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Legislative documents that regulate agricultural insurance in Ukraine (2006)

Legislative documents that regulate agricultural insurance in Ukraine (2006)

Roman Shynkarenko

This document is the second part (section B) of the analytical report “Agricultural Insurance Development and Reorganization of the Insurance Premium Subsidy Program in Ukraine for Improvement of the Agricultural Producers’ Financial Status”. This report was prepared in spring 2006 for USAID’s “Agricultural Policy, Legal and Regulatory Reform Project”. (Published with the permission of the project).


Section B: Current legislation regulating agricultural insurance


(Analytical Report “Agricultural Insurance Development and Reorganization of the Insurance Premium Subsidy Program in Ukraine for Improvement of the Agricultural Producers’ Financial Status”. March-May 2006, USAID,  Agricultural Policy, Legal and Regulatory Reform Project.)


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The main legislative document regulating insurance in Ukraine is the Law on Insurance (85/96-ВР, dated March 7, 1996). This law established the main requirements to insurance practices in the country providing the general guidelines for insurance contracts and regulating relations between the insurers and the insured. Article 7 established a list of mandatory types of insurance. According to this law, insurance of grain crops, sugar beet and agricultural pedigree animals is mandatory for all agricultural producers. Additionally it was prescribed that state farms should insure all crops grow at the farm. Although some types of agricultural insurance programs were declared mandatory, neither the farms nor the government followed that requirement. The government did not provide agricultural insurance subsidies until 2005 and it never fully enforced mandatory requirements in relation to the farmers due to political and budgetary reasons.


Regulation #1000 on mandatory crop insurance (2002)


The insurers lobbied mandatory crop insurance program in 2002 when the Cabinet of Ministers adopted Regulation #1000 on July 11. This regulation was the first legislative document that specified the terms and basic guidelines for crop insurance in Ukraine. Amendments to the regulation included indicative premium rates for insurance of selected crops in all administrative regions of Ukraine and the text of sample contract. The Ministry of Agriculture and the insurers expected that the government would allocate government subsidy for insurance premiums but after it became clear that the State Budget allocated no funds for year 2002, all the parties lost interest in mandatory crop insurance and the regulation became inactive the very next year. The insurance companies did not like the indicative premium rates which they considered to be very general and too high for farmers. The farmers considered mandatory crop and animal insurance as an additional tax and refused to sign insurance contracts.


The regulation introduced “coverage” as a term which could be used for establishing the sum of payout that insurance companies had to pay to the insured in the case of crops or livestock loss. Previously, the insurers applied only non-conditional deductible for this purpose which in some cases was as high as 90%. Most producers did not understand insurance terms and unfair insurance practice had place. The legislator expected that the insurers would start using coverage for agricultural insurance contracts. That could make contract transparent to the producers and provide indication when the insurer’s liability started and which level of payout the producer could expect to get at different level of crop loss or damage. Unfortunately, the term “coverage” is still not widely used as it is practiced in other countries.


After regulation #1000 lost its legal power, the term “coverage” continued to be present in the legislative field and could be applied by the insurers in case they wished.


Regulation # 590 on mandatory animal insurance (2003)


The Regulation of the Cabinet of Ministers of Ukraine # 590 dated April 23, 2003 tried to introduce mandatory insurance of pedigree animals (also including circus and zoo animal) from the risks of death or forced slaughter from diseases, natural disasters and accident. It was not clear why this regulation was extended beyond the boundaries of agricultural sector, though the market players considered that the drafting agency (MAP) was fulfilling the instruction of the Cabinet of Ministers. Understanding the nature and the function of the document, MAP decided to limit its jurisdiction to avoid opposition from the producers’ side as it happened with crop producers. This regulation was never fully enforced as well as the mandatory crop insurance and it is now inactive.


The Law on State Support of Agricultural Sector (2004)


In 2004 the Parliament of Ukraine adopted a law on the State Support of Agricultural Sector of Ukraine (#1877-IV dated June 24, with amendment # 2657-IV from June 16, 2005). This law contains section III on the state regulation of the agricultural insurance and establishment of the agrarian insurance subsidies fund. The law prescribed that every farm trading agricultural commodities, obtaining government subsidy or taking subsidized credit should insure all crops or assets against risks of loss or damage. Section III identified that producers could use MPCI or yield index insurance program and indicated the list of risks (10 entries) that should be insured. The list of risks was limited and did not include all risks which could incur loss or substantial damage to the agricultural crops. Additionally the law indicated the basis for establishing the insurance sum. It could be the sum of production costs, expected yield value or income from crop production. The law did not impose any other requirement to the producers, finance institutions or insurance companies though it was considered to be the ruling document for the future crop insurance initiatives in Ukraine.


