Legislative Regulation in the Area of Agricultural Risks Insurance – Main Aspects and the Need for Reform
This article is dedicated to the analysis of main normative acts of Ukraine which regulate the functioning of agricultural risks insurance and to the range of issues which need further solutions or
Specialist in financing and insurance
“Agrobusiness development in Ukraine”
IFC, Kyiv, Ukraine
Legislative Regulation in the Area of Agricultural Risks Insurance – Main Aspects and the Need for Reform
This article is dedicated to the analysis of main normative acts of Ukraine which regulate the functioning of agricultural risks insurance and to the range of issues which need further solutions or improvement.
History of development and general characteristic of the system
The creation of the system of legislation in the area of insurance activity began with the passing of the Decree of the Cabinet of Ministers of Ukraine “On insurance”. This document laid the basis of the system of legal regulation of insurance activity in Ukraine, defined main concepts related to the insurance services market as well as main principles of implementation of state regulation and supervision of the insurance activity.
The Decree lost its force in 1996, with the passing of the Law of Ukraine “On insurance”, which was in force until 2001. In 2001 the last and valid as of today version of the Law of Ukraine “On insurance” was passed. It is the main document which defines conditions of conducting insurance activities in Ukraine. It is part of the first bloc of legislation which regulates insurance activity – specific legislation on insurance activity. This legislation also includes the norms of other Laws of Ukraine, which touch upon the issues of insurance. These are the Resolutions of the Supreme Council of Ukraine, the Decrees of the President of Ukraine, the Resolutions of the Cabinet of Ministers of Ukraine, departmental acts of the ministries of Ukraine concerning insurance activities.
The second bloc of legislation which has an impact on insurance activity in Ukraine is the legislation of general jurisdiction, which applies to all those subjects of entrepreneurial activities including subjects of insurance activities. This bloc includes: the norms of the Constitution of Ukraine regarding property, entrepreneurship, competence of the state power bodies, regulation of entrepreneurial activities; Civil code of Ukraine; the Laws of Ukraine “On property”, “On entrepreneurship”, “On financial services and state regulation of the financial services markets”, “On economical associations”, “On taxation of the profit of the enterprises “ etc.
Finally, the third bloc of legislation, which regulates the field of agricultural risks insurance, includes the normative acts related to the provision of state support to agricultural producers. One of such documents is the Law of Ukraine “On stimulation of development of agriculture during the years 2001-2004”. It prescribes the main principles of state support provision to the agricultural producers, particularly in the field of pricing, taxation, credit securing and risk insurance of the agricultural production.
During a period of 2001-2004 there was a series of Resolutions of the Cabinet of Ministers of Ukraine and Decrees of the Ministry of Agrarian Policy of Ukraine passed for execution of the given Law, which determined the exact mechanism of such support provision. In 2001, a Resolution of the Cabinet of Ministers of Ukraine “On partial compensation of the interest rate on the commercial banks loans which are given to agricultural producers” was passed. The compensation was 70% for agricultural producers as well as for grain procurement and grain processing enterprises which made mortgaged grain procurements; for other enterprises of the agroindustrial complex the compensation was 50% of the bank rate of the National Bank of Ukraine as of the date of drawing up the agreement. Transition from goods to money crediting and implementation of the mechanism of partial compensation of commercial banks interest rates made a considerable positive influence on the development of the agrarian sector. Partial compensation on the commercial banks loans program runs up to now, though the mechanism of its implementation changes each year, and these changes are reflected in the corresponding governmental Resolutions and Decrees.
In 2002, the government made an attempt to start up the program of compensation of the insurance premiums for agricultural crop insurance. The Cabinet of Ministers issued a Resolution “On approval of the procedure and rules for mandatory insurance of agricultural crop harvest”. It was envisaged that agricultural producers would get a compensation of 50% insurance premium from the budget when insuring crop harvest and sugar beet harvest. The implementation of certain types of state support of agricultural producers depends on the volume of funds which is approved by the budget law for a particular year. However the budget funds for compensation of insurance premiums according to the resolution #1000 were not allocated, and the program remained on paper.
