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9THE PROPOSED INSTITUTIONAL SYSTEM FOR THE IMPLEMENTATION OF AGRICULTURAL
INSURANCE IN THE REPUBLIC OF ARMENIA
Manucharyan M.
Ph.D. in Economics Research Associate, M. Kotanyan Institute of Economics National Academy of Science, Republic of Armenia, Lecturer, Chairs of Economics of Agro-food System and Agrarian Policy and Consulting Armenian National Agrarian University
Abstract
At present, there is a need to develop a state-funded state insurance scheme, theoretical and methodological approaches to agricultural crop insurance tariffs, methodology for determining the capacity of the agricultural crop market. This article is aimed at solving other problems of development of the mentioned and simultaneously existing insurance market.
The conducted studies are the basis to conclude that the introduction of agricultural insurance in Armenia cannot be initiated by private insurance companies operating in Armenia at present. Taking into account the above mentioned, we consider that the process of introducing the insurance system in the RA agriculture should be organized through the State Insurance Company founded by the Government of the Republic of Armenia involving foreign investors.
Thus, the studies are based on the conclusion that the introduction of the state-funded insurance system in the RA agriculture will contribute to the stabilization of the income of the rural households, raising the attractiveness of investments in agriculture, increasing the number of employed in agriculture, reducing poverty and emigration levels, and disseminating insurance culture in rural communities and the development of the insurance market, creation of new jobs for insurance specialists, etc.
Keywords: agriculture, insurance, State support, legislation, agricultural crops, agricultural animals, system, investments.
One of the most important preconditions for the implementation of agricultural insurance with state support is the existence of a legislative framework. The absence of legislation and sub-legislative acts regulating the sector as a limiting factor for the introduction of agriculture in the Republic of Armenia. This applies particularly relevant to the development and enforcement of the RA Law "On State Insurance Agricultural Insurance". The law should define the legal basis for state-supported agricultural insurance to protect the interests of agricultural producers within the framework of agricultural insurance. Within the law, such associations should be defined, as:
- Insured,
- Insurer,
- Beneficiary,
- Competent authority,
- Association of Insurers;
- State-supported agricultural insurance,
- Agricultural crops,
- Agricultural animals,
- A harvest of agricultural crops,
- Loss of agricultural crops,
- Agricultural livestock,
- Decline of agricultural animals, etc.
The procedure for providing state support for agricultural insurance should be defined by the executive power authorities, with relevant legal acts. Moreover, in many countries this insurance is funded by state funding, subsidizing insurance premiums, which does not contradict the WTO requirements [1]. Despite the fact that subsidies for insurance premiums is included in the "green basket" into which no limit exists on the size of subsidies should be justified in order to break
the market balance and not become a "burden" for the state [3]. At the initial stage of agricultural insurance in the Republic of Armenia, a 50% limit of subsidization will be applied, with subsequent application of a differentiated subsidy approach, giving advantage to the strategically important crops and regions of Armenia.
The conducted studies are the basis to conclude that the introduction of agricultural insurance in Armenia cannot be initiated by private insurance companies operating in Armenia at present, because:
- They do not have adequate experience in the field of agricultural insurance,
- They are ready to insure agricultural animals at the initial stage (by the way, Nairi Insurance company has made such an attempt), but the need for insurance coverage in the agriculture of Armenia is growing in plant growing,
- These are profit-making companies and provide a minimum of 20% of the premium in the insurance premium, which will lead to the same increase of the insurance premium,
- Business entities do not trust private insurance companies.
Taking into account the above mentioned, we consider that the process of introducing the insurance system in the RA agriculture should be organized through the State Insurance Company founded by the Government of the Republic of Armenia involving foreign investors. The proposed structure for the implementation of agricultural insurance with an organizational structure should be a closed joint-stock company, the management authority of which should be assigned to the RA Ministry of Agriculture, Ministry of Finance and Ministry of Economy. Later, the company's shares
could be acquired by private companies. This company should cooperate with the public authorities and local self-governing bodies, agricultural enterprises, commercial and economic cooperatives, research institutes, the Central Bank, commercial banks, credit organizations, insurance and reinsurance companies, the Arm-HydroMet service, international organizations (World Bank (WB), EU, the German development Bank (KFW), the international Association of hail insurance (AIAG)) and other organizations.
