BINDING GUARANTEE

Despite all the efforts of the government and the insurance companies, insurance as a financial instrument has not become a part of everyday life of the people of Azerbaijan. This is something that neither the companies nor the experts can deny. Many reasons are being given for this - mental processes, lack of awareness of the benefits of insurance services and people's lack of confidence in this sphere… Although it has to be admitted that thanks to the introduction of compulsory types of insurance and a broader advertising campaign by the government, this year there has been some progress in this area. But again, this is mainly evident in the capital - the regions haven't caught up yet. This particularly applies to insurance in the agrarian sector, one of the spheres of the economy most susceptible to risk.

The problem is there…

Agriculture has always been a risky business. Floods, drought, landslides, fire, cattle infection, aviation flu - these are the sort of problems farmers have to face in order to get their produce to market. It can also perish on the way, fail quality controls, and so on. As a result, instead of a profit the farmer entails huge losses which, of course, make him wonder if it is worth carrying on. At the end of the day, all this affects general agricultural production levels and the government is forced to take emergency measures to boost farmers' interest in the form of tax preferences, financial concessions to pay for fuel and the issuing of preferential credits.

Worldwide, all these aforementioned risks are avoided by a very simple means - by farmers insuring their produce and the production process. And in Azerbaijan there are clearly very serious problems in this regard.

This became particularly clear in the spring of 2010 when because of high flooding in the country's main rivers - the Kura and the Araz, as well as small mountain rivers in rural areas situated in the Aran lowland - a huge torrent of water came rushing down. Homes, farms, outbuildings and seed plots all found themselves submerged. About 20,000 homes were flooded, over 300 destroyed and 2,000 rendered uninhabitable, and 76,000 hectares of ploughland and pasture were under water. Some 1,825 farms in five lowland districts of the country were hit - Kurdamir, Imisli, Sabirabad, Haciqabul and Saatli. The total damage suffered by these farms ran into tens of millions of manats.  At the time, President Ilham Aliyev noted in one of his speeches that because none of the victims had insured their premises the state had allocated a huge sum from the state budget to help the population. It should be pointed out that according to amendments to the law "On assisting and developing agriculture in Azerbaijan", which were endorsed in the summer of 2007, the proportion of state funding of premiums in agricultural insurance was increased from 25% to 50%.  Apart from wheat, barley, maize, sunflower, potatoes, sugar beet and vegetables were included in the list of crops to be insured from state budget funds. The average tariff for agricultural insurance in Azerbaijan is about 1,500 manats annually (5% per hectare) - whereas the average profit per hectare of land is approximately 25,000 manats annually.

These measures kick-started the introduction of insurance services in rural areas but the situation is still far from ideal. Who is to blame for this state of affairs - the farmers who are reluctant to work with the insurance companies, or the companies themselves who grudgingly offer their services to the farmers?

…there is a solution!

If one analyses the state of affairs in this area, one could say there is no point in accusing this or that party of being negative. A solution can only be reached on the basis of mutual cooperation between the parties, but, unfortunately, there is no sign of that today despite, as we have already mentioned, the benefits offered by the state.

According to Sabir Valiyev, head of the department to oversee the production and the processing of crops of the republic's agricultural ministry, the ministry regularly monitors measures to brief the rural population about the importance of insuring produce in the agrarian sector. Nevertheless, the majority of farmers do not use the services of the district insurance companies because of… "a lack of confidence in them".

Vaqif Sixaliyev, who manages the "Halal" farming company, believes that insuring produce is a "lost cause". "You have to scurry from court to court to prove your cause and try to get the insurance company to reimburse your losses. And in most cases it is the farm people who lose out," he claims.

Farmer we spoke to in Saatli, Haciqabul, Salyan, Neftcala, Imisli, Beylaqan and other districts all said the same. In some cases the insurance companies themselves share their opinion about the low level of confidence in insurance services. In their view, a great deal of work needs to be done for rural commodity producers to trust this type of voluntary insurance.

