Alternative to insure Agro-industrial complexes

Insurance takes an important place amongst the different measures for the conservation of stability in the development of the agricultural sector, being one of the most powerful financial institutions, dominating over the logistical components of the economy.

In most countries worldwide, the efficient development of agricultural areas results from serious governmental support, including direct funding from the budgets of different levels. In Azerbaijan, with underdeveloped insurance sector, minor financial flows into the agro-industrial complex (AIC) are "blurred" with compensation for losses because of natural disasters and loss of crops and animals.

The essence of agricultural insurance is various risks, i.e. the risk that the employer will suffer losses in terms of additional costs beyond his actions, or receive revenues below those on which he relied. Full recognition of insurance risk requires a determination of their extent, the calculation of tariffs, development of measures aimed at reducing the negative impact of an insured event.

The most perspective is the structural logic model of economic relations of the agricultural enterprises with budgets, credit institutions and insurance companies, allowing to obtain a loan secured by property insured with an insurance company with the funding from a variety of budgets up to 70 percent of premiums.

Currently in Azerbaijan the budgetary funds cover 50 percent of the insurance policy for insurance of agricultural risks. The remaining 50 percent is insured by insurance companies. The average tariff on agricultural insurance in Azerbaijan is around 1,500 manat per year (five per cent per hectare), despite that the average profit from one hectare of land is around 25,000 manat per year.

In particular, the budgetary funds may be directed at insuring agricultural risks associated with the cultivation of wheat, barley, maize, potatoes, sugar beets, vegetables (except green). According to the assessment of the Ministry of Finance, the existence of such an opportunity to insure risks will allow farmers to increase agricultural production, ensure the profitability of their production.

However, the insurance companies of Azerbaijan received 57,800 manat from the Public budget of Azerbaijan in 2006-2009 within promotion of development of insurance in agriculture. The Public budget envisaged to allocate 1,872,000 manat for this purpose over four years, including 750,000 manat in 2009.

However, during this period, the insurance companies received only 57,800 manat or 3.1 percent of the funds provided. Of these funds, 7,800 manat was allocated in 2008, 50,000 manat in 2009, while budgetary funds remained unused in 2006-2007. This is linked with a small number of appeals by farmers receiving budgetary support to cover their risks.

                           Insurance and Guarantee Fund is necessary for AIC

Azerbaijan Microfinance Association (AMFA) supports the establishment of an Insurance and Guarantee Fund in the field of agriculture in order to improve the situation.
The Association conducted an analysis on the subject of study of insurance mechanism in agriculture. The analysis investigated the international practice, the current situation in Azerbaijan, a number of proposals.

Given the high risks in the agricultural sector, AMFA makes a proposal to establish Insurance and Guarantee Fund for loans in agriculture, which on the one hand, will focus on the insurance of risk in the agricultural sector, on the other hand, will act as a guarantor for loans in the agricultural sector. The Association intends to submit its proposal to the government, since the state should take an active part in the establishment and operation of such a fund.

The Fund may determine the priorities in its activities, establish maximum limits of insurance and guarantees, identify specific cases for the insurance payment, establish evaluation criteria for insurance and guarantee.

Head of the research group of the project "Agricultural loans insurance" Vagif Hasanov said that currently there are certain problems in the field of insurance of risks in the agricultural sector. In particular, this is linked with the limited number of objects of insurance of risks in the agricultural sector, as well as limited terms of the insurance premium for insurance cases, which are mainly natural disasters.

According to Rustamov, there is no need for a separate law to establish the fund, because in 1999 Azerbaijan adopted a Law on State Support for Small Entrepreneurship, which has an item on governmental financial support for small businesses, which envisages issuance of subsidies, compensations, preferential loans, grants, guarantees, leasing and other services to entrepreneurs.

                                                 State support for AIC

The recent natural disasters (earthquake, mudslides, landslides, fires and others) have caused great damage to property in rural areas. But as the property of population has not been insured, they can receive assistance only from the Public budget. Today, farmers operating in the country have not paid adequate attention to the insurance of their properties.
AzerSigorta JSC formerly presented proposals to the government to grant additional funds for insurance of agriculture. The company offers 100-percent coverage of the insurance contract in the field of agriculture compared to the current coverage of 50 percent. The company justifies the need to raise the state guarantee with the fact that most farmers do not insure their properties precisely because of the absence of additional funds for this purpose.

Banks are also reluctant to lend to the agriculture because of the high risks in this sector. If over the five months of 2009, the share of agricultural loans in total loan portfolio of banks made up 5.6 percent, in the same period of 2010 this figure fell to 4.5 percent.

In addition, the State supports agriculture through the State Agency for Agricultural Lending at the Ministry of Agriculture, which since 2007 have been receiving funds the Public budget for preferential lending to farmers.

It is expected that the government of Azerbaijan may in future replace the provision of subsidies for farmers to preferential lending. Today, the economically developed countries support agricultural sector in the form of subsidies. In particular, in the EU the amount of subsidies for the agricultural sector reaches 50 billion euros per year.

The state support for the agro-industrial complex in Azerbaijan in 2010 is planned in amount of 700 million manat. These costs included both direct and indirect costs of the state to finance the agricultural sector.

Moreover, 35 million manat is envisaged to be allocated for Agrolizing JSC from the Public budget, 10 million manat for the Agricultural Credit Agency at the Ministry of Agriculture. Of 44 million manat allocated to the National Fund for Entrepreneurship Development this year, 48 percent is envisaged for the production and processing of agricultural products. 

In 2010, the amount of direct subsidies to the agricultural sector in the country is expected at the level of 115 million manat, and from tax privileges, the indirect subsidies to this sector will total 149 million manat.

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