance affect the behavior of fish farmers, to see if moral hazard and adverse selection is an actual problem within this industry.

This paper investigates how insurance affect the producer behavior (productivity) in Norwegian salmon farming. The case is interesting as Norway has one of the most specialist markets for aquaculture incurrence in the world; a group of Norwegian insurance companies has specialized in the aquaculture insurance since salmon farming began in the early 1970s.  A translog production frontier is used for estimation. In the analyses, we test empirically if insurance has a productivity enhancing effect, and if insurance is altering the utilized input quantum to a more risky bundle.  In addition to this insurances effect on framer's technical efficiency is tested.

The results illustrates that insurance has an enhancing effect on both production and efficiency, which indicate that moral hazard is a problem in this industry. This is as expected since a risk adverse uninsured framer will take into account both the variance and mean function when optimizing his utility function, while an insured framers only has one argument in his utility function; profit maximization.  While it might be rational for an uninsured framer to use productivity reducing instrument to reduce production risk, the insured framer does not have the same incentive to reduce risk, since the consequences for an incident is much less. Particularly an insured farmer is found to apply more of the risk increasing, but also very productive input, feed, than the less insured famers. In that way insured farmers increase both their yield and production risk. Since risk is of less importance when incurred, this increase the insured famer's utility. The result is also interesting form an environmental point of view. One of the main sources of pollution in salmon aquaculture is feed that is not utilized efficiently by the fish. Since insured farms utilize more feed than less insured framers, the development of a well-functioning insurance market can possible lead to increased environmental externalities.