Insurance and Moral Hazard in Salmon Aquaculture

Suggested Bibliographic Reference: Challenging New Frontiers in the Global Seafood Sector: Proceedings of the Eighteenth Biennial Conference of the International Institute of Fisheries Economics and Trade, July 11-15, 2016. Compiled by Stefani J. Evers and Ann L. Shriver. International Institute of Fisheries Economics and Trade (IIFET), Corvallis, 2016.Proceedings of the Eighteenth Biennial Conference of the International Institute of Fisheries Economics and Trade, held July 11-15, 2016 at Aberdeen Exhibition and Conference Center (AECC), Aberdeen, Scotland, UK.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. 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