State support for agricultural insurance is provided on the basis of an agricultural insurance contract that must meet the following basic conditions:
> Agricultural insurance contract shall be concluded between the insurer and the policy holder who must comply with the requirements of the law and the agricultural insurance scheme,
> Agricultural insurance contract is concluded either on agricultural crops or agricultural animals insurance,
> Insurance amount should not be less than 80% of the insurance cost,
> 20% of the damage incurred as a result of an accident must be compensated by the policyholder, namely, the non-contingent franchise (non-refundable) should be set.
In the event of an accident, the insurer shall conduct an expert examination in case of any disagreement between the parties in connection with the damage and the cause of the accident, by inviting independent experts. The procedure and conditions for the examination shall be determined by the competent authorities [2].
Every year, the relevant competent authorities, as well as the Association of Insurers, have to prepare an agricultural insurance plan that should include:
> Agricultural insurance objects subject to state-supported insurance,
> The amount of subsidies, as well as the size of the insurer's participation in damages [4].
The Association of Insurers is a non-profit organization formed on the basis of voluntary membership of insurers. It ensures the interaction of its members within the framework of agricultural insurance, develops and approves binding rules for the Association of Insurers and its members, and follows its maintenance. It advocates the interests of the Insurers' Association in the state and local self-governing authorities. The Association of Insurers forms a compensation fund that is used in the manner and in cases prescribed by law, as well as participates in the elaboration of the annual agricultural insurance program with state support. It collects and maintains statistical data on agricultural insurance used to calculate insurance tariffs.
If an insurance company that has signed an agricultural insurance agreement fails to perform insurance indemnity for insolvency, the Association of Insurers shall pay compensation to the policyholder or beneficiary from the previously formed compensation fund. The compensation fund is formed at the expense of insurance premiums collected by insurers. The amount of membership fees is defined by the Association of In-
surers, but it can not be less than 5% of insurance premiums collected by the insurance company for agricultural insurance contracts. Compensation fund is provided on the basis of claims of the policy holder or beneficiary.
The provisions of the RA Law "On Agricultural Insurance with State Support" should be gradually enforced. Thus, in our opinion, agricultural insurance should start with crop insurance, in particular, grain harvest insurance, taking into account their role in ensuring food security of the country, and also a relatively low level of risk. Initially, first and foremost, must insure the risk of hail, and further other risks may be included in the insurance coverage. This proposal is grounded in the fact that the Armenian agriculture suffers huge damage every year due to the hail and from the point of view of insurance it is much easier to implement hail insurance, taking into account the fact that the damage assessment process is relatively simple [5].
Agricultural insurance has a number of peculiarities in which it is conditioned by the difficulty of its introduction and the need for state support. Agricultural insurance objects are mainly agricultural crops and animals that are constantly in the process of growth and development. For the implementation of agro-insurance, professionals are needed not only for insurance, but also for agricultural knowledge. For a private company, it is difficult to collect the necessary, complete and reliable data, implement an outsourcing policy. Agricultural risks are characterized by systematic nature, as a result of which and damaged areas are huge and the resulting damage. This is the main reason why private insurance companies avoid signing agricultural insurance contracts. In the case of agricultural insurance, compared to other types of insurance, the operating costs are high, which is conditioned by the geographical scattering of agricultural activities. High levels of agricultural insurance risk and operating costs are the basis for high premiums and without state support for farm entities is difficult, and in some cases it is impossible to pay insurance premiums.
