Agricultural insurance with state support in Ukraine: is there any light at the end of the tunnel …




In 2020, agricultural people started recalling the need of development of agricultural insurance system with the state support in Ukraine. The reasons of growing attention to this risk management tool are obvious. Taking into account the global climate changes, the influence of weather risks on agriculture is raising and 2019-2020 years are notable. Farmers faced substantial losses. Moreover, Ukraine is planting winter crops under the unfavorable weather conditions. There have already been concerns regarding the size of the coming crop-2021.

Will the state agricultural insurance be launched as soon as 2021? What are the hazards? Why farmers do not want to insure their crop? Agricultural insurance expert of IFC project “Agricultural financing development in East Europe and Central Asia”, Andrey Zaripov answered these and other questions in interview with APK-Inform. 

Andrey Zaripov is a leading agricultural insurance expert of IFC project “Agricultural financing development in East Europe and Central Asia”, member of technical team of GIIF (Global Index Insurance Facility). He has a degree of Executive MBA in KMBS. In 2008-2018, he took part in IFC project in Ukraine as to the development of agricultural insurance system including legislation development, training program and development of insurance product.

- How do you think is it possible to launch agricultural insurance with the state support in Ukraine as soon as in 2021? How is the developing of a new legislative draft “On state support of agricultural insurance” progressing?

- I have high hopes on this legislative initiative that should bring the agricultural insurance system back to the state support zone. This kind of insurance can not work adequately without the state support due to its specific character. International experience proved it. A working party in the Ministry for Development of Economy, Trade and Agriculture of Ukraine is developing the solutions for this legislative draft. I am in the working party as a volunteer.

I do not want to make any forecast as to the launch of the system in 2021. There are a number of obstacles for full-scale launch. To my mind, it is better not to hurry up. It is not only specific but also catastrophe coverage requiring a proper approach to the development of insurance products, which are more specific than ordinary contract. It is a set of documents including essential risk calculation methodology distinguishing it from other types of insurance. Here, everything is based on the human factor, particularly, factor of estimation. In other words, how a loss is estimated and how to evaluate it so that a farmer agrees.

An insurance company should have good examination proceedings in agricultural sector and experts with experience in agricultural production. Today, there are a number of insurance companies in Ukraine with substantial examination proceedings. However, most of companies who have license, do not have any examination proceedings or experience in agricultural insurance.

- What can you tell about the current work of insurance companies in agricultural segment?

- Unfortunately, I do not see any system approach in the work of insurance companies. There is a number of companies who are rather good in this sphere. However, most of those who have examination proceedings in agricultural insurance are more reactive but not proactive. I mean clients come to them with some inquiries. Because it is rather difficult to sell agricultural insurance. Often there is no information about agriculture insurance services at the websites of these companies. Thus, agricultural producers can not find any information online and have no idea what and how to insure.

Maybe insurance companies do not put their resources in agricultural insurance development because they consider it unpromising. On the other hand, I suppose it makes sense. 

Moreover, it is necessary to provide trainings for farmers about agricultural insurance and private business may play an important role here. There are small number of clients who personally come for agricultural insurance services. Mainly the interest for this kind of insurance arises from companies with foreign investments who understand that agricultural insurance is a risk managing tool, or those people who have already use agricultural insurance and realize it is useful. Additionally, farmers want to get the obligatory farm insurance required by creditors.

Unfortunately, I do not see many farmers who want to insure… Usually, they chose the cheapest option when they need to get obligatory insurance. This option does not provide full-scale defense.

It is a matter of consistency. There is no way of insuring this year and do not insuring next year, as the first year was good and you have paid for insurance but have not got reimbursement.

To my mind, the decision to insure depends not on price, but on things of value. If a farmer does not need to manage his risks, he will not pay for the best insurance product even if it costs about 1% (from the cost of future crop, for example). However, if a farmer realizes the value of insurance, he calculates that 5-7% payment for insurance product will bring him much more money as a reimbursement in case of loss occurrence that will allow him to pay for his obligations and be ready for the next season. We do not have such attitude yet.

- Farmers faced significant losses this year due to the crop failure on long-lasting drought across almost the entire territory of Ukraine. Has it raised the interest to the agricultural insurance?

- The insurance companies I talked to informed that the extent of agricultural insurance has been lower this year compared to 2019. Partially because of COVID-19 that affected sales. However, farmers more often tall that they are interested in agricultural insurance. Climate changes progressively observed in Ukraine is one of the reason. These changes allow cultivating additional crops and getting profit in some regions, while they turn into critical in other regions. There have not been significant weather-climatic cataclysms in Ukraine since 2010. If weather does not cause substantial losses for a long time, farmers are not interested in insurance.

There is no culture of agricultural insurance as well as overall culture of insurance in Ukraine. They have started to insure agricultural equipment and it is good start. It is a long process that needs confidence. It takes a long time to get this confidence. 

Once I told to a farmer who said that he could not get an insurance payout for damaged car window for 3 months adding “and you are talking about agricultural insurance that is much more complicated…I do not trust insurance companies at all”.

- But in Ukraine there are commercial projects on agricultural insurance for several years already. It means, there is an interest, isn’t' it? 

