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BY DAN REYNOLDS, senior editor of Risk & Insurance®

Perhaps no other recent event illustrates the environmental and fiscal perils of the global aquaculture industry better than the near-collapse of Chilean salmon farming in 2007 and 2008.

ISA is fatal, attacking the red blood cells of the popular and romanticized fish, which is prized by chefs and fishermen, and is so rich in the omega-3 fatty acids craved by the health conscious.

Before the ISA outbreak, according to the U.S. Department of Agriculture, Chile had seen substantial increases in its salmon exports to the United States. In 2004, according to the USDA, Chile exported $512.58 million worth of salmon to the U.S. market. By 2007, that figure had ballooned to $810.45 million, an increase of some 58 percent.

Then came the ISA outbreak, and more than half of that country's salmon farms were shut down as farmers were forced to exterminate entire populations.

Chile's salmon exports, which are largely controlled by conglomerates based in Norway, plummeted as thousands of pounds of salmon intended for the international human food markets was instead ground into animal feed or fertilizer.

There were 356 Chilean salmon farms in June of 2008, according to SalmonChile, an industry association. There are now only around 160 farms. At its 2008 peak, Chile sold 403,000 tons of salmon into the global salmon market, according to published reports. In 2010, Chile will be lucky if it sells more than 90,000 tons.

The ISA outbreak isn't the only event that has damaged the Chilean salmon industry. In May of 2008, the volcano at Chaiten, Chile, erupted violently, spewing ash across much of South America and forcing the evacuation or early harvest of more than 5 million farm-raised fish.

The 2008 Chilean salmon losses due to ISA are an "industry-changing" event, according to Durham, England-based Sunderland Marine Mutual Insurance Company Ltd., in a 2009 report to shareholders.

The insurance carrier, which derives one third of its premium income from aquaculture insurance and has been underwriting aquaculture risk for more than 20 years, also said Chilean farmers would implement sufficient risk management measures for the industry to recover. The industry has enough financial, veterinary and pharmaceutical support to recover, according to Sunderland.

The sheer size of today's fish farms ensures that they could never be entirely wiped out, Sunderland also noted in its annual report. Chile's government is also so heavily committed to aquaculture that the industry is bound to recover and even grow again, according to Sunderland. In effect, the Chilean salmon industry is seen as too big to fail, and government intervention will see to it that the industry survives.

Environmentalists and nutritionists, however, point out that fish farms, whether they rely on fresh water ponds favored by another of aquaculture's true money fish, tilapia, or on the salt water pens in which so many salmon are raised, are their own worst enemies.

Writing in the Huffington Post in July of 2009, environmental author and lecturer Dan Imhoff, pointed to the "reverse protein factory" aspect of salmon farming.

It's a debatable point and the ratios probably vary but between two and three pounds of wild fish protein such as anchovies and smelt are needed to produce each pound of farmed salmon.

Other environmental researchers say that in the case of Chile there is no way the waste produced by so many fish being raised in such close proximity can be safely diluted by the ocean's currents.

Chile's fish farming industry is not alone in facing risk exposures. Sea lice threaten farmed salmon in Scotland, and there is a pancreas disease menacing farmed fish in Norway and Ireland. Algae blooms plague farming operations in Western Canada.

But fish farming is seen by many as the only way to counterbalance the decline of the world's natural fisheries. The U.N. Food and Agriculture Organization and WorldWatch have been warning for years that the oceans and their natural fisheries are in danger of being wiped out. The FAO has classified every major natural fishery in as either "depleted," "fully-exploited" or "overexploited."

RISK AND REWARD

While the risk on the supply side is well documented, there is little commensurate risk on the demand side. The demand for fish keeps growing, and that growth will be sure to keep fish farming in business for years go come, according to the International Council for the Exploration of the Seas.

Fish represent the fifth most important agricultural product in the global economy after rice, forest products, milk and wheat, according to the Trade and Environment Database hosted by American University.

When it comes to providing a source of animal proteins for humans, fish is by far the largest source, according to TED researcher Cheryl Brown. Fish provide 25 percent of animal protein needs for people in developing countries and as much as 75 percent of animal protein for people living in nations like Bangladesh, the Philippines and Malawi, said Brown.

Indeed, as global demand continues to rise, North Atlantic salmon suppliers are also growing to meet that demand. North Atlantic fishery production in 2008 grew by more than 5 percent over the previous year, and by more than 16 percent over the five-year arithmetic mean for that region, according to the ICES.

Canada represented Sunderland's largest source of premium income from aquaculture risk coverage in 2007 and 2008. Premium income from coverage of Australian fish farms was roughly equal to the premiums derived from fish farms in United States and South America, according to Sunderland, which declined to provide exact figures.

The ebb and flow of the risks lapping against the supply side of aquaculture hardly seem to be making much of a dent in the demand side, at least not in the United States, which is growing in population at about 3 percent annually.

U.S. salmon imports reached $1.39 billion in 2009, up nearly 60 percent from $871 million in 2004, according to the USDA. With those kinds of numbers, the financial reward in farming fish is likely to outweigh the risk.

Fish are slippery creatures. They move without telling anyone where they are going, and are thus difficult to count. The nature of the medium in which fish are grown also makes it difficult for insurance carriers to predict future claims.

"Water is a fickle environment to deal with, even in its most quiescent state," according to Aquaculture Underwriting & Management Services (AUMS) in East Sussex, England. "Proof of loss" in aquaculture insurance, therefore, is difficult to measure, according to experts with AUMS, who predict robust future demand for sea bass, tuna, bream and cod.

Shrimp farming, for example, which is larger than the salmon farming industry and considered relatively well managed, is largely uninsurable because of the minute size of the invertebrate in question.

The loss experience also only goes back 20 years, which makes aquaculture risk a difficult one to underwrite, according to a recent agricultural risk report from reinsurance broker Guy Carpenter & Co.

The authors of the Guy Carpenter report predict that aquaculture will grow in Asia, which will mean that insurers will have to adjust their calculations for those new risk profiles. In genreal, aquaculture is bound to grow and insurers are going to continue to be attracted to it. Sea bass, tuna, pearl farming, sea bream and cod farming are areas that should see continued growth, according to AUMS.

April 1, 2010

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