In 2005, a new Law “On state support of agriculture of Ukraine” was passed, in which the main principles and all types of state support of agricultural producers were summarized. Section III of this Law was dedicated to the state regulation of the agricultural products insurance market. According to article 3 of the Law, a person is obliged to insure the risks of agricultural products losses if he or she in advance: a) sells any kind of goods derivatives, if its basic active is agricultural production, on the organized agrarian market, b) gets budget grant or subsidy related to the production of agricultural products or reduction of its price, c) receives a bank credit for the purposes of producing of agricultural products, if the interest rates for this credit are compensated at the budget expense, d) receive a budget loan or bank credit with the state or local government body acting as a guarantor on the loan.
The 2005 budget for the first time provided funds for compensation of the part of insurance premiums on crop insurance – in the amount of 54 millions hrn. So 2005 year may be considered the first year when the system of state support of agricultural risks insurance started working. The mechanism of utilization of funds, allocated for these purposes is partly prescribed in the above-mentioned Law “On state support of agriculture of Ukraine”, partly- in the Resolution of the Cabinet of Ministers of Ukraine “The procedure of utilization of state budget funds…”
According to the above-mentioned program, the compensation is paid at the rate of 50% of insurance premium to the subjects of agrarian market who insured the risks of losing the agricultural produce (wheat, rye, mix of wheat and rye, barley, oats, corn, soy beans, flax, rape, sunflower, hops, sugar beets) according to the rules of complex or index insurance. The compensation is provided only within the limits of the tariff which does not exceed 5%. The minimum purchasing price of the mentioned produce is taken for calculation of the insurance premium.
In the terminology of the Law of Ukraine “On state support of agriculture of Ukraine” complex insurance is understood as insurance of the total enumeration of risks implied, namely: a) frost, ice-crusted ground, winterkilling, b) hail or thunderbolt, c) earthquake, d) avalanche, ground slide, land or land-water flow, e) fire, except for forest fires, f) storm, hurricane, blizzard, g) heavy shower, flood, drought, or dehydration of lands which are to be compulsory irrigated, h) epiphyte development of plant diseases, propagation of vermin which transfer the diseases peculiar to Ukraine, and the diseases which were a result of occurring any of the risks mentioned in a)-i) points, i) unlawful actions of the third persons expressed in thefts, hooligan actions against the plants, destroying the coverings of greenhouses, hotbeds, hothouses.
Index insurance is understood as insurance at the index of crop capacity, meaning the risk of loosing the agricultural crops harvest compared to the aggregate index of crop capacity of this culture on a particular territory (region) in the previous five years.
This is what the legislative framework fielding which agricultural risks insurance is carried out looks like in general terms. Below we will analyze positive and negative features of this system and briefly define those changes that, in our opinion, have to be made in the existing legislation in order to encourage more successful development of the agricultural insurance.
Weak spots in the legislation that require amendments or additions
Existing legislation in the area of insurance in general is quite auspicious for the sector development. It does not create considerable obstacles for development of insurance system, and some elements of this legislation even put the insurance activity in advantageous conditions in comparison with other types of activities. Particularly it concerns the rate of the profit taxation: if the general rate of profit taxation in Ukraine comes to 25%, though the income from the insurance activity is taxed at the rate of 3% (if it is risks insurance) or at the rate of 0% (if it is life insurance).
At the same time there are some weak spots of the existing legislation that require interference.
According to the Law of Ukraine “On insurance”, insurance of grain and sugar beet harvests by enterprises of all forms of ownership is mandatory. In our opinion, this type of insurance has to be excluded out of the list of mandatory types of insurance for the following reasons:
· This norm is not executed de facto, since the legislation does not foresee the liability of agricultural producers for non-insurance, therefore participation of agricultural producers in such type of insurance is not obligatory. Besides, other features of mandatory insurance are violated such as total involvement of the objects of insurance, absoluteness of action, non-terminability of insurance action;
· It is not appropriate to introduce real mandatory insurance (an insurance when agricultural producers would be obliged to participate in) because it forcing farmers to buy insurance policy will result in the change of their behavior towards more risky decisions (moral hazard problem), and this will result in a financially weak system of insurance (incapable to pay damages). Besides, mandatory insurance is, in fact, a tax on better-off enterprises in favor of worse-off enterprises. Therefore, implementation of such a system will lead to decrease in the level of effectiveness of the agricultural production.
