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Crop insurance in transition: a qualitative and
quantitative assessment of insurance products
Discussion paper // Institute of Agricultural Development in Central and Eastern Europe,
Provided in cooperation with:
Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO) Suggested citation: Bokusheva, Raushan (2004) : Crop insurance in transition: a qualitative and quantitative assessment of insurance products, Discussion paper // Institute of Agricultural Development in Central and Eastern Europe, No. 76, urn:nbn:de:gbv:3:2-5535, http:// hdl.handle.net/10419/28473
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DISCUSSION PAPERInstitute of Agricultural Development in Central and Eastern Europe
CROP INSURANCE IN TRANSITION
A QUALITATIVE AND QUANTITATIVE ASSESSMENT
OF INSURANCE PRODUCTS*(Preliminary results)
RAUSHAN BOKUSHEVADISCUSSION PAPER NO. 76 Theodor-Lieser-Straße 2, 06120 Halle (Saale), Germany Phone: +49-345-2928 110 Fax: +49-345-2928 199 E-mail: email@example.com Internet: http://www.iamo.de * This research is supported by Volkswagen Foundation.
Dr. Raushan Bokusheva is a senior research associate at the Institute of Agricultural Development in Central and Eastern Europe (IAMO), Division: Structural Development of Farms and Rural Areas, in Halle, Germany. Her research mainly focuses on risk assessment and risk management in agriculture.
Mailing address: Institute of Agricultural Development in Central and Eastern Europe (IAMO) Theodor-Lieser-Straße 2 06120 Halle/Saale Germany
Discussion Papers are interim reports on work of the Institute of Agricultural Development in Central and Eastern Europe (IAMO) and have received only limited reviews. Views or opinions expressed in them do not necessarily represent those of IAMO. Comments are welcome and should be addressed directly to the author(s).
The series Discussion Papers is edited by:
Prof. Dr. Alfons Balmann (IAMO) PD Dr. Heinrich Hockmann (IAMO) Dr. Peter Weingarten (IAMO) ISSN 1438-2172 Crop insurance in transition: a qualitative and quantitative assessment of insurance products 3
ABSTRACTThis discussion paper considers insurance as a possible instrument of farm income stabilization and compares several crop insurance products with respect to their applicability in a transition economy using the case of Kazakhstan. The analysis is based on a qualitative evaluation as well a quantitative assessment of selected insurance products. The qualitative analysis reviews the available literature on the topic. The quantitative assessment completes the comparison introducing the findings of a numerical analysis of farm and weather data.
JEL: G22, Q14, D82Keywords: Risk, insurance schemes, agriculture.
ZUSAMMENFASSUNGDieses Diskussionspapier behandelt Ertragausfallversicherung als ein potenzielles Instrument der Stabilisierung der Einkommen landwirtschaftlicher Betriebe. Dabei werden einige Versicherungsprodukte auf ihre Anwendbarkeit in einem Transformationsland (am Beispiel vom Kasachstan) komparativ analysiert. Die Analyse wurde auf der Basis der theoretischen Beiträge zur Entwicklung des Versicherungsmarktes als auch der Ergebnisse einer numerischen Analyse der Wetter- und Betriebsdaten durchgeführt.
List of Tables
List of Figures
2 Short overview of insurance products
3 Qualitative comparison of insurance products
3.2 Incentives for farmers and insurance companies to participate in crop insurance.....................14
3.3 Effects on farmer’s production patterns
3.4 Feasibility and financial viability
4 Quantitative assessment of insurance products
4.1 Procedure and data
4.2 Index selection and design
4.3 Assessment of fair premium and appropriate price
LIST OF TABLESTable 1: Main crop insurance products
Table 2: Minimum, maximum and average correlation coefficients between selected indices and farm-level yields (Atbasar-rayon in the Akmola-region)................ 19 Table 3: Preliminary results of a numerical analysis
LIST OF FIGURESFigure 1: Grain yields in Kazakhstan (1955-2002)
Crop insurance in transition: a qualitative and quantitative assessment of insurance products 7
1 INTRODUCTIONGovernmental interventions were an important part of agricultural policies in socialist countries.
Unfortunately, these government actions often neglected conditions for economicallysustainable farming. In the former Soviet Union, primarily output-oriented agricultural policies extended agricultural production even to marginal production areas, and thus created a significant misallocation of resources.