Taking into account these circumstances, it is proposed to implement the introduction of agricultural insurance in Armenia through the State Insurance Company established by the Government of the Republic of Armenia. The initiative to create an insurance company with state support in our country is in line with international insurance practices. The Ministry of Agriculture, the Ministry of Finance, the Central Bank of Armenia, the agricultural associations, the agricultural cooperatives should act on the initiative of the mentioned company.
Thus, we can say that in order to introduce state-supported insurance in Armenia it is necessary to develop and put into effect the following legal acts:
- The Law of the Republic of Armenia "On Agricultural Insurance with State Support"
- The Law of the Republic of Armenia ''On Mutual Insurance'',
- Annual agricultural insurance program;
- Long-term Agricultural Insurance Program;
- "The Procedure for the Qualification and Expertise of Independent Experts"
- "Procedure for subsidizing agricultural insurance premiums".
The above-mentioned documents, in our opinion, should clearly define the main points of the agriculture insurance:
1. State involvement in insurance should include the use of public funds both for subsidizing insurance receipts and compensation for losses of agricultural producers only if their property is insured and, in the event that the damages are of exceptional nature. Losses caused by purely adverse weather conditions should be covered by insurance companies.
2. It is necessary to clearly identify the types of agricultural risks that will be guaranteed by state support as well as the place of agricultural insurance coverage in the general insurance classification system.
3. Two models of insurance organization should be fixed:
- agricultural risks insurance by commercial nonprofit organizations. It is important to legislatively define the principles, goals and objectives of their unification in insurance groups, claims for insurance group participants,
- Agricultural risks insurance in rural communities through creation of mutual insurance associations. It is also advisable to determine the main criteria for their work.
4. The terms of insurance must be defined according to the main types:
- a typical list of insurance risks, with description of their criteria,
- the procedure for determining insurance value and amount;
- insurance Guarantee Rules;
- deadlines for signing insurance contracts, etc.
5. Preferential terms for obtaining a bank loan for insurance.
6. Procedure and conditions of State Support. To determine the amount of financing from the budget, the list of indicators characterizing the capacity of the insurance market should be developed. It is also necessary to fix the options for budget allocation (in the form of compensation paid or subsidized), state participation in insurance receipts, terms of allocation of budget funds, etc.
7. Procedures for the use of regional budgets and insurance reserves to compensate for damages caused by natural disasters.
8. Training of specialists and informational work.
9. One of the most urgent issues of the developed concept should be the establishment of an effective tariff policy, establishment of a comprehensive insurance system for agricultural insurance, as well as issues of state centralized reserve formation and insurance monitoring. Most of them refer to agricultural crops insurance as this type of insurance is more costly in terms of the value of insurance and subordinate receipts from the point of view of the probability of occurrence of very high insurance value and insured events, which, in its turn, leads to the need for the development of the system and the creation of centralized reserves.
Thus, the studies are based on the conclusion that the introduction of the state-funded insurance system in the RA agriculture will contribute to the stabilization of the income of the rural households, raising the attractiveness of investments in agriculture, increasing the number of employed in agriculture, reducing poverty and emigration levels, and disseminating insurance culture in rural communities and the development of the insurance market, creation of new jobs for insurance specialists, etc.
REFERENCES:
1. Government Support to Agricultural Insurance; Challenges and Options for Developing countries, Olivier Mahul, Charles J. Stutley, 2010, 250p., www.worldbank.org.
2. Ramiro Iturrioz, Agricultural Insurance, The World Bank, 2009, p. 6-8
3. www.fao.org
4. Manucharyan M.G., The need of state support in the implementation of agricultural insurance. / Topical issues of social and economic development in the Republic of Armenia (A Collection of Scientific Articles), NAS RA, M. Kotanyan Institute of Economics, Yerevan, 2016, pp. 280-284
5. Manucharyan M.G., Elaboration of systemic solutions of the insurance as an important direction of state support for agricultural risk insurance. / Knowledge, New Generation and Development of ASUE XXV Conference, Yerevan, 2015 November 1113, page 492-497
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