June 5 2006, 15:13

Less than 20% of companies with license to insure agricultural risks really do this activity

As is known, unfavorable weather conditions of this winter crippled many agricultural producers. Again, the risks in agricultural business were proven to be uncontrollable by the entrepreneur; such risks can cause significant losses and even bring enterprise to the verge of bankruptcy. According to foreign experience, insurance can be one of the possible tools to manage weather risks and reduce financial losses caused by natural calamities.

More than 180 insurance companies have already received the license to insure agricultural risks in Ukraine; however, not more than 30 companies are actively working now in this segment of insurance activities. But, approximately 70% of agro-risk portfolio is managed by only seven companies (ORANTA, VEKSEL, ETALON, CREDO-CLASSIC, ASKA, Ukrainian security-insurance company and TAC). Roman Shinkarenko, the Consultant on Insurance and Risk Management in Agriculture, PRAGMA Corporation, explains this fact by lack of large-scale insurers' interest to agricultural sector.

Only large companies are able to work on market of insurance services for agricultural producers, as they have enough funds to ensure payments in such years as 2006, Lilia Turba shares her opinion as the Deputy Sales Director, Odesa filial, ASKA insurance company. For example, from the beginning of 2006 ASKA company has already paid to the agricultural producers insurance payments on the total sum worth 2 mln. UAH; it exceeds the abilities of small insurance companies. Lilia Turba says, each year we expand the scope of our services provided to agricultural producers; we approach individually each client and choose the best terms of cooperation. The matter depends on the producer's desire.

To the opinion of many insurers, lack of governmental support is one of the significant obstacles on the way of agricultural insurance market development. Agricultural insurance is the best developed in the US, Canada, EU countries, and India. However, the complex systems of agricultural insurance are unprofitable practically everywhere, especially because of multi-risk products. That's why this activity is subsidized from the state budget in many countries.

Alla Romanyuk, the Chief of Ovidiopol office of ORANTA insurance company, says that the state took an obligation to compensate up to 50% of insurance payments to the agricultural producers and insurers; 54 mln. UAH of budget funds were allocated for this purpose. But, only 5.8 mln. has been actually provided by the end of year. Budget 2006 has only 10 mln. UAH for this purpose. Because of annual price increase for input supplies, especially fuel, many agricultural producers find it problematic to allocate money for insurance purposes. So, only financially stable agricultural enterprises can afford to insure themselves.

Oleg Stoyanov, the Loan Specialist of Odesa office, Agricultural Marketing Project, thinks that now in Ukraine the major part of insurance agreements is signed for grain crops: wheat, barley, corn, sunflower, rape, rye and sugar beets, which banks demand as collateral. Vegetable producers and orchardists insure weather risks very rarely unless there is some loan activity. One of the main reasons for it is distrust to insurance companies. There have been many cases in recent years when some insurers tried to avoid making payments by any means. Year 2003 was notable for that, when 90% of winter crops were actually frosted out. Judging from the overview of insurance market, the payments' level reached its peak of 16% in the first quarter 2005. Roman Shinkarenko considers it to be a very low level comparing to the developed countries where the payments reach 70-75%. And, many insurance agreements leave much to be desired, as major technical and legal moments are written for the benefit of insurance companies.

In addition to the problem of distrust, Roman Shinkarenko mentions some other problems, such as low level of understanding of the essence of insurance, absence of insurance culture, no statistical data and analysis of the risk losses for the previous years. Some illogical actions of the Ministry of Agriculture negatively influence the insurance activities as well. For example, after serious natural calamities (mass winter death of winter crops, severe drought, etc) the Ministry makes a decision to pay compensations to all agricultural enterprises. Of course, farms do not see the necessity to get insured, if there are chances to reimburse losses by state funds.

We see many obstacles on the way of insurance expansion in agro business; however, there is a significant positive dynamics as well. The agricultural business of Ukraine is becoming more attractive to investors. The major part of investments has been made to grain and oil crops production earlier; now other industry branches become attractive as well, for example, intensive orcharding, greenhouse production. The reduced weather risks in these areas can significantly increase the investment attraction of these projects. The specialists believe that respectable insurance companies and agricultural producer have already started to advance each other.

You can read more about the insurance of agricultural risks in Ukraine and about existing insurance products for agricultural producers in the article written by Roman Shinkarenko and Oleg Stoyanov, to be published in one of the next issues of "Agrooglyad: Vegetables and Fruits" journal.