agricultural insurance feasibility study - world bank agricultural insurance feasibility study june...

KAZAKHSTAN

Agricultural �Insurance �Feasibility �Study

June 2012

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Disclaimer:

This �volume �is �a �product �of �the �staff �of �the �International �Bank �for �Reconstruction �and �Development �/ �The �World �Bank. �The �findings, �interpretations, �and �conclusions �expressed �in �this �paper �do �not �neces-sarily �reflect �the �views �of �the �Executive �Directors �of �The �World �Bank �or �the �governments �they �repre-sent.

The �World �Bank �does �not �guarantee �the �accuracy �of � the �crop �production �and �yield �data �and �crop �insurance �financial �data �included �in �this �work �and �on �which �basis �some �analyses �have �been �made �and �from �which �some �conclusions �have �been �drawn �and �recommendations �made. �The �World �Bank �cannot �be �held �responsible �for �any �insurance �result �or �other �financial �outcome �which �might �arise �from �any �decisions �or �actions �taken �by �insurers �or �any �other �party �as �a �consequence �of �the �contents �of �this �report. �The �boundaries, �colors, �denominations, �and �other �information �shown �on �any �map �in �this �work �do �not �imply �any �judgment �on �the �part �of �The �World �Bank �concerning �the �legal �status �of �any �territory �or �the �endorsement �or �acceptance �of �such �boundaries.

Cover �photos: �The �World �Bank �Photo �Library. �Cover �and �Layout �design: �Duina �Reyes

2012 �The �International �Bank �for �Reconstruction �and �Development �/ �The �World �Bank1818 �H �Street, �NWWashington, �DC �20433www.worldbank.org

KazaKhstan

Agricultural Insurance Feasibility Study

June 2012

agriculture and rural development unit

sustainable development department

europe and central asia region

Agricultural Insurance Feasibility Study 3

Table of Contents

acknowledgments ........................................................................................................... 5

abbreviations ................................................................................................................... 6

executive summary ......................................................................................................... 8Context and Scope of the Study ............................................................................................ 8

Crop Risk Assessment ......................................................................................................... 10

Review of Compulsory Crop Insurance Program ................................................................. 11

Strategy and Options for Strengthening the Current Crop Insurance Scheme ................... 15

Opportunities for New Crop Insurance Products ................................................................. 28

Tailoring Crop Insurance to the Needs of Small Farmers in South Kazakhstan .................. 33

agricultural insurance Feasibility study: summary of recommendations for improvement of the obligatory crop insurance scheme in Kazakhstan ................. 36

chapter 1: introduction and objectives of the study ................................................. 41Importance of Agriculture in Kazakhstan ............................................................................. 42

Agricultural Crop Production in Kazakhstan ........................................................................ 42

Government Policy for Agriculture ....................................................................................... 44

Exposure of Agriculture to Natural and Climatic Disasters .................................................. 44

Government Objectives for Crop Insurance ........................................................................ 45

Objectives and Scope of the Study ..................................................................................... 46

Outline of the Report ........................................................................................................... 48

chapter 2: crop and Weather risk assessment ........................................................ 49Objectives and Scope of Agricultural Crop and Weather Risk Assessment ........................ 49

Data Availability for Crop and Weather Risk Assessment .................................................... 49

Climate and Agro-Ecological Regions ................................................................................ 52

Overview of Spring Wheat Crop Production in Kazakhstan ................................................ 54

Key Climatic Perils and Impact on Crop Production and Yields .......................................... 61

Assessment of Crop Production Risk Exposures ................................................................ 65

chapter 3: review of Kazakhstan crop insurance program .................................... 70Policy and Regulatory Framework for Crop Insurance ........................................................ 70

Compulsory Crop Insurance Policy Terms and Conditions ................................................. 71

Government Financial Support to Crop Insurance in Kazakhstan ....................................... 78

Performance Assessment: Technical Results, Liabilities, Reinsurance .............................. 80

Assessment of the Technical, Operational, and Institutional Features of the Compulsory Crop Insurance Program ................................................................................. 92

Evaluation of Crop Insurance Effectiveness for Key Stakeholders ...................................... 98

4 Kazakhstan

chapter 4: strategy and options for strengthening the current crop insurance program ...................................................................................................... 101

Phase 1: Returning the Obligatory Crop Insurance Scheme to Profitability and Financial Stability ............................................................................................................... 102

Phase 2: Transition toward a Market-Based Crop Insurance System ............................... 120

Phase 3: Transformation into a Fully Commercial Crop Insurance Scheme ..................... 130

chapter 5: opportunities for new crop insurance products .................................. 145Named-Peril Crop Insurance .............................................................................................. 145

Area-Yield Index Crop Insurance ....................................................................................... 151

Crop Weather Index Insurance .......................................................................................... 167

chapter 6: tailoring crop insurance to the needs of lower-income smaller Farmers .......................................................................................................... 184

Identification of Appropriate Crop Insurance Products ..................................................... 184

Farmer Segmentation and Crop Insurance ........................................................................ 186

Tailoring Crop Insurance for Different Client Levels ........................................................... 187

Organizational and Operational Systems for Small Farmer Crop Insurance ..................... 192

Identification of Operational Linkages to Bundle Programs .............................................. 199

chapter 7: Fiscal implication of various insurance products on the gKr budget ................................................................................................................. 201

bibliography ................................................................................................................. 209


Acknowledgments

The report was prepared by the World Bank in partnership with the Second Agricultural Post Privatization Assis-

tance Project (APPAP II) and was authored by a team led by Sandra Broka (Senior Rural Finance Specialist, ECSS1, World Bank) and Meiram Akchukakov (Program Coordinator, APPAP II). The team was composed of Ramiro Iturrioz (Se-nior Agricultural Insurance Specialist, Insurance for the Poor Program, GCMNB, World Bank—Technical Leader); Talimjan Urazov (Operations Officer, ECSS1, World Bank); Charles Stutley (Consultant, ARMT, ARD, World Bank); An-drea Stoppa (Consultant, ARMT, ARD, World Bank); Bakhyt Sattybaeva (Consultant, APPAP II); Lunara Umralinova (Consultant, APPAP II); Marina Gabdulinova (Consultant, APPAP II); Aigerim Malik (Consultant, APPAP II); and Arka Consulting, the local consultant firm se-lected by APPAP II for this project.

The team acknowledges the contributions of all stakeholders, including the Ministry of Ag-riculture (MoA) and, in particular, the Depart-ment of Investment Policy and External Rela-tions and the Department of Strategic Planning in Agribusiness and Innovation Policy; the JSC Fund for Financial Support for Agriculture,

Hydro Meteorological Service of Kazakhstan (Kazhydromet, KHM); the National Agency of Statistics; the Agency for Financial Market and Financial Institutions Regulation and Control; the National Space Agency; JSC; the Union of Farmers of Kazakhstan; the Scientific Research Institute of Economy of Agro-Industrial Com-plex and Development of Rural Territories; the A. Barayev Kazakh Scientific and Research Institute of Grain Farming; Akimat of Enbek-shilder rayon; Akimat of Bulandinskky rayon; Akimat of Altynsarin rayon; Kazakh Instrakh Halyk Group Insurance Company; Pana Insur-ance Company; Grain Insurance Company; “Agro-Insurance” Mutual Insurance Society; “SFK-Insurance” Mutual Insurance Society; and “Dostyk 05” Company Ltd.

The authors are grateful to the peer reviewers John Nash (Lead Economist, LCSSD, World Bank), Olivier Mahul (Program Coordinator, FCMNB, World Bank), and Gary Reusche (Op-erations Officer, IFC).

The team gratefully acknowledges funding sup-port from the Commodity Risk Management Multi-donor Trust Fund.

6 Kazakhstan

Abbreviations

A&O Administrative and Operating

Agroseguro Agrupación Española de Entidades Aseguradoras de los Seguros Agrarios Combinados (Spanish Group of Insurance Entities of the Combined Agrarian Insurance)

AIC Agricultural Insurance Company of India

APPAP II Second Agricultural Post Privatization Assistance Project

ARD Agriculture and Rural Development Department, World Bank

ARKS National Agency of Statistics

ARMT Agriculture Risk Management Team

AYII Area-Yield Index Insurance

Centner Grain production unit equivalent to 100 kilograms

CJSC Kazakh Actuarial Center

CoV Coefficient of Variation

CRAM Crop Risk Assessment Model

EEL Each and Every Loss

EKO East Kazakhstan Oblast

FAPRAC Fund for the Care of Rural Population Affected by Weather Contingencies (Mexico)

FFSA Fund for Financial Support for Agriculture

GDP gross domestic product

GMFP Grameen Fisheries and Livestock Foundation (Bangladesh)

GNPI Gross Net Premium Income

GRK Government of the Republic of Kazakhstan

GRP Group Risk Plan (United States)

HTR Hydrothermal Ratio


IU Insured Unit

K Humidity factor

KHM Hydro Meteorological Service of Kazakhstan (alternatively known as Kazhydromet)

KZT Kazakhstan tenge (monetary currency of Kazakhstan)

LIC Loss of Investment Costs (crop insurance policy)

LIF Livestock Insurance Fund (Bangladesh)

MFI Microfinance Institution

MoA Ministry of Agriculture

MPCI Multiple-Peril Crop Insurance

MT Metric tonne, equivalent to 1,000 kilograms

MU Managing Underwriter

MUC Managing Underwriting Company

NAIS National Agricultural Insurance Scheme (India)

NCSRT National Center of Space Research and Technologies

NDVI Normalized Difference Vegetation Index

NGO Nongovernmental Organization

NKO North Kazakhstan Oblast

NSA National Space Agency

Oblast Administrative Region of Kazakhstan

PML Probable Maximum Loss

PPP Private-Public Partnership

Rayon Administrative area within an oblast

SIF Self-Insured Fund (Mexico)

SKO South Kazakhstan Oblast

TSI Total Sum Insured

VaR Value at Risk

WII Weather Index Insurance

WKO West Kazakhstan Oblast

WTO World Trade Organization

8 Kazakhstan

Executive Summary

context and scope of the study

1. Agriculture is a very important socioeco-nomic sector in Kazakhstan. Approximately 7.3 million people (47.2 percent of the total popula-tion) currently live in rural areas, and agricul-ture employs more than 22 percent of the labor force in the country. Agriculture contributes 5.92 percent of Kazakhstan’s gross domestic product (GDP). The country is one of the major global producers and exporters of grains (main-ly wheat). Other principal agricultural products include meat, wool, cotton, and milk. Farming areas occupy more than 220 million hectares (about 74 percent of the country’s total area), of which cereal-growing areas occupy about 13 million to 14 million hectares. The major grain crop is spring wheat, which is grown predomi-nantly under extensive low-cost production sys-tems in northern and central Kazakhstan.

2. In northern and central Kazakhstan, spring wheat production and yields are highly influenced by climatic and biological factors. On account of the very uncertain climatic condi-tions, Kazakhstan has the highest year-on-year variation in national average wheat production and yields of any major wheat-producing and -exporting country. Drought is the most perva-sive peril, affecting rain-fed crop production in northern Kazakhstan, and severe droughts are ex-perienced every two to five years. Spring wheat crops can also be damaged by hailstorms, early autumn frost, pests, and diseases. This study es-timates that, on average, about 14.71 percent of the total value of the national spring wheat crop

is lost due to drought and other perils every year, valued at KZT 66.5 billion (US$443 million).1 In 1998, an extreme drought year, physical loss-es were on the order of 7 million metric tons, equivalent to as high as 42 percent of the total expected value of wheat production. Very severe drought losses were experienced in spring wheat most recently in 2008 and again in 2010.

3. The Government of the Republic of Ka-zakhstan (GRK) introduced a national compul-sory crop insurance scheme in 2005 in order to provide grain producers and other farmers with a minimum level of protection against catastrophic climatic events. The scheme was enacted through the Law on Compulsory Crop Insurance, which is dated March 10, 2004 and became operational in 2005. The law established the terms and conditions for implementation of a compulsory loss of investment costs (LIC) insur-ance policy providing comprehensive protection against the loss of production costs invested in growing a range of strategic grain, oilseed, and other field crops. The Kazakhstan crop insurance scheme is based on a public-private partnership (PPP) implemented by the private commercial and mutual insurance companies and supported by government financial subsidies on claims. The implementing agencies are the Ministry of Ag-riculture (MoA), through the Direction of Stra-tegic Planning, the Fund for Financial Support for Agriculture (FFSA), the private commercial

1 Kazakhstan’s currency is the tenge. This report uses a current 2011 exchange rate of KZT 150 = US$1.00, unless otherwise stated.


insurance companies, the farmer mutual crop in-surance associations, and the local authorities in each oblast and rayon. Under the PPP, the GRK provides financial contributions to the crop in-surance scheme through an indemnity fund—the FFSA—and indemnifies 50 percent of the costs of all crop insurance claims.

4. The GRK’s decision to introduce a na-tional compulsory crop insurance scheme for the most important crops grown in the country should be viewed in the context of government’s policy toward agriculture. The GRK recognizes the importance of the agriculture sector in diver-sifying economic growth, reducing rural pov-erty, and improving food security, with a strong emphasis on maintaining rural welfare for the country’s predominantly small farmers, as set out in the strategic Three-Year Plan for Agri-culture, 2009–11. Government’s introduction of compulsory insurance was designed mainly to guarantee that small farmers and agricultural wage laborers would have a minimum level of financial protection in the event of catastrophic crop production losses. Since the late 1990s, the government has significantly increased its finan-cial support to the crop sector, providing direct input subsidies, subsidized credit, and output price support. Under its goal of meeting World Trade Organization (WTO) accession terms, Ka-zakhstan will need to reduce its direct subsidies to agriculture; however, WTO legislation does not prohibit government from increasing its fi-nancial subsidies to agricultural crop and live-stock insurance.

5. Overall, the crop insurance scheme has not performed well. Over the past six years, the scheme achieved very high levels of uptake, but also encountered major operational and financial problems. Crop insurance penetration is very high in Kazakhstan, averaging 74 percent of the eligible cropped area for the period 2005–10. The high uptake is a function of the compulsory nature of the scheme. Notwithstanding the high level of penetration, insurance results were very poor over the past three years, with the result that

many commercial insurers have ceased to sup-port the scheme. From an operational viewpoint, the scheme is very costly to administer, and it is underrated in several regions. As the terms and conditions of cover are determined by govern-ment and fixed by law, the insurance companies have little say in risk acceptance and underwrit-ing decisions, and today only three companies continue to support the scheme. Finally, private commercial insurers and farmer mutual insurers are very exposed to catastrophic losses, as the scheme is not currently reinsured against excess losses.

6. During 2011, the World Bank, under the risk management component of the Agri-cultural Post Privatization Assistance Project (APPAP II), performed a comprehensive study to review, refine, and improve the compulsory crop insurance scheme in Kazakhstan. The study reviewed the Kazakhstan compulsory crop insurance scheme and made recommendations for its strengthening and transition over time to a more market-based agricultural insurance system. The study also assessed the potential to introduce new crop insurance products and pro-grams to complement the existing LIC policy. The study included the following specific com-ponents:

Review of the compulsory crop insur-a. ance scheme in Kazakhstan. A detailed diagnostic review was carried out of the technical basis of the LIC policy as well as the institutional and organizational features, of the public private partner-ship scheme, and its operating systems, procedures, and financial performance of the PPP scheme. This review identified a series of key issues and challenges for scheme management to address.

Identification of a phased strategy to b. transform this scheme into a finan-cially sustainable market-oriented sys-tem. Drawing on local expertise and in-ternational experience and best practice,

10 Kazakhstan

a phased strategy was identified for the next three to five years to strengthen the scheme, return it to profitability, and transform it into a sustainable market-based system that is supported both by the public sector and by international re-insurers.

Assessment of agricultural riskc. . A for-mal crop risk assessment was performed for spring wheat, the country’s most im-portant export crop. This risk assessment was intended to assist policy makers, planners, and crop insurers in the plan-ning, design, and rating of new crop in-surance products. Owing to the size of the country, it was agreed that the scope of the risk assessment would be limited to spring wheat grown in the eight most im-portant oblasts of Kazakhstan: Kostanay, Akmola, North Kazakhstan (NKO), East Kazakhstan (EKO), West Kazakhstan (WKO), Pavlodar, Karaganda, and Ak-tobe.

Analysis of crop insurance products.d. Four new types of crop insurance prod-ucts were analyzed that, in the future, could either complement or replace the current LIC policy: (1) individual grower multiple-peril crop insurance (MPCI), (2) crop hail cover, (3) area-yield index insurance (AYII), and (4) weather index insurance (WII). For the purpose of the feasibility studies, the research on area-yield index insurance was performed for spring wheat grown in the eight selected oblasts of Kazakhstan. For crop hail and weather index insurance products, the re-search focused on spring wheat grown in Altynsarinski and Auliyekolski rayons in Kostanay; Aktogayskiy and Zhelezinski rayons in Pavlodar; and Bulandinski and Enbekshilderski rayons in Akmola.

Identification of challenges for develop-e. ing crop insurance for small farmers in Kazakhstan. The final objective of this

study was to identify ways to tailor the provision of crop insurance to the needs of resource-poor farmers located in south-ern Kazakhstan. Tole-bi rayon in South Kazakhstan (SKO) was selected for more in-depth study.

Brief Assessment of the Fiscal Implica-f. tion of the various crop insurance prod-ucts on the GKR budget.

crop risk assessment

7. A detailed risk assessment was conduct-ed of weather risks and their impact on spring wheat crop production and yields in northern Kazakhstan. The risk assessment comprised the following components: (a) a review of the availability and quality of time-series crop pro-duction data and the availability of weather data in Kazakhstan for spring wheat risk assessment and insurance design and rating purposes; (b) a review of climatic and agro-ecological regions and spring wheat crop production systems in the selected oblasts of Kazakhstan; (c) a detailed statistical analysis of spring wheat production and yields and the climatic constraints to pro-duction, including an analysis of rainfall data and the relationship to national and rayon-level spring wheat crop production and yields; and fi-nally (d) application of a crop risk assessment model (CRAM) that uses time-series rayon-lev-el production and yield data to estimate values at risk, expected losses, and expected claims costs for spring wheat in the eight selected oblasts in Kazakhstan. This latter analysis is very relevant to crop insurers’ understanding of risk accumu-lation and maximum expected losses in spring wheat. Full results of the risk assessment are presented in chapter 2.

8. The crop risk assessment of rayon-level crop production and yields for spring wheat in the northern and central regions of Kazakh-stan found that this crop is heavily exposed to losses caused by droughts. This is evidenced by the average loss cost estimated by the CRAM for the 17-year period from 1994 up to 2010 of


KZT 66.5 billion (14.71 percent of the total val-ue at risk of spring wheat production) and a cal-culated 1-in-100-year probable maximum loss (PML) of KZT 246.8 billion (54 percent of the gross value of production for spring wheat). The highest average annual expected losses in spring wheat apply to Aktobe (22 percent of the spring wheat crop value) and to WKO (40 percent of the spring wheat crop value) located in western Kazakhstan. Except in a few rayons situated in the north of Aktobe and in the southwest of WKO, spring wheat average yields are both low and highly variable in most of the rayons located in these two western oblasts, which re-ceive much lower and erratic rainfall. Converse-ly, spring wheat production is much less risky in the northern oblasts of NKO, Kostanay, and Akmola, which receive higher and more stable precipitation.

9. The need for accurate and independent measurement and recording of crop produc-tion, crop yield, and weather data at local up to national levels is critical to the design, rat-ing, and implementation of any crop insurance scheme. On the basis of this study, it is apparent that the GRK has very efficient meteorological, agricultural, and statistical services. The avail-ability of production and weather data is, in gen-eral, very good. Kazakhstan has a modern and efficient national meteorological service, Hydro Meteorological Service (alternatively known as Kazhydromet or KHM), which provided time-series rainfall data for a sample of weather sta-tions in the selected rayons. These data enabled a detailed assessment of rainfall and yield rela-tionships and provided the basis for the design and rating of prototype WII products. There is, however, a key constraint at present: the density of weather stations in such a vast territory as Ka-zakhstan is inadequate to implement a national commercial micro-level crop WII scheme in the near future. Kazakhstan also has good statistical records of spring wheat crop area, production, and yield at the rayon, oblast, and national lev-els, which are collected by the National Agency of Statistics (ARKS). These data enabled the de-sign and rating of prototype individual grower

MPCI and area-yield index crop insurance prod-ucts for Kazakhstan (as detailed in chapters 4 and 5).

review of compulsory crop insurance program

10. Chapter 3 of this report provides a de-tailed review of the technical, operational, in-stitutional, and financial features of and chal-lenges faced by the compulsory crop insurance scheme.

technical challenges

11. The Kazakhstan compulsory crop insur-ance policy is a loss of yield policy that indemni-fies the insured when the value of the harvested production falls short of the costs invested in growing the crop due to the action of insured perils. The LIC policy has several advantages: (a) it provides comprehensive MPCI protection to the farmer against the loss of production costs invested in growing the crop, and (b) it can be used in situations where there is inadequate or no information on the historical crop yields of individual farmers. However, it also has several potential drawbacks, including the need for in-field yield-based loss assessment where partial losses are involved and the difficulty of estab-lishing objectively the salvageable amount of the crop, its sale value, and whether this salvage value exceeds the insured investment costs lead-ing to a claim.

12. The coverage levels provided by the LIC crop insurance scheme in Kazakhstan are ex-tremely low and do not provide adequate lev-els of financial protection to the farmer in the event of loss. Although the compulsory scheme offers a series of optional sum insured levels for farmers to choose from, based on different crop technology levels and costs of production vary-ing from low to high production costs, in prac-tice practically all farmers in Kazakhstan elect the cheapest or lowest option for sum insured coverage—about KZT 3,500 (slightly less than US$25) per hectare nationally for spring wheat

12 Kazakhstan

in 2010—because this option has the lowest pre-mium. On average, farmers only insure between 20 and 30 percent of their total production costs. The very low levels of crop insurance cover are, therefore, often inadequate to put farmers back into production in the event of a major crop loss.

13. The methodology for rating LIC insur-ance premiums in Kazakhstan should be re-vised. Currently, crop insurance premiums are calculated for each crop at the oblast level, when they should to be calculated at the rayon level or even higher levels of disaggregation in order to take into account differences in risk either at the rayon level or at the individual farmer level. Crop insurance premium rates are fixed by law. They were last adjusted in 2008 and now need to be adjusted on an actuarial basis. Crop insur-ance premium rates are set for each type of crop and group of oblasts according to minimum and maximum rates, and insurers are not permitted to charge higher rates even when they are actu-arially required.

14. The basis of indemnity on the LIC policy requires strengthening. Crop output valuation prices are determined at the time of harvest, as opposed to being preagreed and specified in the policy wording. This means that neither the insurers nor the government can calculate their liability in the event of claims: when out-put prices are low, the policy is much more ex-posed to losses than when prices are high. This issue should be addressed by introducing fixed, preagreed harvest valuation prices at the time of signing the policy agreement.

operational challenges

15. The obligatory nature of the scheme pre-vents underwriters from exercising proper risk selection and control over the underwriting of their crop insurance portfolios. Insurance com-panies are obliged to accept all crop insurance risks (that is, individual farmers) even when the farmers are poor risks (that is, they do not use the correct crop production or husbandry practices for growing the insured crop) or the farms are

located in such high-risk areas that they would normally be considered uninsurable by commer-cial crop insurers.

16. Policy sales are currently permitted to continue up to the time of sowing, when farm-ers are in a good position to predict whether the growing season will be poor, and this exposes the program to moral hazard. Where preexist-ing drought conditions are developing, farmers may modify their behavior by (a) electing to buy the maximum level of “normative costs” sum insured in the expectation of receiving a claims payment or (b) incurring less than their normal level of expenditure on crop husbandry and in-puts because they know they are likely to lose their crops, in which case, they can expect to claim on their insurance policies (this is termed moral hazard).

17. Private insurance companies do not have their own network of locally based quali-fied agronomists to inspect the insured farms at the time of sowing. Such inspections are needed to confirm whether the farmer has complied with the correct sowing practices, seed rates, and so forth. As such, cover is open to moral hazard. The costs of establishing such a network and inspecting each and every farm would be pro-hibitively high for the insurers, which, under the current rating system, are not able to increase rates to cover their administrative and operating (A&O) expenses.

18. Loss adjustment requires the participa-tion of several parties, is expensive, and some-times lacks transparency. In Kazakhstan, up to five persons are involved in adjusting crop losses at the local level, and this is a very time-consuming and costly exercise. There is a need to rationalize the loss assessment procedure and to reduce its costs.

institutional challenges

19. The Kazakhstan compulsory crop insur-ance scheme is a public-private partnership. It is highly regulated by government and is under-


written by the private commercial (and mutual) insurance sector, with financial claims subsidy support provided by government through the FFSA. As such, the insurance companies are unable to accept or reject individual crop risks (farmers), which is a fundamental principle of crop underwriting. In most countries where ag-ricultural insurance PPPs exist, the main role of government is to provide legal and regulatory support and financial subsidies.

20. Crop insurance in Kazakhstan is writ-ten by commercial insurers and farmer mutual insurance associations. The level of participa-tion of the private insurance companies is very low (only three commercial insurers participate in the scheme), and there is a danger that, un-less the scheme can be returned to profitability, the private insurance companies may cease to provide their support altogether. Conversely, the participation of farmer mutual crop insurance associations is gaining importance. As of 2011, more than 38 farmer mutual associations were offering crop insurance in Kazakhstan.

21. Private insurance companies and farmer mutual associations providing crop insurance are not equally regulated. While private insur-ance companies are regulated by the Agency for Financial Market and Financial Regulation and Control, the farmer mutual crop insurance as-sociations are regulated separately by the Law on Mutual Insurance. Nonlife private insurance companies are required to have minimum capi-tal of KZT 1.2 billion (US$8.0 million) in order to operate and are frequently monitored on their solvency, net retentions, and implementation of risk management procedures. Conversely, the farmer mutual associations offering crop insur-ance are not subject to minimum capital require-ments, controls over net retentions, or solvency requirements. In 2010 several mutuals report-edly did not collect enough crop insurance pre-miums to pay the full amount of claims incurred during the 2010 crop season. There is a need to ensure that the private companies and mutuals are regulated equally under the crop insurance scheme.

government support

22. The GRK provides major financial sup-port to the compulsory crop insurance scheme. This support is provided in two ways: (a) by compensating the insurers for 50 percent of all the claims incurred and (b) by funding the A&O expenses of the FFSA. The 50 percent claims compensation fund is administered by the FFSA, which is responsible for monitoring and manag-ing the financial transactions of this insurance scheme on behalf of the government and for ap-proving the claims reimbursements to individual insurance companies. Over the past six years, the GRK provided KZT 4.7 billion to the FFSA, of which 93 percent was allocated to settling the 50 percent of claims and 9 percent to paying the A&O expenses of the FFSA. During this period, the FFSA reimbursed the insurance companies a total of KZT 3.84 billion, equivalent to 46.7 per-cent of total claims paid or an average of KZT 641 million (US$4.3 million) per year.

Financial challenges

23. The compulsory crop insurance pro-gram in Kazakhstan experienced poor overall underwriting results over the period 2005 to 2010. The long-term average loss ratio for the six-year period was 140 percent, and in four of the six years, the scheme operated at a financial loss, with a loss ratio (gross claims to premium) exceeding 100 percent. The average net loss ratio for the insurance companies after receiv-ing the 50 percent government claims subsidies was 75 percent. Over the past three years (2008 to 2010), the results deteriorated badly, with an average loss ratio of 182 percent (99 percent af-ter government claims subsidies); the worst loss was experienced in 2010, with a loss ratio of 261 percent.

24. Scheme performance varies widely across different regions, and the very poor underwrit-ing results in Aktobe and WKO are making the scheme financially unviable. The pattern of claims varies widely by geographic region. The best-performing oblast is NKO, which over

14 Kazakhstan

the past six years contributed 22 percent of total scheme liability but only 3 percent of claims and had a long-term loss ratio of only 24 percent. At the other extreme, Aktobe and WKO in western Kazakhstan, which collectively accounted for only 4.8 percent of total scheme liability, in-curred 41 percent of all claims and had six-year long-term loss ratios of 381 and 507 percent, re-spectively. These two oblasts are severely preju-dicing the financial viability of the national crop insurance program, and measures for controlling the claims costs in these two oblasts must be in-troduced.

25. The private insurance companies and mutuals do not have access to reinsurance

on their 50 percent retained claims, and they are extremely exposed to catastrophic drought losses. This is a major issue that will need to be addressed under any future reform of the Ka-zakhstan crop insurance scheme.

evaluation of crop insurance effectiveness for Key stakeholders

26. The Kazakhstan compulsory crop in-surance scheme was launched with very well-intentioned social and economic objectives, but it is failing to meet the requirements of its key stakeholders, including farmers, crop insurers, and government. The program was

FarmersDissatisfaction with compulsory nature of crop insurance.•

Reluctance to purchase insurance in spite of being compulsory.•

Extremely low levels of coverage.•

Difficulties in understanding the insurance agreement especially the • basis of indemnity and loss assessment procedures.

governmentVery good social intentions, but compulsory nature of the • program is very unpopular with most farmers.

Intention of obligatory insurance in early years to develop crop • insurance market has not been achieved.

Uncertainties about financial exposure.•

Uncertainties about budgeting claims participation in • catastrophic events.

insurers:Limitations to perform risks selection/underwriting.•

No incentives to invest in underwriting/claims • management infraestructure.


Difficulties to gain access to reinsurance.•

Concern by private commercial insurers that they do not face a level • playing field with the Farmers’ Mutual Crop Insurance Associations.

Crop Insurance has been unprofitable to date.•

Figure 1 Key issues Facing main stakeholders involved in the compulsory crop insurance scheme

Source: Authors.


originally conceived as a mechanism to ensure that all farm workers and small peasant farm-ers would receive a minimum indemnity in the event of crop failure due to drought or other nat-ural and climatic perils. The obligatory nature of the scheme was intended to be a short-term measure that would enable the development of a sound and stable crop insurance market based on a partnership between the private and public sectors, while at the same time providing time to educate farmers in the benefits of crop insurance so that they would continue to purchase cover once the scheme was made voluntary. After six years, the scheme has failed to develop a strong crop insurance market and to educate farmers. The fact that the program is very unpopular with many farmers also suggests that it is failing to meet its social objectives. Finally, government faces major uncertainties over its financial expo-sure to claims (figure 1).

strategy and options for strengthening the current crop insurance scheme

27. A phased approach is recommended for strengthening and improving the obligatory crop insurance scheme in Kazakhstan and for gradually converting it into a fully market-based commercial crop insurance system.The proposed approach involves three distinct phases: (a) strengthening the current obligatory scheme and achieving financial stability (short term, one to three years); (b) moving toward a market-based crop insurance system (short term, one to three years); and (c) becoming a fully market-based pool crop insurance system backed up by international reinsurance under a PPP suitable for Kazakhstan (medium term, three to five years).

phase 1: short-term measures to strengthen the existing compulsory scheme

Measures to Strengthen the Legal and Regulatory Framework

28. In the short term, it is recommended

that the Law on Compulsory Crop Insurance be amended to permit insurance companies greater flexibility in determining the premium rates and other terms and conditions of cover they provide under the LIC policy. While it is assumed that crop insurance will continue to be obligatory for farmers in the short term, the law should be amended to permit insurers to set their own terms, conditions of cover, and, especially, premium rates (see chapter 4).

