Georgian Agro-Insurance Ups And Downs
05 April, 2012
Georgian Agro-Insurance Ups And Downs

Georgian agriculture and agro-insurance are equally underdeveloped and only mutual partnership of private and state sectors can alleviate the problem. 

 

Georgian agriculture, being the leading sector of the country during the Soviet times, now barley reaches 9% of GDP. However, the sector is believed to become the first fiddle in Georgian economy if developed properly, as it still remains the major job creator of the country as the overwhelming majority of Georgian population earns the living by framing. Nonetheless, number of

agro-insurance policies in the total Georgia insurance portfolio amounts to just 1200 at the moment. Sector pundits believe the reason is low level of awareness in entrepreneurs involved in the agriculture on the one hand, and lack of communication between the state and private sector on the other hand.

According to Giorgi Darchia, insurance expert with the USAID supported Economic Prosperity Initiative (EPI), agro-insurance in Georgia started 10 years ago in fact by insuring vineyards and things went quite well when Russian market was open till 2006 for the market demand boosted relevant insurance product but situation spoiled after Russian market closure as demand for insurance waned.

“If there is no demand no insurance develops,” He said in the interview with Georgian Journal. However in 2010 when agriculture became one of the top priorities in Georgia agro-insurance revived and three insurance companies Aldagi BCI, GPI Holding and Imedi L International disbursed approximately 165 policies totally however the portfolio increased to around 1200 in 2011 and this year Darchia hopes to enhance the portfolio five-fold since EPI decided to address to the problem by providing trainings and consultation to private sector insurance companies and farmers alike.

“Interest of insurance companies toward agro-sector increased as much as agriculture became a priority and is supposed to start development in near future that will be very difficult without insurance… Any business includes risks but some risks in agro-business like natural disasters are beyond control and if it happens one can lose everything without insurance,” Drachia elaborates. “Even petty farmers who do not take banking loans as they cannot afford it need insurance for stabilization their income, let alone the profit, for if natural disaster spoils harvest they cannot get the money they have already spent on farming and cannot find sources to farm next year.”

Georgian farmers frequently claim they cannot afford insurance for it is very expensive. Darchia agrees the product is expensive for agro-insurance is a difficult product and companies have big administration expenses.  But he believes it is worth of costs and not as much expensive as farmers claim and the problem in most cases is rather lack of awareness in farmers than the insurance costs. According to him, the most expensive insurance does not exceed 7.5% of total insurance cost that means that if a farmer for instance spends GEL 1000 on farming work and expects GEL 3 thousand of profit and the insurance premium is GEL 1000 this farmer has to pay just GEL 75 in insurance that is not unaffordable for a farmer who spends GEL 1000 on farming. Moreover, if farmers take loans it can be cheaper if they have insurance for the interest rate is basically defined by risk factor and if risk is already insured bank will reduces the yield rate. But farmers lack skills to handle with intricate insurance paper-work that scares them in fact.

“Yes, agro-insurance is expensive here because we have no tools to cut down administration costs to minimum like in countries with well-developed agro-insurance but farmers overlook insurance for they lack skills to learn the very scrupulous and difficult insurance documentation, farmers prefer to say no rather than acknowledge they cannot understand the thing,” Darchia said. “There are mentality problems, they perceive insurance as extra costs not inter-alliance in their business.”

He expects agro-insurance can be developed in 2 years so as to bring tangible results but state and private sector must cooperate hand-in-hand to this end.  Insurance companies as a profit - oriented businesses are interested in the sector but they cannot insure all risks unless the concept of natural disaster is not defined by the state as everywhere in developed world.  The point is the state [not companies] is responsible to cover losses in case of natural disasters, also do land maps, gather due statistical data and so forth that is essential for insurance industry to develop agro-lines. In 95% of countries agro-insurance did develop through state support and in well-developed agriculture countries the state subsidizes the sector. In Turkey for example the state is involved directly in agro-insurance equally proportional to private sector including risk redistribution and reimbursement of losses.

But Georgian state did not define the concept of disasters as of yet, neither land mapping and statistic work is done that creates setbacks to agro-insurance development. Nevertheless, companies seem interested to develop the agro-insurance. Four more insurance companies including Irao, IC Group, Standard Insurance Georgia and Alfa appear interested to undertake agro-insurance this year thus increasing number of companies involved in agro-sector to seven.

On March 20, 2012 EPI in partnership with Aldagi BCI insurance company and Bank of Georgia (BOG) launched a 3-year pilot project to boost agro-insurance in Georgia and raise awareness of farmers toward the product as well as create a better access to banking loans.

According to Giorgi Baratashvili, Deputy Director General of Aldagi BCI, the company is ready to invest in agro-insurance irrespective its high risk.

“Farmers need enhanced access to banking product and I think insurance will facilitate this as it encourages banks to credit the sector,” he said.  “Aldagi BCI concluded re-insurance agreements with our European partners that enable us to become more active in insurance of risks in agriculture.”

Aldagi assures the interest is increasing in the questioned sector and if in 2010 they had 100-200 hectares insured lands today the figure reaches 3000.

According to BOG,  it almost doubled crediting agriculture as the agro-loan portfolio  increased from GEL 13.7 million of 2010 to GEL 25.8 million in 2011.

The program envisages USD 1.2 million credit disbursement in agriculture that will be backed by insurance too. 300 farmers involved in harvesting fruits and vegetables are supposed to be insured as beneficiaries of the program. The key criterion is to be a BOG borrower. Initially  EPI and BOG will be co-financing 90% of the insurance premiums by 60% and 30% respectively and the remainder 10% will be covered by beneficiaries who will also be able to get trainings and consultation to establish best farming practice.

All in all EPI expects to increase number of project beneficiaries to a thousand in 3 years and to improve their business skills so that they can cover 75% of co-financing in the last year of the program.

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