This report was prepared by short-term consultant according to the terms of reference to provide analysis of the agricultural insurance system in Ukraine reflecting the impact of the government subsidies. The document provided the ideas for further agricultural insurance development in Ukraine and possible strategies for government participation. The consultant analyzed international experience in development of the insurance system for agribusiness sector focusing on regulatory and operational aspects. The report proposed the possible changes/development activities required for establishing an effective risk mitigation system in agribusiness.
The structure of the analytical report:
A. Overview of the agricultural insurance system in Ukraine; B. Current legislation regulating agricultural insurance; C. Functions of the government agencies and other relevant institutions; D. Problem issues at the agricultural insurance segment: i. Agricultural insurance products currently offered at the market; ii. Methodological issues and problems; iii. Statistics; iv. Farmers access' to insurance services; v. Use of insurance instruments by finance institutions and agribusiness partners; E. International experience and practices; F. Possible strategies and instruments for agricultural insurance development in Ukraine; G. Activities, legislation and resources required; H. Expected outcomes of the modified/new agricultural insurance system; I. Suggested further activities Annexes:Annex 1. Example of Statistical Data on Agricultural Insurance in Italy Annex 2. Resources and Documents used for report Annex 3. Crop Insurance System in Spain Annex 4. Crop Insurance in the USA – General Policies and Provisions Annex 5. Building Agribusiness Risk Management System: Strategy and Stages of Development
Please read selected sections of the report below:
Abstract from section A. Overview of the agricultural insurance system in Ukraine
General information
According to the State Commission for Regulation of Financial Services Markets, there were 426 insurance companies in Ukraine registered by December 31, 2005. Most of these companies are small and operate either in several regions or work with selected types of insurance products. Approximately 180 companies received licenses for agricultural insurance though most of them keep licenses as an option for working with the agricultural risks in the future.
Agricultural insurance system in Ukraine is underdeveloped and represents a modest segment of the general insurance system in the country. About 30 companies regularly underwrite agricultural risks and 10 companies out of TOP-50 list dominate the segment. Most of these companies operate nationwide with regional offices established in most administrative regions (oblasts). The number of insurers servicing agricultural sector remains relatively stable during the last four years. The list of dominating companies includes Oranta, ASKA, Etalon, Veksel, Credo-Classic, TAS, etc. These companies tried to develop agricultural insurance products since 2001 when the Government of Ukraine declared its interest in establishing the national agricultural risk mitigation system. It should be indicated that the overall efforts had limited success until the government introduced agricultural insurance subsidy program in late 2005.
Agricultural sector profile and potential market volume for insurance
Ukraine is one of the biggest world producers of sugar beet, grain and oilseeds crops. The agricultural sector accounts for approximately 15% of country’s GDP with annual production volume of 50 billion UAH or 10 billion USD. There are about 40,000 private and 16,000 commercial farms. Private households produce approximately 60% of fruits, vegetables, milk and meat per annum. Ukrainian agrarian sector supplies annually about 40 million ton of grain, 16 million ton of sugar beet, 5 million ton of oilseeds and 27 million ton of fruits and vegetables .
Assuming experience of other countries where agricultural insurance is in the development stage, it is estimated that about 20% of Ukrainian producers might insure 25-30% of the annual crop production volumes. This means that the insured sum (Value at Risk) might be approximately 3 billion USD that can make Ukraine an attractive market for international reinsurance community. The potential annual premium sum might be around 250-300 million USD being equal to the current Ukrainian government support budget for agricultural sector per year.
Risk management strategies and producers’ attitude to insurance
Ukrainian farms and agribusiness have limited choice of risk management instruments. The major risks, as the farmers indicate, are weather, price and marketing risks and changes in government regulation and legislation. Producers try to manage weather risks by using insurance, diversification (seasonal, crop types, crop rotation and combination of crop production with animal husbandry) and seasonal finance. Most farms have no finance reserves or liquid assets which can be employed in case of getting critical losses due to unfavorable weather events.
According to the farmers’ surveys , producers consider drought (34%), natural calamities (56%), low prices (39%), winterkill (22%) and pests (21%) to be the most considerable risks for their farming activities. It is necessary to indicate that the overall risk comprehension for natural calamities and low prices has a tendency for growth, meaning that producers adjust their production practices to mitigate the impact of particular risk events (drought, winterkill and hail). At the same time, the farmers tend to purchase less Multi-Peril Crop Insurance (MPCI) and more of named peril coverage (see the graph below).
About 90-95% of insurance contracts in 2002-2005 were purchased by the farmers on demand of the commercial banks to be able to obtain seasonal and mid-term credits. According to Ukrainian legislation (The Law on Collateral), all pledged property (collateral) should be insured and the banks strictly follow this requirement. The farmers treat this requirement as an additional tax and tend to choose the cheapest insurance coverage to minimize their costs associated with credit provision. The situation is changing during the last two years however the overall agricultural insurance volumes grow slowly.
There is lack of trust to insurance sector from the farmers’ side. The insurance companies just recently started to publicize their payouts results and this information mostly does not reach farmers. The producers suffered big crop losses in 2003 due to winterkill and severe drought in May-June but the insured farms had problems with getting payouts because of tricky contract wording and unclear terms definitions. Insurance companies deferred payouts as long as six months or refused to compensate farmers’ losses even under the threat of going to the court for disputes’ resolution. Negative experience of year 2003 is remembered by the farmers and many of them tend to treat insurance companies as unreliable partners till now.