Measures to Strengthen the Design and Rating of the LIC Policy

29. Practical measures were identified for strengthening the design of the LIC policy. These measures are listed in box 1; full details are provided in chapter 4, and key recommenda-tions for strengthening are highlighted in box 1.

30. There is a need to consider increasing the sums insured. Currently, the LIC policy does not provide adequate levels of protection for the majority of farmers. If the levels of sum insured coverage were to increase under this program, farmers would receive higher levels of protection, but this would have to be accompa-nied by increases in the premium rates that in-surers would have to charge and in the amount of premium farmers would have to pay. With in-creased sums insured, the insurance companies would face a much higher financial liability in the event of severe drought losses, and it would be essential for them to have comprehensive re-insurance protection. For government, the higher coverage levels would mean a correspondingly higher budgetary allocation to cover the 50 per-cent claims reimbursements. The sums insured in each rayon should be set according to (a) the actual production costs of different types of farmers in each rayon and (b) the risk exposure in each rayon.

31. There is a need to revise the crop pre-mium rating methodology in order to (a) intro-duce a system of rayon-level premium rates and (b) update the premium rates on an actuarial basis. The six-year long-term gross loss ratio at end-2010 was 140 percent (equal to a 70 percent loss ratio net of the government’s 50 percent

16 Kazakhstan

claims reimbursement), suggesting that, on av-erage, the scheme has operated on a breakeven basis. The premium rates were last revised in 2008; however, the performance of the scheme deteriorated very badly over the past three years, with an average loss ratio of 182 percent (loss ratio of 91 percent net of the government’s 50 percent claims subsidy). In some oblasts, includ-ing NKO and Kostanay, the scheme performed very well, but in others, including Aktobe, WKO, and Zhambyl, it performed very poorly. There are also major differences in the pattern of losses among rayons in individual oblasts and a need to revise the oblast rating methodology by introducing a system of rayon-level actuarially determined premium rates for each crop. Final-

box 1 measures to strengthen the design of the loss of investment costs policy

criteria for acceptance of risk and compulsion of cover. Even if the government decides in the short term to maintain compulsory crop insurance for all producers, special consideration will need to be given to farmers located in Aktobe and WKO.

insured perils. Current coverage should be maintained to include loss or damage to crop production due to “adverse weather events,” as defined.

sales cutoff date. A policy sales cutoff date of April 1 should be introduced.

cover period. The cover period should be from the time of crop emergence and full stand establishment (for example, 10 centimeters for wheat) through to completion of the harvest.

insured unit (iu). The IU is currently defined as the “individual field.” For farms of less than 250 hectares, the IU should perhaps be redefined as “the total area of all fields of the same crop grown in the same location or farm.”

sum insured. Government should amend the law to permit insurance companies to have the option of establishing an agreed sum insured with each farmer according to its own circumstances and insurance requirements.

premium rates. Government should amend the obligatory law to permit each insurance company to set its own premium rates for each crop and zone. Actuarial rating should be introduced to reflect differences in risk exposures between rayons in each oblast and possibly differences in levels of technology use and risk exposures between farmers.

bonus-malus system. It is recommended that underwriters introduce a bonus-malus system on the compulsory crop insurance scheme. The objectives of the bonus-malus are (a) to introduce rating of individual farmers and (b) to reduce the submission of speculative claims notices by farmers.

basis of indemnity and claims settlement. The crop sales price, which is used to value actual production in the event of a partial loss, should be preagreed and based on an average historical farm-gate sales price for each crop in each rayon and stated in the policy wording.

Source: Authors.

ly, it is recommended that a bonus-malus system be introduced into the crop rating methodology (see chapter 4).2

Measures to Improve Scheme Profitability

32. The financial viability of the crop insur-ance scheme is being adversely affected by the inclusion of Aktobe and WKO. Over the past six

2 Under a bonus-malus system, a farmer who does not submit a claim is rewarded at the renewal date of his policy by receiving a reduction in his premium rate (termed the “bonus”), while a farmer who submits a claim sees an increase in his rate at the time of re-newal (termed the “malus”).


years Aktobe and WKO collectively accounted for only 4.8 percent of total scheme liability, but contributed 41 percent of total claims and had actual loss ratios of 381 and 507 percent, respec-tively. Over this period, if Aktobe and WKO had not been included in the scheme, this would have led to a reduction in total premium earn-ings of only 13 percent, but would have led to a huge savings in claims costs for insurers of 40 percent of actual claims (or a reduction in claims of KZT 3.3 billion—US$22.0 million) and a re-duction in the six-year long-term gross loss ratio from 140 to 96 percent. Following application of the government 50 percent reimbursement of claims, the “as if” loss ratio for the scheme would have been reduced to about 48 percent (table 1). These two oblasts (in common with much of the northern and central regions of Ka-zakhstan) were traditionally livestock grazing regions that were converted to cereal (mainly spring wheat) production during Soviet times. The underlying problem in most of Aktobe and WKO is that soils are mostly poor and average annual rainfall is very low: in a normal year, rainfall is barely adequate for growing spring wheat in most rayons in these two oblasts. As such, these oblasts are very marginal for spring wheat crop production. No matter how a crop

insurance policy is structured, production will always be very heavily exposed to loss and the technical and commercial premium rates that would have to be charged will be so high (an average commercial rate prior to application of government claims subsidies of between 37 per-cent in Aktobe and 66 percent in WKO) as to make the scheme commercially unviable. There are, however, a few areas where spring wheat production is more stable and where crop insur-ance might be considered in the future, albeit at very high rates, including the rayons of Taskal-isky and Kaztalisky located in the southwest of WKO and the rayons of Karagaly and Martuk located in northern Aktobe.

Options for WKO and Aktobe

33. The first option for insurance compa-nies to consider would be to continue operat-ing the LIC scheme in Aktobe and WKO on the understanding that government will reimburse them for a higher percentage of claims in these two oblasts. Currently, government reimburses insurers for 50 percent of the value of all paid claims. Under this option, the GRK would agree to indemnify a higher percentage of claims in-

table 1 actual results of the crop insurance scheme with and without aktobe and WKo

Item Actual portfolio

(with Aktobe and WKO)Modified portfolio|(without

Aktobe and WKO)% reduction

Number of policies 140,961 134,193 −5

Total insured area (number of hectares)

73,770,915 69,453,803 −6

Sum insured (thousands of KZT) 242,631,438 231,048,598 −5

Premiums (thousands of) 5,861,958 5,102,670 −13

Average premium rate (%) 2 2 −9

Claim payments (thousands of KZT)

8,222,776 4,910,314 −40

Loss ratio (%) 140 96 −31

Loss cost (%) 3.39 2.13 −37

Source: Authors based on FFSA crop insurance data for 2005–10.

18 Kazakhstan

curred in Aktobe and WKO only. The insurance industry has asked government to consider rais-ing its share to 70 or 75 percent of total claims in these two oblasts in 2012. Over the past six years, government’s 50 percent contribution to claims costs amounted to about KZT 4.1 billion or an annual average of KZT 0.685 billion per year. If government agreed to increase its share of claims in Aktobe and WKO, the “as if” an-nual total cost to government would increase as follows under the two options: (a) under option A, 75 percent claims share in Aktobe and WKO, the cost would increase to KZT 0.823 billion per year, an increase of 20 percent, and (b) un-der option B, 100 percent claims share in Ak-tobe and WKO, the cost would increase to KZT 0.961 billion per year, an increase of 40 percent. Option B shows the maximum expected costs to government if it wishes to continue includ-ing Aktobe and WKO in the LIC scheme and assumes that insurance companies act purely as administrators in these two oblasts, but do not accept any claims liability: the “as if” 100 percent claims cost to government in these two oblasts would average about KZT 550 million or US$3.7 million per year. While this option may provide government a short-term solution to re-taining the support and underwriting capacity of the insurance industry and increasing the prof-itability of the program, it does not tackle the fundamental issue in the medium to long term, which is that commercial spring wheat crop in-surance is not financially viable in most of the rayons located in Aktobe and WKO.

34. The second option for government to consider would be to take Aktobe and WKO out of the crop insurance scheme altogether and to establish a separate disaster relief scheme for producers of annual crops in these two oblasts. The argument for removing Aktobe and WKO from the scheme centers on the following: (a) these areas receive very marginal rainfall and therefore are not suitable for growing annual grain crops and (b) from a crop insurance view-point, these oblasts (with the possible exception of a few rayons listed above) are effectively un-insurable, with six-year long-term loss costs of 22 and 40 percent, respectively, and catastrophic

losses every other year, with loss ratios (claims to premium ratios) as high as 1,000 percent in major drought years. It is therefore necessary for government to consider whether to continue promoting annual crops in these oblasts, but to use a separate disaster relief fund to compensate farmers in severe drought years. The cost of this disaster relief compensation program for farm-ers in Aktobe and WKO, assuming the same 100 percent original claims costs and compensa-tion levels as under the current LIC insurance scheme, would be exactly the same as the 100 percent claims compensation option outlined previously: the average cost to government for these two oblasts would be about KZT 550 mil-lion (US$3.7 million) per year, with a peak of about KZT 1.6 billion (US$10.7 million) in a very severe drought year, such as 2010. Op-tions for some form of macro-level catastrophe drought weather index insurance (WII) cover are also examined in this report.

Measures to Strengthen the Scheme’s Operating Systems and Procedures

35. In conjunction with the changes in de-sign identified to strengthen the LIC policy, administrators of the scheme should consider a series of potential measures to improve un-derwriting and claims operating systems and procedures and to reduce the costs of these operations. Box 2 summarizes some of the key operational areas that require strengthening. In the specific case of loss assessment, the current procedures, whereby a committee of up to five individuals from five different organizations is involved in the in-field loss assessment, must be rationalized and made more cost-effective, and the insurance companies should be given a more central role in loss assessment. At the same time, impartiality and fairness must be maintained for both the insured and the insurer. In the short term, Kazakhstan does not have independent firms of certified and approved loss adjusters who specialize in crop loss assessment, but in the medium term, options should be explored for creating such specialists.


Measures to Strengthen the Institutional Framework

36. In the short term, a major challenge is to find ways to encourage more private commer-cial insurance companies to support the crop insurance scheme. Several measures identified under this study should be attractive to local in-surers, including (a) the introduction of actuari-ally determined premium rates, (b) the measures to reduce insurers’ liability in Aktobe and WKO, and (c) recommendations for strengthening loss assessment procedures and for giving insurers more direct control over this important function. However, in the medium term, it is also probable that insurers will insist on being given greater control over risk selection and underwriting if they are to join the scheme.

37. There is also a need to create a level playing field for commercial insurers and the farmer mutual insurance associations. Mutual

insurance associations should in the future be regulated by the Agency for Financial Market and Financial Institutions Regulation and Con-trol and be required to follow the same guide-lines with regard to capital requirements and insurance reserves as commercial insurance companies. Failing to do so creates biased com-petition and increases the chances that mutual associations will fail to meet their financial ob-ligations.

Measures to Cap Catastrophic Losses (Excess of Loss Protection)

38. Both the crop insurance companies and the farmer mutual crop insurance associations in Kazakhstan are very exposed to catastrophic losses that exceed their reserves, and options for enhanced reinsurance protection need to be considered. The GRK currently provides free proportional reinsurance protection equal to 50

box 2. options for streamlining and reducing the costs of policy marketing, preinspections, and loss assessment

introduce preinspections. A system of sample preinspections should be considered for large farms in northern Kazakhstan. Preinspections are needed in order to minimize moral hazard.

streamline loss notification and loss assessment procedures and make them more cost-effective. The law should be modified to simplify the loss notification obligations of the insured, to enable loss assessment functions to be managed by the insurance companies, and to streamline procedures and reduce the costs of loss assessment. A bonus-malus system should be introduced to dissuade farmers from submitting claims except where a major loss has occurred and is likely to lead to an indemnity.

use remote sensing to support in-field loss assessment. The National Space Agency (NSA) already applies remote sensing to estimate crop sown area, production, and yield for the MoA and to monitor crop status during the growing season. The crop insurance scheme managers should review potential supporting roles by the NSA in loss assessment.

review policy marketing and distribution channels with a view to reducing costs. Currently most policies are sold through local agents located in each oblast and subregion. The agents are currently paid 10 percent brokerage by law. Alternative crop insurance marketing and distribution channels should be promoted in order to reduce costs, including sales though cooperatives and farmer associations, input dealers, rural banks, and grain merchants.

offer farmer awareness programs on crop insurance. In conjunction with the proposed improvements in operating systems and procedures, greater emphasis needs to be placed on farmer awareness programs about the basis of insurance and indemnity in the current LIC program.

Source: Authors.

20 Kazakhstan

percent of the claims to the private insurance companies and mutuals in Kazakhstan. However, neither the private insurers nor the mutuals have any reinsurance protection on their 50 percent retentions, and they are therefore very exposed to major systemic drought losses. In the case of the private insurance companies, their abil-ity to absorb catastrophic losses is much higher than that of the mutuals because of their much larger size, their capital and claims reserves, and their diversified nonlife insurance portfolios, under which crop insurance only represents a fraction of their overall premium earnings and overall liability. In 2010 there is evidence that some mutuals could not meet their claims obli-gations in full because the claims exceeded their premium earnings: they therefore had to prorate down claims. There is an urgent need to design catastrophe excess of loss reinsurance protection for both the private insurance companies and the mutual associations on their 50 percent reten-tions through some form of nonproportional or stop-loss reinsurance protection.

39. In the short term, it is unlikely that the Kazakhstan obligatory crop insurance scheme will be able to meet the standards required to attract international reinsurers; therefore, any nonproportional reinsurance solutions will probably have to be provided by the GRK. Some indicative rating analyses were carried out for a GRK aggregate (that is, over the whole crop insurance scheme) stop-loss reinsurance protec-tion3 for spring wheat under the assumptions of the existing LIC scheme sum insured and actu-arially determined rates for priority levels of 70

3 Stop-loss reinsurance is a type of nonproportional reinsurance protection that is designed to cap an in-surer’s claims liability at a preagreed amount (value), which is referred to as the priority. Any claims above the priority are then transferred (ceded) to the rein-surer to settle, up to the limit of the reinsurer’s liability, which is defined in the reinsurance agreement. The priority is often expressed as a percentage of the pre-mium income that is underwritten by the insurance scheme, net of any policy cancellations and returns of premium; hence the term gross net premium in-come.

and 100 percent of gross net premium income (GNPI). This analysis was conducted separately, first assuming that Aktobe and WKO are includ-ed in the scheme and then assuming that they are excluded. Although this is a preliminary analy-sis, it is considered robust and suggests that the indicative costs of providing full value (that is, up to 100 percent of the total sum insured) ag-gregate stop-loss protection in excess of 100 percent and 70 percent priorities would be on the order of KZT 0.27 billion (US$1.8 million) to KZT 0.31 billion (US$ 2.1) per year (see chapter 4).

Premium Subsidies

40. If government were to switch its support from a share of 50 percent of claims to some form of nonproportional excess of loss protec-tion, the insurers would need to increase their premium rates and the GRK would need to consider whether such rates are affordable or whether premium subsidies are needed. Over the past six years, government’s 50 percent of claims liability was an average of KZT 685 mil-lion per year (US$4.6 million), but in severe drought years such as 2010, it was much higher, at KZT 1.4 billion (US$9.3 million), and the total cost was KZT 4.1 billion (US$27.3 mil-lion) in claims compensation. If instead, over the past six years, government had provided 50 percent premium subsidies, the total cost would have been somewhat higher, at KZT 5.86 billion (US$39.1 million) total, or an average of KZT 0.98 billion (US$6.5 million) per year.

41. The GRK should study very carefully the issues surrounding premium subsidies before deciding whether to switch from subsidizing claims to subsidizing premiums. In the current system, government compensates 50 percent of the claims costs and then caps premium rates at approximately 50 percent of the technically required rates. In some regions of the country, current premium rates are above the actuarially required rates and in others actual rates are far too low. On the one hand, this results in distorted crop insurance price signals in the market, and,


on the other hand, the 50 percent claims compen-sation does not provide local insurers with the ca-tastrophe protection they need on their retained claims. Finally, international reinsurers are not willing to support an underpriced scheme. While the authors are very cautious about recommend-ing premium subsidies, it would be preferable in Kazakhstan to have an actuarially rated and commercially priced program and then for gov-ernment to decide whether to provide financial support in the form of premium subsidies, to provide nonproportional stop-loss reinsurance protection in the short term, and to promote the participation of international reinsurers in the medium term.

phase 2: transition toward a market-based crop insurance system

42. The proposed transition over the next few years to a market-based crop insurance system in Kazakhstan is centered on (1) the in-troduction of individual grower MPCI, either as a complement to or as a substitute for the current LIC policy and (2) the introduction of formal excess of loss reinsurance protection for the crop insurance industry. It is assumed that crop insurance would continue to be obligatory for farmers during this interim phase and that Aktobe and WKO would no longer be included in the scheme because spring wheat cannot be commercially insured in these two oblasts. It is intended that farmers in these two oblasts would be protected by a separate disaster relief mecha-nism.

Individual Grower MPCI Cover for Spring Wheat

43. The transition from the existing LIC cover to a more standardized individual grower MPCI policy would be relatively simple. The crop insurers of the LIC policy have gained con-siderable experience in underwriting loss of yield multiple-peril crop insurance and in conducting in-field loss assessment to establish actual yields and the amount of loss. This experience would enable them relatively easily to design, rate, and implement individual grower MPCI.

44. MPCI and LIC insurance products are slightly different. The main differences be-tween an individual grower MPCI product and the LIC policy include (a) the establishment of a preagreed insured yield at the time of policy subscription (the insured yield is usually calcu-lated as a percentage of the individual farmer’s historical average or normal crop yield or the local area average yield), (b) a preagreed unit valuation price, which is applied to the insured yield to calculate the sum insured, and (c) loss assessment, which involves measuring the ac-tual yield, comparing it to the insured yield, and indemnifying the amount of shortfall at the preagreed valuation price. Insurance and indem-nity procedures that are based on loss of yield are potentially much more transparent and un-derstandable for farmers than the existing LIC policy, and loss assessment is also much more objective, as yield loss is measured rather than expected shortfall in production costs and then compared to the estimated value of the remain-ing crop (salvage revenue).

45. The international experience is that MPCI is very popular with farmers, but be-cause the premiums associated with this prod-uct are high, most schemes depend on govern-ment support in the form of premium subsidies. The international literature on MPCI often high-lights the drawbacks encountered under volun-tary schemes of antiselection and moral hazard, the difficulties of establishing average farmer yields and corresponding premium rates, the high costs of premiums requiring government support in the form of premium subsidies, and the often very high costs of individual grower in-field loss inspection and loss assessment. While these arguments are indeed valid, they apply as equally to the existing LIC policy in Kazakh-stan. Currently, issues of antiselection are less of a problem because the scheme is obligatory for all farmers, but because it is a loss of yield multiple-peril scheme, it shares the drawbacks of other MPCI schemes.

46. In Kazakhstan, the main challenge for introducing individual grower MPCI centers

22 Kazakhstan

on the procedures for establishing an individ-ual grower “normal average yield” and then establishing premium rates for different MPCI coverage levels in each rayon. On the basis of international experience, it is believed that the quality of the rayon-level crop production and yield data in Kazakhstan is good enough to en-able the 17 years of data on spring wheat yield to be used to design and rate an individual grower MPCI program. As the historical rayon-level data on spring wheat crop production and yield are available for both production enterprises and commercial farmers, separate coverage levels and premium rates can be offered for each type of farmer, if required.

47. A detailed rating analysis was conducted for MPCI cover for spring wheat grown in the six main oblasts (excluding WKO and Aktobe) located in northern Kazakhstan. The statistical rating methodology used in this study to estab-lish individual grower MPCI rates conforms to the MPCI rating procedures used by the in-ternational crop insurance industry. The spring wheat MPCI rates presented in this report are indicative of commercial premium rates for a 60 percent target loss ratio, but final decisions over rates will be taken by insurers and their reinsurers. For insured yield coverage of 20 to 30 percent of yield, the MPCI rates would be roughly comparable to the full (unsubsidized) LIC premium rates, but for higher levels of cov-erage, rates would be correspondingly higher. See chapter 4.

48. It is likely that, if individual grower MPCI is introduced into Kazakhstan, the GRK will need to consider subsidies for the higher premiums. Chapter 4 makes some preliminary estimates of the costs to government under dif-ferent uptake scenarios.

Risk Financing and Reinsurance

49. If individual grower MPCI is introduced for spring wheat and other crops, and higher coverage levels and sums insured are offered to farmers, this would have important impli-

cations for insurers’ and government’s liabil-ity in the event of severe drought losses. For these reasons, a detailed analysis is conducted in chapter 4 of the PML associated with increased coverage levels for the spring wheat program. The analysis suggests that, for a maximum 50 percent coverage level, the expected losses that might occur every 10 years could be on the order of KZT 36.3 billion (US$242 million, or 17.13 percent of the value of the total sum insured, TSI), and for a 1-in-100-year PML, the expected loss could be on the order of KZT 99.7 billion (US$665 million, or 47 percent of TSI).

50. Given the exposure of spring wheat pro-duction to catastrophic drought risks in Ka-zakhstan, it is extremely unlikely that the in-surance sector would be willing to assume the increased liabilities implied under the proposed MPCI program unless the government is will-ing to provide reinsurance support for this ini-tiative. Currently, government is providing 50:50 quota-share reinsurance protection to the private commercial crop insurers and mutual crop insur-ers, but, as previously noted, this protection does not cap their exposure to catastrophic losses. Therefore, for the purposes of this study, some preliminary analyses were conducted for non-proportional stop-loss reinsurance protection for the spring wheat MPCI program.

51. Some preliminary modeling was con-ducted to establish the indicative pricing for aggregate stop-loss reinsurance protection for the spring wheat MPCI program. The modeling was conducted assuming full-value protection and priority levels of 70, 100, and 150 percent of Gross Net Premium Income, GNPI, for the four levels of MPCI insured yield coverage. The analysis found that, for a full-value aggregate stop-loss reinsurance protection for losses in ex-cess of 100 percent of GNPI, the stop-loss rein-surance pricing would be on the order of KZT 991 million (US$6.6 million) for 20 percent coverage, rising to KZT 5.8 billion (US$38.7 million) for 50 percent coverage. If the lower 70 percent of GNPI priority were adopted, the ag-


gregate stop-loss pricing would be correspond-ingly higher.

52. In phase 2, it is possible that some of the larger private commercial crop insurers would be able to arrange their own reinsurance pro-grams with international reinsurers. If these insurance companies can demonstrate that, even under an obligatory crop insurance scheme, they are underwriting a balanced portfolio by risk and region, are adopting technically based MPCI rating, and have strengthened their MPCI loss assessment systems and procedures, then they should be able to arrange both proportional and nonproportional reinsurance through leading in-ternational reinsurers of this class of business.

phase 3: transformation into a commercial crop insurance pool scheme supported by international reinsurance

53. In the final phase, it is assumed that the scheme will be transformed into a fully mar-ket-based PPP agricultural insurance scheme. Central features of such a scheme would include (a) voluntary crop insurance, (b) formation of an agricultural pool coinsurance system to crowd in private commercial insurers (and possibly mutu-al crop insurers if they can conform to insurance market regulations), (c) a formal program of in-ternational reinsurance protection for the pool, and (d) suitable backing by the government, which might include financial support for pre-mium subsidies or catastrophe risk financing.

Transition from Obligatory to Voluntary Crop Insurance

54. As part of the transition to a market-based crop insurance system, policy makers in Kazakhstan will need to consider making crop insurance voluntary. Kazakhstan is one of a small minority of countries to adopt obligatory crop insurance and is almost unique in trying to implement obligatory crop insurance through the private commercial insurance sector. Inter-national experience suggests that agricultural in-

surance should be a voluntary class of insurance. In many countries (including India, the Philip-pines, and Mexico), the links between public sector provision of crop credit and crop insur-ance are very close, and banks make their lend-ing conditional on the farmer having crop insur-ance in place at the time of receiving the loan. In other words, crop insurance is mandatory for borrowers, but voluntary for nonborrowers.

55. If crop insurance is made voluntary in Kazakhstan, it is likely that there will be a ma-jor reduction in the demand for crop insurance in the short term, while the farming sectors ad-just to the realities of a demand-driven volun-tary crop insurance system. At this stage, it is not possible to predict how great the contraction in demand for voluntary crop insurance may be, but it is likely to be significant. Under a volun-tary system, crop insurers would be free to select which types of farmers, which crops, and which regions they are willing to underwrite.

Rationale for and Features of an Agricultural Insurance Pool in Kazakhstan

56. Coinsurance pools for agricultural in-surance have proved to be very popular with private and mutual insurers in many countries. Most notable are the Agroseguro pool in Spain,4 the TARSIM pool in Turkey, the livestock insur-ance pool in the Philippines, the hail insurance pool in Austria, and various other pool arrange-ments in Argentina, China, Malawi, Mongolia, and Ukraine.

57. The rationale for recommending the for-mation of a coinsurance pool in Kazakhstan centers on several key factors. These include the following:

The very small number of private com-a. mercial companies that are currently

4 Agroseguro stands for Agrupación Española de Entidades Aseguradoras de los Seguros Agrarios Combinados (Spanish Group of Insurance Entities of the Combined Agrarian Insurance).

24 Kazakhstan

supporting this scheme and the need to crowd in commercial insurers if crop in-surance is to remain a viable proposition in Kazakhstan. LIC/MPCI crop insurance is a catastrophe class of business, and many insurance companies are reluctant to risk their capital on it; however, under a pool agreement, individual companies can participate with very small shares of the overall risk if they wish.

The prohibitively high start-up invest-b. ment costs for individual insurance companies in creating their own internal crop underwriting and claims depart-ments and then in developing regional networks of marketing and sales agents to sell the product and trained crop in-spectors and loss assessors to implement the scheme. Pools offer the opportunity to create a single centralized insurance underwriting and claims management and loss assessment capability (often termed a managing underwriter company, MUC); individual members of the pool contrib-ute to the costs of running the MUC, while benefiting from the advantages of economies of scale.

The lack of common standards at the re-c. gional level in the underwriting of crop risks, especially with regard to the in-field loss assessment capabilities of indi-vidual insurance companies and farmer mutual insurance associations. Under a pool agreement, the MUC would be re-sponsible for coordinating all underwrit-ing and loss adjustment activities and for ensuring that common standards are ad-opted throughout the country.

A lack of consistency in crop rating and d. competition, which is driving down the crop insurance premium rates to unsus-tainable levels. Under a pool agreement, all insurers would issue standard crop insurance policies and would adopt the same premium rates for each crop in each zone and region.

The difficulties of arranging commercial e. international reinsurance protection for individual Kazakhstan insurance com-panies with very different underwriting standards and portfolios. Under a pool agreement, the MUC would purchase a single reinsurance program, which would lower the transaction costs and thus the cost of reinsurance.

58. There are also potential drawbacks to introducing pools to underwrite agricultural insurance. Classical economic theory would ar-gue that forming a pool (with monopolistic or oligopolistic tendencies) reduces competition, particularly over the pricing of insurance prod-ucts. These arguments do not apply directly to Kazakhstan, where there is currently no com-petitive market for agricultural insurance, a single product is available, and premium rates are fixed by law. While initially each member of the pool would offer standard crop insurance policies and uniform technical premium rates, the aim over several years would be to expand the range of crop insurance products available in the Kazakhstan market, to achieve economies of scale in key areas such as loss assessment, to lower commercial premium rates overall, and to improve the insurance services provided to farmers.

59. The proposed Kazakhstan agricultural insurance pool would involve the active par-ticipation of the public and private sectors. The central feature of the new system would be the creation of an agricultural coinsurance pool, which would be designed to underwrite all classes of agricultural insurance business. It is recommended that the pool coinsurers also cre-ate a separate managing underwriting company (MUC), which would be responsible for un-derwriting the scheme, handling premiums and loss assessment, settling claims, and negotiating reinsurance on behalf of members of the pool. Members would be responsible for marketing crop insurance through their sales distribution networks. The public sector, including the insur-ance regulator, the MoA, and the FFSA, would play very important roles in the proposed sys-


tem. The FFSA would continue to act as the main public sector implementing agency for the scheme, but would no longer participate in field-level loss assessment; instead, it would (a) coor-dinate with the crop insurance pool’s MUC in the development of the technical studies required to design new crop, livestock, forestry, and aqua-culture insurance policies and programs, (b) manage the FFSA and disburse funds (including, as appropriate, premium subsidies and catastro-phe reinsured claims payments) to the MUC on behalf of the pool coinsurers, (c) maintain crop insurance underwriting and claims databases,

and (d) provide information and advice to farm-ers. An outline institutional framework for the agricultural insurance pool is shown in figure 2, which draws on the organizational structures of the Spanish and Turkish agricultural insurance pools.

60. Details of the proposed operating sys-tems and procedures for the Kazakhstan agri-cultural insurance pool are set out in chapter 4. The MUC would be responsible for the func-tions of product design and rating, underwriting and risk acceptance, claims administration, and

Source: Authors.

Figure 2 organizational Framework of the proposed agricultural insurance pool scheme

Find for Financial Support to Agriculture (FFSA)

Ministry of Agriculture Agency for Financial Market

and Financial Institutions Regulation and Control

Farmers Associations, Cooperatives, Rural Banks and other Aggregators Large Farmer production Enterprises

Small and Medium Farmers

Managing Underwriting Company

Financial Support: premium subsidies,

catastrophe, reinsurance

Policy, planning, research and development

Insurance legal and regulatory

International Reinsurers

Pool Management Board

agricultural insurance pool

Kazakhstan Non-Life Insurance Companies

Farmer Mutual Crop Insurance Associations

26 Kazakhstan

loss assessment and for negotiating common ac-count reinsurance protection on behalf of and re-porting to the pool coinsurers. The potential for the MUC to organize and train an independent crop loss assessment capability in standardized, timely, and accurate field-based loss assessment procedures is one of the major potential advan-tages of a pool system. The MUC, as a single entity acting on behalf of all pool coinsurers, should be able to achieve major economies of scale and A&O cost savings.

Government Support to the Kazakhstan Agricultural Insurance Pool

61. As part of the transition to a market-based agricultural insurance pool system in Kazakhstan, the role of public sector support for this scheme should be reviewed. To date, the GRK’s main support for the obligatory crop insurance scheme has been in the form of free quota-share reinsurance of 50 percent of the in-curred claims, but this is likely to change under the transition to a market-based agricultural in-surance scheme.

62. The GRK has several potential roles to play in supporting the pool. These roles in-clude (a) providing legal and regulatory sup-port, including a review and reform of the Law on Compulsory Crop Insurance, (b) enhancing crop insurance data and information systems and infrastructure support, for example, invest-ing in weather stations, (c) supporting the insur-ance companies through implementation of crop insurance awareness programs for farmers, (d) providing catastrophe risk financing, and (e) subsidizing premiums. Full details are reviewed in chapter 4.