"Despite the obvious advantages, neither the farmers nor the insurance companies have given a proper assessment of this type of insurance. Although our agents have managed to conclude about 400 contracts every year with farmers, this is just a small share of the existing potential," Mammad Mammadov, chairman of the board of Azersigorta, said earlier in an interview for our magazine.

He noted that every year an amount to cover 50% of the cost of an insurance contract with the farmers is provided for in the state budget, but unfortunately, this is virtually never fully used.

It should be pointed out that Azarsigorta earlier submitted to the government proposals to allocate additional funds to insure agriculture. At the same time, an insurance contract in the field of agriculture would be fully covered. Proposals were drawn up because the majority of farmers were not insuring their property due to a lack of additional funds - the 50% share which would have to be paid by the farmers is a large sum for small businessmen. Moreover, experts studying this sphere believe, one of the reasons why agricultural insurance has not developed in Azerbaijan, is the lack of knowledge among farmers of insurance and their potential.

There is another problem, too. Azar Aliyev, executive director of the Association of Azerbaijani Insurance Companies, believes that the reasons for the lack of development of agricultural insurance in Azerbaijan are a lack of work experience in this type of insurance and the corresponding human resources. "This type of insurance is not simple and it requires trained specialists, particularly when it comes to settling claims," he said.  In connection with this many insurance companies are still not deciding to enter this market even though it has serious potential. "Bearing in mind that agriculture is one of the leading spheres in our economy, insurance of this type of activity is a prospective line of development," he said.

At the same time, the situation in this sphere could very soon alter significantly, because the draft concept for socio-economic development for 2012 and the following three years points out that in 2012-2015 a mechanism for compulsory insurance is due to be created in Azerbaijan with the aim of reducing damages sustained by farmers as a result of natural disasters. "Furthermore, in the period under review it is proposed to improve the existing legislative base to stimulate agricultural insurance," the draft states. As Namiq Xalilov, head of the state service for insurance supervision at the Finance Ministry, said earlier, a joint working group has been set up comprising representatives of the ministries of agriculture and finance with the aim of studying international experience in this sphere and preparing relevant proposals.

In the opinion of Orxan Hasanov, chairman of the board of the Basak Inam Sigorta insurance company, which believes that agricultural insurance is a priority trend in its activities, the introduction of compulsory agricultural insurance in Azerbaijan meets the demands of the market. "In many countries, Turkey, for example, this mechanism is working successfully," Hasanov said. In his view, one of the problems of agricultural insurance today is the difficulty in identifying farmers as businessmen. "Imprecise statistics make it difficult to evaluate this sphere and to make predictions," Hasanov believes. He said that failure to use land for its proper purpose is hindering the development of the agrarian sector, and, consequently, that of agricultural insurance. "For example, in the southern regions, which are favourable for growing tea and citrus crops, a good deal of land is used for stockbreeding, although this could be done in other regions," Hasanov said. He believes that the introduction of compulsory insurance could solve many problems, including the insurance culture of the rural population. This will also help to realize the potential of this type of insurance in Azerbaijan which is today estimated at 100 million manats, and increase its proportion to the overall volume of levies.

Furthermore, experts believe that for the development of agricultural insurance in Azerbaijan, the mechanism of insurance of agricultural credits needs to be improved. As Ayxan Nasibli, coordinator of a project being conducted by the Azerbaijani Association for Micro-funding jointly with the international organization Oxfam, said, improving this mechanism will help the development of agriculture and the country's financial sector. A guarantee fund in the sphere of insurance of agricultural credits will also be an important instrument here. The creation of such a fund is one of the main proposals contained in a project "Mechanism for the insurance of agricultural credits." "The second stage of the project to improve the mechanism of insurance of agricultural credits is now underway and is due to be completed at the end of December - beginning of January. The third and final stage will see the adoption of the project at top state level," the expert noted.

In other words, by means of additional incentive projects and measures, the government and non-state structures are trying to help farmers understand the advantages of insuring their produce. The main thing is that the positive effect should be real, and then, perhaps, there will be a drop in the need for "mandatory obligation".