Questioning of farmers provides that most farm directors and owners lack understanding of insurance principles. Many of them consider that insurance policy should cover any crop losses as it was practiced during the old USSR times. The farmers do not read contracts thoroughly and are unfamiliar with most of insurance terms and specific provisions. There are many cases when producers ask for the cheap price of the insurance coverage neglecting the level of deductible and coverage as well as the definition of risks and description of loss adjustment procedures. Such practice results in misunderstanding of the coverage amount and leads to confusion when the risks take place.
G. Activities, legislation and resources required
The legislation requires minor changes to introduce an integrated risk management and insurance system. It is advised to exclude provision on the mandatory agricultural insurance from article 7 of the Law on Insurance. This provision is not active since its introduction and it would be the overall benefit if it was cancelled.
It is considered that a law on agricultural insurance could be adopted. This law could identify the functions and responsibilities of the government agencies as well as setting up the basics of the Government of Ukraine’s strategies on agricultural risk management and insurance strategy. It might be necessary to adopt a special law on the risk management and insurance agency if the Government would consider this option. This agency (ARMA) or MAP should take responsibility for development of the national agricultural risk and insurance program (strategy) for the next 5 or 10 years indicating the long-term nature of this strategy. This program should be approved by the Parliament or the Cabinet of Ministers of Ukraine being the basic document for the agricultural insurance and risk management national system. The Parliament should consider provision on the necessary operational and subsidy budget allocations for the nearest 5 years. The annually approved allocations would put the program in tight situation and would prevent the agency from development of a sound system.
Alternatively, the government might consider foundation of a special department within the Ministry of Agrarian Policy or the Regulator though the success of such initiative would greatly depend on the mandate of the department and human resource factor. It is important that either the agency or the department would be capable to employ professional staff and qualified personalities.
In case the government would like to leave the insurance issues within the MAP area of responsibility, it would be vitally important for the department to be able to provide informational and educational campaign for farmers and insurance specialists. The annual programs should be developed and announced far in advance before the annual insurance marketing campaign started.
The most important issue would be acceptance of the national agricultural insurance program by the Parliament and the Cabinet of Ministers. The legislators should be explained the benefits of the new risk management system and the conceptual basics required for its successful implementation.
The Law on the State Support of Agricultural Sector should be redesigned and modified as most of the insurance-related provisions do not correspond to the needs of the modern agricultural insurance system.
H. Expected outcomes of the modified/new agricultural insurance system
The new agricultural insurance system should provide a wide range of risk management instrument to the producers as well as making Government support more structural, logical and transparent. The suggested instruments and activities should help the producers to stabilize their annual revenues from agricultural production. The new system will introduce fair and reliable strategies that the farmers and their partners (banks, input suppliers, processors, traders, etc.) can employ to improve their contract and partnership relations making agricultural production predictable and contractual obligations executable.
Initially, the Government would be required to provide substantial finance support to develop a new insurance and risk management system though within some time the need in government support should go down transferring part of the catastrophic assistance functions to the private insurance sector.
The new agricultural insurance system should target insurance of 20% to 50% of the farms in the country within the next 5 years. The insured volumes of production can be within 40-70% from the total production volumes. The government agencies should monitor the introduction of the new insurance system making the necessary legislative and organizational modifications when required. The new agricultural insurance system should be discusses with the private insurance companies that need to understand the concept and strategic objectives of the program from the nearest 5-10 years.
The insurance and risk management measures fall in the green and yellow boxes of the WTO which are accepted by the international community and should provide easier access of the Ukrainian agricultural produce to the international markets.
I. Suggested further activities
The Agricultural insurance working group should discuss the possible strategies for further development of the insurance and risk management system in Ukraine. Its suggestions and decisions should be delivered and introduced to the main policy-making bodies of Ukraine including the Parliament, the Cabinet of Ministers, the Ministry of Agrarian Policy, the Regulator, the Ministry of Finance and other potentially interested institutions.
The group should formulate clear the strategy papers that should be discussed with the private insurance companies, farmers, agricultural professional organizations and other interested parties.
The government should make decision on how it would like to modify the existing agricultural insurance system. The present system established very high targets that usually not possible to achieve without good actuarial support and thorough informational activities. MPCI is one of the most difficult agricultural products and its introduction requires many years until the acceptable and sustainable results can be achieved. Ideally, it would be the best to establish a separate government agency that would accept full responsibility for development of insurance system and design of a wide set of agricultural insurance products. This agency might need to contract the best available professionals (domestic and international) at the initial stage to initiate the system and to design a framework for the future activities.
The government should initiate a working group including the representatives from the key government institutions (MinFin, the Regulator and MAP) which should be responsible for design of the strategic plan and its adoption by the policy makers.
Further, the risk management agency (or other responsible institution) will need to take a lead in development of new products and modification of the present ones. This institution should be capable to make regular and quality analysis of the system operation to be able to introduce changes if any of the products would not work properly. The institution will need to set a clear requirements list for the insurance companies that might be interested in working with agricultural risks. It will make no sense to allow any insurer to be involved as agricultural insurance is difficult and resource demanding activity. According to the current practice and international experience, it seems that there need to be from 10 to 20 insurance companies who might qualified for participating in the program.
Источник - www.agroinsurance.com