Financial Estimates of the Voluntary Crop Insurance Scheme

63. Some provisional financial estimates of total sum insured, premium, and costs of pre-mium subsidies to government were calculated for the spring wheat MPCI program over the next five years. The estimates were based on a voluntary MPCI scheme for spring wheat with an

average 40 percent coverage level and projected uptake rates of 10 percent the first year, rising to 50 percent after five years. On this basis, total scheme liability in year 1 might be on the order of KZT 17 billion (US$113 million), rising to KZT 85 billion (US$567 million) by year 5, with corresponding commercial premium in year 1 of nearly KZT 2.1 billion (US$14.0 million), rising to KZT 10.7 billion (US$71.3 million) by year 5. The provisional estimates of the costs to gov-ernment of 50 percent premium subsidies would be nearly KZT 1.07 billion (US$7.1 million) in year 1, rising to KZT 5.35 billion (US$35.7 mil-lion) by year 5. Estimates are also provided for premium subsidies of 25 and 65 percent of pre-mium (table 2).


64. It is recommended that in the future the agricultural insurance pool would purchase common account reinsurance protection from international reinsurers in order to protect the program against catastrophic losses. The sup-port from international reinsurers could include both proportional and nonproportional reinsur-ance. It is likely that, in the initial stages, inter-national reinsurers will only be willing to pro-vide layered stop-loss reinsurance protection in order to limit their liability to catastrophe claims and that the GRK may therefore need to provide catastrophe reinsurance for low-frequency but high-severity losses. An example of layered in-surance and reinsurance is presented in figure 3 for the proposed spring wheat MPCI program. Full results of this analysis are presented in chapter 4.

65. The access to the international agricul-tural reinsurance markets will benefit the local industry by making available the expertise and services of specialized reinsurers. The interna-tional agricultural reinsurers can provide servic-es and expertise critical for the development of agricultural insurance schemes, particularly dur-ing the first years of operation. International ag-ricultural reinsurers can provide their expertise and services to the local industry in the fields of agricultural insurance product research and de-


table 2. Five-Year estimates of voluntary mpci uptake, total sum insured, premium income, and costs of premium subsidies (40% coverage level)

Item MPCI 40 %

coverage and 100% uptake

MPCI uptake

Year 1 10%

Year 2 20%

Year 3 30%

Year 4 40%

Year 5 50%

Total sum insured 169,697 16,970 33,939 50,909 67,879 84,849

Total commercial premium

21,410 2,141 4,282 6,423 8,564 10,705

Cost of GRK premium subsidies

25% of premium 5,353 535 1,071 1,606 2,141 2,676

50% of premium 10,705 1,071 2,141 3,212 4,282 5,353

65% of premium 13,917 1,392 2,783 4,175 5,567 6,958

Probable maximum loss

1 in 100 years 66,470 6,647 13,294 19,941 26,588 33,235

1 in 250 years 79,688 7,969 15,938 23,906 31,875 39,844

Source: Authors.

05

101520253035404550

Mino

rSm

all

Med

iumLa

rge

Catas

trophic

Goverments

Risk Transfer

Type of Event

Siz

e o

f th

e Lo

ss

Risk Pooling

Risk Retention

Reinsurers

Insurance Companies

Cooperatives/Mutuals

Agricultural Producers

Figure 3. example of agricultural risk layering

Source: Mahul and Stutley 2010.

28 Kazakhstan

velopment, pricing and underwriting, and claims management.

opportunities for new crop insurance products

66. As part of this World Bank study, an as-sessment was conducted of the potential to de-sign and implement new crop insurance prod-ucts. These products include named-peril frost and hail cover, area-yield index insurance, and weather index insurance for specific types of Kazakhstan farmers and for different regions, according to the key risk exposures. Chapter 5 of the report presents the findings of this assess-ment.

named-peril crop hail insurance for spring Wheat Farmers

67. Crop hail was the second most important cause of insured claims on the obligatory crop insurance scheme over the past six years, and this study found that farmers in specific regions of Kazakhstan may be interested in a hail-only crop insurance policy. Hail is a moderate to se-vere problem in many parts of Kazakhstan, with peak months of hail exposure occurring between May and July (chapter 2). Over the past six years of operation of the obligatory LIC scheme, hail was the second most important cause of loss af-ter drought, accounting for about 2.5 percent of the total area lost due to insured perils. On the basis of the field visits conducted as part of this study, farmers in some regions have expressed interest in a voluntary scheme of hail-only in-surance for spring wheat, including pockets of medium to high hail risk in parts of NKO, Ak-mola, Kostanay (for example, in the rayons of Altynsarin and Kostany), and Pavlodar.

68. Crop hail insurance is a simple and well-understood class of crop insurance, and it is widely applied throughout the world to wheat and a wide range of cereals, horticultural, and tree fruit crops. Single-peril hail insurance is the simplest and best-known type of indemnity-based crop insurance; it has operated for more

than 100 years in Argentina, Australia, Europe, New Zealand, and North America. Today there is a large body of accumulated experience with crop hail damage-based insurance and indem-nity products. Wordings are readily accessible through international associations of hail insur-ers, and premium rates can initially be set based on transferred international experience. As long as suitably high each and every loss (EEL) de-ductibles (or franchises) are maintained, the premium rates are generally not high. Finally, standardized damage-based loss assessment pro-cedures can be obtained from the international hail associations, and training can be provided to local staff. This experience could be transferred very easily to Kazakhstan and then be tailored by the crop insurers to meet local requirements. Features for the design of a spring wheat hail insurance policy for Kazakhstan are outlined in chapter 5.

69. Crop hail insurance should be relatively easy to design and implement in Kazakhstan as a commercial crop insurance product. A preliminary hail rating exercise conducted for spring wheat in selected rayons in Kazakhstan suggests that it should be possible to design hail cover at affordable rates. In low hail-risk regions for a standard 6 percent damage excess (fran-chise), average hail rates of between 2.5 to 3.5 percent should be feasible, rising to between 5 and 6 percent in medium hail-risk regions. Since this is a noncatastrophe crop insurance product, it should be relatively easier for the crop insur-ance companies and possibly the farmer mutual insurance associations to underwrite this product with limited access to reinsurance protection. It is likely that the demand for single-peril crop hail insurance for spring wheat will be quite low in the initial stages of implementation, as hail risk exposure is not as widespread as drought risk exposure. There would be an important start-up cost—namely, to design the suitable loss as-sessment procedures and then to identify a core of loss assessors who would receive specialist training in hail loss assessment procedures in wheat. Finally, it is likely that there will be de-mand for hail protection for other crops—for example, cotton and horticultural crops—grown


in southern Kazakhstan; over time there should be potential to develop and expand a crop hail portfolio in Kazakhstan.

area-Yield index insurance for spring Wheat

70. On the basis of this feasibility study, there may be considerable potential in Kazakh-stan to design and implement crop AYII as an alternative or complement to the existing indi-vidual grower LIC and the proposed individual grower MPCI programs. Outline proposals are presented in chapter 5 of this study for a pro-totype area-yield index insurance, AYII,product and program for spring wheat grown in Kazakh-stan. The AYII proposals relate only to the six main wheat-growing oblasts of Akmola, EKO, Karaganda, Kostanay, NKO, and Pavlodar; Ak-tobe and WKO and their rayons are excluded on account of their commercially uninsurable risk exposures.

Features, Advantages, and Disadvantages

71. AYII aims to overcome many of the draw-backs of traditional individual grower MPCI. The key feature of this product is that it does not indemnify crop yield losses at the individual field or grower level; instead, it makes indem-nity payments to growers according to yield loss or shortfall against an average area yield (the in-dex) in a defined geographic area (for example, the total sown area of spring wheat grown in a single rayon) and which is termed the Insured Unit, UI. In Kazakhstan, it is proposed that the AYII product would operate at the rayon level.

72. In the context of Kazakhstan, a key po-tential advantage of AYII over individual grow-er MPCI is the ability to offer higher levels of insured-yield coverage at lower rates because losses are adjusted against an area-yield index and not at the individual farmer level. Other advantages of the AYII approach are that it mini-mizes moral hazard and antiselection bias and reduces administrative costs. These advantages offer the potential to market this product at lower premium costs to farmers. There are also major

cost savings in AYII loss assessment, as this is not conducted on an individual farmer and field-by-field basis, but rather according to a preagreed random sampling of crop yields on plots within the IU (the rayon). However, the AYII product has one important drawback: “basis risk” or the potential difference between the insured area-yield outcome and the actual yields achieved by individual insured farmers within the IU. Basis risk arises when an individual grower incurs se-vere crop yield losses due to a localized peril, such as hail, but these localized losses do not af-fect the average yield of the district or rayon, so the farmer who has incurred crop damage does not receive an indemnity. In addition, basis risk arises when the crop production and yields of individual farmers in the same rayon are highly heterogeneous and some farmers whose aver-age yields are above the area average receive indemnities, even though they have not incurred any significant reduction in yield or loss on their own farms.

73. AYII is potentially a flexible crop insur-ance product that can be implemented at the mi-cro level for individual farmers or at the meso level to protect the credit portfolio of a regional financial institution. In Kazakhstan, there may be scope to design AYII both as a micro-level individual grower product for medium to large wheat (or other cereal) producers and as a meso-level product to protect the loan portfolios that cooperatives or microfinance institutions (MFIs) offer to large numbers of small rural households in individual rayons in southern Kazakhstan (discussed further in chapter 6).

74. AYII has been adopted in several coun-tries, including India, the United States, and more recently Brazil and Ukraine, and is be-ing tested in Peru, the Philippines, and Viet-nam. India has more than 30 years of experience with implementing AYII for food crops and oilseeds under the National Agricultural Insur-ance Scheme (NAIS), which is a public sector program for small and marginal farmers that is linked on an automatic or compulsory basis to the provision of crop credit and is heavily sub-sidized by government in the form of capped

30 Kazakhstan

premium rates and government compensation of excess claims. As such, there are many similari-ties between the NAIS and the current scheme in Kazakhstan. The NAIS is the world’s largest crop insurance program and is currently insur-ing about 25 million farmers each year. Since 2010, it has been undergoing major transforma-tion, both to strengthen the AYII policy and to move the scheme toward a market-based sys-tem, and many of the issues and lessons from the NAIS are of potential interest to crop insurance planners in Kazakhstan. In the United States, AYII has been offered for a wide range of ce-real and oilseed crops for more than a decade, but it is a relatively small program in contrast to the popular individual farmer MPCI covers that are available. In Ukraine, which has spring wheat production systems very similar to those of Kazakhstan, attempts have been made since 2002 to introduce both AYII for cereals and weather index insurance, but with limited suc-cess. In the case of AYII, there were difficulties in accessing quality oblast and rayon time-series crop production and yield data because of the disruptions surrounding independence and be-cause the product was not widely accepted by farmers, who preferred individual grower MPCI cover. The experience in Ukraine can provide useful lessons for any future planning and de-sign of AYII for Kazakhstan. See chapter 5 for further details on the AYII programs in India and Ukraine.

Design, Coverage Levels, Sums Insured, and Premium Rating

75. In Kazakhstan, the proposed AYII policy for spring wheat would operate at the rayon level. This is the lowest level of disaggregated time-series crop area, production, and yield data available through the ARKS. A preliminary premium rating exercise was conducted for the spring wheat AYII program for all eligible ray-ons in the six oblasts. The rating exercise was based on 17 years of historical time-series data on crop production and yield for spring wheat. This exercise adopted internationally recog-nized rating procedures, and full details of the

calculated technical and indicative commercial premium rates are presented in chapter 5.

76. Under a spring wheat AYII program for Kazakhstan, the coverage level in each rayon should be set in accordance with (a) the under-lying exposure to and frequency of risk and (b) the commercial premium rate that the target farmers can afford. In order for a crop insurance scheme to be affordable to farmers, the levels of insured yield coverage in each rayon should be set to enable commercial premiums of no more than about 10 percent; on this basis, coverage levels of up to 50 percent could be offered in most oblasts or rayons, and levels as high as 70 percent could be offered in NKO (chapter 5).

Operational Considerations

77. The procedures followed by the ARKS for estimating actual average yield in each ray-on are technically sound for the implementa-tion of AYII. However, it is recommended that, if AYII is implemented, the insurance companies enter into a formal agreement with the ARKS to provide the results of their crop-cutting yield es-timates for each rayon. Under an AYII scheme, it is also likely that insurers and their reinsurers will wish to implement some form of indepen-dent monitoring of the area-yield estimation pro-cedures at the rayon level to verify that standards of accuracy in the measurement of yields are maintained. Insurance companies may also wish to establish formal agreements with the National Space Agency in order to use its remote-sensing services to estimate crop sown area, production, and yields and to monitor crop status during the growing season.

Financial Estimates and Reinsurance

78. Some provisional financial estimates were calculated for AYII cover for spring wheat, assuming a voluntary program and 5 percent incremental uptake rates per year over the next five years. Under the assumptions of a 50 percent insured yield coverage and 5 percent uptake of AYII insurance per year over the next


five years, the total sum insured might rise from KZT 10.6 billion in year 1, with corresponding premium income of KZT 692 million, to KZT 53 billion in year 5, with premium income of KZT 3.5 billion. The costs to government of different levels of premium subsidy were also estimated. These uptake estimates are extremely ambitious for a voluntary insurance scheme and would need refinement following a more detailed study of AYII demand.

Conclusions on AYII

79. AYII for spring wheat is technically and operationally feasible in Kazakhstan. However, until further research has been conducted into the potential demand for this cover, it is very difficult to predict likely uptake rates under a voluntary crop insurance program.

80. Farmers’ demand for and willingness to pay for AYII crop insurance will also have to be studied further before any decisions are made to proceed with the design of an AYII program. This feasibility study identified a very low level of interest in the obligatory LIC crop insurance scheme by farmers, and it is probable that this would apply equally to voluntary crop insurance in the future. Similarly, Ukraine has experienced low demand for this voluntary product. It is therefore recommended that the key stakehold-ers in Kazakhstan conduct a formal study to as-sess demand for AYII.

81. AYII for spring wheat could possibly be underwritten. This could be either a meso-level product designed to protect the seasonal loan portfolio of agencies that are lending to cereal producers (banks, input suppliers, or MFIs) or macro-level AYII cover operated by govern-ment to protect small family farms in southern Kazakhstan.

Weather index insurance opportunities for Kazakhstan

82. The analysis carried out in this feasibility study found that developing WII contracts for

hedging the drought exposure of spring wheat in the north of Kazakhstan is technically fea-sible. However, challenges related to the scale of implementation of, commercial viability of, and farmers’ interest in WII may limit the ap-plication of this class of insurance products. The details of the analysis are presented in chapter 5, where the prototypes developed for this study are illustrated and the operational and commer-cial challenges of WII are discussed.

Features, Advantages, and Disadvantages

83. The essential feature of WII is that the insurance contract responds to an objective parameter (for example, measurement of rain-fall or temperature) at a defined weather sta-tion during an agreed-upon time period. The parameters of the contract are set so as to cor-relate, as accurately as possible, with the loss of a specific type of crop suffered by the policy-holder. All policyholders within a defined area receive payouts based on the same contract and measurement at the same station, eliminating the need for field loss assessment.

84. The suitability of WII for transferring weather risks depends on the strength of the correlation between the weather parameter and the crop yield and the spatial correlation of the risks. WII is best suited to transferring weather risks, where these risks are well correlated over a widespread area and there is a strong correlation between weather and crop yield. The strongest relationships typically involve a single crop, a marked rainy season, and no irrigation. WII is less suited to the transfer of weather risks where conditions are more complex. Localized risks, such as hail, or areas with microclimates (for example, in mountainous areas) are not suitable for WII. Similarly, the scope for WII is limited where crop production is affected by many or complex causes of loss or where pests and dis-eases are major influences on yields.

85. The features of spring wheat crop pro-duction in the north of Kazakhstan indicate that WII is a potentially suitable risk transfer product for this crop. Spring wheat is almost a

32 Kazakhstan

monoculture in northern Kazakhstan, the region enjoys a marked rainy season, and crop produc-tion is fully rain fed. Furthermore, the analysis presented in this report of cumulative rainfall deficits and spring wheat yields for a sample of stations and rayons, in general, found very high correlations, which suggests that there is consid-erable scope for the GRK to continue to research the development of rainfall deficit WII cover for spring wheat in the northern region.

86. As for AYII, basis risk is the key con-straint of WII. “Basis” can be defined as the difference between the loss experienced by the farmer and the payout triggered by the weather index. It could result in a farmer experiencing a yield loss without receiving a payout or receiv-ing a payout without experiencing a loss. WII works best where losses are homogeneous in the defined area and are highly correlated with the weather peril.

87. WII can be retailed at different business levels. At the micro level, the policyholders (the insurer’s customers) are individual farmers, households, or small business owners who pur-chase insurance to protect themselves from po-tential losses caused by adverse weather events. At the meso level, the insurance policy is issued to an organization with economic interests that are contingent on the results of agricultural ac-tivities, including, for example, an input suppli-er or a financial institution or cooperative that lends to the rural sector and wants to protect it-self against eventual default of the loans given to farmers due to unfavorable weather condi-tions during the crop season. At the macro level, the insurance policy is settled to a government or a national organization. The insured interest in the case of macro-level coverage is usually related to government disaster relief for small farmers (macro-level index programs in Mexico are presented in box 6.1 in chapter 6) or food security issues.

Weather Data and Contract Design

88. Under this study, a prefeasibility analy-sis of a prototype WII product design was con-

ducted for drought peril in spring wheat pro-duction in six rayons in northern Kazakhstan. The prefeasibility analysis was performed based on rainfall information provided by the KHM for nine weather stations situated in the selected rayons or in neighboring rayons that fully com-plied with the best practice for the design and operation of WII. The prefeasibility analysis followed a widely used methodology developed by the Agriculture Risk Management Team (ARMT) of the World Bank and specific addi-tional indexing procedures that were developed for the spring wheat environment of northern Kazakhstan.

89. WII may be technically feasible for transferring drought risk in spring wheat crop production in northern Kazakhstan. In six out of the nine combinations of rayon-level yield and weather station data analyzed, it was pos-sible to develop meaningful rainfall deficit WII structures. However, while this applies to the areas surrounding the specific weather stations analyzed, full-scale implementation of a micro-level (farm-level) WII program may be hindered by the relatively low density of the weather station network. Taking as a reference the nine cases examined, in Kazakhstan, distances be-tween contiguous weather stations start from a minimum of 70 kilometers (against conventional wisdom that, for rainfall WII, stations should be no farther than 20 to 25 kilometers apart), which is probably too far for granting full micro-level WII coverage of the entire territory.

90. The potential implementation of macro-level or meso-level WII contracts, which are less reliant on the weather station network than micro-level WII contracts, could have a good chance of being implemented relatively rapidly. Although it may be possible to over-come the structural constraints related to the insufficient density of weather stations in the medium term, widespread full-scale implemen-tation of WII at the farm level does not seem to be realistic in the short term. In this regard, the implementation of WII contracts at the meso or macro levels, which may be less influenced by


the density of the weather network, could have a greater chance of being rapidly implemented than the micro-level approach.

Basis Risk

91. Preliminary analyses conducted under this study suggest the existence of a relevant basis risk for individual farmer WII cover. Basis risk is defined as the potential mismatch between the actual financial losses due to an in-sured event suffered by the farmer on his farm and the payouts received from the insurance. During the study, a basis risk assessment of WII was performed for a limited sample of farmers situated within 25 kilometers of the selected weather stations for the 2010 spring wheat crop year. The results of this analysis suggest the ex-istence of basis risk and highlight the importance of carefully evaluating the basis risk embedded in farm-level WII products.

Costs

92. If WII were implemented to cover drought for spring wheat crop production in northern Kazakhstan, it would be a relatively expensive product. The analysis carried out in the feasibility study found that indicative com-mercial premium rates of the technically feasi-ble contract structures range from 13.7 percent in relatively good crop areas to 24.2 percent in marginal areas. This is a clear indication of the high potential cost of using WII contracts to in-sure against drought.

Meso-Level WII and Reinsurance

93. A specific form of meso-level application of WII could be the use of index contracts as reinsurance coverage for insurance companies involved in agricultural insurance programs. The analysis carried out in the study found that it is possible to structure drought insurance prod-ucts for spring wheat production by calibrating weather indexes on rayon-level yield records. These structures could technically form the ba-sis of a reinsurance transaction.

Conclusions on WII

94. The analysis carried out in this feasibil-ity study found that offering WII for spring wheat in the north of Kazakhstan is technically feasible. Despite the positive technical findings, the actual density of the weather measurement network does not make full-scale implementa-tion of farm-level WII a realistic option in the short term. While potential actions to address this constraint may be undertaken, including the GRK’s current investments in new weather sta-tions, for the time being individual farmer WII cannot be considered a readily implementable alternative to the current LIC insurance scheme. In addition, the high potential cost of WII prod-ucts developed in the analysis, together with a preliminary analysis of the patterns of basis risk, suggests the need to carry out further research to assess the potential interest of farmers in such an approach.

tailoring crop insurance to the needs of small Farmers in south Kazakhstan

95. The final section of this report presents some of the international lessons and experi-ence on strategies and programs to address the agricultural risk transfer and insurance needs of small farmers. These lessons may be applica-ble to the small household mixed crop and live-stock farming sectors, which are mainly located in southern Kazakhstan.

identifying appropriate crop insurance products

96. One size does not fit all. To date, crop in-surers in Kazakhstan have offered a single LIC crop insurance product mainly to medium and large cereal producers located in northern Ka-zakhstan. There has been very little debate about the appropriateness of this product for small and marginal farmers in southern Kazakhstan.

97. A wide range of crop insurance prod-ucts is available internationally, and this report

34 Kazakhstan

recommends that Kazakhstan’s crop insurers should aim to develop and introduce several of these alternative products in the future. The products that are recommended for individual farmers include named-peril (hail) crop insur-ance, MPCI loss of yield insurance, area-yield index insurance, and crop weather index insur-ance. The suitability of each type of crop insur-ance product should be studied carefully in the context of the types of farmers (commercial, semicommercial, subsistence) and farming systems (irrigated, nonirrigated) prevailing in southern Kazakhstan.

98. Traditional individual farmer MPCI is a risk management tool that is often appropriate for commercial and semicommercial farmers; however, it cannot provide solutions for sub-sistence farmers. There is much evidence today that traditional MPCI does not work for small and marginal farmers and usually ends up being heavily subsidized by governments. Few small subsistence farmers producing food crops for on-farm family consumption can afford crop in-surance, which explains why governments offer premium subsidies. In Kazakhstan, crop insur-ance is unlikely to be a useful intervention for the very small rural households of subsistence producers.

99. For subsistence farmers, it may be much more cost-effective for governments to exam-ine alternative social safety nets or, where they elect to use insurance, to consider some form of macro-level weather index program, to per-mit early payments to be made in the event of a major natural disaster. To date, several coun-tries, including Ethiopia, Malawi, and Mexico, have designed macro-level rainfall deficit index covers to provide national or regional govern-ments with immediate cash liquidity following a natural disaster and to enable the government to provide an early response.

tailoring crop insurance to different clients

100. Crop index insurance (including both AYII and WII) is potentially a very flexible in-

strument that can be designed to transfer risk at different levels of aggregation. Index prod-ucts can be offered at three levels: (a) at the in-dividual farmer level (termed micro-level insur-ance), (b) at an intermediate level of aggregation as financial business interruption protection for banks and other lending organizations such as cooperatives and MFIs (meso-level insurance), and (c) at the regional or national level as in-surance for regional or national governments against major systemic perils such as drought (macro-level insurance).

101. In Kazakhstan, there may be opportuni-ties for government to use macro-level index insurance as a catastrophe drought insurance mechanism. For nearly a decade Mexico has operated a system of AYII and WII catastrophe climatic insurance programs that provide in-surance protection to state-level governments against crop failure among small-scale subsis-tence farmers. This macro-level index approach may offer solutions to severe drought losses in WKO and Aktobe that are not be insurable un-der a commercial individual farmer insurance program. The application of such a macro-level cover for small subsistence farmers in SKO ap-pears more limited because farming systems are highly heterogeneous and do not lend them-selves to macro-index solutions.

insurance delivery systems

102. Insurance companies throughout the world face major challenges in trying to iden-tify cost-effective ways of delivering and ad-ministering agricultural crop and livestock insurance programs for small farmers. In Ka-zakhstan, this problem is accentuated by the very low sums insured under the obligatory crop insurance scheme, with an average sum in-sured over the past five years of only KZT 3,287 (US$22) per hectare and an average premium rate of only 2.42 percent, generating an average premium of about KZT 80 (US$0.53) per in-sured hectare. In other words, a farmer with only 100 hectares would, on average, generate a total premium of about US$53, and this amount is far too low to enable Kazakhstan’s commercial crop


insurers to cover their A&O costs on such small farm units.

103. In southern Kazakhstan, there may be considerable potential for commercial insur-ers to enter into a “partner-agent” relationship with rural organizations (such as the coop-eratives or MFIs) that have an existing rural distribution network and a large membership of farmers. Under a partner-agent model, the insurance company enters into a formal con-tractual agreement in which the agent assumes responsibility for marketing and promoting the insurer’s policies to its membership, for collect-ing premiums from the insured and paying these over to the insurer, for notifying claims to the in-surer, and, in some cases, for distributing claims settlement payments to the insured. Usually the insurer agrees to pay the agent a commission for its services. This model would potentially enable the private commercial insurers in Kazakhstan to deliver crop insurance more cost-effectively to large numbers of small and medium farm-ers. Such a model could also be used to deliver livestock insurance to the small mixed cropping and livestock farmers located predominantly in southern Kazakhstan.

mutual insurance

104. The farmer mutual insurance associa-tions have been heavily promoted by the GRK since 2008, and if their financial status could be strengthened they might be the ideal in-stitutional vehicle for underwriting Kazakh-stan’s small and marginal crop and livestock producers. Currently, about 38 farmer mutual crop insurance associations are underwriting

the obligatory LIC crop insurance scheme in Kazakhstan. These mutuals have very limited fi-nancial reserves, and none is formally protected by any form of insurance or reinsurance. The in-dividual mutuals are therefore very exposed to catastrophic losses that exceed their reserves. In the event that claims exceed their reserves, as happened in 2010, the mutuals had to pro rata down each claim settlement made to members who incurred losses (as reported in chapter 4). International experience shows that, when catas-trophe claims occur, the mutual often cannot pay and eventually collapses.

105. If the mutuals are to remain solvent and to underwrite crop insurance, livestock insur-ance, or both for small and marginal farmers in Kazakhstan, ways of providing some form of catastrophe reinsurance protection must be de-veloped. In the short term, it is unlikely that the private commercial insurance sector in Kazakh-stan or international reinsurers will be willing to provide excess of loss reinsurance protection to the mutuals. It is likely that such a program will have to be offered through the public sector. Given the FFSA’s experience with administer-ing financial claims subsidies on the obligatory LIC program, the FFSA would be best placed to administer some form of excess of loss program for the mutual crop insurance associations. In this context, policy makers in Kazakhstan may wish to study the Mexican “fondos de asegura-miento” (self-insurance funds, SIFs) program, which is a very successful small farmer mutual crop and livestock insurance scheme that is for-mally reinsured by Agroasemex, the national agricultural reinsurance company. See chapter 6 for further details of the SIF program.

36 Kazakhstan

Agricultural Insurance Feasibility Study:Summary of recommendationS for improvement of the

obligatory crop inSurance Scheme in KazaKhStan

The current situation in Kazakhstan is as follows:

An obligatory crop insurance scheme was initiated in 2005. Insurers (commercial companies and • farmer mutual associations) offer a single loss of investment costs (LIC) policy for major crops, including cereals. The financial results of the scheme have deteriorated in recent years.

The Government of Kazakhstan (GRK) contributes 50 percent of claims costs through the Fund • for Financial Support of Agriculture (FFSA). Over the past six years (2005–10), the GRK’s 50 percent claims subsidy amounted to a total of KZT 4.1 billion. In the worst year—2010—it amounted to KZT 1.4 billion.

The existing fiscal cost of the subsidy for the GRK is KZT 685 million per year on average. Ex-• cluding Aktobe and WKO, it is about KZT 409 million per year.

In addition, the GRK pays for the operating costs of the FFSA, which average KZT 46 million • per year.

The following are the main options for consideration under the proposed phased approach.

Strengthen the legal and regulatory framework• Strengthen of the design and rating of the LIC policy• Introduce measures to improve profitability (reconsider insurability of WKO and Aktobe)• Strengthen operating systems and procedures• Strengthen institutions• Cap catastrophe losses• Consider implementing GRK premium subsidies instead of contributing 50% of claims cost•

Phase 1 (short term): Strengthen

the existing compulsory scheme

Introduce individual grower multiple-peril crop insurance (MPCI) • Introduce higher levels of insured yield coverage and sums insured• Introduce actuarially calculated rates (implications for affordability and government premium • subsidies)Continue to strengthen the scheme’s operating systems and procedures• Introduce excess of loss reinsurance protection for the crop insurance industry•

Phase 2: Transition toward a market-

based crop insurance system

Transition to voluntary crop insurance• Improve the current public-private partnership for crop insurance• Create a crop coinsurance pool• Conduct research and development of new insurance products• Strengthen operating systems and procedures• Introduce a formal program of international reinsurance protection for the pool•

Phase 3 (medium term): Transform into a commercial

pool crop insurance scheme


phase 1 (short term): strengthen the existing compulsory scheme

Options for consideration

Main recommendations

Considerations Fiscal implications

Strengthen the legal and regulatory framework

Amend legislation to allow insurance companies to set terms and conditions

Assuming that crop insurance will continue to be obligatory in the short term, the law should be amended to permit insurers to set their own terms and conditions (premium rates and sums insured).

strengthen of the design and rating of the lic policy

Increase sum insured values

The LIC policy does not provide adequate levels of protection to farmers.

Revise the rating methodology in order to update the rates on an actuarial basis

Premium rating should be revised to reduce the loss ratio to 60% and allow some profit in the scheme (which currently experiences a 70% loss ratio net of 50% claims reimbursement).

Revise the rating methodology to introduce rayon-level premium rates

Rayon-level rates would help to avoid cross-subsidization between different rayons and oblasts. Farmers in each rayon should pay for the risk that applies in that rayon.

Strengthen the terms and conditions of the current insurance policy

Terms and conditions should be aligned with international best practice in order to avoid moral hazard and attract international reinsurers.

Introduce measures to improve profitability

Remove WKO and Aktobe from the insurance scheme

Over the past six years, Aktobe and WKO accounted for only 4.8% of total scheme liability, but contributed 41% of claims valued at KZT 3.312 billion, of which government paid KZT 1.656 billion in 50% claims compensation or an average of KZT 276 million a year. The study considered two options for Aktobe and WKO: establish a separate disaster relief scheme or provide 100% government claims reinsurance support.

The additional cost of moving from government 50% financing of claims to 100% financing of claims in Aktobe and WKO is KZT 276 million a year (based on past claims pattern) or a total cost for these oblasts of KZT 552 million a year.

Strengthen operat-ing systems and procedures

Streamline and reduce the costs of marketing, preinspections, and loss assessment procedures

Streamlined procedures would improve underwriting and claims operating systems and procedures and reduce the costs of these operations. The goal is for farmers to pay for risks, not transaction costs. This is important for phase 2.