- Yes, there are several commercial initiatives which work without the government support and it demonstrates that the demand on agro-insurance is gradually increasing. For example, the program of the company “Syngenta” of the index insurance of agriproducers from weather risks which works since 2016. This program is a perfect integration of the value of agricultural insurance into the company's value proposition: buying some package of products, agriproducer receives a right to insure his expenses and in case of risk to receive the compensation. This is in fact, the new index weather insurance for Ukraine and it works. As I see the dynamics of contract growths with the program «Meteorological protection» with Syngenta company I understand that  agriproducers use such offers more and more, which means there is a demand.

- In Your opinion, how to get the agriproducers more interested in protection of thier business from risks with agricultural insurance?

It all depends on who will be insuring and which product? Without the standardization of the insurance products agriproducer will be first to take a hit. I don’t think that it will be possible to implement the filter which will be able to separate the reliable insurance companies from unreliable ones. In any case, the list will contain companies without the work experience in agriculture and which will offer some solutions, that are not going to be effective. As a result, there would be dumping of the insurance product price which will reduce the possibility of receiving payment. One way or another the agriproducer will be hurt. If agriproducer pays 1% for insurance, then a risk is expected that happens once in 100 years, and from which the entire crop will die, or it happens 2 times in 100 years and 50% of the crop will die. And if we speak about the 5 tariff, this is a respectively massive catastrophe which happens ones in 20 years or 4 times every 5 years which is more or less corresponds to the cyclical nature that exists in Ukraine.

Due to the complexity of the agricultural insurance and the associated product development process, there should be a single knowledge center that would conduct training for both farmers and insurance companies and control this process. The foundation of such a center was one of the aims of the IFC project of development of agricultural insurance in Ukraine in which I took an active part in the last 10 years. In terms of our project we have developed some standard insurance products and recommended the, to the Ministry of Agrarian Policy and Food of Ukraine, which was still operating at that time, and the National Commission for Financial Services, which was at that time a regulator. These products were approved by these bodies, but  with their liquidation the situation has changed slightly. But even now these products are available for the market including the system of government subsidies.

It is possible that after the approval of the new law the subsidies will change the situation in the system of agricultural insurance.

- You told about the subsidies. Can You please tell us more about the law the Ministry of Economy is working on and how the subsidies can be used?

- The systematic approach in agricultural insurance allows the government to manage the load on the budget, especially  in disastrous years, when many agriproducers can bear losses from the  climate. Compensating the part of insurance premium, government can transfer part of the risks to private sector, which in many ways  is more effective in terms of analysis of volumes and payments of  damages. There is so-called public-private partnership where there is a clear role for the state and the private sector.

In all countries which have the system of agricultural insurance with the government support, the support is expressed (not limited) also in a form of subsidies for the compensation of the part of a premium, which makes agricultural insurance more available for agriproducer. Together with this the standard insurance products are one of the foundations for the system of agri-insurance, which the government develops and/or approves (subtracts) and includes to the subsidy program. This is done primarily in order to guarantee the quality of insurance and to ensure that you receive payment in the event of a loss.  This is made primarily in order to guarantee the quality of insurance and the receiving of the payments in case of damage. But the government support is not limited only by subsidies and insurance products, but also includes the educational programs popularize agricultural insurance for agricultural producers, protect their interests and accumulate data to improve the program or create new solutions.    

Currently unfortunately the draft law does not provide for many systemic factors that would guarantee the sustainable development of the system. Yes, subsidies are important, but it is also important to have guarantees of payment (the quality of insurance products), which at this stage are not included in the draft. The role of the government and mechanisms of interaction with the private sector are also not clearly defined.

In pursuit of the noble goal of providing the maximum set of various insurance products for agricultural producers in the first years of the program's operation, the result can be opposite (and we already encountered this in the mid-2000s, when there was a state program to support agricultural insurance), when looking for a "client" instead of competition in the quality of services, we get competition in price and, as a result, “non-payment” products - which, in turn, will dissatisfy agricultural producers and cause a loss of trust (there is almost no trust anyway). However, agriproducers are not to blame - the issue is that having wide choice and no appropriate knowledge it is nearly impossible to analyze and choose the correct insure product.

I am against restricting the free market. Outside of government support programs insurance companies can offer, and an agricultural producer can buy various insurance products without any restrictions, but under government programs, subsidies should be provided only for approved standard products (and this is confirmed by world experience).

- Do You believe that with this approach the farmer will be more protected?

- Buying the standard insurance product the farmer will be totally protected as it will include all the risks. Moreover, all the methodology of damage estimation are tested and insurance company will not have a possibility to make a mistake. In any case, this product also has a possibility for agriproducer to challenge the results of an assessment. In other words, these some rules, common to all.

We in the IFC project have worked hard to create these standard insurance products using actuarial calculations. We are the only ones who have collected the entire data set at various levels, which helped to calculate tariffs. We brought in expert actuaries from the United States. And, having done a tremendous job, we know exactly why the insurance product has a rate of 7% or 5%, and so on. All tariffs are justified with clearly defined risks. 

- Andrei, thank You for interesting conversation. We would like that the tremendous work You have been accomplishing for the last 10 years for the development of the agricultural insurance and development you have prepared and gave to the Ministry of Economic Development is finally successful and farmers receive the table tool for protection from many risks.

- Unfortunately farmers start to think about the agri-insurance only when something happens and weather conditions in 2020 are a perfect example. Maybe, this is a right year to make right conclusions and resolve the question of implementation of agricultural insurance with the government support in Ukraine. But I will repeat, it should be decided in a strategic and deliberate way. There is a global practice and we should use global experience and learn from our own mistakes.

Interviewed by Elena Cherednichenko