Peculiarities of agricultural insurance legal regulation with state support
Oleksii Kominarets, Associate, ILF Integrites
The article was published in UJBL №7-8, 2012
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 of agricultural production manufacture risks' insurance.
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 crops cultivation.
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 of agricultural sector, according to the survey of agricultural producers, is caused by weather vagaries - 58%. In this case, the necessary mean of protection is the insurance of agricultural products that will protect agricultural producers from the possible risks during the crops cultivation.
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 state support", which will come into force on July 1, 2012.
This law, 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 Law itself actually stimulates the agricultural products insurance under condition of insurance contract conclusion with state support as a condition for government subsidies receiving.
Under this Law, 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 agricultural products manufacturing 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 give-and-take basis, and supply of such products.
The right of agricultural products insurance has 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 Law provides the right of agricultural production manufacture risks' insurance, including with suppliers of agricultural products, which is rather questionable n the light of the fact that the contract subject is the yield, that is, the products obtained on the ground.
The insurers, carrying out agricultural products insurance with state support, establish a fund of catastrophic risks cover with the use of allocation in it 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 Law also provides that the risks 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, the insurance companies are required to use only the standard insurance contracts.
Ineligible for insurance with state support are the following: 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 Law 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 Law establishes a mandatory services licensing on providing of agricultural products insurance.
Thus, the provisions of the Law provide that the licenses for agricultural products insurance are issued to legal entities, meeting the requirement of the Law of Ukraine "On Insurance", 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 of 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 Law’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 the legal entity and a nonprofit organization (financed at the insurers’ cost). The Pool’s Charter is 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 Law, 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 that the Pool is a particular professionals club, to which not all get the 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 customers’ cost.
In general, the positive innovations of the Law are graded by the accompanying administrative requirements and procedures.
Thus, the Law contains numerous references to the regulations of CMU, without which the full implementation of this Law is not possible. For example, the list of agricultural products, which are the subject to 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 Law (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 Law provides necessity of specialized agency decisions, i.e. the Ministry of Agricultural Policy and Food of Ukraine, which should, in particular, to establish for each region and for each product unit prices for farmed products. This value is needed to determine the insured value, respectively, without a contract of insurance with agricultural products with state support can’t be concluded.
In addition, should be paid attention to article 2 of the Law, 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 of land on which crops are insured, an essential condition of the insurance contract. However, the land, which had separated until 2004, Inventory numbers are not assigned. Thus the tenant of such lands excluded from state support of insurance of crops.
In general, introduced by the Law "On peculiarities of agricultural products insurance with state support" should promote innovation necessary market mechanisms in the sector of insurance regulation and transparency of relationships between its participants, which, in turn, will create the necessary guarantees for agricultural producers and make Ukraine a civilized world player in agro-sector.