Strengthen institutions

Create incentives for private insurance companies to support the crop insurance scheme

Incentives are needed to reverse the exodus of private insurance companies. Insurance companies will likely remain in the scheme if certain conditions are in place (actuarially determined premium rates and freedom to select their own risks).

38 Kazakhstan

Create a level playing field for commercial insurers and the mutual insurance associations

Mutual (farmer) insurance associations should be regulated under the Agency for Financial Market and Financial Institutions Regulation and Control and be required to follow the same guidelines with regard to capital requirements and constitution of insurance reserves as insurance companies.

Cap catastrophic losses (excess of loss protection)

Design catastrophe excess of loss reinsurance protection for private insurance companies and farmer mutual insurance associations, based on their risk retentions

Private insurers and mutual farmer associations do not have reinsurance protection and are very exposed to major systemic drought losses. In the short term, it is unlikely that the scheme will be able to meet the standards required by international reinsurers; therefore, the GRK will have to provide nonproportional reinsurance.

The additional cost to cap the losses in excess of the collected premiums is about KZT 270 million per year.a

Consider premium subsidies

Assess whether farmers can afford the rate increases associated with higher levels of coverage and whether premium subsidies are needed

If government switches to some form of nonproportional excess of loss protection, premium rates will rise, and premium subsidies may be necessary.

A 50% premium subsidy scheme would cost KZT 980 million a year or KZT 295 million a year more than the current cost of assuming 50% liabilities (KZT 685 million a year).

a. Values assuming the current spring wheat portfolio in Akmola, Kostanay, NKO, Pavlodar, EKO, Aktobe, and WKO.





Introduce individual grower multiple-peril crop insurance (MPCI)

Engage in MPCI product research and development

The main challenges for introducing MPCI center on the procedures for establishing an individual grower “normal average yield” and then premium rates for different MPCI coverage levels for each type of farmer and each rayon. For insured yield with coverage levels of 20 to 30% of yield, the MPCI rates would be roughly comparable to the full (unsubsidized) loss of investment costs (LIC) premium rates, but for higher levels of coverage, MPCI rates would be correspondingly higher. A major objective of introducing MPCI would be to increase the levels of yield protection purchased by farmers from about 13% of average yield (approximately 1 centner per hectare) to about 30% of average yield (3 centners per hectare); in the best wheat-growing areas (NKO, Kostanay), even higher levels of yield coverage should be affordable.


Consider mechanisms of government support for the scheme

MPCI is very popular with farmers, but in most schemes is dependent on government support in the form of premium subsidies. It is likely that, if individual grower MPCI is introduced into Kazakhstan, the GRK will need to consider financing premium subsidies. The fiscal implications for government are if the levels of insured yield protection and sums insured are increased, the corresponding premium subsidies will also increase significantly.

Assuming obligatory crop insurance, the estimated additional cost of providing 50% premium subsidies for the same level of coverage as the current LIC policy is KZT 686 million on average. This amount would be KZT 1.9 billion for 20% coverage and KZT 5.3 billion for 30% coverage.a

Introduce excess of loss reinsurance protection for the crop insurance industry

Introduce nonpropor-tional stop-loss reinsur-ance protection for the MPCI program

If MPCI is introduced and higher coverage levels and sums insured are offered to farmers, the liabilities assumed by insurers and the GRK will increase significantly. Insurers and government will need to protect their risk retention against catastrophic losses, and nonproportional reinsurance may have an important role to play.

Assuming obligatory crop insurance, the estimated additional cost to cap losses in excess of the collected premiums for the same level of coverage as the current scheme is KZT 409 million. This amount would be KZT 991 million for 20% coverage and KZT 2.24 billion for 30% coverage.a

a. Values assuming current spring wheat portfolio in Akmola, Kostanay, NKO, Pavlodar, and EKO (excluding risks from Aktobe and WKO).

phase 3 (medium term): transform into a commercial pool crop insurance scheme




Move to voluntary crop insurance

Give insurers the opportunity to select risks (that is, to select which types of farmers, which crops, and which regions they are willing to underwrite)

A voluntary scheme will allow insurers to perform risk selection, which is the basis of all insurance. Insurers’ technical results from underwriting agricultural insurance will depend on how efficient they are in selecting and underwriting risk. It is ex-pected that this will incentivize insurance compa-nies to invest in human resources and information infrastructure related to agricultural insurance.

Link crop insurance with other services received by farmers (for example, rural credit, government programs targeting farmers, and so forth)

Linking crop insurance with other services received by farmers will reduce transaction costs due to cost sharing in the delivery channel. In some countries (Brazil, India) crop insurance is mandatory for farmers seeking to obtain rural credit. Public banks use crop insurance as collateral for the loans given to farmers and, in some cases, as a risk selection tool. Farmers improve their access to rural credit. Insurers are willing to participate because there is a minimum volume of guaranteed business.

40 Kazakhstan

Improve the current public-private partnership (PPP) for crop insurance

Have the Kazakhstan PPP for agricultural insurance define clear roles for the private sector and public sector participants

The primary role of the GRK in the PPP will be to create an enabling environment for the development of crop insurance, including addressing market imperfections and providing financial stability. The insurance sector will provide expertise on risk management, underwriting, and loss adjustment and capacity to operate the scheme.

Pool risks Create a crop coinsurance pool among nonlife insurers in Kazakhstan

The potential benefits of an insurance pool include the ability to underwrite a much broader and larger book of business and the potential to achieve a much better geographic spread of risk than if each company were operating independently. Other benefits include economies of scale in developing new products and programs, underwriting risks, adjusting claims, and, purchasing reinsurance.

Strengthen operating systems and procedures

Develop crop underwriting expertise and rationalize MPCI in-field loss assessment systems and procedures

Stronger systems and procedures would assist the pool in developing underwriting expertise, strengthening in-field loss assessment procedures, and seeking cost savings through appropriate training courses.

Costs will be quantified in due course

Introduce a formal program of international reinsurance protection for the pool

Have the GRK promote insurers to purchase quota-share, stop-loss reinsurance, or both to protect the liabilities arising from the risks written by the coinsurance pool

The GRK should encourage companies participating in the pool to purchase proportional, nonproportional stop-loss, or both types of reinsurance treaties in the international reinsurance market.

The GRK’s cost of purchasing stop-loss nonproportional reinsurance in excess of the premiums collected for 30% coverage in northern Kazakhstan is KZT 224 million and KZT 95 million for MPCI and AYII products, respectively, assuming 10% uptake and is KZT 448 million and KZT 190 million, respectively, assuming 20% uptake.

a. Values assuming current spring wheat portfolio in Akmola, Kostanay, NKO, Pavlodar, and EKO (excluding risks from Aktobe and WKO).


chapter 1: Introduction and Objectives of the Study

1.1. The Republic of Kazakhstan is located in Central Asia. It is the ninth largest country in the world, with an area of 2,724,900 square ki-lometers (1,049,150 square miles). Landlocked, Kazakhstan shares common borders with China, the Kyrgyz Republic, Turkmenistan, Uzbeki-stan, and the Russian Federation; the total length of its borders amounts to 12,187 kilometers. The territory of Kazakhstan stretches some 3,000 ki-lometers from the low reaches of the Volga River in the west to the foothills of the Altai Mountains in the east, and about 2,000 kilometers from the

West Siberian lowland in the north to the desert of Kyzylkum and the mountain range of Tien Shan in the south.

1.2. With gross domestic product (GDP) of US$6.3 billon, Kazakhstan is the largest econ-omy in Central Asia. Formerly part of the So-viet Union, Kazakhstan gained independence in 1991 and is composed of 14 regions, known as oblasts. Map 1.1 shows the administrative divi-sions of Kazakhstan.

map 1.1 administrative divisions of Kazakhstan

Source: Wikipedia.

42 Kazakhstan

importance of agriculture in Kazakhstan

1.3. Agriculture is a very important econom-ic sector in Kazakhstan. Agriculture contributes 5.92 percent of Kazakhstan’s GDP (Economist Intelligence Unit 2011a). 5 Although agricultural output contracted sharply during the transition following independence in 1991, output has re-covered steadily since 1998. During 1998–2010, total agricultural output increased at an average annual rate of 5.21 percent. Most of this growth was a consequence of increases in crop produc-tion (+84 percent), while livestock grew in real terms a modest 7 percent. Despite the recovery of agricultural production, agriculture’s share in the economy shrank because of strong growth in other sectors, particularly the extractive oil in-dustry.

1.4. The agriculture sector is also very im-portant from a social perspective in Kazakh-stan. Approximately 7.3 million people (47.2 percent of the population) live in rural areas.6 Agriculture employs more than 22 percent of the labor force. Although Kazakhstan is classified as a middle-income country, rural poverty is wide-spread. The transition from a centrally planned to a market economy brought about a decline in many state-provided agricultural services, and enduring problems of soil degradation and lack of infrastructure have resulted in abandonment and underuse of agricultural land.

1.5. The natural and climatic conditions in Kazakhstan are favorable for agriculture. The country is one of the major global producers and exporters of grains (mainly wheat). Other prin-cipal agricultural products include meat, wool, cotton, and milk. Farming areas occupy more

5 GDP values are calculated as average for the pe-riod 2006–10.

6 Embassy of the Republic of Kazakhstan in the United States, http://www.kazakhembus.com/index.php?page=national-goals-and-initiatives.

than 220 million hectares (about 74 percent of the country’s total area), of which cereal-grow-ing areas occupy about 13 million to 14 million hectares. The area under pastures totals 185.7 million hectares or 68 percent of the total farm-ing area. Individual farmers, collective farms, and organizations use 81 percent of all farming areas and 98 percent of all pastures.

1.6. Livestock is also a very important agricul-tural activity. For a country with a long nomadic history, it is not surprising that stockbreeding is the traditional and dominant agricultural sector. No less than three-quarters of all agricultural land is used for grazing. Sheep breeding is pre-dominant, while cattle breeding and the rearing of pigs, horses, and camels are also well de-veloped. Animal husbandry typically accounts for about 45 percent of the production value in Kazakhstan agriculture. Primary meat products include beef, veal, chicken, horse, lamb, pork, and rabbit.

agricultural crop production in Kazakhstan

1.7. Kazakhstan is an important producer and exporter of crops, especially high-quality wheat. In 2010 Kazakhstan was the sixth largest wheat exporter, by volume, in the world. Average annual production of wheat is about 13 million tons, but output is highly dependent on weather and, in recent years, has fluctuated between 10 million and 17 million tons. Between 2 million and 8 million tons of wheat are exported annu-ally, mainly to destinations in Europe (includ-ing Russia and Ukraine), northern Africa, and Central Asia. Kazakhstan also produces around 2 million tons of barley and a small amount of oats, corn, and rice, but wheat is by far the coun-try’s most important commodity. The production of oilseeds (sunflower seed and rapeseed) is in-creasing, but total oilseed output remains well below 1 million tons. The country also grows a small amount of cotton in southern Kazakhstan, with annual lint output of about 100,000 tons.


1.8. Crop production consists mostly of grain crops in northern Kazakhstan. About 75 per-cent of the country’s wheat is produced in three oblasts in north-central Kazakhstan: Kostanay, Akmola, and North Kazakhstan (NKO); see map 1.2 for the main crop-producing areas. Kostanay alone plants about 4 million hectares of wheat per year. Spring wheat occupies 95 percent of the total wheat area in Kazakhstan and virtu-ally all of the wheat in the three north-central oblasts. Minor grains include spring barley and oats (which are grown in the same region as spring wheat), winter wheat (southern Kazakh-stan), and rice (southern Kazakhstan, mostly in Kzyl-Orda). Oilseed area has nearly doubled in the past five years but still accounts for only about 6 percent of the country’s total crop area. Sunflower, which is Kazakhstan’s main oilseed crop, is grown mostly in eastern Kazakhstan. Rapeseed is grown in north-central Kazakhstan. Cotton is grown only in southern Kazakhstan.

The crop farming sector is highly heteroge-

neous with regard to farm structure and pro-ductivity. The northern region is dominated by large agricultural enterprises (also termed pro-duction enterprises) specialized in crop produc-tion, whereas smaller mixed peasant farms (also termed commercial farms) and household plots predominate in the south. The total agricultural land area increased by about 6 percent between 2003 and 2007, including 4 percent growth in the amount of arable land and 6 percent growth in the amount of hayfields and pastures. The share of agricultural land farmed by production enterprises declined from 59 to 50 percent dur-ing 2003–07, while land farmed by individual commercial farms increased from 41 to 49 per-cent. Commercial farmers slightly reduced their arable land (by 0.14 million hectares), while increasing their hayfields and pastures (by 8.47 million hectares) between 2003 and 2007. In contrast, production enterprises increased their arable area (by 0.92 million hectares) and de-creased their hayfields and pastures (by 5.14 million hectares).

map 1.2 main crop production areas for Wheat in Kazakhstan and russia

Source: Authors based on ARKS.

44 Kazakhstan

1.9. The agro-industrial sector of Kazakh-stan still suffers from several problems that result in low productivity and low profitability. Labor efficiency in agriculture is five times low-er in Kazakhstan than in Eastern Europe, lower even than in Russia and Ukraine. Although in the process of being updated, the fleet of agri-cultural machinery is aged. According to the National Agency of Statistics (ARKS), a high portion of Kazakhstan’s current fleet (including 77 percent of its tractors and 59 percent of its harvesters), was more than 15 years old at the time of the 2006 agricultural census. Improve-ments in crop management practices funded by expanding state subsidies have contributed to higher and more stable wheat yields. Since around 2002, government support for agricul-ture has increased significantly in the form of subsidies on the prices of fuel, seed, fertilizer, and agricultural chemicals.

government policy for agriculture

1.10. The Government of the Republic of Ka-zakhstan (GRK) is encouraging diversification of the country’s economy to reduce its depen-dence on oil, whose price volatility and result-ing fluctuations in revenues make budget man-agement challenging. The GRK recognizes the importance of the agriculture sector for diversi-fying economic growth, reducing rural poverty, and improving food security. The GRK’s main strategies for agriculture are set out in a strate-gic plan, which is elaborated every three years. The Three-Year Strategic Plan for 2009–11 de-fines three strategic objectives for the agricul-ture sector in Kazakhstan. The first objective is to achieve the sustainable development of the agro-industrial sectors, increasing their compet-itiveness, ensuring food security, and adapting agrarian production to the conditions for World Trade Organization (WTO) accession. The sec-ond objective is to preserve, use rationally, and rehabilitate forest, fauna, and natural resources as well as to establish conditions for sustain-able water supply and efficient water manage-ment. The third objective is to establish normal

conditions for rural welfare based on optimizing rural settlements by improving the capacity of rural territories through integrated rural devel-opment.

1.11. The GRK has significantly increased its support to the agriculture sector since the end of the 1990s (World Bank 2010a). This is evi-denced by the introduction of support measures including a significant increase in budget alloca-tion and institutional improvements, such as new laws and reorganized institutions. The budget allocated to agriculture reached KZT 390.7 bil-lion (around US$2.7 billion) in 2010 (Economist Intelligence Unit 2010b), which represents 8.76 percent of the total budget allocations in Ka-zakhstan for 2010 and 36 percent of agricultural GDP (World Bank 2010a). The most important budget allocations are for (a) development of ru-ral finance associated with agricultural machin-ery and (b) support for crop production, such as marketing, phytosanitary, and soil fertility activities. GRK expenditures are much smaller for livestock production than for crop produc-tion, even though livestock contributes about 44 percent of total agricultural output. The types of GRK expenditures in support of the agriculture sector are varied and can be classified as fol-lows: (a) direct input subsidies, (b) subsidized credit programs (that is, with reduced interest rates), (c) market price support schemes (such as the one carried out by the Food Contract Cor-poration to stabilize grain prices and maintain state reserves), (d) expenditure on developing public goods (such as market information, land title and registration, disease control, and seeds and grain quality analysis and grading), and (e) expenditure on forestry and fisheries.

exposure of agriculture to natural and climatic disasters

1.12. Agricultural production in Kazakhstan is an extremely risky economic endeavor. Many risks associated with agricultural production in Kazakhstan are due to climate events. Drought is the most pervasive peril affecting crop pro-


duction in Kazakhstan. Reasonably higher lev-els of agricultural productivity can be achieved during years of adequate rainfall, but the region is subject to frequent drought and is considered a zone of risky agriculture. Historically, Ka-zakhstan’s agricultural production has suffered from serious drought events. As a result, the ag-ricultural value added in Kazakhstan is marked by frequent and sharp year-to-year fluctuations. Besides droughts, hailstorms and autumn early frost are important perils affecting crop produc-tion, and outbreaks of pests and diseases can lead to severe crop losses. Figure 1.1 shows the relation between fluctuations in annual agricul-tural GDP growth and the occurrence of major drought years (highlighted in yellow). 7

7 Caution should be exercised in interpreting the GDP shortfalls in 1993, 1994, and 1995, as the de-cline in GDP in these years was not related only to drought. In the early 1990s, following the breakup of the Soviet Union and the loss of massive government subsidies for state and collective farms and live-stock enterprises, agricultural productivity declined

government objectives for crop insurance

1.13. The GRK has three objectives for crop insurance. The first objective is to protect farm-ers against loss of their crop production due to the effects of adverse natural, climatic, and bio-logical hazards. Kazakhstan is one of the most exposed countries in the world to drought losses in spring wheat, followed by late spring and

sharply. Local agricultural officials began to set pro-ductivity thresholds for individual fields. Fields that consistently failed to meet the threshold—typically 0.6 to 0.7 ton per hectare against a national average of about 0.9 ton per hectare—were taken out of grain production and converted to permanent pasture. The decline in grain area accelerated in the mid-1990s, when shrinking livestock inventories caused demand for feed grain to plummet, leading to a 75 percent drop in area planted with barley between 1993 and 1999. During these six years, total grain area in Ka-zakhstan contracted at a rate of nearly 2 million hect-ares per year.

Figure 1.1 agricultural gdp and occurrence of droughts in Kazakhstan, 1991–2010

Source: Authors from World Bank 2010b; Economist Intelligence Unit 2011a; KHM data.

-23%

29%

-7%

-21%

-24%

-5%-1%

-19%

21%

-3%

17%

3% 2% 0%7% 6% 9%

-6%

13%

-12%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Kazakhstan: Agriculture Value added (annual % growth)

Year reported with drought

46 Kazakhstan

harvest frosts, hail, and pests and diseases. The GRK uses crop insurance to protect small and medium farmers from bankruptcy following a major crop loss. The second objective is to help farmers to gain access to rural finance by provid-ing insurance collateral that farmers can use to protect their loans against default in the event of a major crop loss. The third objective is to en-hance the effectiveness of government support programs for crop production.

1.14. In accordance with its objectives for agricultural insurance, the GRK enacted the Law on Compulsory Crop Insurance, which is dated March 10, 2004, and became effective on April 1, 2004. The law established the terms and conditions for implementation of a mandatory salvage-based loss of investment costs (LIC) crop insurance scheme for all farmers growing a range of strategic grain, oilseed, and other field crops in Kazakhstan.88 Under the law, the in-surance indemnity is determined in accordance with the normative production cost per hectare for each type of crop, multiplied by the planted area of the insured crop. The insured loss is de-termined as “a positive difference between the normative cost per 1 hectare of crop production, which is set at the moment of concluding an in-surance contract, and the revenue from 1 hectare of crop production in the area affected by the adverse natural events, multiplied by the ex-act area on which the given crop was produced and which was affected by an adverse weather event.”

1.15. The Kazakhstan crop insurance sys-tem is based on a public-private partnership (PPP). The Law on Compulsory Crop Insurance created the institutional framework and estab-

8 The salvage-based LIC crop insurance policy (termed “loss of investment cost” policy for short) protects farmers against adverse natural, climatic, and biological phenomena resulting in production shortfalls that cause farmers’ expected revenues from the insured crop in the insured unit to fall short of the investments made in growing the crop in that unit.

lished the legal, financial, and organizational basis for the implementation of crop insurance. The implementing agencies are the Ministry of Agriculture (through the Direction of Strategic Planning), the Fund for Financial Support for Agriculture (FFSA), the private commercial in-surance companies, the farmer mutual crop in-surance associations, and the local authorities in each oblast and rayon. Under the PPP, the GRK provides financial contributions to the crop in-surance scheme through an indemnity fund (the FFSA). The GRK supports agricultural insur-ance by paying 50 percent of the insurance in-demnities reported by the insurance companies. This is similar to a free 50 percent quota-share reinsurance facility. Government payouts are made both to private insurance companies and to farmer mutual associations.

1.16. Crop insurance has reached high lev-els of uptake and penetration in Kazakhstan, which is a function of its obligatory nature; however, the system is experiencing serious fi-nancial and operational drawbacks. Because it is mandatory, crop insurance uptake in Kazakh-stan averaged 74 percent of the cropped area for the period 2005–10. Notwithstanding the high level of penetration, from 2005 to 2010 the av-erage annual loss ratio after 50 percent govern-ment reimbursement of claims was 75 percent, indicating that the program is not financially sus-tainable. In addition to the financial drawbacks, the crop insurance system also has experienced operational problems, as evidenced by the low level of sum insured chosen by farmers to insure their crops: average of US$25.7 per hectare in 2010. From a financial point of view, the insur-ers and mutual associations are very exposed to catastrophic drought losses because the current system is not reinsured again excess losses.

objectives and scope of the study

1.17. The overall objective of the current study is to assist the GRK in improving the existing mandatory crop insurance program. The spe-cific objectives of this study include (a) to per-


form a crop and weather risk assessment for key crops; (b) to review the current crop insurance scheme; (c) to identify the potential gaps in the current scheme and to provide recommendations for its improvement, based on international ex-perience and best practice; (d) to identify oppor-tunities for the development of alternative crop insurance products, including area-yield index insurance (AYII) and weather index insurance (WII), as well as hail named-peril crop insur-ance; and (e) to identify ways to tailor the provi-sion of crop insurance to small farmers and the rural poor (particularly in the southern part of the country).

1.18. The study aims to identify sustainable market-based alternatives to the current crop insurance system in Kazakhstan. In this regard, all of the options for improving the current sys-tem that were developed under this study are market based and take into account global ex-

perience and the best insurance and reinsurance industry practices for agricultural insurance.

1.19. The study follows the principles estab-lished in the agriculture risk management framework developed by the World Bank. The development of market-based agricultural insur-ance risk transfer solutions in the region implies the promotion of several practices, including es-tablishment of (a) an adequate agricultural risk management framework for countries in the re-gion, which would include farmer segmentation, an accurate assessment of the risks faced by the agriculture sector, an adequate risk financing strategy for agricultural risks, and proper institu-tional arrangements; (b) well-identified roles of the public sector, insurance industry, and farm-ers with regard to agricultural insurance; and (c) possible actions to be taken by governments in order to support agricultural insurance.

map 1.3 oblasts examined under the agricultural insurance Feasibility study and rayons selected for development of agricultural insurance prototypes

Source: Authors.

48 Kazakhstan

1.20. The study focuses mainly on spring wheat crop production in the principal grow-ing regions of Kazakhstan. Owing to the geo-graphic size of the country, the study is limited to spring wheat grown in the eight main produc-tion oblasts for spring wheat: NKO, Akmola, Kostanay, Aktobe, Pavlodar, West Kazakhstan (WKO), East Kazakhstan (EKO), and Kara-ganda. The study also explores opportunities for developing crop insurance for small farmers in Tole-Bi rayon in South Kazakhstan (SKO). For those activities related to the identification of opportunities for developing new crop insurance products (crop hail, AYII, and WII), the study is limited to a prefeasibility analysis and the eventual development of prototype products for spring wheat in a few rayons in the north and east (including Altynsarinski and Auliyekolski rayons in Kostanay; Aktogayskiy and Zhelezin-ski rayons in Pavlodar; Bulandinski and Enbek-shilderski rayons in Akmola) and Tole-bi rayon in SKO. The oblasts and rayons selected for the analysis are highlighted in red in map 1.3.

outline of the report

1.21. The study is set out in six chapters. Chapter 2 presents an overview of agricultural production systems and markets in Kazakhstan, followed by an assessment of the climatic haz-ards and other risks affecting spring wheat in the country’s main crop areas. Chapter 3 reviews the structure and performance of the current manda-tory crop insurance system in Kazakhstan and identifies a series of institutional, operational, technical, and financial drawbacks of the current system. Chapter 4 presents a phased strategy and a series of options and recommendations for the GRK to consider for the introduction of market-based solutions that aim to strengthen the cur-rent scheme. Chapter 5 explores the opportuni-ties for developing new crop insurance products in Kazakhstan, including prefeasibility analyses for AYII, WII, and named-peril hail insurance for selected rayons. Finally, chapter 6 deals with the challenges of tailoring crop insurance to the needs of lower-income smaller farmers.


objectives and scope of agricultural crop and Weather risk assessment

2.1. To date, in Kazakhstan there has been little formal risk assessment for crop insur-ance purposes of the key climatic, biological, and natural perils and their impact on crop production, yields, and farm incomes. The risk assessment presented in this chapter aims (a) to aid policy makers and planners in Kazakhstan in understanding the major climatic and natural-peril risk exposures in spring wheat, which is the main food and export crop grown in the country, (b) to quantify wherever possible the value of expected spring wheat crop losses in normal and catastrophic loss years, and (c) to discuss the im-plications of these findings for any modification of the country’s current crop insurance program. Specifically, it aims (a) to identify and quantify the key natural, climatic, and biological perils af-fecting spring wheat production in Kazakhstan, (b) to quantify the frequency and severity of the perils affecting spring wheat production, and (c) to define and map homogeneous risk zones for spring wheat crops.

2.2. This chapter presents a preliminary risk assessment of weather risks and their impact on spring wheat crop production and yields in northern Kazakhstan. This chapter starts with a review of data availability in Kazakhstan for spring wheat risk assessment purposes. This is followed by an overview of climate and the agro-ecological regions and spring wheat crop production systems in the selected oblasts of

Kazakhstan and then an analysis of spring wheat production and yields and the climatic con-straints to production, including an analysis of rainfall data and the relationship to national and rayon-level spring wheat crop production and yields. The final part of this chapter presents the results of a crop risk assessment model (CRAM) that uses time-series rayon-level production and yield data to estimate values at risk, expected losses, and expected claims costs for spring wheat in the eight selected oblasts in Kazakh-stan. This analysis is very relevant to crop in-surers’ understanding of risk accumulation and maximum expected losses in spring wheat.

data availability for crop and Weather risk assessment

2.3. Three types of data are commonly used to assess climatic risk in crop production. They are (a) time-series weather data, (b) crop dam-age and production loss data by cause of loss for each crop, which may include estimates of the financial value of the damage or losses, and (c) time-series crop area, production, and yield data. The analysis of variance in annual crop produc-tion and yield data is commonly used to design and rate multiple-peril crop insurance (MPCI) programs.

2.4. Kazakhstan has a modern, efficient na-tional meteorological service known as the National Hydro Meteorological Service or Ka-zhydromet (KHM). The surface meteorological network managed by the KHM includes 260 weather stations (50 automated) and 71 agro-meteorological measurement points. The vari-

chapter 2: Crop and Weather Risk Assessment

50 Kazakhstan

map 2.1 Weather station network in Kazakhstan, 2011

Source: KHM.

ables recorded at most meteorological stations include air temperature, precipitation rate, snow, soil moisture, and evaporation. The data commu-nication system is well structured, but somewhat obsolete in some of the more remote locations. Each set of observations undergoes a strict qual-ity check, according to World Meteorological Organization (WMO) standards. Weather data are transferred to each oblast center at the ap-propriate frequency (three hours for temperature to one dekad for soil moisture). From the oblast center, a communication specialist transfers in-dividual weather messages into the KHM’s cen-tralized web server in Astana. The web server also shares weather data with other profession-als in the country (synoptic specialists, agro-me-teorologists, climatologists, and Gismeteo).

2.5. Given the huge size of Kazakhstan, the weather station density is currently not able to provide adequate coverage for all the country. According to the WMO, Kazakhstan would need

to have approximately 1,600 weather stations in order to achieve an optimum weather station density. The KHM continuously upgrades its weather station network. The geographic distri-bution of weather stations in Kazakhstan is pre-sented in map 2.1.

2.6. The weather risk assessment performed under this study was based on information pro-vided by the KHM. Under this feasibility study, the KHM provided the World Bank with access to daily rainfall and minimum and maximum daily temperature data for 10 weather stations located in seven rayons selected for the develop-ment of agricultural insurance prototypes. The selected weather stations for which the daily data were provided are located in the following seven rayons: Auliyekolski and Altynsarinski in Kostanay; Aktogayskiy and Zhelezinski in Pav-lodar; Bulandinski and Enbekshilderski in Ak-mola; and Tolebi in South Kazakhstan (SKO). In addition to the daily data, the KHM also provid-


ed monthly rainfall and average minimum and maximum daily temperature data for the follow-ing 18 weather stations located in nine oblasts: Bulaevo and Saumalkol in North Kazakhstan (NKO); Diyevskaya and Mikhailovka in Ko-stanay; Yegendykol and Schuchinsk in Akmola; Mikhailovka and Aktogay in Pavlodar; Kamen-ka and Chingirlau in West Kazakhstan (WKO); Komsomolskoe and Novoalekseevka in Aktobe; Korneevka and Karaganda Agricultural Experi-mental Station in Karaganda; Dmitriyevka and Samarka in East Kazakhstan (EKO); and Shim-kent City and Kazygurt in SKO.

2.7. Kazakhstan has very good records for spring wheat crop production. The National Agency of Statistics (ARKS) is responsible for collecting, recording, and managing national crop production data and statistics in Kazakh-stan. It is charged with recording seasonal crop acreage, production, and yield data for all major food crops and also for horticultural crops in Ka-zakhstan. In addition to ARKS, the Department of Statistics, under the Ministry of Agriculture (MoA) and the Land Resources Management Agency, is also involved in the collection of ag-ricultural statistics. A third important source of agricultural statistics is the “household account-ing” system, which is carried out by the regional administrations (akimats) of townships, villages (auls), and rural counties (rayons). There is a close interaction between all state bodies that record agricultural statistics in Kazakhstan. The data are collected from all categories of farms engaged in agricultural production and services. Among them there are agricultural enterprises (production enterprises), peasant farms (also called commercial farms), and household farms. Statistical observations are conducted on the basis of the Statistical Register of Agricultural Organizations, which includes all of these cat-egories of agricultural producers. Production enterprises are required to complete and submit a general statistical survey on a monthly, quar-terly, and annual basis. To obtain data on com-mercial farms and household farms, general farm accounting surveys (household accounting books and commercial farm accounting books)

are carried out by the rural county administra-tions (akimats). The farm accounting surveys contain complete information on the area sown by each type of farmer. To determine the volume of agricultural production and average yields per hectare of the commercial farms and household farms, sample statistical surveys (sample size is 30 and 5 percent, respectively, of all farms) are conducted at semiannual and annual intervals.