Under the Virgin Land policy, 41.8 Million hectares (ha) were opened up for grain farming in the Soviet Union. In Kazakhstan, crop farming was extended from 6.7 Million to 21.9 Million ha from 1954 to 1964. Thereby, in addition to the areas suitable for crop production, much virgin land was ploughed in areas with poor soil quality and weather conditions which were unfavorable for crop production. Prior to 1991, the crop farming in Kazakhstan was extended to
35.3 Million ha. In the Soviet times, production risks due to natural hazards and catastrophes did not affect farmers' incomes since their production losses were compensated by the government.
Nowadays agricultural enterprises face high production risks and inevitably have to adapt to natural conditions. During the last 10 years, a drastic reduction of sown area has been observable. According to an official statistic, sown area was reduced from 35.2 to 17.8 ha in the same period (see Appendix A). The steepest decline of sown area was evident from 1996 to 1998, when most parts of the country experienced drought, and as a result many farm businesses were forced into bankruptcy (GRAY, 2000). Territorially, the sharpest decline occurred in the regions which, due to their agro-climatic conditions, have a higher exposure to natural risks. In 2002, less than 33 percent of the total area sown in 1990 was being cultivated. As a consequence of different rates of reductions in the area cultivated in individual regions, regional structures of cultivated area underwent substantial changes as well. Currently, the most productive areas in Northern Kazakhstan cover about 63 percent of whole sown area. 11.5 percent of sown area is in the primarily irrigated production area in Southern Kazakhstan. These two regions have increased their share of production. Regions with many marginal production areas account for a little more than 25 percent of whole sown areas in the country. Though this development illustrates that much land where sustainable production is not achievable is taken out of cultivation, Kazakhstan is still confronted with the problem of high vulnerability of farm incomes with regard to unfavorable weather and production conditions in vast areas of the country.
The extension of wheat production to areas with a high exposure to natural hazards was supposedly accompanied by an increase of a systemic, i.e., non-diversifiable, component in production risk. Natural hazards such as drought and extremely high temperatures typically affect a large number of farms over widespread areas in Kazakhstan simultaneously. This serves as an explanation for a high variation in the level of the national annual yields (Figure 1).
The option of reducing production risks by applying on-farm risk management tools can be used only to a limited extent in a transition economy. Hard budget constraints, the lack of working machinery, and scarce working capital result in even less favorable conditions for crop production when compared to previous years (PETRICK, 2001). Like many of the former Soviet Republics, Kazakhstan preserved compulsory agricultural insurance in order to help farmers manage their risks.
Raushan Bokusheva Figure 1: Grain yields in Kazakhstan (1955-2002)
Source: ROSTANKOWSKI, 1979; PETRICK, 2001; STATISTICAL YEARBOOK OF KAZAKHSTAN, 2003.
Up until 1997, insurance services for agriculture were provided by the state insurance company KazGosstrakh. In spite of the legal requirements for all legal farm entities to take risk insurance for all operations, the market for insurance remained under-developed and few farms were insured. Those, which did buy insurance usually did so only to meet formal requirements for other purposes such as access to credit (GRAY, 2000). In 1998, the Government established KazAgroPolis in order to develop a public-sector supplier of crop insurance. However, its operations remained very limited and, according to the National Bank of Kazakhstan (THE NATIONAL BANK OF KAZAKHSTAN, 2002) after its last restructuring in 2001, KazAgroPolis lost its licence for providing any type of insurance services.
In 2003, Kazakhstan’s government prepared a draft law on compulsory insurance in crop production. According to this document, private insurance companies were allowed to provide crop insurance, and the government was obliged to pay 50 percent of indemnity in case of crop failure. A survey of key actors1 conducted in autumn 2003 showed that the insurance scheme proposed by the government contained many serious shortcomings and was attractive neither for insurance companies nor farmers. However, the Parliament passed the law in March 2004 to provide an insurance option to farmers. Nevertheless, no farm was insured in 2004, as many issues of the institutional framework with respect to the introduction of the new insurance scheme remain not solved.
The survey was conducted in the form of the structured interviews with members of Parliament, representatives of insurance companies, farmers' unions, regional administrations and insurance and agricultural experts. 21 persons were interviewed in September-October 2003.
Crop insurance in transition: a qualitative and quantitative assessment of insurance products 9 There are many critical issues which explain the failure to develop a crop insurance in Kazakhstan. But, most of them could be separated into two major groups: Neglecting of general insurance requirements and specific issues with regard to transition process.
Therefore the motivation of this study is to assess several insurance products with respect to their potential to be adequate to both general insurance aspects and particular problems of transition.