Having excluded crop insurance from the list of agricultural risks, we propose to legalize the necessity of creating programs of state support of the insurance of agricultural risks by means of incorporating appropriate proper articles into the Law of Ukraine “On state support of agriculture of Ukraine”.
There is a need to amend the Law of Ukraine “On state support of agriculture of Ukraine” because:
· This Law does not contain general principles of state support provision in the area of agricultural risks insurance. In particular, it does not determine the criteria for access of private insurance companies to provision of services which are subsided by the state; it does not determine how provision of state subsidy will be administered, who has to develop the program on subsidy provision and how it has to be done (this work is complicated in a technical sense, and requires involvement of the specially trained staff.);
· At the same time this Law provides too many details on the mechanism of subsiding itself, such as the list of cultures, the list of risks, the boundary tariff rate at which the compensation should be made, the rate of insurance premium compensated for by the state. Such itemization will lead to the necessity to make amendments to the Law very often, at least once a year.
Therefore, in our opinion, the Law requires the following changes (in the part of the state regulation of the insurance market, Section III of the Law):
· The Law should determine the criteria of access of insurance companies to provision of services to agricultural producers which are subsidized by the state (qualification requirements). In our opinion, the permission to work on this market has to be provided only to the companies which proved documentarily the fact that they have the necessary regional infrastructure and technical ability to take part in state programs of agricultural insurance support;
· The Law has to determine conditions for general administration of state subsidy provision (regulation of activities of the agency which will administrate the provision of subsidies). We suggest that the State Agency of Risk Management in Agriculture will be such an agency. We propose that Article 11 of the Law (Fund of Agricultural Insurance subsidies) is to be replaced completely by article “The Agency of Risk Management in Agriculture,” in which the mission, main functions, subordination and principles of financing the Agency’s activities will be described. The key difference between the Agency of Risk Management and the Fund of Agricultural insurance Subsidies lies in the fact that functions of the Agency are much wider than mere distribution of the compensational funds. Particularly, the Agency should be the technical body which engages in creation of data bases needed for development of insurance products, actual calculations, development of technology for loss evaluation, development of mechanisms of state programs financing and mechanisms of the control of using the budget resources, the questions of reinsurance within the country and on the international market of reinsurance. The Agency should also become the resource of reliable and valid information and knowledge for private agents on the insurance market who carry out the private insurance of the agricultural risks.
· The concrete mechanism of financing has to be revised each year and compiled in the form of annual Program of provision of subsidies. So we suggest to exclude from the Law everything that relates to concrete mechanism of provision of subsidies (particularly, sub-paragraph 10.2.1 of paragraph 10.2 of the Article 10 of the Law, where the full enumeration of risks included to the complex insurance is given). On the other hand, it is necessary to prescribe in the Law the mechanism of annual program review and approval (which agency should develop the programs and by what normative act they have to be approved). In our opinion, such programs have to be developed annually by the Agency of Risk Management in Agriculture which would have the necessary statistic data and analytic (professional) resources for this purpose. These programs should be approved by the Resolution of the cabinet of Ministers.;
· The Law should contain the complete enumeration of the objects and types of insurance, to which state subsidy may be applied. Particularly, paragraph 10.3 of the Article 10 of the Law, in which a definition of index law is given, has to be completed with the sub-paragraph concerning index insurance according to the weather index;
· The Law should contain the definition of the catastrophic risk and the conditions of the direct state support in case of such risk occurrence (the principles of forming the Catastrophic Fund, the conditions of the access of the agricultural producers to this support). The Catastrophic Fund may be formed on the basis of parity principles, for example half of resources could come from the state budget and the other half – deductions from the insurance contracts which are concluded by the agricultural producers with the insurance companies. Regarding access of agricultural producers to this aid, in perspective such an aid has to be provided only to those agricultural producers who took part in insurance. For transition period (until the insurance system of Ukraine is not able to satisfy the needs of agricultural producers in insurance) it is possible to provide the aid to all, but the conditions of providing such an aid should be differential: the volume of compensation for those agricultural producers who concluded the insurance agreements has to be more considerable than the volume of compensation for those who did not conclude such agreements. It is also necessary to carry out a state information campaign on clarification of this difference in providing state aid for further stimulation of agricultural producers to take part in insurance.