2.8. A major statistical analysis at the rayon level for spring wheat was performed under this World Bank study. The World Bank ana-lyzed ARKS 17-year (1994–2010) time-series data on annual sown area, harvested area, crop production, and yield for spring wheat, with a breakdown into production enterprises and com-mercial farms, for each of the 118 rayons located in the eight oblasts selected for the analysis (Ak-mola, Kostanay, NKO, Aktobe, WKO, Pavlodar, EKO, and Karaganda). The quality of the data is, in general, very good. Only 4.6 percent of the data entries are missing. These time-series data enabled a series of useful analyses to be con-ducted. To date, preliminary analyses have been made of (a) the rayon-level, oblast-level, and na-tional-level distribution of crop exposure (value at risk) for spring wheat by type of farmer and overall, (b) the annual variation in spring wheat crop production and yields at the rayon level to identify the areas of higher yield-variability risk, and (c) to conduct simple correlation analysis with rainfall variables. Furthermore, these series were used to develop the risk assessment mod-els at the rayon level to assess the risk exposure for spring wheat as well as to establish expected yields and illustrative premium rates for (a) an individual grower MPCI program for spring wheat (see chapter 4 for further details) and (b) an area-yield index insurance (AYII) program for spring wheat (see chapter 5).

2.9. In Kazakhstan, there is no systematic monitoring and recording of loss or damage to spring wheat production arising from natural perils, including floods and droughts. In some countries, public sector organizations (minis-tries of agriculture or the agencies responsible

52 Kazakhstan

for natural disaster management) systematically record crop damage (area damaged and percent-age loss of crop production and yields) arising out of major natural or climatic events and the cause of loss; these estimates of damages often are used to determine compensation payments for farmers and rural households in the affected areas. Time-series crop damage data are there-fore very useful for analyzing the frequency and severity of major events. In Kazakhstan, neither the MoA nor the Ministry of Emergency Situ-ations 9 systematically records crop damage by

9 According the Ministry of Emergency Situations (written communiqué, March 5, 2011), between 1996 and 2010 no government financial disaster relief as-sistance was provided to farmers affected by natural disasters in Kazakhstan.

cause of loss; therefore, there is no national da-tabase of historical damages by cause of loss in crops. Without such a database, it was not pos-sible to use crop damage data in this report. In order to overcome this problem, the World Bank team sought to establish the relationship be-tween shortfalls in spring wheat yield and rain-fall, which made it possible to identify drought years. However, it was not possible to identify years with losses due to other perils such as hail or freeze.

climate and agro-ecological regions

2.10. Kazakhstan experiences a marked conti-nental and dry climate. Kazakhstan experiences a continental climate, with long cold winters

map 2.2 monthly rainfall distribution for selected oblasts in Kazakhstan

Source: Authors based on KHM rainfall data.


and very short hot summers and a short grow-ing season that varies from as little as 105 days in the north to 165 days in the south (Nomura 2008). Seasonal temperatures are polarized and vary depending on the region. Average winter temperatures during the day are −16°C to −18°C in the far north and about −6°C in the south; summer temperatures average 21°C in the north and 27°C in the south. Snow starts to fall around November, and the mountain passes are snow-bound until April and sometimes even into May. Precipitation in the spring wheat crop production areas is very low. Total annual rainfall in north-ern Kazakhstan averages from 280 millimeters in Aktobe to 400 millimeters in NKO. The rainfall in northern Kazakhstan is distributed throughout the year, with a peak during the months of June, July, and August. In southern Kazakhstan, rain-fall is also distributed throughout the year, but with peak rainfall in winter and a pronounced

dry season during the months of June, July, and August. In southern Kazakhstan, the total annual rainfall is higher than in northern Kazakhstan: for example, in SKO the average annual rainfall for the period 1990 to 2010 was 556 millime-ters. Although precipitation is higher in southern Kazakhstan on account of very high evapotrans-piration levels, most agriculture is dependent on irrigation. Map 2.2 shows the monthly distribu-tion of rainfall for eight oblasts in Kazakhstan.

2.11. In Kazakhstan, drought events are deter-mined by two important patterns of atmospher-ic circulation that affect interannual rainfall variability. The so-called “Azores high” affects rather homogeneously the entire country by gen-erating anticyclones (usually associated with dry conditions) that move from west to east, while the so-called “Siberian low” generates anoma-lies of opposite signs in the east and west of

map 2.3 agro-ecological zones in Kazakhstan

Source: Arka Consulting from KHM

54 Kazakhstan

Kazakhstan. A consequence of the interplay of these patterns of atmospheric circulation is that western and central Kazakhstan are usually dry, whereas more favorable conditions for agricul-ture are found in the northeast. 10 How wide-spread or localized a drought event may be is influenced by the interaction of such circulation patterns.

2.12. The country is divided into 16 agro-ecological zones according to temperature and availability of water for plant growth. The flat areas of the country can be divided according to the cumulative temperature suitable for grow-ing crops and the humidity factor measured by the hydrothermal ratio (HTR). Under this crite-rion, the territory of Kazakhstan can be divided into nine agro-climatic zones: from moderately warm (zone I) to very dry and hot (zone IX). The hilly and mountainous areas of Kazakhstan can be divided into seven additional natural land-scape zones (zones X to XVI). Temperature is higher in the south than in the north, with cu-mulative temperatures of 4,000оС in the south and 2,000оС in the north. Soil moisture content also varies from north to south. During the warm summer months, HTRs vary from 0.2 in the south to as much as 1.1 in the north (map 2.2). An HTR of 1.0–1.3 indicates a wet zone (forest steppe), 0.7–1.0 indicates an arid zone (steppe), 0.5–0.7 indicates a very arid zone (dry steppe), 0.3–0.5 indicates a dry zone (semidesert), less than 0.3 indicates a very dry zone (desert). Map 2.3 summarizes the agro-ecological zones of Kazakhstan.

overview of spring Wheat crop production in Kazakhstan

2.13. Kazakhstan is well endowed with land

10 “Anticyclone” conditions imply subsidence of moist air from top layers in the atmosphere—hence less condensation (dry conditions). “Cyclone” condi-tions imply convergence of moist air from surface at-mospheric layers—hence more cloud formation (wet conditions).

resources for agricultural production. The country has 76.5 million hectares of agricultural land. According to the 2006 agricultural cen-sus, 61 percent of the agricultural land in Ka-zakhstan is permanent pasture, and 32 percent is arable land (systematically cultivated for the production of row crops). Of the remainder, 3 percent is used for hay production and 4 percent is “long-term fallow” (indicating potentially ar-able land that has remained uncultivated for at least several consecutive years). Of the 24 mil-lion hectares of arable land, about two-thirds, approximately 18 million hectares, are devoted to grain production. Total sown area, including grains, forage crops (mostly perennial grasses), technical crops (chiefly oilseeds and cotton), and food crops (potatoes, vegetables, and melons) decreased sharply during the late 1990s due to the contraction of grain and forage-crop areas (USDA, FAS 2010).

2.14. Kazakhstan privatized its agricultural land in 2003, and today three types of legal en-tities are recognized. The first are agricultural enterprises (also termed production enterpris-es), many of which are former state collective farms that have been privatized. They include joint-stock companies, limited-liability partner-ships, and cooperatives and are located mainly in northern and central Kazakhstan. They are typically large-scale commercial grain-produc-ing companies. The second are peasant or indi-vidual farms (also termed commercial farms), which are generally less than 1,000 hectares and involved in commercial crop and livestock pro-duction. The third are household plots, which are not registered and consist of small family vegetable plots and livestock holdings that pro-duce mainly for self-consumption. As shown in table 2.1, in 2004 there were 2.2 million farms in Kazakhstan, the bulk of which, 93 percent, were household plots accounting for less than 1 percent of all arable land, but contributing to 50 percent of the value of agricultural output. At the other extreme, in 2004, the 4,600 production enterprises controlled nearly 13 million hect-ares or 59 percent of the total arable area, with an average size of farm of slightly greater than


2,800 hectares and with some farms as large as 400,000 hectares. Between 2004 and 2007, the total number of farms increased to 2.4 million. In spite of privatization in 2003, a freely func-tioning land market has been slow to develop, and much of the former state-owned arable land has not been privatized and instead is leased to private corporate farms under 49-year leases (World Bank 2010; Nomura 2008).

2.15. Kazakhstan is an important producer and exporter of high-quality wheat. Average annual production is about 13 million tons, but output is highly dependent on weather and in recent years has fluctuated between 10 million and 17 million tons per year. Between 2 million and 8 million tons are exported annually, mainly to destinations in Europe (including the Russian Federation and Ukraine), northern Africa, and Central Asia). Kazakhstan also produces around

2 million tons of barley and a small amount of oats, corn, and rice, but wheat is by far the coun-try’s most important commodity. The production of oilseeds (sunflower seed and rapeseed) is in-creasing, but total oilseed output remains well below 1.0 million tons per year. The country also grows a small amount of cotton in southern Kazakhstan, with annual lint output at around 100,000 tons (USDA, FAS 2010).

2.16. The main spring wheat crop production areas are situated in northern Kazakhstan. About 83 percent of the country’s spring wheat is produced in four oblasts located in north-central Kazakhstan: Kostanay, Akmola, Pavlo-dar, and NKO; 3 percent of the country’s wheat is produced in EKO, 4 percent is produced in Karaganda, and 7 percent is produced in western Kazakhstan (Aktobe and WKO). Spring wheat occupies 95 percent of the total wheat area in

table 2.1 Farm ownership structure in Kazakhstan, 2004 (or 2007)

Item

Commercial agriculture Subsistence

TotalProduction enterprises

(multiple ownership)

Commercial farms (individual

ownership

Household plots (individual ownership)

Number % Number % Number % Number %

Number of farms (2007)

7,340 0.3 194,550 8.1 2,206,870 91.6 2,408,760 100

Number of farms (2004)

4,600 0.2 156,000 7.2 2,000,000 92.6 2,160,600 100

Labor force (thousands)

326 14 280 12 1,782 75 2,388 100

Agricultural land (thousands of hectares)

43,420 56 34,228 44 325 0.4 77,973 100

Arable land (thousands of hectares)

12,921 59 8,816 40 231 1 21,968 100

Average arable farm size (hectares)

2,809 57 0.1 10

Gross agricultural output (KZT billions)

171 24 178 26 349 50 698 100

Source: World Bank 2010a; Nomura 2008.

56 Kazakhstan

Kazakhstan and virtually all of the wheat in the four north-central oblasts. Minor grains include spring barley and oats (which are grown in the same region as spring wheat), winter wheat (southern Kazakhstan), and rice (southern Ka-zakhstan, mostly in Kzylorda). Out of the total area planted with spring wheat in northern Ka-zakhstan, 68 percent is planted by large agribusi-ness enterprises (farms with more than 1,000 hectares of wheat), while the remaining 32 per-cent is planted by commercial farms (farms with between 100 hectares and 1,000 hectares). Map 2.4 shows the area planted with spring wheat (in hectares) in the eight oblasts of northern and central Kazakhstan at the rayon level. The most important spring wheat rayons—with between 320,000 hectares and 640,000 hectares of spring wheat—are located in Kostanay, NKO, and Ak-mola. Conversely in many rayons in EKO and WKO, the area planted with spring wheat is less than 2,500 hectares.

2.17. In northern Kazakhstan, on account of the extreme winter climate, all wheat is spring sown and depends on a combination of snow-melt and summer rainfall. Planting of spring wheat commences in mid-May, once the winter snows have melted and average soil tempera-tures have achieved the minimum temperatures (12˚C–15˚C) for seed germination and crop growth. In northern Kazakhstan there is a very narrow fortnight’s window for sowing spring wheat of between May 15 and May 30, accord-ing to the region. Wheat that is planted beyond the end of May is exposed to early autumn frosts from the beginning of September. Given the very low spring and summer average rainfall in much of northern Kazakhstan, the level of win-ter snowfall and thus snowmelt at the time of sowing is a critical factor in determining the suc-cess of the spring wheat crop: indeed, farmers and scientists who were spoken to as part of this study advised that they could predict in April or

map 2.4 area planted with spring Wheat at the rayon level in northern Kazakhstan

Source: Authors from ARKS data.


May whether the harvest would be successful, according to the quantity of accumulated winter snowfall. The main varieties of spring wheat are 90-day to 110-day varieties, and harvesting nor-mally starts in late August and runs through to mid-September.

2.18. Most spring wheat in Kazakhstan is grown under extensive farming systems us-ing low levels of technology and requiring low production costs. Spring wheat production is mechanized, using technical practices that date back to Soviet Union times. Technology levels are generally low, and the use of chemical fer-tilizers is extremely low for most farmers. In order to produce 1 metric ton of spring wheat, recommended fertilizer rates are on the order of 35–45 kilograms of nitrogen, 8–12 kilograms of phosphorous, and 17–27 kilograms of potas-sium. However, average fertilizer use is much lower than recommended. In general, produc-tion enterprises have better access to production credit and use higher levels of purchased inputs of seed, fertilizers, and equipment than commer-cial farms. In 2010 average costs of production for wheat varied widely, from a low of about KZT 5,000 (US$35) per hectare11 for the lowest-technology producers to a high of about KZT 20,000 (US$140) per hectare and occasionally as high as KZT 25,000 (US$170) per hectare for the highest-technology producers.

2.19. Wheat prices in Kazakhstan tend to be very volatile. Average farm-gate prices paid to farmers between 2006 and 2010 varied sig-nificantly: from a low price of KZT 12,600 (US$104) per metric ton in September 2006 to as high as KZT 31,000 (US$261) per metric ton in September 2008, which was a severe drought year when total production was significantly re-duced. Prices averaged KZT 25,000 (US$172) per metric ton in September 2009, which was a good year for spring wheat, and rose sharply to about KZT 35,000 per metric ton in 2010, which was a very severe drought year. The Food Con-

11 At a 2010 exchange rate of KZT 145 = US$1.00

tract Corporation, a state-owned enterprise, is a major player in the Kazakhstan grain market and was established by government to maintain grain reserves and to stabilize grain prices for the benefit of producers and consumers. Annu-ally it purchases some 10 to 15 percent of the wheat market and appears to have a strong influ-ence on farm-gate wheat prices paid by the rest of the market. In view of the wide fluctuations in wheat prices, returns to wheat production are highly variable: in times of high wheat prices, farmers who incur low average costs of produc-tion can make high profits if they achieve aver-age yields of about 10 centners (1 metric ton) per hectare.12

2.20. Spring wheat average yields in Kazakh-stan are low. On account of the marginal climate, long-term soil degradation, and low technology use, average yields for spring wheat were about 10.1 centners (1.1 metric tons) per hectare over the past five years. This compares unfavorably with, for instance, Canada, which has similar climatic conditions and where yields reach 27 centners (2.7 metric tons) per hectare, or Aus-tralia, which has a similar extensive crop system and harvests an average of about 18 centners (1.8 metric tons) per hectare of wheat. Spring wheat yield performance is more variable for com-mercial farms than for larger production enter-prises. While the spring wheat average yield for commercial farms was 9.6 centners per hectare for the most recent five years, the spring wheat average yield for production enterprises was 7.5 percent higher, or 10.3 centners per hectare, for the same period. The main reason that produc-tion enterprises achieve higher average yields for spring wheat than commercial farms is that they use improved seeds and fertilizers and im-proved tillage practices. Spring wheat yield per-formance is also uneven throughout the north-ern areas of the country. The best performance for spring wheat crops is in the rayons situated in the northern areas of NKO and Kostanay. In these areas, average spring wheat yields are

12 1 centner is equal to 100 kilograms.

58 Kazakhstan

above 12 centners per hectare. The worst per-formance for spring wheat crops is observed in WKO, Aktobe,13 southern regions of Karaganda, and southwest of Pavlodar. In these areas, spring wheat rayon-level five-year average yields are below 6 centners per hectare. Map 2.5 summa-rizes the geographic distribution of spring wheat yields at the rayon level throughout the eight selected oblasts in northern Kazakhstan. Further details of this analysis are provided in annex 1.

2.21. Spring wheat crop production and yields improved significantly during the last decade. Average spring wheat yields in the main produc-tion areas in northern Kazakhstan reached 10.1

13 Average spring wheat yields are somewhat high-er in two of the most westerly rayons of WKO, and this also applies to two rayons located in northern Aktobe.

centers per hectare. Crop management practices fueled by expanding state subsidies contributed to higher and more stable wheat yields. Begin-ning in 2002, government support for agriculture increased significantly in the form of reduced (subsidized) prices for fuel, seeds, fertilizer, and agricultural chemicals. The average wheat yield for 2005 through 2009 was 13 percent higher than the average yield for 1986 through 1990, which was the peak of the so-called intensive technology movement in the Soviet Union. One of the most interesting recent developments in Kazakhstan agriculture has been the introduc-tion and spread of reduced-tillage technology. According to MoA figures, reduced tillage was employed on almost 60 percent of the sown grain area in 2009, including 1.3 million hectares un-der zero tillage. The sector also increased the use of fertilizers and certified seeds. The application rates for mineral fertilizer increased nearly six-fold between 1999 and 2010 and continue to in-

map 2.5 average spring Wheat Yields per rayon in northern Kazakhstan, 2006–10

Source: Authors based on ARKS spring wheat yield data.


crease due, in part, to the subsidies on fertilizer prices. Perhaps the most important technologi-cal factor contributing to the improvement in Kazakhstan grain yield has been the increase in the use of certified seeds. The government has been providing support to agricultural research facilities, paying 40 percent of the research and development costs for breeder and foundation seeds. Most spring wheat enterprises use only first-reproduction seed. However, the inventory of machinery is becoming outdated (particularly among commercial farmers) and has declined significantly over the past 20 years. Figure 2.1 shows the evolution between 1994 and 2010 in the sown area and yields of spring wheat in the eight selected oblasts in northern Kazakhstan.

2.22. Spring wheat crop production is particu-larly risky in Kazakhstan. Kazakhstan has a very high variation in yield, as expressed by the co-

efficient of variation (CoV), in national average spring wheat yields: 29 percent, compared to 5 percent in the European Union and 8 percent in Canada.14 The northernmost areas of the country are less risky for spring wheat production than the southern, western, and eastern areas. In the rayons situated in NKO, the north of Kostanay, and the northwestern areas of Akmola, the CoV for spring wheat yields is less than 40 percent. In the rayons situated in the south of Kostanay and the eastern parts of Akmola, the CoV for spring wheat yields is between 40 and 50 per-

14 The CoV is the standard deviation about mean annual yield divided by the mean yield and expressed as a percentage. A CoV of more than 100 percent shows that the standard deviation is larger than the mean yield—in other words, crop yields are highly variable.

Figure 2.1 spring Wheat sown area and Yields in northern Kazakhstan, 1994–2010

Source: Authors based on ARKS data.

7.3

5.0

6.3

7.5

4.0

12.4

8.7

11.6

10.19.5

7.78.4

10.8

12.7

9.4

11.3

6.4

y = 1.6032ln(x) + 5.6195R = 0.25203

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

North Kazakhstan Region: Evolution of Spring Wheat Sown Area and Yields

Sown Area (million hes) Yield (Centner/he) Log.(Yield (Centner/he))

60 Kazakhstan

cent. In Karaganda and western areas of EKO, the CoV for spring wheat is mostly between 50 and 60 percent, except for the rayons situated in the mountainous areas of EKO, where the CoV is between 40 and 60 percent. Pavlodar shows a high CoV for spring wheat production at the ray-on level: on average, between 50 and 70 percent. The oblasts situated in the western areas of the country show the highest level of risk for spring wheat production. For instance, in WKO the av-erage CoV at the rayon level for spring wheat is between 70 and 100 percent. Map 2.6 summariz-es the distribution of the CoV for spring wheat at the rayon level in the eight selected oblasts in north-central Kazakhstan.

2.23. Spring wheat crops produced by produc-tion enterprises are less risky than spring wheat crops produced by commercial farms. The pro-duction enterprises, through their use of higher levels of inputs and technology, tend to achieve

both higher and less variable (and therefore less risky) average yields in spring wheat over time than the commercial farms. The analysis of vari-ance in spring wheat yields for the 17-year se-ries from 1994 up to and including 2010 found that the observed CoV is, on average, 10 percent lower for production enterprises than for com-mercial farms. This difference is accentuated in the main spring wheat production areas of Ko-stanay, NKO, and Akmola, where the observed CoV of rayon-level spring wheat yields is 16, 27, and 25 percent lower, respectively, for pro-duction enterprises than for commercial farms. The main reason for the differences between production enterprises and commercial farms is the introduction of technologies that conserve soil moisture, such as zero tillage, which enables the crop to perform better during the recurrent droughts that effect Kazakhstan’s grain-produc-ing regions.

map 2.6 coefficient of variation of spring Wheat Yields at the rayon level in northern Kazakhstan

Source: Authors based on ARKS spring wheat data.


Key climatic perils and impact on crop production and Yields

2.24. In northern and central Kazakhstan, spring wheat production and yields are highly influenced by climatic and biological factors. Drought is the most pervasive peril affecting rain-fed crop production in northern Kazakh-stan. Spring wheat crops can also be damaged by hailstorms and autumn early frost. Pests and diseases, mainly fungal diseases like leaf blotch caused by Septoria tritici and rust caused by Puccinia tritici, are also common.

2.25. Spring wheat yields in Kazakhstan are highly influenced by the occurrence of droughts.15 Reasonably high yields can be achieved during years with adequate rainfall, but the country is subject to frequent droughts and is considered a zone of risky agriculture. Histori-cally, Kazakhstan grain production suffers from serious drought two out of every five years. As a result, crop production and yields are marked by frequent and sharp year-to-year fluctuations. The aggregate annual average spring wheat yields for the eight selected oblasts in the northern and central regions of Kazakhstan are highly corre-lated with the cumulated rainfall and snowfall index from January to September, as shown by the overall correlation coefficient (aggregate for the eight oblasts) of 73 percent.16 This strong re-lationship between spring wheat average yields and cumulated rainfall between January and September is also evidenced at the oblast level. In this regard, all of the selected oblasts in north-ern and central Kazakhstan, except NKO and Karaganda, show correlation coefficients for an-

15 For a more detailed indication of how the cor-relation coefficients were determined, see the note to figure 2.2.

16 The correlation coefficient or R value in this case is interpreted to mean that 73 percent of the variation in oblast annual yields is explained by the variation in total January to September rainfall each year. This means that the remaining 27 percent of yield varia-tion is due to variables other than rainfall.

nual average spring wheat yields and cumulated rainfall and snowfall between January and Sep-tember of each year that are above 0.65 (65 per-cent). Figure 2.2 shows the relationship between spring wheat annual average yields and the total cumulated snowfall and rainfall from January to September for the period 1994 to 2010.

2.26. Spring wheat farmers in Kazakhstan suffer severe losses due to drought. Between 1994 and 2010 crop years, spring wheat suf-fered significant crop losses on six occasions: 1995, 1996, 1997, 1998, 2004, and 2010. This study estimated the value of the historical spring wheat production losses in each year (see the summary in figure 2.3 and annex 1 for further details). In 1995 a drought affected Kostanay and Karaganda, causing estimated production losses in the spring wheat crop valued at KZT 74.4 billion (equivalent to a 26 percent reduction in the value of production).17 In 1996 a severe drought affected the western part of the country (WKO and Aktobe), and a moderate drought af-fected the eastern oblasts (Pavlodar and EKO). The total losses due to the 1996 event amounted to KZT 46.4 billion (or a 15 percent reduction in the value of production). In 1997 the spring production areas in Kazakhstan were affected by drought again. On this occasion, the reduc-tion in the total value of production was only 4 percent of the expected value for that year. The year 1998 was one of the worst years for drought damage in spring wheat crop production. The 1998 drought was particularly severe in WKO, Aktobe, Kostanay, and Akmola, but also affect-ed NKO, Pavlodar, and Karaganda. The event caused a 51 percent reduction in total expected value of spring wheat crop production (a loss of KZT 179.4 billion). The years 2004 and 2005 were also dry. The total estimated value of losses amounted to KZT 74 billion (18 percent) in 2004 and KZT 49.1 billion (12 percent) in 2005. The

17 Losses calculated in terms of gross value of pro-duction lost due to yield shortfalls in respect of the expected yield for each of the years, assuming sown area and prices are equal to the most recent five-year average.

62 Kazakhstan

Source: Authors from KHM and ARKS data.

Note: Correlations are computed by (a) cumulating for the January–September period precipitation measured at each of the weather stations for which monthly data were made available by the KHM, (b) taking the simple average of each pair of stations belonging to the same oblast, and (c) relating the cumulated precipitation index with oblast-level spring wheat yield data. The northern-central Kazakhstan rainfall index is calculated by aggregating the oblast cumulative precipitation indexes as a share of each of the oblasts on the average spring wheat planted area for the period 2006–10.

Figure 2.2 spring Wheat Yields and total cumulated snowfall or rainfall in northern and central Kazakhstan from January to september, 1994–2010


dry conditions in Pavlodar and eastern Kazakh-stan during 2008 also caused losses in spring crop production. Most recently, in 2010, a dev-astating drought affected the main spring wheat crop production areas throughout much of the country (Kostanay, Akmola, Karaganda, NKO, and Pavlodar), causing losses amounting to KZT 158.5 billion, equivalent to a shortfall of 58 per-cent compared with the expected gross value of spring wheat production of KZT 274.4 billion. Figure 2.3 shows the spring wheat crop produc-tion losses from 1994 to 2010.

2.27. Hail is reported to be a moderate to se-vere problem in spring wheat in some parts of the country. Many parts of Kazakhstan experi-ence hail in early and mid-summer associated with major rainstorms: the months of peak hail activity are May to July, as shown by the data on monthly hail incidence for selected weather sta-

tions. For example, at Kostanay weather station, the return period for a hail event in the month of May is one in three years; in the month of Au-gust, it is one in eight years (table 2.2). Hail is a localized peril that tends to cause severe damage in wheat at the time of crop maturity and harvest in August and early September; these months tend to have a lower hail exposure.

2.28. Early autumn frost can be a problem for spring wheat crop production in some ar-eas of northern Kazakhstan. The occurrence of early autumn frosts during late August and the beginning of September may damage wheat crops that were sown late in the season. Early frost damage affects wheat crops when they are in milk grain or dough phenology stages prior to harvest. The damage occurs when temperatures fall below −2°C for more than two hours. Loss-es due to early autumn frost can be moderate to

Figure 2.3 gross value of production of spring Wheat lost due to droughts in Kazakhstan, 1994–2010


0.0

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64 Kazakhstan

severe. Historical records of monthly absolute minimum temperatures indicate that the return period for frost below −2°C during the last week of September is once in 20 years for some loca-tions in Akmola, Karaganda, Kostanay, and Pav-lodar. The probability of having an early frost increases dramatically for each week beyond the last week of September.

2.29. Spring wheat is susceptible to locust at-tacks in northern Kazakhstan. Locust attacks are relatively common in northern Kazakhstan, and the country has suffered recurrent crop and pas-ture damages from locusts. There are two main species of locusts in Kazakhstan: (a) the “Asian” locust, which is not considered a major problem, and (b) the Italian locust (Callitamus italicus), which is the most common and dangerous pest in nearly all of Kazakhstan. In 1999 the country experienced a severe outbreak of Italian locusts. This species has a peak cycle of 10 to 12 years, so the next outbreak is expected in 2010 or 2011.18 The scale of the problem increased dramatically after independence (during 1996–2001), when cessation of state subsidies for wheat production in the northern steppes led to the abandonment

18 “Kazakhstan: Locust Invasion in West under Control, Officials Say.” IRIN Asia, July 10, 2007. http://www.irinnews.org/report.aspx?reportid=73155.

of up to one-third of the former wheat lands. The resulting mosaic of weedy fields, pastures, and bare ground provides ideal breeding grounds for locusts. In 1999 more than 7 million hectares were invaded by Italian locusts, and 220,000 hectares of crops were destroyed, causing total damage equivalent to US$15 million. In 2008, again, more than 200,000 hectares of crops were destroyed in SKO (Latchininsky and Sivanpillai, 2010). The government was forced to conduct a massive chemical control campaign throughout the country with assistance from the Food and Agriculture Organization.

2.30. Spring wheat fungal leaf diseases are also a problem for spring wheat production in Kazakhstan. Despite the dry climate, cultivation of susceptible varieties results in epidemics of leaf rust on average in one year out of four, af-fecting over 1 million hectares, with yield losses of up to 25–30 percent. Excess moisture and high humidity during the month of July gener-ate conditions conducive to the development of rust. Most of the wheat cultivars planted in the region are susceptible to leaf rust, although sev-eral resistant lines and new varieties have been tested in recent trials (Morgounov, Rosseeva, and Koyshibayev 2007). Stripe rust, caused by Puccinia striiformis f. sp. tritici, is considered the most important disease of wheat in Central Asia and the Caucasus. Although stripe rust has

table 2.2 monthly return period for the occurrence of hailstorms in Kazakhstan

number of years

OblastRecurrence period for hailstorms for each month throughout the year

I II III IV V VI VII VIII IX X XI XII

Kostanay 42 5 3 6 8 21 84

Akmola 5 8 5 13 63

NKO 7 5 11 5 7

Pavlodar 21 8 9 7 30 10 63

SKO 11 4 3 8 11 21 42 42 42

Source: KHM hail frequency statistics for 1990–2010.


been present in the region for a long time, it has become a serious constraint to wheat production in the past 10 years. Rust attacks were observed in northern areas of Kazakhstan in 2007 and in 2009.

assessment of crop production risk exposures

spring Wheat values at risk

2.31. The total spring wheat values at risk (VaR) in northern Kazakhstan are KZT 452 billion (about US$3.0 billion).19 The bulk of

19 For the purpose of evaluating spring wheat pro-duction, an average price of KZT 3,210 per centner was considered. This price is the result of the aver-age spring wheat farm-gate price for the month of harvest (September) for the three most recent crop seasons (2008, 2009, and 2010).

spring wheat production in Kazakhstan is con-centrated in a relatively small area. Out of the KZT 452 billion in total spring wheat VaR, 87 percent (KZT 392 billion) is concentrated in a relatively small area of approximately 240,000 square kilometers comprising NKO, the north-ern rayons of Kostanay, and the northern and western rayons of Akmola. The remaining 13 percent of spring wheat VaR, or KZT 56 bil-lion, is distributed throughout a vast area that comprises EKO, Pavlodar, Karaganda, Aktobe, WKO, rayons located in the south of Kostanay, and rayons located in the east of Akmola. Map 2.7 summarizes the geographic distribution of spring wheat VaRs at the rayon level throughout the eight selected oblasts in northern Kazakh-stan. Further details of this analysis are provided in annex 1.

2.32. Because 87 percent of spring wheat risk exposure is concentrated in a relatively small geographic area of northern Kazakhstan, the

map 2.7 spring Wheat risk exposures in northern Kazakhstan


66 Kazakhstan

chances of experiencing catastrophic losses in spring wheat crop production are high. There is a huge accumulation of risk in the area com-posed of NKO, the northern rayons of Kostanay, and the northern and western rayons of Akmo-la, and the chances of experiencing a systemic event affecting the main part of the spring wheat crop portfolio are high.

2.33. The major spatial differences in spring wheat VaRs will need to be addressed carefully in the redesign and strengthening of the obliga-tory crop scheme for spring wheat production. The purpose of any crop insurance scheme is to spread risk optimally both spatially and tempo-rally. The concentration of VaRs in NKO, the northern rayons of Kostanay, and the northern and western rayons of Akmola will need to be assessed closely under the redesign and strength-ening of the exisiting obligatory crop insurance scheme.

expected value of spring Wheat crop losses

2.34. The expected value of losses for spring wheat crops at the rayon level for each of the eight selected oblasts in northern Kazakhstan was estimated. The estimation was based on an analysis of variance in time-series average wheat yields in each zone under the CRAM model (see annex 1 for full details of the model’s assump-tions).

