D.e.s Dulambaeva R.T., Akynbayeva M.E.

Kazakh National University named by Al-Farabi, Kazakhstan

Problems of agricultural insurance development in the Republic of Kazakhstan

Despite all the advances achieved in science and technology, the most important industry for the humankind– agriculture- is still remained dependent on the vagaries of nature. Heavy rains or prolonged frosts could serve as a real disaster for farmers. Insuring the risks in agricultural production is a globally important system’s element in provision of finance and credit support to agricultural producers. [1]

Taking into account a fairly justified risk in crop insurance, insurance (reinsurance) organizations are not interested in compensation of most likely agricultural losses as it extracts the major part of savings. Although the mechanisms for the final formation of the agricultural insurance system - creation of a state farm insurance company "Kazagropolis" (1996.), Mandatory insurance of agricultural production (1997.), The adoption of the Law "On obligatory insurance in crop" (2004.), the adoption of the Law "On mutual insurance" (2006). - have been brought in our country, it was observed that the country, according to the Committee on Statistics of the Republic of Kazakhstan (Table 1),has a low level of activity of the insurance business in the mandatory insurance of agricultural sector.

Table 1. Number of contracts between insurance companies and agricultural producers of Kazakhstan (2007 - 2014gg.)

	2007	2008	2009	2010	2014 (until 09.01)
Number of contracts (000’s units)	25,446	33,957	32,165	17,389	14525
thereof MIS(Mutual insurance companies)	738	5792	8292	9953

Additionally, the low level of intense activities among insurance companies, licensed as the mandatory insurance providers, can be evidenced by the official figures that clearly depict a lack of interest of insurance companies to this type of insurance and their unwillingness to take responsibility for the risks in agricultural production occurring throughout Kazakhstan. (Figure 1)

Figure1. Number of insurance (reinsurance) companies licensed as the mandatory insurance providers for agricultural production

Problems of the insurance industry in the agricultural sphere consist of several systematic problems in this area:

1) The presence of systematic risk

Kazakhstan is in the zone of risky husbandry. The probability of adverse natural phenomena depends largely on regional factors. As a result, the frequency of droughts over the years in the whole country is up to 40% (2 out of 5 years), as for the west of the country, it is up to 60% (3 out of 5 years).

Unprofitableness also depends on agricultural producers themselves that do not seek to improve production technology, and in some cases even a slight deterioration of weather conditions could lead to a loss of a crop due to an inconsistency of compliance of agricultural technologies at seeding. Besides, the risk specificity of agriculture gives a rise to make additional requirements to insurers, such as: the development of the agency network in the regions or the presence in the state of experts in the technology of growing crops. All of this requires additional investments that, in return, do not generate adequate returns. As a result, there is a downward trend of active players in this segment of market.

The presence of the high risks in this type of insurance makes it unattractive to insurers. For example, in 2010 there were six insurance companies that had the relevant licenses for the above type of insurance, whereas in current days only three insurance companies and 38 mutual insurance companies carry out operation on mandatory insurance in plant cultivation.

It should be noted that this type of insurance is unprofitable though 50% of the insurance payments are compensated by the government. In this regard, in Kazakhstan mandatory insurance annually on the average covers only 74% of acreages.

2) The inadequacy of applicable insurance rates

Law "On obligatory insurance in crop" set the minimum and maximum rates for groups of crops. Generally, the amount of insurance premiums is calculated on the minimum insurance rate, which will not allow generating a sufficient reserve for insurance payments and will lead to financial instability of insurance companies if insured events occur.

3) Imperfect settlement system of losses

The existing ban for insurers in terms of the request to comply with agricultural technology equivalent to a ban on the insurance investigation, which actually creates a lack of possibility of denial of insurance benefits, even in the face of clear, demonstrable fraud.[3]

In order to resolve problematic issues Ministry of Agriculture of the Republic of Kazakhstan proposes the following measures:

     1. Changes in the mechanism of support of crop insurance by switching from subsidizing insurance payments to subsidizing insurance premiums based on the experience of the main-crop producers (Canada, USA, EU).

It is envisaged that state support of mandatory crop insurance will be implemented by subsidizing insurance premiums paid by the insured to the insurer under the contract of mandatory insurance.

       2. Establishment of a mechanism of reinsurance of financial risks in the crop insurance by creating a reinsurance fund of insurance payments in crop - an organization with one hundred percent involvement of the state and /or national management holding company created by the government, operating on reinsurance of financial risks in crop insurance.

For the financial sustainability of the Fund at the initial stage it is advisable to allocate funds for its capitalization.

       3. Clarification and differentiation of insurance rates by actuarial calculations.

The introduction of more accurate gradation of insurance rates on climatic zones, taking into the account the frequency of adverse natural phenomena on the basis of statistics and agent actuarial calculations, is envisaged.

       4. Exclusion of mutual insurance companies from the system of mandatory insurance in crop.

The need to exclude mutual companies from the system of mandatory crop insurance is caused by the problems of the practical realization of the Law "On mutual insurance" and low efficiency of their operations.

       5. Extension of crop species covered by insurance (with the inclusion of vegetables and melons, potatoes, fodder crops)

In accordance with the policy of crop diversification of melons, potatoes, fodder crops areas will be significantly expanded in the future. This requires taking the measures to cover these crops by agricultural insurance.

   In the description of the existing problems, it was correctly pointed out that the unprotifableness depends on agricultural producers themselves that do not seek to improve production technology, and in some cases even a slight deterioration of weather conditions could lead to the loss of a crop due to the inconsistency of compliance of the agricultural technologies at seeding. Then, it is worth adding that in current days there is no certification of arable land (i.e. information about which crops can be sown in considered land) on the basis of which the insurer could determine insurance risks of any farmer in terms of the non-compliance of agricultural technologies. [4]

Moreover, as the insurance amount is determined in the sum value of the crop (on average yield for the area) and costs of agronomic measures, in the case of crop losses at the stage of germination agricultural producers will be better off if they hide the fact of the occurrence of insured event. That is, insured event increases the amount of insurance payments. This takes a place because there are no objective means of monitoring agronomic measures under which the insurer could determine the actual losses under a separate contract of insurance or identify fraudulent activities on the part of the insured. As these important issues were not reflected in the current version of the law, the unscrupulous agricultural producers could directly take a part in fraudulent activities to obtain insurance payment again.[5]

      In general, there are a lot of problems in agricultural insurance and approaches to their solutions should be systematic, analytical, accounting on consequences of changes to be applied on the insurance legislation.

References:

1. Bakirov AF On the method of subsidizing the damage for insurance in agriculture // Economics of agricultural and processing enterprises. 2012.

2. Nikitin convergence programs of agricultural insurance .// Agroinsurance and lending.

3. Problems of development of agricultural insurance, Magazine "The insurance market« http://www.allinsurance.kz/index.php/chto-poseesh-to-i-pozhnyosh.html

4. Tereshenkov D. Improving the system of agricultural insurance .// agribusiness economics, management. 2006.

5. Prospects for the development of agricultural insurance market. Irina Sokolova http://www.kgau.ru/img/konferenc/62.doc