Peculiarities of Agricultural Insurance Legal Regulation with State Support

Oleksii O. Kominarets

The specificity of agricultural production as a form of economic activity in agrarian business, its seasonality, dependence on climatic and natural conditions, increased risk of agricultural production loss stipulate the development and implementation of effective mechanisms for insuring the manufacturing risks incurred by agricultural producers.

Thus, according to statistics of 2011, Ukraine is ranked number two in corn export turnover (after the USA) and number three among the grain exporters in general (after the USA and EU countries combined).

However, in this case, Ukraine sustains significant losses during the cultivation of crops.

The agrarians identify that the blasts and weeds, together-42%, 10%-illness, are among the main causes of losses. However, these problems can be resolved by applying agro-protective means. The greatest loss to the agricultural sector, according to the survey of agricultural producers, is caused by weather vagaries-58%. In this case, the necessary means of protection is the insurance of agricultural products that will protect agricultural producers from possible risks during the cultivation of crops.

The program of state regulation of agricultural insurance market by complex and index insurance implementing, developed in 2004, as well as the establishment of agricultural insurance subsidies fund, were ineffective, which led to the adoption of a separate On Peculiarities of Agricultural Products Insurance with the State Support Act of Ukraine, which will come into force on 1 July 2012.

This Act, aimed to regulate relations in the field of agricultural products insurance, is carried out with state support, in order to protect the property interests of agricultural producers and aims to ensure the stability of production in agricultural industry. It should be noted that the Act itself actually stimulates the agricultural products insurance under condition of insurance contract conclusion with state support as a condition for receipt of government subsidies.

Under this Act, the subjects of agricultural products insurance with state support are the policyholders and insurers.

The policyholders are agricultural producers who have concluded a contract of agricultural products insurance with state support with the insurers. An agricultural producer is a legal entity, regardless of business legal structure, who is engaged in manufacturing agricultural products and/or fish farming, aquaculture, and fishing in inland waters and fish processing on its own or rented facilities, including processing of internally produced products on a give-and-take basis, and supply of such products.

The right to insurance of agricultural products is possessed by agricultural producers operating in Ukraine and meeting criteria established by the Cabinet of Ministers of Ukraine (except for non-resident producers). In the case of transfer of agricultural lands lend-lease, the right of agricultural products insurance, including seeds and yield of agricultural crops and perennial plantings, is owned to a lease holder, except for non-residents. The insurance contributions, made by a lease holder, cannot be included as an offset against the rental payment.

However, the Act provides the right of agricultural production manufacture risks’ insurance, including with suppliers of agricultural products, which is rather questionable in the light of the fact that the contract subject is the yield, that is, the products obtained from the ground.

The insurers, carrying out agricultural products insurance with state support, establish a fund of catastrophic risks cover with the use of allocations in it of no more than 5% of insurance payments (insurance premium). The Procedure for recognizing agricultural risks as catastrophic risks is determined by the Cabinet of Ministers of Ukraine.

The Act also provides that risk insurance in the agricultural production field is carried out in accordance with the insurance contract, concluding between the insurer and the policy holder-agricultural goods producer on agricultural products insurance. Typical insurance contracts are developed for each insurance product and/or for a separate crop and shall be agreed with the Ministry of Agricultural Policy and Food of Ukraine and National Commission, regulating the field of financial services markets. As part of the state support program of agricultural products insurance, insurance companies are required to only use standard insurance contracts.

The following are ineligible for insurance with state support: yields of agronomic crops that failed to produce yield throughout the last three or more years in their cultivation, yields of perennial plantings of bearing age that failed to produce yield throughout the last five years, diseased agricultural animals, poultry, rabbits, animals used for fur, honey-bee colonies, fish and other living aquatic resources, and agricultural products, or those in a quarantine area or areas affected by an emergency epizooty.

A positive innovation of this Act is that the budget compensation is not provided to insurance companies, but directly to agricultural producers, who must use these sums for the payment under a relevant contract.

In addition, the Act establishes a mandatory services licensing on providing insurance for agricultural products.

Thus, the provisions of the Act provide that the licenses for agricultural products insurance are issued to legal entities, meeting the requirement of the On Insurance Act, by the National Commission, carrying out state regulation in the field of financial services markets.

However, at this point, the criteria and conditions for obtaining the appropriate license are not defined — the Cabinet of Ministers of Ukraine is granted a 6-month term for the development and adoption of necessary regulations, which will be definitely a limiting factor to rapid implementation of the Act’s provisions.

It should be noted that insurers, having a license for agricultural products insurance with state support, are required to establish the Agrarian Insurance Pool, which is a legal entity and a non-profit organization (financed at the insurers’ cost). The Pool’s Charter is an approved meeting of Pool’s founding members and is registered in accordance with legislative requirements. To become a member of the Pool, it is necessary to meet the requirements which will be determined by Ministry of Agriculture together with the competent authority in the field of financial services.

The Agrarian Insurance Pool ensures the coordination of insurers’ activities on agricultural products insurance with state support, and performs the functions and tasks defined by this Act, while possessing broad powers with respect to its members: to establish a database of their agricultural products insurance, keep records of contracts and monitor their implementation and carry out expertise on insurance contracts.

It may be said that the Pool is a particular professionals club, to which not everyone gets admission, but insurers that meet the highest requirements, this will be a confirmation that one or the other insurance company operates at the highest level.

Despite the positive effect of the introduction of agricultural products insurance licensing, the concern raises the question of how the necessity of insurance companies licensing and Pool’s financing affect the “purses” of agricultural producers.

It is evident that insurers will try to recover their costs at the expense of customers.

In general, the positive innovations of the Act are graded by the accompanying administrative requirements and procedures.

Thus, the Act contains numerous references to the regulations of CMU, without which the full implementation of this Act is not possible. For example, the list of agricultural products, which are the subject of insurance, as well as a list of agricultural risk for this insurance must be approved by acts of CMU. That is, despite the wide range of agricultural products, which shall be insured according to the Act (crops, plantations, livestock), the government can always severely limit or even eliminate the possibility of individual products insurance. Taking into consideration a stable budget deficit, it can be assumed that the amount of state agricultural insurance support will be minimal, and the variety of agricultural products — substantially limited.

Furthermore, the Act provides the necessity of specialized agency decisions, i.e. the Ministry of Agricultural Policy and Food of Ukraine, which should, in particular, be established for each region and for each product unit prices for farmed products. This value is needed to determine the insured value, respectively, and without a contract of insurance with agricultural products state support can’t be concluded.

In addition, attention should be paid to Article 2 of the Act, which deals with the legal framework regulating the insurance relationship. It contains a reference to the law of the State Budget of Ukraine for the period. Apparently, without the approval of the document, this type of insurance is impossible.

Among the shortcomings of the definition of inventory, should be allocated numbers for land on which crops are insured, which is an essential condition of the insurance contract. However, the land, which was separated until 2004, did not have assigned inventory numbers. And so the tenant of such lands is excluded from state support for the insurance of crops.

In general, introduced by the On Peculiarities of Agricultural Products Insurance with the State Support Act of Ukraine should promote innovation of necessary market mechanisms in the sector of insurance regulation and transparency of relationships between its participants which will, in turn, create the necessary guarantees for agricultural producers and make Ukraine a civilized world player in the agro-sector.