2.35. The analysis of expected losses shows that spring wheat production in Kazakhstan is extremely risky, with annual average ex-pected losses valued at KZT 66.5 billion (about US$443 million). The annual average expected losses for spring wheat are valued at KZT 66.5 billion per crop year (US$443 million), equiva-lent to 14.7 percent of the total spring wheat VaR of KZT 452 billion. However, within northern Kazakhstan, some oblasts and rayons are more

map 2.8 expected losses for spring Wheat in northern Kazakhstan

Source: Authors from CRAM.


risky than others. Map 2.8 shows the average ex-pected losses for spring wheat crop production, expressed as a percentage of the VaR in each of the rayons in northern Kazakhstan.

2.36. The highest average annual expected losses in spring wheat are in Aktobe and WKO located in western Kazakhstan. Within these two oblasts, only two rayons in western WKO and two rayons in northern Aktobe have annual average expected losses of less than 25 percent. In all other rayons, the average annual expect-ed losses for spring wheat are extremely high, at between 25 percent to more than 38 percent of the total values at risk. These annual average expected losses are equivalent to a total loss of spring wheat production one in every three to four years. This indicates that the western zone of Kazakhstan is very marginal for spring wheat crop production.

2.37. Conversely, spring wheat production is much less risky in the northern oblasts of NKO, Kostanay, and Akmole. In rayons such as those situated in NKO, the northeastern and southern areas of Akmola, and the northern area of Kostanay, the annual average expected loss for spring wheat ranges between 10 to 15 per-cent of total VaR. The rayons of Pavlodar and the western areas of EKO can be considered as intermediate with regard to the risks for spring wheat production. In these rayons, the average expected losses range between 18 and 27 per-cent. Finally, a vast geographic area compris-ing the center and south of Kostanay, the center and east of Akmola, most of Karaganda, and the eastern rayons of EKO has acceptable levels of expected losses. In these areas, the average ex-pected loss per hectare averages from 15 to 18 percent of the total VaR.

2.38. The analysis of expected losses also found that spring wheat produced by com-mercial farms is much more risky than spring wheat produced by production enterprises. An-nual expected losses for spring wheat produced by production enterprises are 22 percent lower, on average, for the whole of northern Kazakh-

stan than the annual expected losses for spring wheat produced by commercial farms. While the annual average expected losses for spring wheat produced by commercial farms are 17.24 percent of the total spring wheat VaR produced by them, the average expected losses for spring wheat produced by production enterprises are only 13.39 percent. The main reason for these differences is that production enterprises man-age their production risks better than commer-cial farms (they have more working capital and better machinery) and use soil moisture conser-vation technologies (such as zero tillage). The fact that the expected losses of spring wheat crops are lower for production enterprises than for commercial farms is an important finding that should be taken into consideration in the de-sign of any individual grower loss of yield crop insurance scheme. The eventual modification of the current scheme should recognize the risk management efforts implemented by the differ-ent types of farms insured.

2.39. The analysis of 17-year (1994–2010) rayon-level yields for spring wheat in NKO shows that 1998 was the worst loss year in this series, with total production losses of 7.7 mil-lion metric tons of spring wheat, equivalent to a financial loss of 41.6 percent of the total expected value of spring crops in northern Ka-zakhstan. Although 1998 was a year of severe loss for spring wheat production in northern Kazakhstan, even worse crop losses could oc-cur in the future. From an insurance viewpoint, underwriters need to know with a high degree of confidence the maximum losses that they might incur (termed the probable maximum loss, PML)20 either one in 100 years or, to be even more conservative, one in 250 years. This information is an invaluable aid to structuring an insurance and reinsurance program and to

20 The probable maximum loss is defined as “an estimate of the maximum loss that is likely to arise on the occurrence of a single event considered to be within the realms of probability, remote coinci-dences and possible but unlikely catastrophes being ignored.”

68 Kazakhstan

determining how much capital must be reserved to cover the PML year.

2.40. The World Bank’s PML cost analysis at 100 percent yield coverage found, for northern Kazakhstan, the 1-in-10-year expected PML is equivalent to a loss of 34.0 percent of the total value at risk for spring crop or a loss of KZT 153.6 billion (US$1.02 billion), while the 1-in-100-year PML is equivalent to a loss of 54.61 percent of the total VaR for spring crop or a loss of KZT 246.8 billion (US$1.6 billion). These PML estimates show that the spring wheat crop in northern Kazakhstan is very exposed to cata-strophic (mainly drought) losses and that these losses greatly exceed the retention capability of local insurance companies (figure 2.4). The PML presented in this report is preliminary and will need to be developed further to (a) establish the catastrophe loading that must prudently be added to the calculated base rates and (b) assist

in the design of a risk financing and risk reten-tion and risk transfer or reinsurance strategy for the Kazakhstan insurance market.

2.41. The PML cost analysis at 100 percent yield coverage found that commercial farms are more exposed than production enterprises to catastrophic losses in northern Kazakhstan. The 1-in-100-year expected PML is equivalent to a loss of 58.0 percent of VaR for commercial farms and a loss of 55.7 percent of VaR for pro-duction enterprises.

conclusions of the spring Wheat risk assessment

2.42. The analysis of rayon-level crop produc-tion and yields for spring wheat in northern Kazakhstan shows that this crop is heavily ex-posed to losses caused by droughts. This is evi-denced by the average loss cost estimated by the

Figure 2.4 probable maximum losses for the spring Wheat portfolio in northern Kazakhstan

Source: Authors from CRAM.

34% - KZT 154 billion

50% - KZT!225 billion

54% - KZT 247 billion57% - KZT 263 billion

60% - KZT 271 billion61% - 277 billion

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CRAM for a 17-year period, 1994 up to 2010, of 14.71 percent of the total value at risk in spring wheat production and a calculated 1-in-100-year PML of 54 percent of the national gross value of spring wheat production.

2.43. The design of any crop insurance pro-gram for spring wheat in northern Kazakhstan should take into account the differences in ex-pected yields and yield variability by rayon. The analysis of expected yields and expected yield variability for the different rayons in north-ern Kazakhstan showed different levels of risk for spring wheat and, therefore, different rates across the different rayons in the region.

2.44. The design of any crop insurance pro-gram for spring wheat in northern Kazakhstan

should also take into account the differences in expected yields and risk between production enterprises and commercial farms. In Kazakh-stan there are important differences in the level of technology used by different types of farmers to grow spring wheat. Even when they are situ-ated in the same region, their yields are different, and their crops perform differently under similar crop stress (for example, drought) situations. In the case of spring wheat production in northern Kazakhstan, production enterprises perform better than commercial farms, in terms of both quantity and stability of yield. The reasons for these differences in the spring wheat yields of production enterprises and commercial farms should be taken into consideration when design-ing future crop insurance products and schemes in Kazakhstan.

70 Kazakhstan

3.1. This chapter reviews the compulsory crop insurance program, including its key fea-tures, results, and financial performance, and highlights its issues and drawbacks. Chapter 4 considers options for strengthening the pro-gram.

policy and regulatory Framework for crop insurance

3.2. Kazakhstan has a history of state-sup-ported compulsory agricultural insurance. During the Soviet period, a national compulsory crop insurance scheme operated from 1970 to 1991, and all state and collective farms partici-pated in it. The scheme was based on a multiple-peril crop insurance (MPCI) cover that provided limited indemnity for loss of production costs invested in growing the crop. Following inde-pendence in 1991, there was no crop insurance in Kazakhstan for the next decade.

3.3. The current crop insurance system in Kazakhstan is a public-private partnership (PPP) that was created by law in 2004. Law no. 533-II of March 10, 2004, established the legal and regulatory framework and the financial and organizational basis for implementation of a na-tional crop insurance program in Kazakhstan. A copy of the law is attached in annex 2. The law sets out the terms and conditions for imple-mentation of a compulsory salvage-based loss of investment costs (LIC) crop insurance program for farmers growing a range of strategic cereal, oilseed, and other field crops in Kazakhstan. The implementing agencies are the Direction of Strategic Planning of the Ministry of Agriculture

(MoA), the Fund for Financial Support for Ag-riculture (FFSA), the private and mutual insur-ance companies, and the local authorities in each oblast and rayon.

3.4. The crop insurance law in Kazakhstan is aimed at meeting three objectives. The first objective is to protect farmers against loss of their crop production due to the effects of ad-verse weather events. Kazakhstan is one of the most exposed countries in the world to losses in spring wheat caused by drought, followed by late spring and harvest frosts, hail, and, to a lesser extent, excessive rain and flooding as well as crop pests and diseases. The Government of the Republic of Kazakhstan (GRK) seeks to protect small and medium farmers from bank-ruptcy following major crop losses by provid-ing subsidized crop insurance for the main crops grown in Kazakhstan. The second objective is to assist farmers in gaining access to rural finance by protecting their crop loans against default due to weather-induced crop failure. The third objec-tive is to enhance the effectiveness of govern-ment support programs for crop production.

3.5. The current crop insurance system in Ka-zakhstan is compulsory by law. The law states that all farmers in Kazakhstan who produce a series of strategic crops, including cereals, oil-seeds, sugar beets, and cotton, are obliged to purchase crop insurance; otherwise, they cannot obtain access to other government-subsidized programs supporting agriculture and are sub-ject to the application of financial penalties by the GRK. Under the compulsory crop insurance program, all private commercial insurance com-

chapter 3: Review of Kazakhstan Crop Insurance Program


panies and farmer mutual associations licensed to operate crop insurance are equally obliged to offer crop insurance and to insure all of the insur-ance proposals received regardless of the quality of the risk. The only reason that an insurer may refuse to conclude a compulsory contract of in-surance cover is if the insured farmer has failed to submit his or her application and to complete the insurance contract, including the payment of premium, by the agreed cutoff date.

3.6. The Law of Compulsory Crop Insurance is very comprehensive and specifies the terms and conditions of the standard crop insurance policy that is offered throughout Kazakhstan. The law prescribes the terms and conditions of the standard LIC crop insurance policy that all insurance companies are obliged to adhere to, including the insured crops and insured perils, the amount of the sum insured for each crop grown in each oblast and rayon, which is based on three optional levels of crop production in-vestment costs, and the minimum and maximum premium rates that can be charged for each crop in each oblast in the country. The law also states the basis of indemnity and loss assessment pro-cedures that apply on the standard LIC policy.

3.7. The law specifies the GRK’s financial support to the compulsory crop insurance pro-gram. In addition to its statutory and regulatory roles in setting the terms and conditions of the program, the GRK also provides financial sup-port in the form of a 50 percent reimbursement of paid claims to the private and mutual insur-ance companies each year. The settlement of the 50 percent claims is administered through the FFSA. Under the law, the GRK is also respon-sible for funding the FFSA’s operating costs.

compulsory crop insurance policy terms and conditions

3.8. The Kazakhstan compulsory crop insur-ance policy is a loss of yield policy that indemni-fies the insured when the value of the harvested production falls short of the costs invested in growing the crop due to an insured peril. The

policy is sometimes referred to as a salvage-based loss of yield policy because it only indem-nifies crop production losses at the point when the sales value (revenue) of any residual har-vestable crop production (termed the “salvage”) is inadequate to cover the costs of production invested in growing the crop up to the time of loss. Alternatively, this policy is called a loss of investment costs crop insurance policy (“loss of investment cost” policy for short).

3.9. A key potential advantage of the LIC policy is that it can be used in situations where there are no accurate historical records of indi-vidual farmer crop production and yield. A con-ventional individual grower loss of yield policy requires each grower to provide data on between five and 10 years of their actual crop produc-tion and yields in order to establish an average or normal yield and then to establish an insured yield against which to measure yield reduction or loss due to an insured peril. In Kazakhstan, few farmers can provide an accurate history of their crop yield. The LIC policy can, however, be offered to individual growers in situations where data on yield history are not available, because the basis of indemnity does not depend on measuring yield loss against a preestablished insured yield. The LIC policy establishes a sum insured based on the production costs invested in growing the crop; in the event of a loss due to an insured peril(s), the policy makes an indemnity payment when the estimated sales value of the salvage is inadequate to cover the costs invested in the crop at the time of loss.

3.10. The main drawback of the LIC policy is that, in the event of partial crop area or produc-tion losses, the remaining or salvageable crop yield has to be measured on a field-by-field ba-sis and the value of the salvage estimated. This method of loss adjustment is a time-consuming and costly exercise.

3.11. The LIC policy has been extensively pro-moted in various countries for more than 30 years. It is usually linked to bank lending in the form of seasonal crop loans and is found in Mex-

72 Kazakhstan

ico, in other parts of Central and South America, and in several Eastern European countries.

3.12. This section reviews the key features of the Kazakhstan compulsory LIC policy. A sum-mary of the main terms and conditions of the policy wording, which is termed the Standard Form of Compulsory Crop Insurance Contract, is contained in box 3.1, and full details are pre-sented in annex 2.

compulsion of cover

3.13. Kazakhstan is one of very few coun-tries in the world where crop insurance cover is compulsory for all farmers who grow cere-als, oilseeds, and other strategic crops. Because crop insurance cover is legally enforceable, a farmer who deliberately avoids purchasing crop insurance is penalized by heavy fines. Currently about 100 countries offer some form of pub-

box 3.1 summary of terms and conditions of cover of the Kazakhstan standard compulsory lic crop insurance policy

type of cover. The underlying basis of insurance and indemnity is a salvage-based loss of yield policy.

insured interest. The main crops insured are spring and winter wheat, spring and winter barley, winter rye, buckwheat, oats, millet, maize (grain), chickpeas, peas, brassica, rice, sunflower, safflower, soybeans, sugar beets, and cotton.

location. All crop-growing regions in Kazakhstan are covered.

criteria for acceptance of risk or compulsion of cover. Crop insurance is compulsory for all producers of the above insurable crops throughout Kazakhstan.

insured perils. Cover is provided against loss or damage to crop production due to “adverse weather events,” defined as (a) long-lasting natural phenomena (drought, frost, low temperatures, excess moisture in the soil, excess moisture in the air, flooding, and shallow dry wind) and (b) short-lasting natural phenomena (hail, excessive rain, frost, strong wind, and mud flow).

cover period. Cover is provided from the time of sowing of the insured crop through to completion of harvest.

insured unit. For each farmer, the insured unit is defined as a “field.” The insured is obliged to declare and insure each and every separate field of the insurable crop(s) and to submit a map of the field locations.

sum insured. The sum insured is based on the normative costs of production for 1 hectare of the insured crop, multiplied by the insured area. The insured is permitted to select from three optional levels of normative costs of production: (a) science-based agricultural technology, (b) simplified agricultural technology, and (c) costs of fuel and lubricants, seeds, and wages.

deductible (franchise). The compulsory insurance law prohibits the use of franchises or deductibles.

basis of indemnity and claims settlement. Where the action of insured perils causes the actual value of harvested production (salvage) to fall short of the costs of production invested in growing the crop (the sum insured), the policy indemnifies the amount of shortfall. In the event of a total loss, the indemnity is the sum insured for 100 percent of the damaged area. In the case of a partial loss of area or yield, the salvage (harvestable production) from the affected area is estimated in field at the time of harvest and valued at the prevailing sales price of the crop. Where the value of salvage (crop revenue) falls short of the investment costs, the shortfall is indemnified.

exclusions. Any losses that occur due to causes other than “adverse weather events” are excluded.

other conditions. Cover is only binding from the time of payment of premium by the insured.

Source: Authors based on the Standard Form of Compulsory Crop Insurance Contract (see annex 2).


lic, private, or PPP agricultural insurance (Ma-hul and Stutley 2010), and agricultural insur-ance is compulsory in China (compulsory only for swine epidemic diseases), Cyprus (for all crops), Japan (for wheat and rice only), Kazakh-stan (for major strategic crops, but voluntary for livestock), the Democratic People’s Republic of Korea (for rice and maize), the Netherlands (for livestock epidemic diseases), Switzerland (for livestock epidemic diseases), and the Windward Islands (windstorm cover for export bananas). In all other countries, either agricultural insur-ance is purely voluntary or borrowers of credit are obliged by the lender to purchase crop credit insurance protection. The potential advantages and disadvantages of compulsory national crop insurance schemes are reviewed later in this chapter.

insured crops

3.14. Under the 2004 Law on Compulsory Crop Insurance, insurance is mandatory for a list of 17 strategically important food and ex-port crops, including spring wheat and other grains, oilseeds, sugar beets, and cotton. A full list of the compulsory insurable crops is given in box 3.1. Spring wheat is the most important crop, accounting for more than 90 percent of the program’s total sum insured (TSI) over the past six years (2005 to 2010).

insured perils

3.15. The compulsory LIC policy insures a wide range of perils. The insured perils include a broad range of climatic perils, including drought, winter freeze, frost, low temperature, hail, ex-cessive rain, flooding, waterlogging (excess soil moisture), excessive humidity, wind (hot dry winds and strong winds), and one natural peril, mudflow, that may or may not be associated with excessive rain.

3.16. The compulsory LIC policy excludes all other causes of crop loss, including the natu-ral peril of fire and all biological perils (pests and diseases). Plant pests and especially fungal

diseases in cereals are a major cause of loss in adverse climatic years in Kazakhstan. In most other countries that operate similar LIC policies, coverage is usually “all risk” and includes all natural, climatic, and biological perils (unavoid-able and uncontrollable pests and diseases) that result in loss of expected crop production and crop revenue. In Kazakhstan, it is likely that loss assessment is more complicated because the ad-justment needs to take into account losses due to insured adverse climatic events and to separate these from other uninsured causes of loss. This theme is discussed further in chapter 4.

definition of insured unit

3.17. The definition of the insured unit is critical for adjusting and indemnifying losses under any crop insurance scheme. In Kazakh-stan, the insured unit is the separate or indi-vidual “field.” The policy requires farmers to declare and insure all of their fields sown with the insurable crop(s) and to provide maps and schedules showing the location and area of each field and crop(s). With the lack of field boundary fences and roads, the definition of what consti-tutes a separate field may, however, be very open to interpretation at the time of loss assessment.

cover period

3.18. Most crop insurance programs provide protection during the growing season and ter-minate cover on completion of the harvest. There are, however, a great many variants on the inception dates of cover, and some MPCI loss of yield programs (for example, in Spain and Portugal) only begin cover once the sown crop has germinated and emerged and a full stand has been established, while other programs insure against loss of the sown seeds due to perils that cause germination failure. The LIC program in Mexico insures crops from the time of sowing against natural and climatic events as well as biological perils that lead to germination failure. In a few cases, including the Federal Crop In-surance Program in the United States, coverage may even extend to “prevented sowing,” for ex-

74 Kazakhstan

ample, due to extreme drought or excessive rain that prevents the farmer from gaining accessto the field with machinery to sow the crop.

3.19. The cover period of the compulsory LIC policy is not clearly defined. Article 9 of the LIC policy wording states that the contract is deemed valid and binding for all parties from the moment of payment of the insurance premium until an agreed termination date. The Law on Compul-sory Crop Insurance stipulates that the contract of insurance must be concluded and be in place no later than 15 days after completion of sow-ing: it is, however, unclear whether the intention of the policy is to provide back-dated coverage from the time of sowing of the crop and whether losses that occur within the 15-day period would be deemed insured or not. Under a voluntary crop insurance program, it would be unaccept-able to permit farmers to purchase cover up to 15 days after completion of sowing because of the potential for antiselection. Such polices nor-mally carry a sales cutoff date of at least 30 days prior to the start of sowing.21 In Kazakhstan it might be argued that antiselection is minimized because the program is compulsory for all farm-ers. However, allowing farmers to purchase cover up to 15 days after completion of sowing may lead to moral hazard—for example, where crop germination is poor, the farmer may lower his or her husbandry and management standards, thereby accentuating the loss of crop production in the knowledge that the policy will pay out a claim.

premium rates

3.20. Government is responsible for setting the reference premium rates on the compulso-ry crop insurance scheme, and these rates are declared in the Law on Compulsory Crop In-

21 Examples where antiselection could arise under a voluntary program include where preexisting ad-verse climatic conditions are developing at the time of sowing (for example, a major freeze or drought) and farmers purchase cover knowing there is a high probability of crop failure.

surance and subsequent amendments. In 2003 the GRK through the MoA commissioned a crop insurance premium rating study for the LIC crop insurance policy through the Kazakh Actuarial Center (CJSC). The CJSC used 11-year (1991–2001) MoA crop-area damage data at the oblast level to design a system of regional or oblast-lev-el technical premium rates for the major insured crops (grains, oilseeds, sugar beets, and cotton). For each major type of crop in each oblast, the average loss cost rates were calculated accord-ing to the percentage of total sown area dam-aged and adjusted by spreading catastrophic loss years in particular oblasts—for example, West Kazakhstan (WKO)—over the whole portfolio. The technical rates were reduced by 50 per-cent on account of the government’s 50 percent claims subsidies and then loaded by factors of 10–25 percent for insurers’ administrative and operating (A&O) expenses and profit margins.22 Further details of the CJSC’s premium rating methodology are presented in annex 2. The fi-nal commercial premium rates were published in the 2004 law and last updated in 2008, when a system of minimum and maximum reference rates was introduced for grain crops. They have remained unchanged since then.

3.21. For each crop and group of oblasts, the GRK premium rates are presented in terms of a minimum and a maximum rate that may be charged by the insurance companies. A list of the current reference premium rates that apply in 2011 are contained in table 3.1. In the higher-rainfall growing areas of northern and eastern Kazakhstan, the premium rates for grains are be-tween 1.78 and 3.48 percent, rising to between 5.21 and 9.15 percent in the most drought-prone areas of western Kazakhstan, including the oblasts of Aktobe and WKO. For all other classes of crops, including oilseeds, sugar beets, and cotton, the minimum and maximum refer-ence rates are the same for all oblasts; in other words, there is no regional differentiation of the premium rates.

22 Full details of the rating methodology are set out in CJSC (2003).


3.22. Since the GRK reimburses the insur-ers for 50 percent of the claims free of cost, the MoA- determined technical premium rates were adjusted downward to reflect only 50 per-cent of the expected claims costs. These reduced technical rates were then loaded for acquisition costs, insurers’ operating expenses, and reason-able profit margins to derive the MoA-approved minimum and maximum commercial premium rates or reference rates (table 3.1). As such, farmers receive an implicit premium subsidy of 50 percent of the amount of premiums they have to pay.

sum insured

3.23. In Kazakhstan, the sum insured of the compulsory LIC policy is determined by a “normative cost of production” per hectare. This cost is established by MoA per crop, oblast, and agro-ecological zone in the country. The normative costs of production are approved by

the GRK and then published by law.

3.24. In each oblast, farmers are permit-ted to choose between three optional levels of sum insured for each insured crop according to technology levels. The three optional levels of sum insured correspond to high-technology/high-production-costs cultivation (science-based agro-technology), medium-technology cultivation (simplified agro-technology), and low-technology cultivation (based on three com-ponents of production input costs: wages, fuel, and seeds). Farmers are free to elect to insure their crop at any level, irrespective of their ac-tual use of technology and production costs. Ta-ble 3.2 presents a summary of the three levels of average normative costs or sum insured in KZT per hectare for each type of crop that applied in 2009 and 2010.

3.25. The per hectare sums insured are in general very low, reflecting both the low aver-

table 3.1 crop insurance commercial premium reference rates set by lawtan

Crop and oblastPremium rate (%)

Minimum Maximum

Grains (cereals)

Аkmola, Аlmaty, East Kazakhstan (EKO), Zhambyl, Kostanay, North Kazakhstan (NKO)

1.78 3.48

Karagandy, Kyzylorda, Pavlodar, South Kazakhstan (SKO) 3.17 5.83

Аktobe, WKO 5.21 9.15

Oilseeds

National (applicable in all oblasts where the crop is grown) 2.01 3.44

Sugar beets

National (applicable in all oblasts where the crop is grown) 5.76 8.39

Cotton

National (applicable in all oblasts where the crop is grown) 0.92

Source: Law on Compulsory Crop Insurance 2004.

76 Kazakhstan

age technology levels adopted by Kazakhstan’s farmers, the low costs of production for most crops, and the government’s desire to manage the financial exposure on this compulsory pro-

gram by capping the maximum permitted sums insured. Table 3.2 shows that in 2010 for the highest level of science-based agro-technology, the average sum insured for all crops was only

table 3.2 average normative costs of production in 2009–10, by type of crop

KZT per hectare unless otherwise noted

CropScience-based

agro-technologySimplified

agro-technology

Costs based on salary, fuels and

lubricants, and seeds

Brassica napus 8,409 6,230 2,353

Buckwheat 8,482 5,848 3,180

Chick peas 7,990 6,101 3,699

Cotton 24,060 14,211 9,706

Grain maize 25,804 16,836 8,640

Millet 4,830 3,392 1,731

Oats 6,904 4,682 2,987

Peas 8,064 5,780 3,935

Rice 33,524 21,459 5,130

Safflower 8,323 6,407 3,311

Soybeans 10,624 6,822 4,803

Spring barley 7,676 5,111 3,104

Spring rye 6,518 3,874 2,449

spring wheat 8,829 5,831 3,407

Sugar beets 40,646 23,469 7,583

Sunflower 9,026 5,661 3,824

Winter wheat 9,361 6,143 3,699

Average all crops 9,909 6,540 3,674

Average all crops (US$ per hectare) 9,909 6,540 3,674

Source: Authors based on Regulation March 25, 2009, no. 410.


KZT 9,908 (US$68)23 per hectare, with a range from a low for millet of KZT 4,830 (US$33) per hectare to a high for sugar beets of KZT 40,646 (about US$280) per hectare. For the lowest-sum-insured option, based on the costs of wag-es, fuel, and seeds, the average sum insured for all crops was a very low KZT 3,674 (US$25) per hectare in 2010. For spring wheat, which is the most important insured crop grown in Kazakh-stan, 2010 average sums insured ranged from a maximum of KZT 8,829 (US$61) per hectare to a minimum of KZT 3,407 (US$23) per hectare. Details of 2010 normative costs for wheat by oblast and agro-ecological risk zone are includ-ed in annex 2. The normative costs per hectare are multiplied by the number of insured hectares in each field to derive the TSI for each crop in each insured unit.

basis of indemnity

3.26. The policy indemnifies the farmer when the expected revenue (actual remaining crop production times the prevailing farm-gate sales price) derived from the insured crop in the insured unit (which in Kazakhstan is de-fined as the individual “field”) falls short of the sum insured (investment cost) by the farmer. In such cases, the insurance policy indemnifies the farmer by the difference between the sum insured (investment cost) per hectare minus the expected revenue per hectare times the area of the insured unit.

3.27. Damage is assessed by in-field sampling by a committee of up to five persons (organiza-tions). The field loss assessment exercise is de-signed to assess (a) the cause of loss to verify whether this is due to an insured (uninsured) peril(s), (b) the affected or damaged area of the crop in each insured unit, and (c) whether dam-age to the crop is a partial or total loss. The pro-cedures for indemnifying total and partial losses are explained below.

23 A 2010 exchange rate of KZT 145 = US$1.00 was used in this analysis.

3.28. Where a total crop loss occurs, the loss assessment and indemnity procedures are rela-tively simple. In the case of total crop loss, the main task at the time of in-field crop loss assess-ment is to measure the area (in hectares) of total-ly (100 percent) damaged crop due to an insured peril. The damaged area is then multiplied by the normative costs of production (sum insured) per hectare selected by the insured to derive the total value of the claim. No deductible is ap-plied to the claim. The LIC policy wording is, however, ambiguous as to whether the total loss must apply over the entire area of the declared insured unit (field) in order to qualify for a claim or whether a total loss in any hectare of the in-sured crop will open the policy for a claim. This lack of clarity over the definition of the insured unit may lead to misunderstandings between the insurer and the insured at the time of loss assess-ment. Also the policy does not clearly state what constitutes a total loss and does not appear to carry a constructive total loss clause.24

3.29. In the case of partial losses due to in-sured perils, the loss assessment procedure and basis of indemnity are considerably more complicated. In the case of partial losses to crop production and yields, in-field assessment is re-quired using 1 meter square crop-cut samples located at random in the field to estimate the actual remaining harvestable yield (salvage) in the affected area. Loss assessment is a costly and time-consuming process, and the law stipu-lates that a committee of five persons (including the local rayon executive authority, the FFSA representative, insurance agent, insurance com-pany, and insured farmer) must inspect the af-fected field(s) and determine the damaged area and, within this area, the amount of harvestable

24 Under the Mexican LIC policy there is a total constructive loss clause under which a total loss is defined as “where more than 90 percent of the sown crop stand and expected production has been lost and where it is not economic to harvest (salvage) the remaining proportion of the crop because the harvest costs would exceed the sale value of the salvage.” It is not clear whether this definition applies under the Kazakhstan compulsory LIC policy.

78 Kazakhstan

yield (salvage). The value of salvage must then be calculated in one of two ways: (a) according to the actual sales value of the crop received by the farmer or (b) prior to sale of the crop, by the estimated local sales price for the crop. If the value of salvage is lower than the sum insured (investment costs), the difference is indemnified. A worked example is given in box 3.2. However, this procedure has a major drawback: because an insured price for valuing the salvage is not preagreed at the time of binding the insurance contract, neither the insurer nor the insured has a clear idea of the amount of indemnity that is due in the event of a partial crop loss (this issue is discussed further in chapter 4).

government Financial support to crop insurance in Kazakhstan

3.30. The GRK provides financial support for the scheme in two ways. The first is by compen-

sating insurers for 50 percent of all the claims incurred, and the second is by funding the A&O expenses of the FFSA. Insurance companies and mutual societies are not required to pay pro rata premiums for this cover, which is similar to a free quota-share (50-50 percent) reinsurance agreement.

3.31. The 50 percent claims compensation fund is administered by the FFSA, which is responsible for monitoring and managing the financial transactions of the scheme on behalf of government and for approving the claims reimbursements to individual insurance com-panies. Since 2005, the FFSA has maintained a database on each and every insured farmer, showing data by oblast and rayon on the crops grown, premium rates, and claims. Between 2004 and 2010, the FFSA received total (A&O) subsidies from government of KTZ 319 mil-lion (US$2.5 million) or an average of KZT 53 million (US$0.32 million) per year (table 3.3). Apart from the direct financial support of

box 3.2 example of indemnity calculations for partial crop losses

sum insured details

insured crop. Sunflower

insured field number. 53

area of insured field. 300 hectares

sum insured per hectare. KZT 3,390 per hectare

total sum insured field number 53. KZT 1,017,000

cause of loss. Drought

partial loss: claims calculation

affected area. 300 hectares, partial losses

harvestable yield (salvage). 5.5472 metric tons

sales price for sunflower. KZT 55,000 per metric tons

value of salvage. KZT 305,100

value of salvage per hectare. KZT 1,107 per hectare (305,100 ÷ 300)

difference between sum insured and salvage value. −KZT 2,373 per hectare (1,107 – 3,390)

insurance payment: KZT 711,900 (300 hectares x KZT 2,373 per hectare).