Article 11 of the law prescribes foundation of the Agrarian Subsidies Fund (ASF). It defines the Fund as a specialized government agency which would disburse insurance subsidies to the agricultural producers. The agency should be approved and founded by the Cabinet of Ministers of Ukraine and should be a non-banking finance institution however the legislator did not define who and how would be supervising and regulating the agency. The law indicates that the agency income (?) should originate from the initial funds allocated by the State budget, credits from the State budget and mandatory allocations by the insurance companies as a percentage (2%) of the insurance premiums collected by the insurer insuring agricultural produce. The law prescribed that the insurers had to provide quarterly reports to the regulating agency and ASF. After publication of the law, the insurers opposed mandatory allocations and considered them to be an additional tax on agricultural insurance activities.


According to the law, ASF had to use its funds for:


–         directing insurance subsidies to the insured producers in the range of 50% from the premium sum paid by agricultural producers under MPCI and yield index insurance products;

–         subsidizing 50% of deductible when the risk events incur crop loss or damage under MPCI and yield index insurance products;

–         making payments to the state budget according to other  provisions of the law.


It is worth mentioning that there is no international practice of subsidizing deductible. The intentions of the legislator are not clear but the independent consultants indicate that such possible practice goes against the insurance principles when the deductible defines the level of losses borne by the insured and helps to address the moral hazard problem[1]. The payments to the state budget are not clearly defined and the law wording does not provide the clear strategy for compiling catastrophic loss fund.


Regulation # 325 on the State funds allocation for supporting agricultural producers (2005)


The Cabinet of Ministers of Ukraine adopted Resolution # 325 on May 6, 2005 to allocate funds to support agricultural producers through a set of subsidies including subsidization of crop insurance premiums. The regulation formally launched the insurance premium subsidy program as specified by the Law on State Support of Agricultural Sector. The Regulation included instructions to the regional departments of agriculture on how the program had to compensate the part of insurance premium paid under MPCI and yield index contracts.  Adoption of this regulation followed allocation of insurance subsidy funds in the sum of 54 million UAH in the State Budget. MAP hoped to utilize all these funds however the insurers were able to collect approximately 13 million UAH out of which 5.845 million UAH were reimbursed to the producers of the agricultural commodities. The regulation extended the requirements of the previous legislative documents related to crop insurance and provided no changes to the earlier program design and procedures. Winter crop insurance campaign went until the end of year 2005 breaking the reasonable deadline of December 1 after which the insurers would better not accepted applications for crop insurance. The farmers and the insurance brokers reported that even if any insurer refused to accept crop for insurance, the producers had a chance to try getting coverage from other companies. The example could be Oranta company, which accepted applications for insurance until December 15 in some oblasts though this should be treated as breakage of sound insurance practice[2].


The regulation was amended on December 27, 2005 (# 1294, Cabinet of Ministers Regulation) and on March 2, 2006 (# 243, Cabinet of Ministers Regulation) extending insurance subsidy program for year 2006. The Ministry of Agriculture did not introduce any considerable changes to the program design though the insurers were unable to utilize 54 million UAH subsidy fund in 2005.  The Parliament of Ukraine allocated smaller allowance for 2006 (10 million UAH) that could be used as insurance subsidy.


The future of the insurance subsidy program will depend on the ability of insurance companies to increase the number of policies and to improve the terms of insurance for crops producers in 2006 crop year. The market players are looking forward to the results of the winter crops survey as it is expected that approximately 15-20% of crops could be damaged or lost due to extremely low temperatures (up to -32° C) during the winter time. In case the insurers would not be able to objectively regulate the losses, the Ministry of Agriculture might re-consider the program design. The insurers have already claimed that the government subsidy funds (10 million UAH) would not be sufficient to meet demand for subsidized crop insurance in 2006.


[1] Moral hazard is a key problem of insurance when the insured can change its behaviour and indulges in riskier activities or stops using sound crop production practices (uses bad seeds, worth quality pesticides, misses optimal calendar terms for cultivation applications, etc.)

[2] Non-official communication with producers from the central and southern oblasts of Ukraine.

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