INSURANCE MARKET TREND

Agroinvestor, Moscow, March 30, 2016

Agricultural insurance in Russia is still underdeveloped. There are a lot of problems in the system of agricultural insurance, which have led insured areas to the drop from 20% to 11% in 2015. Why doesn’t the system work?  What do we need to do for its popularization? And how will  an association of agroinsurers help?

It is obvious, that the maximum subsidizing rate for the crop insurance with the governmental support is too low. Otherwise, how will they explain why the rates in different regions are equal for winter crops and for spring ones? For example, let’s compare a spring crop rate in the Volgograd region and in the Krasnodar region.  The difference is only  3%.  Though, a chance to lose the harvest due to the drought is much more higher in Volgograd. It proves that the situation demands a significant increase of the state support.

But it seems that official compensation pay statistic holds the state back: the governement spends more money on the insurance than the insurers pay to the agrarians.

Unfortunately, this also has an explanation:  insurance directives and loss adjustment procedure are formalized and an insurer has all the reasons for lower compensation size, he can extend payment period or decline payment at all. For example,    loss definition criteria –“dangerous natural hazard”  - they practically don’t reflect a causes variety of real unforeseen losses for an agrarian. The first time adjustment doesn’t involve an independent examination, and in the case if the insurer is not subsidized from the budget, he will automatically under- estimate the payment. Indemnity period in reality is close to 1,5-2,5 years, it depends on the time of the loss occurrence. And the payment statistic speaks for itself.

In order to build a reliable insurance system the state needs to create adequate insurance and reinsurance infrastructures used in the classical risk insurance worldwide. But it will be hard to implement that in Russia considering the situation on the insurance market.

The foundation of the agroinsurers association will hardly lead to a significant change in the quality of insurance coverage. Insurance directives are the same for everybody, but they allow underrating payments. There are no common underwriting and adjustment methods and their implementation is not planned. Financial stability of the insurers is relative.  And the existence of the compensation fund doesn’t guarantee losses payment for the agrarians, since it will be used only in the case of insurer’s bankruptcy. 

Another important element of the developed agro insurance market is an independent institution of loss adjusters. “Independent” - it means, they get paid by state, for example, not by an insurer or an assured. Loss adjuster’s responsibility is just to record an insurable event and its size, and the loss calculation should be made based on a transparent adjustment methodic, clear to both - insurer and assured. Also it should be available on the institution’s website. Unfortunately, this insurance market development peak also hasn’t been concurred in Russia.

Russia’s problem is that we are going backwards. Instead of accepting our mistakes and modernizing our system in favor of consumers-agrarians we enforce insurance obligation while not creating solid background for reliable insurance coverage. Obligation itself won’t create it. Yes, it would let the Agriculture Ministry report on bigger amount of insured sowings, as well as create additional income for the insurers. But what will agrarians    get? Based on suggested insurance rules, they will get  only headache to receive subsidies, which previously were given without any special conditions.

Obligation could have a positive effect, if it would be implemented not as a way to equal the performance or not as new means for the insurer’s growth, but if it would really replace compensation pay  out of federal and regional budgets in case of emergency situation. The insurance coverage should be transparent and understandable for the agrarians. It should guarantee protection of their investments in crops in the case of the total losses. This coverage should be basic foundation for crop insurance with the state aid.

Creating a comprehensible scheme of compensation payment (sizes, rules, conditions and limits) in case of natural hazard would automatically assure the agrarians in getting a compensation pay, which wouldn’t depend on the budget conjuncture or current paying capacity of the insurers.   This would justify the obligation: the government has created for agrarians a working insurance system and it wants to protect its money that is given as green box subsidies. So if an agrarian wants to receive subsidies, he should assure the crop with minimal coverage - to assure the expenses on growing agricultural products (shock loss).

Other insurance products, including an incomplete harvest insurance with the state aid existing in Russia today, must enlarge direct expenses coverage and improve consistently; this is more complicated and more expensive insurance coverage.

To create such a system, a calculated and efficient capacity in form of reassurance protection or joint insurance pool should be formed. To eliminate pseudo insurance, the order of the state aid granting should be changed. Instead of compensating a part of the agrarian expenses on insurance coverage, reassurance capacity should be formed under the state’s control, which would receive these subsidies, previously meant for paying 50% of the insurance premium. The effective centralized system of obligatory reinsurance would allow regulating and hardening requirements for insurers in time of fieldwork in agroinsurance with the state aid sector, as well as secure financial stability of the system. The Government has already announced a State reinsurance company foundation and this initiative is very rational.

Comments of Sumanta Kumar De,  General Director of Rusmolco:

“Rusmolco actively uses all the range of insurance services. All our property and cattle is insured. In 2015 we used voluntary insurance scheme without a state aid to assure a part of our winter crops.

We don’t use insurance with the state aid because the existing system is more likely oriented on supporting insurers, not agrarians. Moreover,excessively rigid regulations are applied to the object insured, the situation on the market is not always adequate, and it is very hard to prove an insurable event. For example, an average crop yield (scheme with the state aid) is calculated based on the 5 years data all over the Penza region. So, we get some index considered as normal. But for Rusmolco this index is critically low!!! So, our case, if it is, will not be accepted as an insurable event. Besides, we have had a negative experience of cooperation with the insurance companies. Couple of years ago,  Rusmolco became the first agricultural company demanding a compensation pay though the court. The drought of 2010 destroyed a significant part of the company’s crop yield. At that time our crops were insured in VSK and MAKS. Out of 3,5 thousand ha insured in VSK, 1, 8 thousand ha was completely destroyed and 1, 6 thousand ha was considered as partial crop failure. The VSK company paid only a small part of the actual losses – 1, 8 million rubles, and only after our judicial recourse. One year later, after this case, Rusmolco and VSK signed a settlement where the total compensation to be paid  was equal to 11, 8 million rubles.

Another case occurred with  the MAKS company: we insured 3 thousand ha. The company has paid us only 4, 7 million rubles and declined to compensate the rest. In March 2012, the Arbitrazh Court satisfied completely our claim. In view of that MAKS  paid us 12, 8 million rubles as compensation and 1, 1 million rubles of legal costs.

Both trial cases took up a lot of our resources: a whole team of lawyers was forced to solve these matters. If it was such a difficult challenge for us, could you imagine how hard that is for small- and medium – sized enterprises!

This precedent showed an imperfection of the agroinsurance andinefficiency of the state aid system.

In my opinion, the main reason that holds the agroinsurance development back is agrarians’ distrust to the insurance companies. Because all the actions of the last seem to be directed not to admit a fact of insured event on any ground.”