Source: Authors based on FFSA data.


the FFSA’s A&O expenses, the GRK also indi-rectly subsidizes the costs of field-level loss as-sessment activities (government staff, vehicles, equipment, and so forth).

3.32. Over the past six years, the GRK pro-vided KZT 4.7 billion to the FFSA, of which 93 percent was allocated to settling the 50 percent of claims and 9 percent was allocated to pay-ing the A&O expenses of the FFSA. Table 3.3 shows that, in the start-up phase of this scheme, the GRK provided KZT 2 billion per year for the first two years and since then has provided smaller payments, such that by the end of 2010 the scheme had received total financial subsi-dies valued at KZT 4.7 billion (about US$31 million).25 Over the six years to 2010, the 50 per-cent claims compensation fund received a total

25 At the current 2011 exchange rate of KZT 150 = US$1.00.

of KZT 4.4 billion (US$28.9 million) from gov-ernment.

3.33. Over the past six years (2005–10), the FFSA reimbursed insurance companies a to-tal of KZT 3.84 billion (US$25.6 million), equivalent to 46.7 percent of total paid claims. Over this period, the FFSA settled an average of KTZ 641 million (US$4.3 million) per year for 50 percent claims to the insurance companies. However, over the past three years the trend was for increased claims, and in 2010 the cost of the 50 percent claims reimbursement to the FFSA was KZT 1.2 billion (US$8.0 million). At end-2010, the claims fund had KZT 538 million in reserves, which would be inadequate to cover the average claims cost of the past three years. The level of GRK budgetary support for crop in-surance in 2011 is not known. Issues relating to the whether it is more cost-effective for govern-ment to provide 50 percent quota-share coinsur-ance of claims or to switch its financial support

table 3.3 state budget program 050: “support for crop insurance”

KZT (millions)

Year Budget

allocation

Allocation Disbursements

Agent services payment for the

FFSA

50% claims compensation

fund

Actual 50% claims payments

Balance on claims fund

2004 2,000.0 10.0 1,990.0

2005 2,000.0 10.0 1,990.0 520.1 3,459.9

2006 100.0 60.0 40.0 236.0 3,263.9

2007 300.0 68.4 231.6 350.2 3,145.3

2008 100.0 68.4 31.6 819.1 2,357.8

2009 100.0 49.9 50.1 693.1 1,714.7

2010 100.0 52.2 47.8 1,224.5 538.0

Total 4,700.0 318.9 4,381.1 3,843.1

Average 783 53 730 641

Source: Authors adapted from FFSA data.

80 Kazakhstan

to subsidizing premiums or to purchasing rein-surance or some form of catastrophe excess of loss reinsurance protection are considered fur-ther in chapter 4.

performance assessment: technical results, liabilities, reinsurance

3.34. This section presents a review of the compulsory crop insurance results from 2005 to 2010. Full details are presented in annex 3.

coverage (insured crops, insured Farmers, and insured area)

3.35. Crop insurance has reached high lev-els of penetration in Kazakhstan. Owing to its compulsory nature, crop insurance has reached high levels of penetration both in terms of the number of insured farmers and the amount of in-sured area.

3.36. The crop insurance portfolio is com-posed mainly of spring sown cereals, of which spring wheat is the most important insured crop. In the first six years of operation (2005 to 2010), spring crops accounted, on average, for 98 percent of the insured area, and spring wheat accounted for 86 percent of the insured area of spring crops (annex 3).

3.37. Over the period 2005 to 2010, the com-pulsory crop insurance scheme issued an aver-age of 23,494 crop insurance policies per year, with an average of 523 hectares of insured crops per policy. Coverage peaked in 2008, with a total of 33,957 insured policies, but in 2010 the number of policies was halved to only 16,766. In 2010 the average size of insured farm was significantly larger than in any other year, with an average of 756 hectares per policy, or 144 percent of the five-year average of 523 hectares per policy. According to the insurance industry, the major losses experienced in 2009 dispropor-tionately affected smaller farmers: insurers were very reluctant to insure these small farmers in

2010, resulting in a major reduction in the num-ber of insured polices and a shift in the portfolio toward larger farms.

3.38. It is difficult to report the type of benefi-ciary and percentage of insured farms in Ka-zakhstan. In 2010 there were 7,441 registered agricultural enterprises (production enterprises) and 193,435 peasant farms (commercial farms) or a total of 200,876 farms (ARKS). With a to-tal of 16,766 insured crop policies in 2010, this suggests an insurance penetration level of only 8.3 percent of all farms. However, these figures must be interpreted with caution. Practically all (100 percent) of the 7,441 production enterpris-es purchase crop insurance because of their high profile and the major financial penalties (fines) they are likely to incur if they do not purchase compulsory cover. Conversely, crop insurance uptake by small commercial farms is very low across the country. Finally, data on the number of farm holdings distort the true penetration rates for crop insurance because they include large numbers of small peasant livestock holdings, which are outside the scope of the scheme.

3.39. The crop insurance scheme is highly concentrated in the main spring cereal belt of northern Kazakhstan. Over the past six years, a total of 73.4 million hectares of crops were in-sured under the compulsory LIC scheme. Over-all, 77 percent of this total area was underwrit-ten in the three northern oblasts of Kostanay (29 percent of insured area), Akmola (26 percent), and NKO (22 percent). Conversely, crop insur-ance is relatively unimportant in the other 11 oblasts, none of which accounts for more than 5 percent of total insured area to date (figure 3.1).

3.40. The insured area has expanded over time, with a peak of 15 million insured hectares in 2009, representing 82 percent of the total eli-gible acreage of the insurable crops grown in Kazakhstan in 2009. In 2005, the first year of the compulsory scheme, the insured area was 10.5 million hectares (70 percent of total sown area); by 2008 this had increased to 14.5 million hectares (84 percent of total sown area), and in


2009 it increased again to 15.0 million hectares (82 percent of total sown area). In 2010, how-ever, the insured area declined significantly to 12.7 million hectares or only 68 percent of total eligible acreage.

3.41. Over the first six years of the scheme, the insured area of crops averaged 73 percent of the total sown area; this implies that, in spite of the compulsory nature of the scheme, more than a quarter of the cropped area was not insured. The fact that, on average, nearly one-quarter of the insurable area remained uninsured shows that the compulsory scheme is failing to achieve one of its core objectives—to ensure that all farmers are insured against catastrophic crop loss. There are several reasons for the fail-ure to achieve a higher level of insurance pen-etration. Over the past three years, most insur-ance companies incurred negative underwriting results, particularly in the drought-prone regions of WKO and Aktobe, and they are increasingly reluctant to operate in these high-risk areas. Also their results were, on average, worse for small peasant farmers, and, as evidenced in 2010, in-surance companies were not willing to renew

cover for this group of farmers. Many crop producers interviewed under this study do not perceive any benefits from the compulsory crop insurance scheme, and some prefer to pay the fines for failing to contract insurance than to pay the premiums.

3.42. The penetration of crop insurance, as measured by the ratio of insured area to total planted crop area, is very uneven across the country. In the northern and eastern regions of Kazakhstan, where large-scale spring wheat production is concentrated, over the five-year period from 2006 to 2010, the percentage of total insured area exceeded 70 percent of total planted area in the oblasts of Kostanay (90 per-cent), Pavlodar (79 percent), NKO (76 percent) Akmola (75 percent), and EKO (72 percent). Conversely, uptake was much lower in the very drought-prone region of western Kazakhstan in the oblasts of WKO (58 percent) and Aktobe (52 percent). Even lower penetration rates were re-corded in the southern region of Kazakhstan, as evidenced by the rates in Zhambyl (41 percent), Almaty (41 percent), and SKO (27 percent). See figure 3.2 and map a1 in annex 3. Given the

Figure 3.1 distribution of insured area in Kazakhstan, by oblast, 2005–10


26%

3% 2%5% 4%

29%

0%

22%

5%

1%3%

1%0%

5%

10%

15%

20%

25%

30%

35%

Akmola

Aktob

e

Almat

yEKO

Karag

anda

Kosta

nay

Kyzylo

rda

NKO

Pavlod

ar

SKOW

KO

Zham

byl% o

f to

tal i

nsur

ed a

rea

(hec

tare

s)

82 Kazakhstan

compulsory nature of the scheme, the extremely low uptake in southern Kazakhstan is unexpect-ed. The main reasons for this are (a) insurers’ reluctance to insure the often very small farms and (b) the fact that a high proportion of agricul-tural cropping is irrigated and farmers do not see any value in purchasing the catastrophe drought insurance cover.

scheme liability (total sum insured) and levels of protection

3.43. Since inception of the scheme in 2005, average total liability has been about KZT 40 billion (US$267 million) per year. Over the past six years, the TSI of the scheme increased from KTZ 34.4 million (US$229 million) in 2005 to a peak of KZT 52.9 billion (US$353 million) in 2009, reflecting the gradual increase in coverage over time as the program matured in terms of the number of insured farmers and amount of in-sured area. In 2010, however, with the reduction

in the number of insured farmers and insured crop area, the TSI was correspondingly reduced to KZT 47.3 billion (US$325 million). See an-nex 3 for details.

3.44. The financial liability of the compul-sory crop insurance scheme is distributed very unevenly throughout Kazakhstan. Figure 3.3 shows that, over the past six years, the scheme liability was highly concentrated in the three northern oblasts of Akmola, NKO, and Kostanay, accounting for 78 percent of total sum insured, which reflects the fact that grain production is highly concentrated in these regions. This rep-resents a very large accumulation of risk in the event of a major drought affecting the northern region. Conversely, no other oblast accounted for more than 5 percent of scheme liability over the past six years, and liability was very low in the southern part of the country (SKO, Almaty, Zhambyl, and Kyzylorda).

Figure 3.2 penetration of crop insurance, by oblast, 2006–10


75%

55%

41%

74%68%

90%

61%

76% 79%

27%

58%

41%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Akmola

Aktob

e

Almat

yEKO

Karag

anda

Kosta

nay

Kyzylo

rda

NKO

Pavlod

ar

SKOW

KO

Zham

byl

% t

ota

l pla

nted

are

a in

sure

d


levels of sum insured purchased by Farmers

3.45. The level of sum insured elected by the farmers to protect their crops is extremely low, and over the past six years the average sum in-sured for all crops was only KZT 3,289 (US$23) per hectare.26 As noted, the MoA, in conjunc-tion with the local authorities in each region, is responsible for setting the sums insured for each type of crop in each oblast and agro-ecological zone based on three levels of technology pack-age (high, medium, and low) and the associated costs of production. Farmers are then permitted to choose which level of production costs they wish to insure for crops grown in their fields. An analysis of the actual average sums insured elected by farmers since inception of the scheme found that most farmers are purchasing the low-

26 At a 2010 average exchange rate of KZT 145 = US$1.00.

est permitted level of sum insured, which cov-ers only three production costs (wages, fuel and lubricants, and seeds): over the six-year period, the average sum insured was KZT 3,289 (about US$23) per hectare, with a range from an av-erage low in 2007 of KZT 2,871 (US$20) per hectare to an average high in 2010 of KZT 3,728 (US$26) per hectare. See annex 5.

3.46. On the basis of this study, it appears that many farmers elect the lowest permitted level of sum insured per hectare in order to minimize the amount of premium they have to pay. Farm-ers’ reasons for selecting the lowest permitted level typically are that the policy only insures a small proportion of their production costs and expected yield and that they would have to incur a near total loss in order to trigger an indemnity. They do not see the coverage provided as benefi-cial to them and so generally opt for the lowest permitted level of sum insured.

3.47. The current levels of sum insured do not afford farmers adequate protection against the

Figure 3.3 distribution of total sum insured per oblast, 2005–10


25%

3% 2%5%

3%

31%

1%

22%

4%1% 2% 1%

0%

5%

10%

15%

20%

25%

30%

35%

Akmola

Aktob

e

Almat

yEKO

Karag

anda

Kosta

nay

Kyzylo

rda

NKO

Pavlod

ar

SKOW

KO

Zham

byl

% o

f T

SI

84 Kazakhstan

loss of the costs they have invested in growing the crop. For spring wheat, where average to-tal costs of production were about KZT 12,000 to KZT 17,500 per hectare in 2010, the current levels of sum insured of about KZT 3,500 per hectare (minimum) and KZT 9,000 per hectare (maximum) only represent between 20 and 50 percent of the actual total costs invested in pro-ducing the crop. In the event of a total loss, the indemnity payment is therefore inadequate to cover the farmers’ incurred costs and may not be adequate to cover the costs of production loans from banks.

3.48. Over the past five years, the effective amount of yield protection afforded to farmers by the LIC policy gradually eroded. Under the LIC policy, an indemnity is payable when the value of any harvestable production (salvage) is inadequate to cover the costs of production invested in growing the crop. The analysis pre-sented in figure 3.4 shows that, over the past six years, the average sum insured per hectare only increased 13 percent, from KZT 3,288 per

hectare (2005) to KZT 3,728 per hectare (2010). Over this period, however, the average Septem-ber farm-gate price for wheat increased 350 per-cent, from KZT 1,149 per centner (2005) to KZT 3,988 per centner (2010).27 With the increase in wheat prices, which are used to value salvage, there has been a major reduction in the underly-ing insured wheat yield. In 2005, with an aver-age sum insured of KZT 3,288 per hectare when the average farm-gate sales price for wheat was very low at KZT 1,149 per centner, the policy would start to indemnify losses when the re-maining yield fell below 2.85 centners per hect-are; however, by 2010, with a high average sales price of KZT 3,988 per centner, a farmer would only receive an indemnity when his actual yield fell below 0.93 centner per hectare.

3.49. The current LIC crop insurance policy provides one of the lowest levels of yield protec-

27 Wheat prices based on data provided by Arka Consulting in 2011.

Figure 3.4 sums insured and average Farm-gate prices for Wheat and effective Yield coverage levels of lic policy, 2004–10

Source: Authors based on FFSA data on sum insured and September wheat price data from Arka Consulting.

2.86

2.30

1.29 1.05

1.38

0.93

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2004 2005 2006 2007 2008 2009 2010 2011

Whe

at y

ield

eq

uiva

lent

(cen

tner

per

he

ctar

e)

Whe

at p

rice

(KZ

T p

er c

entn

er)

Ave

rag

e su

m in

sure

d (K

ZT

per

hec

tare

)

Average Sum Insured (KZT/Ha) Wheat price (KZT/Centner) Wheat Yield Equivalent (Centner/Ha)


tion of any major individual grower national crop insurance scheme in the world. The cur-rent LIC policy, with its very low sums insured, equates to a level of insured yield coverage of about 1 centner per hectare or on average only 14 percent of the national average spring wheat yield. Most individual grower loss of yield in-surance policies in the world offer a minimum level of insured yield coverage of about 40 to 50 percent of average yield, and in some coun-tries the maximum coverage that farmers can purchase is 75 to 85 percent of the normal aver-age yield. There is a need to review the levels of insured yield coverage provided under the Kazakhstan compulsory crop insurance scheme, and this subject is discussed in chapter 4.

Financial performance: premiums, claims, and claims ratios

Overall Results

3.50. The compulsory crop insurance pro-gram in Kazakhstan experienced poor overall underwriting results over the period 2005 to 2010. The long-term average loss ratio for the six-year period (2005–10) was 140 percent, and in four of the six years the scheme operated at a financial loss, with the gross claims to premium, or loss ratio, exceeding 100 percent. The average net loss ratio to the insurance companies after government reimbursement of 50 percent insur-ance losses (claims) was 75 percent. Assuming average administrative and acquisition expenses of 25 to 30 percent of gross premium for the in-dustry, the average net loss ratio of 75 percent indicates that, at best, the insurance companies and farmer mutual insurance associations are operating on a breakeven basis, but that most of the companies are operating at a financial loss (table 3.4).

3.51. Underwriting results deteriorated badly over the past three years (2008–10), which co-incided with drought loss years, especially in 2010. Over the past three years, the program incurred negative underwriting results in all years and an average loss ratio of 182 percent

(99 percent after government claims subsidies). In the worst-loss year of 2010, it incurred a 261 percent loss ratio: underwriters paid out claims of KTZ 2.61 for every KTZ 1.00 they received in premiums prior to recoveries from the FFSA. On account of the very poor results, all but three of the seven registered commercial insurance companies no longer participate in the scheme.

Regional Performance (by Oblasts)

3.52. Scheme performance varies widely across different regions, and the very poor underwriting results in Aktobe and WKO are making the scheme financially unviable. The pattern of claims varies widely by geographic re-gion. The best-performing oblast is NKO, which over the past six years contributed 22 percent of total scheme liability but only 3 percent of claims and had a long-term loss ratio of only 24 percent. The next best-performing oblast is Ko-stanay, which had the largest share or 31 percent of total scheme liability but only accounted for 11 percent of total claims and had a long-term loss ratio of 73 percent. At the other extreme are Aktobe and WKO in western Kazakhstan, which collectively accounted for only 4.8 percent of to-tal scheme liability over the past six years but in-curred 41 percent of all claims and had six-year long-term loss ratios of 381 and 507 percent, re-spectively. These two oblasts are severely preju-dicing the financial viability of the program, and measures of controlling the claims costs in these two oblasts are urgently needed (figure 3.5). See annex 3 for full details.

Causes of Loss

3.53. Drought was the main cause of loss un-der the compulsory crop insurance scheme. Drought events accounted for 91 percent of the total reported damaged area in the five-year pe-riod 2006–10; with the inclusion of losses due to drought in combination with other perils such as hail or freeze, total drought losses rose to 97 per-cent of the total damaged area. The second most important cause of loss was hailstorms, which accounted for 2.5 percent of the total area lost due to insured perils. See annex 3.

86 Kazakhstan

adequacy of premium rates and claims costs

3.54. Over the past six years, average premium rates tended to fall, although this is not justified by the claims experience. At the time of incep-tion in 2005, a system of single fixed premium rates for each crop in each oblast was adopted, and these rates applied during the three-year pe-riod from 2005 to 2007. During this three-year period, the average premium rate was 2.68 per-cent. Rates varied little from year to year, rang-ing from a low of 2.57 percent in 2006 to an av-erage high of 2.87 percent in 2007. Prior to the 2008 renewal, the rating system was reviewed and amended to introduce a system of minimum

and maximum premium rates, and the minimum premium rates were lower than the original single fixed premium rates. In 2008 the scheme was opened up to competition from the newly formed mutual crop insurance associations. For the past three years (2008–10) the premium rates charged by the insurers decreased to an aver-age of 2.24 percent, representing a reduction of nearly 17 percent from the previous three-year average. According to the commercial insurance companies, the mutual insurers generally charge their members the minimum premium rates set by government, and the resulting price competi-tion reduced the overall average premium rates charged on the scheme. At the same time that average premium rates were reduced, the claims

table 3.4 summary of Kazakhstan crop insurance Financial results, 2005–10

Item 2005 2006 2007 2008 2009 2010 Total

Number of policies (thousands)

19.0 13.6 25.4 34.0 32.2 16.8 141.0

Total insured area (millions of hectares)

10.5 9.1 12.1 14.5 15.0 12.7 73.8

Sum insured (KZT millions)

34,372 26,650 34,796 46,645 52,903 47,266 242,631

Premiums (KZT mil-lions)

899 685 997 1,093 1,114 1,074 5,862

Average premium rate (%)

2.61 2.57 2.87 2.34 2.11 2.27 2.42

Claim payments (KZT millions)

1,065 478 701 1,710 1,465 2,805 8,223

Loss ratio (%) 119 70 70 156 131 261 140

Loss cost (%) 3.1 1.8 2.0 3.7 2.8 5.9 3.4

FFSA compensation (KZT millions)

520 236 350 819 693 1,225 3,843

FFSA compensation (% of claims)

49 49 50 48 47 44 47

Loss ratio (% net of FFSA support)

61 35 35 81 69 147 75



on the scheme rose significantly (figure 3.6).

3.55. The combination of higher claims and lower average premium rates for the past three years means that the scheme is now seriously underrated. Figure 3.6 compares the annual average premium rate charged on the scheme with the annual average cost of losses, which is equivalent to the value of claims divided by the total sum insured and expressed as a percent-age. The loss cost is a useful ratio, as it shows the minimum premium rate that would need to be charged on an insurance scheme to cover the paid claims. Figure 3.6 shows that, in the three years to 2007, average premium rates were ad-equate to cover the average loss cost, but, after 2008, the average loss cost exceeded the aver-age premium rates in all three years, culminat-ing in a peak loss cost of 5.93 percent of total sum insured in 2010 compared with an average premium rate of only 2.27 percent. There is an

urgent need to review and adjust the premium rates on this scheme in order to maintain its fi-nancial viability.

3.56. The claims experience between 2005 and 2010 shows that the scheme is severely underrated in WKO and Akmole in western Kazakhstan, and this applies to a lesser extent in several other oblasts. The six-year long-term average loss cost on the scheme currently stands at 3.4 percent, but the pattern of losses varies widely across geographic regions. As shown in figure 3.7, over this period average premium rates were highest in WKO, with average premi-um rates of 7.8 percent; however, this premium rate was totally inadequate to cover the actual claims, as evidenced by the loss cost of 39.6 percent. This is followed by Aktobe, with aver-age premium rates of 5.8 percent, but again the program was very underrated in this oblast, as the breakeven rate to cover actual claims should

Figure 3.5 scheme liability, claims, and loss ratio, by oblast, 2005–10


105%

381%

132%176%

100%73%

2% 24%

199%

30%

507%

412%

0%

100%

200%

300%

400%

500%

600%

0%

5%

10%

15%

20%

25%

30%

35%

Akmola

Aktob

e

Almat

yEKO

Karag

anda

Kosta

nay

Kyzylo

rda

NKO

Pavlod

ar

SKOW

KO

Zham

byl

% of TSI % of Claims Payments Loss Ratio

88 Kazakhstan

have been 22.2 percent. The scheme was also underrated in Pavlodar, Zhambyl, EKO, and Almaty. In contrast, the scheme performed very well in NKO, with a six-year long-term average loss cost of only 0.5 percent compared to aver-age premium rates of 2.0 percent. In effect, this oblast cross-subsidized the very poor results in WKO and Aktobe for the past six years. Substan-tial premium rate increases would be required in WKO and Aktobe if the scheme were actuarial-ly rated in these oblasts; however, the minimum average rates of at least 40 percent (WKO) and 22 percent (Aktobe) would not be commercially acceptable to farmers in these oblasts.

3.57. The variation in claims experience be-tween rayons in the same oblast clearly indi-cates the need to introduce a system of rayon-level actuarial rating. The five-year claims experience also varies significantly between rayons in each oblast. For example, in rayons located in northern NKO, the average loss costs are less than 0.25 percent, but in the southern

part of the oblast, which is drier, rayon-level loss costs are higher, with a maximum of 0.5–1.0 percent loss cost. Similar differences in drought risk exposure and loss costs between rayons also apply to other oblasts, such as Pav-lodar, Akmola, Kostanay, and WKO (see map 3.1). This analysis clearly demonstrates a need to consider introducing a system of rayon-level rates in the future.

3.58. The analysis of variation in yields at the rayon level also shows significant differences in the yields obtained by different types of farm-ers, and these differences need to be addressed in rating. Specifically, the analysis of time-se-ries rayon-level spring wheat yields obtained by the large-scale production enterprises and the smaller commercial farms shows that yields are much more variable for the commercial farmers on account of their use of lower levels of tech-nology. This group of farmers should be charged higher premium rates.

Figure 3.6 average premium rate and loss cost, 2005–10


2.61% 2.57%2.87%

2.34%2.11%

2.27%

3.10%

1.79%2.01%

3.67%

2.77%

5.93%

1.50%

2.50%

3.50%

4.50%

5.50%

6.50%

2004 2005 2006 2007 2008 2009 2010 2011

Ave

rag

e p

rem

ium

rat

e &

loss

co

st

(% o

f T

SI)

Average Premium Rate % Loss cost (%)


Financial and reinsurance issues

3.59. The claims results were very volatile in the past six years, with a trend over the past three years for increased claims. Over the past six years, the pattern of claims on the compul-sory crop insurance scheme ranged from a low of KZT 478 million (US$3.9 million) in 2006 to a high of KZT 2,805 million (US$8.4 million) in 2010.28 There also was a marked trend to-

28 Actual annual average exchange rates are KZT 122 = US$1.00 for 2006 and KZT 145 = US$1.00 for 2010.

ward increasing claims over the past three years, which coincided with three very bad drought years (table 3.4).

3.60. Over the past six years, the scheme paid total claims of KZT 8.22 billion (US$62 mil-lion), of which private and mutual insurers paid 53 percent of total claims and govern-ment, through the FFSA, reimbursed the insur-ers for 47 percent of the total value of claims. As shown in table 3.4, the government provides 50 percent proportional or quota-share reinsur-ance protection to the insurance companies free of cost.

Figure 3.7 adequacy of premium rates, by oblast, 2005–10


1.9%

5.8%

3.5%

3.4%

4.7%

1.7%

5.2%

2.0%

3.6%

2.7%

7.8%

3.5%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

Akmola

Aktobe

Almaty

EKO

Karaganda

Kostanay

Kyzylorda

NKO

Pavlodar

SKO

WKO

Zhambyl

Average premium rate and loss cost (% of TSI)

Loss cost Avg Premium Rate

90 Kazakhstan

3.61. Under the compulsory crop insurance scheme, insurance companies have little scope for managing the liability on their 50 percent of risk retention and are very exposed to major losses. The insurance companies have very little ability to manage their exposure to losses on this compulsory scheme because they are not able to exercise decisions over whether to accept indi-vidual risks or to decline to underwrite the port-folio in regions they consider to be too risky. In spite of the government’s reinsurance protection, the insurance companies remain very exposed to loss, as they retain unlimited liability on their 50 percent share of claims. Any company that wrote an unbalanced portfolio that was overly con-centrated in the western oblasts of Kazakhstan would have incurred unsustainable underwriting losses over the past six years, especially in 2010, as evidenced by gross loss ratios of 900 percent in Aktobe (450 percent net of FFSA reinsurance) and 1,075 percent in WKO (537 percent net of FFSA reinsurance). Even those insurance com-

panies that are fully capitalized and maintain claims reserves would not be able to sustain such losses in the medium term.

3.62. Currently, private commercial insur-ers are unable to obtain commercial rein-surance protection to limit their exposure to catastrophic losses on the obligatory crop in-surance scheme. Several private commercial insurers have, in the past, sought quotations from international reinsurers to provide either quota-share or nonproportional reinsurance on their portfolios. International reinsurers, how-ever, are reluctant to provide capacity support for the scheme for various reasons, including (a) the compulsory nature of the scheme, which prevents them from selecting which risks they are willing to underwrite in which region(s), (b) the fact that the scheme is underrated, and (c) the fact that indemnity and loss assessment procedures would require strengthening to meet international standards.

map 3.1 variation in loss costs, by rayon, 2006–10



3.63. The farmer mutual crop insurance as-sociations are not required to maintain claims reserves and are unable to meet their liabilities if claims exceed the net premiums they col-lect from their members. The private registered insurance companies are obliged by insurance legislation to meet minimum capital require-ments for underwriting any class of business, but also retain full liability for settling any and all legitimate claims. In contrast, the farmer mutual crop insurance associations, which have been formed since 2008, are not required to meet minimum capital requirements or to meet claims that exceed the net premiums (premium net of management charges, which are typically on the order of 25 percent of gross premium) paid into their mutual funds by their members. On the basis of this study, it is apparent that sev-eral of the mutuals interviewed were not able to pay their 50 percent share of claims liabilities in full in 2010 and were therefore forced to pro rata down the claims paid to all farmers who incurred losses. Nevertheless, these companies were able to collect the government 50 percent of claims payments in full and to return these amounts to their members. It is not possible to report on the extent of this problem in both 2009 and 2010, as the number of mutual associations that could not meet their liabilities on their 50 percent retained claims is not known.

3.64. In Kazakhstan, there is a concern that, if the mutual crop insurers are not able to meet their claims liabilities in full, this will rapidly undermine farmers’ confidence in mutual in-surance. International experience shows that, where mutual crop insurers have not been able to meet their financial liabilities in catastrophe years, this rapidly undermines the confidence of their members and usually leads to the collapse of the mutual(s). There is an urgent need in Ka-zakhstan to (a) review the extent of this prob-lem among the mutual insurers, (b) seek ways of strengthening their claims reserves, and (c) consider alternative ways of reinsuring the mu-tuals in order to cap their liability in the event of catastrophic losses—for example, through some form of nonproportional reinsurance on their re-tained risk. This subject is reviewed further in chapter 4.

3.65. Government is also exposed to cata-strophic losses on this scheme, which may not have been budgeted for. To date, government has funded the FFSA to the tune of KZT 4.4 bil-lion and has paid out KZT 3.8 billion in 50 per-cent reinsured claims. Government’s liability over the past six years was very volatile, vary-ing from total payments of KTZ 250 million in 2006 to KZT 1.2 billion in 2010. In common with the problem faced by insurance compa-nies, government’s liability cannot be budgeted ex ante, and the claims fund may be inadequate to cover catastrophic claims that may only be incurred every 100 or more years (figure 3.8).

3.66. Due to ambiguities in the indemnity for-mula used to settle losses on the LIC policy, both the insurance companies and government face considerable uncertainty over their finan-cial liability in the event of claims. The LIC policy indemnity formula for partial losses val-ues any remaining harvestable production (sal-vage) according to the actual local sales price for wheat at the time of loss. This means that neither the insurance companies nor the govern-ment can predict their financial liabilities with any accuracy at the time of renewing cover each year. Instead, they have to wait until the time of harvest to discover their liability. This is illus-trated in table 3.5 for a 1 hectare field of wheat with an average normative cost of production sum insured of KZT 3,500 per hectare and three different wheat prices that apply at harvest, in-cluding a low of KZT 2,000 per centner (as en-countered in 2007), KZT 2,500 per centner, and a high of 3,500 per centner for 2010 (similar to the average for 2010). When average sales pric-es for wheat are low (KZT 2,000 per centner), insurers are more exposed to first loss because, once the actual average yield falls below 1.75 centners per hectare, the revenue from the crop will be less than the breakeven sum insured val-ue of KZT 3,500 per hectare. Conversely, when wheat prices are high (KZT 3,500 per centner), the insurers are much less exposed to loss, as they will only be liable for a claim once the ac-tual remaining yield (salvage) falls below 1.0 centner per hectare. Insurers’ and government’s uncertainties over their financial exposure will

92 Kazakhstan

only be removed by agreeing on a valuation price for salvage at the time of policy inception. This valuation price could be based either on an average of the recent historical farm-gate prices for each crop in each oblast or on the MoA’s estimated average prices for the current season.