We have discussed those changes which need to be made to the legislative basis of agricultural insurance regulation. At the same time, it should be mentioned that there is a need for some changes in general legislation on insurance. Let us dwell on some of them.
1. Starting from 1996 there is a clear difference between life insurance and “non-life” insurance (risks types of insurance). Insurance companies which obtained licenses for provision of life insurance do not have the right to engage in risks types of insurance. This practice totally corresponds to European and best international standards.
At the same time, the definition of the risks and types of insurance for the purposes of licensing in Ukraine is based not on the above-mentioned division of insurance of life and “non-life”, but on the division of insurance into voluntary and mandatory insurance. The list of mandatory types of insurance is too long but the law does not provide provisions on liability for not taking part in such insurance. As the result this creates a misperception, which suggests that mandatory insurance is insurance which is not necessary to buy, and the obligation means only that the terms of such insurance are determined by the state.
So there is a need in reforming special legislation of Ukraine on insurance (first of all the Law “On insurance”) in the part of bringing the definition of the risks and types of insurance in accordance with European legislation.
2. Terminology which is used in the legislation of Ukraine on insurance needs more clarification and consistency. Alternative interpretations which can be found in insurance contracts as a result of different interpretation of the concept of “insurance losses”, “sum of insurance”, “franchise”, “insurance coverage” are the cause of misunderstandings between those who provide insurance and who buy it.
Moreover, wrongly used terms often prevent from understanding the essence of state policy in the area of insurance. For example, in the Law of Ukraine “On state support of agriculture of Ukraine” the term “complex insurance” was used to define the concept, which in reality means multiple risks insurance (See Article 10 of the Law). The term “complex insurance” has a separate meaning which is different from how it was used is the mentioned article.
3. In the Ukrainian legislation on insurance clauses of the protection of the consumer of insurance services are missing completely. So there is a need in adding the norms of consumer protection to the existing law.
4. There is a need to reform the part of the special legislation of Ukraine on insurance which concerns the insurance intermediaries and reinsurance of the risks by the insurers-non-residents.
Particularly the activity of insurance brokers, as defined in Article 15 of the Law of Ukraine “On insurance,” looks too restricted. According to the international norms, brokers should have wider possibilities both in providing services and in receiving payment for these services.
Regarding the rules of reinsurance of the risks with non-residents, these rules require from insurers-non-residents who assume the reinsurance of the risks of Ukrainian market to provide the documentary confirmation of their reliability and the experience of working on the market. Such rules have its purpose to prevent the using of reinsurance in the shadow schemes. However, in practice it leads to rejection of really reliable reinsurers-non-residents to work in Ukraine, because they consider ineffective to lose the efforts on providing the needed documentation. Besides they rightly believe that their international reputation and place in the world’s ratings is a sufficient guarantee of their reliability.
 Decree of the Cabinet of Ministers of Ukraine “On Insurance” dated 10.05.1993
 Law of Ukraine №85,96-ВР “On Insurance” dated 7.03.1996
 Law of Ukraine № 2745-III “On Insurance” dated 4.10.2001
 Law of Ukraine № 2238-III “On stimulation of development of agriculture during years 2001-2004” dated 18.01.2001
 Resolution of the Cabinet of Ministers of Ukraine №59 “On partial compensation of the interest rate on the commercial banks loans which are provided to agricultural producers and other enterprises of agricultural complex in 2001” dated 27.01.2001
 Resolution of the Cabinet of Ministers of Ukraine №1000 «On approval of procedures and rules for mandatory insurance of agricultural crops and perennial plants by state agricultural enterprises, grain crops and sugar beets by agricultural enterprises of all forms of ownership» dated 11.07.2002
 Law of Ukraine №1877-IV “On state support of agriculture of Ukraine” dated 24.06.2004
 Law of Ukraine №1877-IV “On state support of agriculture of Ukraine” dated 24.06.2004
 Resolution of the Cabinet of Ministers of Ukraine №325 «Procedure of utilization of state budget funds, allocated to reduction of insurance premiums costs, which are actually paid by agrarian market subjects» dated 6.05.2005
 Refer to Article 7.2. of the Law of Ukraine №334 / 94 – ВР «On taxation of profits of enterprises» dated 28.12.94
 Refer to Article 7 of the Law of Ukraine № 2745-III «On insurance» dated 4.10.2001
 See above.
 See above.