3.67. Insurers and government face major exposures on this scheme in the event of a catastrophe year, as defined by the probable maximum loss (PML) expected once in 100 years. To date, the worst loss on this scheme over the six-year history occurred in 2010 and was equivalent to a loss of 5.9 percent of the total liability (TSI), valued at KZT 2.81 billion (US$19.3 million). This loss was equivalent to a return period of about one in 45 to 50 years, but it is not the worst loss that insurers and their re-insurer (government) may expect in the future. Figure 3.9 and table 3.6 show the results of a modeling exercise to calculate the PML of the scheme for return periods of up to 250 years and four different scenarios: (a) one based on the ac-tual average three-year portfolio TSI and three

assuming a wheat indemnity sales price of (b) KZT 2,000 per centner, (c) KZT 2,500 per cent-ner, and (d) KZT 3,500 per hectare. Figure 3.9 shows that, for option a—the actual portfolio—the 1-in-100-year PML is 9.4 percent of the TSI, which would be equivalent to a loss of KZT 4.4 billion (US$29.3 million) on the 2010 portfo-lio TSI of KZT 46.48 billion. This PML would equate to a gross loss ratio of nearly 396 percent at 2010 premium terms. The analysis also shows that, if the actual average prices of wheat were to fall to levels of between KZT 2,000 and KZT 2,500 per centner, the PML exposures would be very much higher on this scheme.

assessment of the technical, operational, and institutional Features of the compulsory crop insurance program

3.68. This subsection reviews the technical, op-erational, institutional, and financial features of the compulsory crop insurance program and

Figure 3.8 claims and share of claims paid by insurers and government, 2005–10


y = 362.05x + 103.28R = 0.6515

0

500

1000

1500

2000

2500

3000

2005 2006 2007 2008 2009 2010

Pai

d c

laim

s (K

ZT

mill

ions

)

Total Claims Net Claims to Insurers

Government Reinsurance Linear(Total Claims)


highlights some of the key advantages, issues, and drawbacks of the current program.

technical Features

3.69. The salvage-based LIC policy imple-mented in Kazakhstan has several advantages, but also a series of drawbacks. The main ad-vantages of the LIC policy are that (a) it pro-

vides comprehensive MPCI protection to the farmer against the loss of production costs in-vested in growing the crop and (b) it can be used in situations where there is inadequate or no in-formation on the historical crop yields of indi-vidual farmers. This is in contrast to a conven-tional loss of yield MPCI policy, which relies on time-series farm-level crop production and yield data to establish a normal average yield

table 3.5 examples of indemnity calculations according to different Wheat prices at harvest

Indemnity calculationPrice 1: KZT 2,000

per centnerPrice 2: KZT 2,500

per centnerPrice 3: KZT 3,500

per centner

Sum insured (KZT per hectare) 3,500 3,500 3,500

Breakeven yield (centner per hectare) 1.75 1.40 1.00

Sales value for wheat (KZT per centner) 2,000 2,500 3,500

Revenue value for salvage (KZT) 3,500 3,500 3,500

Source: Authors.

Figure 39 estimated pml assuming 2010 average sum insured per hectare and three scenarios of Wheat prices

Source: Authors.

0%

5%

10%

15%

20%

25%

0 50 100 150 200 250

% lo

ss c

ost

min

us %

TS

I

Return Period (years)

3-year Average Price Price= KZT 3500/centner Price= KZT 2500/centnerPrice = KZT 2000/center

94 Kazakhstan

and then an insured yield for each farmer. There are, however, several potential drawbacks to the LIC policy, including the need for in-field yield-based loss assessment where partial losses are involved and the difficulty of establishing ob-jectively the salvageable amount of the crop and its sales value and determining whether this sal-vage value exceeds the insured investment costs leading to a claim.

3.70. The coverage levels provided by the crop insurance scheme in Kazakhstan are extremely low. The sum insured levels that MoA is respon-sible for fixing each year by crop and by oblast according to three technology levels—high, medium, and low—are extremely low for most crops, as shown in table 3.2. In practice, almost all farmers in Kazakhstan elect the cheapest or lowest option of sum insured coverage, which is about KZT 3,500 per hectare (slightly less than US$25 per hectare nationally for spring wheat) because they will pay the least amount of premium for this option. However, this means that, on average, farmers are only in-suring between 20 and 30 percent of their total production costs. The very low levels of crop insurance cover are, therefore, often inadequate to put farmers back into production in the event of a major crop loss.

3.71. The crop insurance premium rates are calculated for each crop at the oblast level and

do not take into account differences in risk at the level of either the local rayon or the indi-vidual farmer. Ideally crop insurance premium rates should be established for homogeneous agro-climatic risk zones, but in most countries such risk zoning and mapping are not available; rates are typically established for administra-tive regions and then smoothed to ensure con-sistency with adjoining regions. In Kazakhstan, the oblast represents a very large geographic area, and there is evidence that agro-climatic and soil conditions vary widely across most of the oblasts. This variation is reflected in major differences in crop yields within the rayons in each oblast.29 A technical study is needed to re-view the possibility of introducing a system of rayon-level crop insurance premium rates in the short term, while more detailed risk zoning and risk mapping are carried out. For this reason, under this World Bank study, an actuarial rating

29 The CJSC identified this issue in its original rat-ing study, which noted that oblasts are very large ter-ritories and agricultural conditions within the oblast may vary significantly, leading to a situation in which farms in low-risk areas end up subsidizing farmers in high-risk areas because they both pay the same tariff averaged for the oblast. The CJSC, however, played down the need for rayon-level and possibly farmer-level premium rates classified by high or low risk because of the compulsory nature of the scheme (CJSC 2003).

table 3.6 estimated pml according to different price assumptionsa

Return period (years)Actual portfolio

(average last three years)

Wheat price 1: KZT 3,500 per

centner


centner


center

10 785,966 682,553 1,159,043 1,707,702

25 1,778,278 1,565,370 2,520,147 3,484,647

50 2,867,899 2,543,651 3,929,562 5,430,554

100 4,372,797 3,960,971 6,195,513 7,950,115

250 7,354,656 6,847,274 9,111,056 11,736,143

Source:Authors based on FFSA data. a. PML values calculated based on portfolio TSI of KZT 46.48 billion.


exercise was carried out at the rayon level for spring wheat, and the results of this analysis are presented in chapter 4.

3.72. Crop insurance premium rates are cur-rently fixed by law for each type of crop and group of oblasts according to minimum and maximum rates, and insurers have little in-fluence over rating decisions. The private and mutual insurance companies have no say in set-ting premium rates or in selecting risk. They are, however, permitted to charge an individual farmer a premium rate that falls between the MoA fixed minimum and maximum rates. Pri-vate insurance companies use the minimum and maximum premium rates to manage, in part, their risk: in the most drought-prone regions of the country, they charge the maximum pre-mium rates to try to avoid writing too much crop business, and when they consider an individual farmer to be a poor risk, they again quote the maximum premium rates. While private insur-ance companies use this difference in minimum and maximum premiums to perform some sort of risk selection, farmer mutual associations ad-vised that they nearly always have to operate at the level of minimum premiums, because their members are not willing to pay the higher rates permitted by law. For spring wheat grown in the more favorable, higher-rainfall regions of Ak-mola, Almaty, Kostanay, EKO, and NKO, the current commercial premium rates are very low, at between 1.78 percent (minimum) and 3.48 percent (maximum); where mutuals are forced to charge the minimum rate of 1.78 percent due to competition, it is unlikely that this rate will be sustainable in the medium to long term. There is a need to reconsider the system of minimum and maximum permitted premium rates.

3.73. The current rates for crop insurance pre-miums do not differentiate between farmers in terms of technology use or implementation of risk management practices. The current rating system does not differentiate between farmers in terms of their technology levels or risk man-agement practices and therefore does not pro-vide any incentive for farmers to manage their

risk exposures—for example, by adopting snow conservation measures in winter and minimum tillage practices and soil moisture conservation practices during the growing season. Chapter 2 shows that the large production enterprises achieve higher average yields and less variable yields in spring wheat and therefore represent a lower-risk group than commercial farmers. The private insurers reported that they aim to in-centivize the best farmers by offering them the minimum rates and to penalize low-technology users in riskier areas by charging them the maxi-mum permitted rates.

3.74. Crop insurance premium rates do not in-clude specific allocation for the costs of in-field loss assessment or loss adjustment expenses. Under the current system, each of the five or-ganizations involved in the in-field assessment of total and partial crop losses is responsible for bearing its own costs of this exercise. In 2010 the average size of a crop insurance policy was 756 hectares, with an average premium of KZT 64,037 (US$442) or KZT 85 (US$0.58) per hectare. Because of the combination of very low average sums insured per hectare and low premium rates, the average premium per policy is very low for a cover requiring such intensive in-field loss assessment, and it is likely that the total costs of adjusting losses will exceed the to-tal premium generated per policy. This evidence suggests a need to review (a) the adequacy of the premium rating methodology for covering loss assessment expenses and (b) the ways of overhauling loss assessment procedures in order to make them more efficient and to reduce loss assessment expenses. See chapter 4 for recom-mendations regarding strengthening of loss as-sessment procedures.

operational Features

3.75. The obligatory nature of the scheme means that there is a major potential problem of moral hazard in the most drought-prone regions of the country. In some regions of Ka-zakhstan, seasonal rainfall is extremely mar-ginal for spring wheat production and, even in

96 Kazakhstan

years of normal rainfall, is very dependent on the amount of winter snowfall and soil moisture at the start of the cropping season. Western Ka-zakhstan (WKO and Akmola) experiences major droughts every two or three years, and it is possi-ble for farmers to predict a drought year accord-ing to the amount of winter snowfall. However, because of the obligatory nature of the scheme, insurers cannot decline to insure farmers in these areas even when they can foresee that they will incur major drought-induced crop losses. In a predicted severe drought year, some farmers in these regions are likely to modify their behavior in two ways: (a) by electing to buy the maxi-mum level of “normative costs” sum insured in the expectation of receiving a claims payment and (b) by incurring less than their normal level of expenditures on crop husbandry and inputs because they know they are likely to lose their crops and be able to submit a claim on their in-surance policies (this is termed moral hazard). The private insurance companies have incurred major losses in western Kazakhstan in the past and are now very reluctant to insure farmers in this region. This is one of the major reasons that most private companies have ceased underwrit-ing crop insurance.

3.76. Private insurance companies do not have their own networks of locally based quali-fied agronomists to conduct preinspections on the insured farms at the time of sowing in order to confirm whether the farmer has complied with the correct sowing practices, seed applica-tion rates, and so forth. As such, cover is open to moral hazard. The costs of establishing such a network and inspecting each and every farm would be prohibitively high. Under the current rating system, insurers are not able to increase rates to cover their A&O expenses.

3.77. The obligatory nature of the scheme means that it is very difficult for insurance companies to exercise any form of accumu-lation control. Drought and frost are systemic or covariate risks that have a potential to cor-relate over very wide geographic areas. In the context of any MPCI program, it is very impor-

tant for insurers to attempt to manage their crop insurance portfolios in extreme drought years, and they do this mainly by setting underwrit-ing limits in each region according to the rela-tive rainfall patterns and drought exposures. In Kazakhstan the huge size of the country means that, even in extreme drought years, not all the spring wheat grown in the country is equally af-fected by drought. If insurers were able to set underwriting capacity limits in each region, they would be able to manage their drought exposure to a major extent. This is, however, currently im-possible to achieve because of the compulsory nature of the crop insurance program.

3.78. Crop insurance is currently marketed exclusively through local sales agents in each oblast and rayon, and this represents an ex-pensive delivery channel. All private companies market their crop insurance policies through lo-cal sales agents who receive a commission for their services that is paid out of the premium collected from the farmer. Many of the mutual insurance companies also rely on sales agents to promote and market their crop insurance policies to farmers who then sign up to become a member of the mutual. Current legislation caps the com-mission paid to agents and brokers at 10 percent of the commercial premium (also termed origi-nal gross premium).30 This represents a signifi-cant cost, which is paid by the farmer. In many countries, insurers use rural service organiza-tions such as agricultural banks, microfinance institutions, input suppliers, or farmer associa-tions to deliver and administer crop insurance to their clients. In such cases, the rural organization acts as an agent, but because of its much lower operating overhead and economies of scale in dealing with large numbers of clients or mem-bers, both the commission payments as well as the company’s own administrative expenses can be significantly reduced. This offers the poten-

30 In early years of the program, the agent’s fees were as high as 30 percent of the premium, but the regulators subsequently imposed a 10 percent ceil-ing in order to make the scheme more acceptable to insurers.


tial to pass on these cost savings to the insured in the form of lower premium rates. The subject of developing alternative and cheaper ways to de-liver crop insurance to small and medium farm-ers in southern Kazakhstan is reviewed further in chapter 6.

3.79. Loss adjustment requires the participa-tion of several parties, is expensive, and some-times lacks transparency. In Kazakhstan up to five persons are involved in adjusting the crop losses at the local level, and this is a very time-consuming and costly exercise. The main draw-back of any LIC policy is the requirement, es-pecially where partial crop losses are involved, for individual farmer and field-by-field loss as-sessment to determine the damaged area and the remaining amount of harvestable crop (termed salvage) in the field. Such assessments are the basis for calculating the expected value of the salvage. It is then necessary to determine wheth-er the value of salvage exceeds the costs invested in the crop up to the time of the loss and whether it is economic for the farmer to continue man-aging the remaining undamaged portion of the crop through to harvest or whether these costs will exceed the salvage value. This process is often subject to conflict over whether the value of salvage exceeds the sum insured investment costs, in which case there would be no claim, or whether the expected value of salvage falls short of the sum insured costs of production, in which case there would be a claim.

3.80. Crop output valuation prices are deter-mined at the time of harvest as opposed to be-ing preagreed and specified in the policy word-ing. This section has shown that, because actual farm-gate wheat prices can vary widely accord-ing to demand and supply, this leads to major variations in the amount of physical crop pro-duction and yield that is required to cover the in-sured costs of production. This situation, where neither the farmer nor the insurer can quantify his indemnity exposures (the amount of crop production and yield loss that needs to occur be-fore an indemnity is paid) is very unsatisfactory and needs to be reviewed.

institutional Features

3.81. The Kazakhstan compulsory crop insur-ance scheme is a PPP that is highly regulated by government and underwritten by the private commercial (and mutual) insurance sectors, with financial claims subsidy support provided by government through the FFSA. The regula-tory, operational, and financial roles assumed by the GRK include (a) to approve the standard LIC policy for crop insurance, including the basis of coverage and insured perils and other policy terms and conditions; (b) to approve each year the sums insured based on the normative costs of production of the crops that are subject to com-pulsory insurance; (c) to develop the minimum and maximum commercial premium rates to be used for the different crops and regions under the crop insurance scheme; (d) to approve the budget for supporting crop insurance; (e) to es-tablish and regulate the commissions payable to sales agents; (f) to set the norms and procedures for the adjustment of crop losses at the individual insured farmer and field level; and finally (g) to provide financial subsidy support both through contributions to the A&O costs of the FFSA and in the form of a 50 percent share in the value of paid claims. In most countries where govern-ments support agricultural insurance PPPs, they usually assume a much smaller degree of opera-tional and underwriting control, and their main function is to provide legal and regulatory sup-port and financial subsidies.

3.82. At the inception of the compulsory crop insurance scheme, seven private insurance companies registered their interest in under-writing this product, but on account of poor underwriting results only three companies sup-ported the scheme in 2010. The level of partici-pation of the private insurance companies in crop insurance in Kazakhstan is very low. Only seven out of 37 private nonlife insurance companies in the market are currently licensed to operate crop insurance, and only three of them actively un-derwrote the obligatory crop insurance scheme in 2010. The main reason companies have ceased underwriting this class of business is that

98 Kazakhstan

they view it as unprofitable; crop insurance is the least profitable of 10 classes of compulsory insurance in Kazakhstan. There is a danger that, unless the scheme can be returned to profitabil-ity, the private insurance sector companies may cease to provide their support in the future.

3.83. Due to the lack of interest of the pri-vate insurance industry in participating in the mandatory crop insurance scheme, the GRK decided in 2006 to license farmer mutual crop insurance associations to write crop insurance. Under Law no. 163-III ZRK of the Republic of Kazakhstan on Mutual Insurance, dated July 5, 2007, government authorized farmers to form mutual insurance associations to underwrite the compulsory crop insurance policy. As of 2011, more than 38 farmer mutual insurance asso-ciations are offering crop insurance in Kazakh-stan.

3.84. Private insurance companies and farmer mutual associations providing crop insurance are not equally regulated. While private insur-ance companies are subject to the regulation of the Agency for Financial Market and Financial Regulation and Control, the farmer mutual crop insurance associations are regulated separately by the Law on Mutual Insurance. The Agency for Financial Market and Financial Regulation and Control exercises tight control over insur-ance activities in the country, including crop insurance. Nonlife private insurance companies are required to have a minimum capital of KZT 1.2 billion (US$8.3 million) in order to operate. On top of the minimum capital requirements, private insurance companies are frequently monitored on their solvency, net retentions, and implementation of risk management procedures. Conversely, farmer mutual associations offering crop insurance are not regulated or supervised by the Agency for Financial Market and Finan-cial Regulation and Control. Therefore, they are not subject to minimum capital requirements or controls over net retentions and solvency re-quirements. In fact, an association with more than 250 farmers can constitute a farmer mutual association and provide crop insurance to its as-

sociates without having to establish any capital or claims reserves. According to the interviews held with farmer mutual insurance associations during the mission, several mutuals did not col-lect enough premiums to pay the full amount of claims incurred during the 2010 crop season. In order to remain solvent, these mutual insurers were forced to reduce the 2010 paid claims on a proportional basis according to the total amount of premiums they had collected during the year.

evaluation of crop insurance effectiveness for Key stakeholders

3.85. This final section briefly summarizes the main issues and concerns that face the three principal stakeholder groups involved in the Kazakhstan obligatory crop insurance scheme. These stakeholders are farmers, insurers, and government (box 3.3).

Farmers

3.86. The compulsory nature of the crop in-surance scheme is very unpopular with many farmers. With very few exceptions, farmers met during the conduct of this study expressed their major dissatisfaction with the obligatory nature of the scheme. As a result, some farmers refuse to purchase crop insurance and prefer to pay the accompanying fines. In addition, the majority of farmers purchase the minimum permitted level of protection in order to minimize their costs. Although most farmers appear to understand that the very low levels of sum insured cover-age they are purchasing do not afford them with adequate financial risk protection in the event of a major crop loss, they have such low expecta-tions of the scheme that they prefer to purchase minimum cover in the knowledge that they will only receive an indemnity in the extreme case of near total crop failure. Moreover, farmers do not understand the operation of the policy and are dissatisfied with the cumbersome indemnity and loss assessment procedures.


insurance companies

3.87. In recent years, the private insurance companies have lost money underwriting the obligatory crop insurance scheme, and they have increasingly withdrawn from underwrit-ing this class of business. Originally, seven insurance companies supported the obligatory crop insurance scheme, but on account of severe financial underwriting losses, today only three companies are actively underwriting it. The in-surance industry’s main concerns are that, be-cause of the compulsory nature of the scheme, they can only exert very limited control over individual risk selection and underwriting. They therefore lack any incentives to invest in crop underwriting and claims management staff or in

operating systems and procedures. In particu-lar, they are concerned about their exposures in western Kazakhstan, where they have incurred major losses over the past six years. In spite of government financial support in the form of 50 percent reimbursement of all claims, the insur-ance companies face major financial exposures because they are unable to access commercial quota-share and or nonproportional reinsurance to cap or limit their liability to loss.

3.88. The private commercial insurers are concerned about what they perceive to be un-fair competition from the farmer mutual in-surance associations. The private insurers are concerned that the mutual insurers are not sub-ject to insurance regulations and do not need to

FarmersDissatisfaction with compulsory nature of crop insurance.•

Reluctance to purchase insurance in spite of being compulsory.•

Extremely low levels of coverage.•

Difficulties in understanding the insurance agreement especially • the basis of indemnity and loss assessment procedures.

governmentVery good social intentions, but compulsory nature of the • program is very unpopular with most farmers.

Intention of obligatory insurance in early years to develop crop • insurance market has not been achieved.


Uncertainties about budgeting claims participation in • catastrophic events.

insurers:Limitations to perform risks selection/underwriting.•

No incentives to invest in underwriting/claims • management infraestructure.


Difficulties to gain access to reinsurance.•

Concern by private commercial insurers that they do not face a level • playing field with the Farmers’ Mutual Crop Insurance Associations.

Crop Insurance has been unprofitable to date.•

box 3.3 Key issues Facing main stakeholders in the compulsory crop insurance scheme

Source: Authors.

100 Kazakhstan

maintain minimum capital or claims reserves. They also noted that the mutuals are not subject to the minimum crop insurance premium rates and therefore undercut their rates, engaging in unfair competition. Finally, they expressed con-cerns about the reputational risks that the insur-ance industry faces when the mutuals are not able to meet their claims liabilities, as occurred in 2010.

government

3.89. The Kazakhstan compulsory crop insur-ance scheme was launched with very well-in-tentioned social objectives, but it is failing to achieve its financial and institutional objec-tives. The program was originally conceived as a mechanism to ensure that all farm workers and small peasant farmers would receive a minimum indemnity in the event of crop failure due to drought or other natural and climatic perils. The obligatory nature of the scheme was intended to be a short-term measure that would enable the

insurance sector to develop a sound and stable crop insurance market based on a partnership between the private and public sectors, while at the same time providing time to educate farm-ers about the benefits of crop insurance so that they would continue to purchase cover once the scheme was made voluntary. After six years, the scheme has failed to develop a strong crop in-surance market or to educate farmers. The fact that the program is very unpopular with many farmers also suggests that it is failing to meet its social objectives. Finally, government faces major uncertainties over its financial exposure to claims.

3.90. In summary, the current obligatory crop insurance scheme is failing to meet the re-quirements of all three major stakeholders. For these reasons, government has asked the World Bank to provide technical support to review the scheme and to identify practical options for strengthening it in the future.


4.1. This section presents a series of options and recommendations for strengthening and improving the current national compulsory crop insurance scheme for the Government of the Republic of Kazakhstan (GRK) to consider. These options and recommendations are made on the basis of the detailed diagnostic technical, institutional, financial, and operational review of the obligatory crop insurance scheme that was presented in chapter 3. Where relevant, it draws on international practice and experience.

4.2. A phased approach is recommended for strengthening and improving the current scheme and for gradually converting it into a fully market-based system. Agriculture in Ka-zakhstan has had to adjust to the major struc-tural changes that occurred at independence 20 years ago, including the switch from collective and state farming systems to individual house-hold farms, small to medium commercial farms, and large production enterprises, along with the financial challenges this brought to individual farmers. These challenges include the need to invest in crop production machinery and equip-ment and to purchase seeds, fertilizers, and plant protection chemicals. Since 2004, the GRK, the Ministry of Agriculture (MoA), insurance com-panies, and other stakeholders (including, since 2008, the farmer mutual insurance associations) have invested in the promotion and implemen-tation of a mandatory crop insurance scheme. These investments laid the foundations for a na-tional scheme, and this is a considerable achieve-ment, given the logistical challenges of provid-

ing crop insurance to large numbers of small to medium farmers who are widely scattered over very large geographic regions. The obligatory crop insurance scheme has, however, suffered major financial losses in the past three years due to very severe droughts in parts of Kazakhstan, and unless the scheme is reformed and strength-ened, it is in danger of failing. Any changes to the existing scheme will need to be introduced gradually and phased in over a three- to five-year period, with the central aim of moving this program onto a sounder commercial basis and toward a more market-oriented approach.

4.3. This study identified three major phases and strategic options for moving toward a mar-ket-based national crop insurance scheme. The phased approach offers government a sequential set of measures that can be adopted over the next three to five years to move this program onto a much more sound commercial footing. If taken, such measures should help the scheme to attract international reinsurance support. The three phases include the following:

Strengthening the current obligatory insur-1. ance scheme and achieving financial stabil-ity (short term, one to three years)

Transitioning toward a market-based crop 2. insurance system (short term, one to three years)

Transforming the obligatory scheme into 3. a national commercial crop insurance pool

chapter 4: Strategy and Options for Strengthening the Current Crop Insurance Program

102 Kazakhstan

backed up by international reinsurance un-der a suitable public-private partnership (medium term, three to five years).

Within each of these strategic options, a series of legal and regulatory, technical, operational, institutional, financial, and reinsurance recom-mendations are made.

phase 1: returning the obligatory crop insurance scheme to profitability and Financial stability

4.4. This section sets out a series of short-term measures designed to return the crop in-surance scheme to profitability, to ensure the continued participation of private commercial insurers, and to ensure financial stability of the system.

legal and regulatory considerations

4.5. It is recommended that the current law be reviewed and reformed. There is a clear need to review and amend the Law on Compulsory Crop Insurance of 2004 to make the scheme more market oriented and to ensure its viability in Kazakhstan. International experience shows that crop insurance is most successful when it is implemented by the private insurance sector on a strictly commercial basis and when insurance companies have responsibility for selecting risk, underwriting, and setting their own terms and conditions. Under a public-private partnership (PPP), agricultural insurance legislation should define the types of public sector support that will be available and set the overall framework for agricultural insurance. An agricultural insur-ance law should not, however, prescribe specific terms and conditions of cover, including sums insured, rates, and loss assessment procedures. These specifics should be the responsibility of underwriters.

4.6. In the short term, it is recommended that the crop insurance law be amended to permit insurance companies to set their own policy terms and conditions, rates, and sum insured

levels. Immediate changes in legislation that should be considered include removing the mini-mum and maximum premium rates from the law and permitting insurance companies to set their own rates for each crop in each oblast and rayon. Similarly, more flexibility should be given to in-surers to determine the sum insured they offer to each farmer under the loss of investment costs (LIC) policy.

4.7. Options for gradually phasing out oblig-atory crop insurance and replacing it with a sys-tem of voluntary insurance need to be consid-ered. In Kazakhstan, the GRK originally planned to make crop insurance compulsory for the first two or three years only. It was thought that, once farmers gained knowledge and experience with it, crop insurance would become voluntary. To date, however, the law has not been amended to permit voluntary insurance. Some of the major problems associated with obligatory insurance are highlighted in chapter 3, including farmers’ dissatisfaction with crop insurance, which some regard as a tax, and the fact that farmers in low-risk regions who adopt high levels of risk man-agement practices and technology are currently cross-subsidizing farmers in the most risk-prone areas, who perhaps should not be producing an-nual crops because of the very high frequency and severity of drought and other causes of loss. The obligatory nature of the program also causes major problems for insurers because they are un-able to exercise any control over risk selection or accumulation, which are key functions for un-derwriting a commercially viable crop insurance program. As evidenced over the past six years, most private insurers have lost a lot of money writing obligatory crop insurance policies, and it is very unlikely that any new companies will register to underwrite this business so long as cover is obligatory. While government has been very successful in promoting mutual insurers, some mutualsexperienced major losses in 2010, threatening their future viability. Options for gradually phasing out obligatory crop insurance and replacing it with a combination of volun-tary insurance and crop credit–linked insurance should be explored further by the various work-ing groups.


4.8. In the medium term, the crop insurance law should be amended to provide the basis for a fully market-based national crop insurance scheme under an appropriate public-private partnership. Under this strategic option, the GRK may wish to consider establishing some form of crop insurance pool, drawing on the ex-perience of countries, such as Spain, Turkey, and the Republic of Korea, that operate commercial agricultural insurance pool schemes under strong PPP relationships. The potential benefits of coin-surance pools in agriculture are reviewed in this chapter. The law would need to be amended to reflect changes under a national pool program.

4.9. Any changes in the crop insurance leg-islation need to consider both private commer-cial insurers and private farmer mutual crop insurance associations. As indicated in chapter 3, the mutuals are regulated separately from the private insurance companies under the Law of the Republic of Kazakhstan on Mutual Insur-ance, dated July 5, 2007 [[. Under this act, the farmer mutual crop insurance associations do not have to meet any minimum capital reserves requirements to cover catastrophic losses, they have considerable flexibility in setting the pre-mium rates charged their members, including the ability to reduce rates or suspend premium pay-ments the following year if they have achieved an underwriting profit, and they are not legally obliged to settle claims that exceed their col-lected premiums. The insurance companies are regulated both by the insurance act and by the obligatory crop insurance law; they have to meet both minimum capital requirements and claims liabilities in full. In order to create a level play-ing field, it is important to bring mutuals under the same regulations as private commercial in-surers.

4.10. The obligatory crop insurance law needs to be reviewed and redrafted to support the introduction of market-based crop insurance. The law requires significant modifications and amendments in order to move to a market-based system. This task needs to be conducted by a le-gal expert with knowledge of international ag-

ricultural insurance legislation. Such an expert should be familiar with the legal and regulatory frameworks of major PPP agricultural insurance schemes in countries such as Spain and Turkey that may have applications to Kazakhstan.

technical strengthening of the loss of investment costs policy

4.11. On the assumption that, in the short term, government and the insurance sector will need to continue to offer the uniform LIC pol-icy, a series of recommendations are identified for improving and strengthening this product. It is assumed that there will not be time prior to the 2012 crop season to introduce any new products or programs and that the standard LIC policy will continue to be marketed for all in-sured crops. Some simple, practical changes for strengthening the design of the LIC policy are identified in box 4.1, and these measures are re-viewed further below. There should be time to introduce these amendments to the existing LIC policy for implementation in the 2012 season starting in May 2012.

4.12. In the short term, even if government elects to maintain LIC crop insurance as an obligatory class of insurance, special consider-ation will need to be given to farmers located in Aktobe and West Kazakhstan (WKO). As shown in chapter 3, Aktobe and WKO are so exposed to drought losses that conventional crop insur-ance cannot continue to be provided to farmers in these two oblasts. Alternative solutions need to be considered if the overall program is to be stabilized and returned to profitability. The GRK therefore needs to consider short-term amend-ments to the crop insurance law to reflect this situation.

4.13. There is a need to introduce a sales pe-riod and final sales cutoff date(s) at least one month prior to sowing to avoid situations of antiselection and moral hazard. Currently the policy is very exposed to antiselection because the final date for binding cover is two weeks af-ter the completion of sowing. Farmers can there-

104 Kazakhstan

fore monitor the development of the season, and if preexisting drought conditions are develop-ing, they can purchase the highest level of sum insured cover in the expectation of receiving a higher indemnity. Most multiple-peril crop in-surance (MPCI) programs introduce final sales cutoff dates for each crop in each region at least one month prior to the recommended sowing dates. It is recommended that policy makers in Kazakhstan introduce a similar sales cutoff date for the obligatory crop insurance scheme.

4.14. It is recommended that the cover period be clearly stated in the policy wording and spe-cifically that cover only incept following germi-nation of the crop and full stand establishment. Full stand establishment is defined as more than 10 centimeters in height for grasses (Graminae) and two-leaf stage for dicotyledons. This recom-mendation is intended to avoid moral hazard, whereby farmers fail to adopt the recommended seed varieties, sowing densities, and sowing dates.

4.15. The insured unit for the purposes of loss adjustment should be strengthened. Currently the insured unit (IU) is understood to be the individual “field” of each crop. In northern Ka-zakhstan, fields may be extremely large (greater than 1,000 hectares), and field boundaries are very poorly demarcated on the ground. In order to avoid conflict at the time of loss assessment, it is recommended that this definition be tightened up. For small units of less than 250 hectares, un-derwriters may wish to consider redefining the IU as “the sown area of all fields of the same crop type, grown in the same farm location.”

4.16. It is recommended that crop insurers be given greater flexibility to set their own levels of sum insured with each insured, according to the insured’s requirements for cover. It is recommended that government modify current legislation to permit insurance companies to ne-gotiate the levels of production cost-based sum insured with their clients—in other words, to provide farmers with more choice. If sums in-sured are significantly increased, this will have

implications for premium rating under the cur-rent LIC basis of insurance and indemnity. See the section on rating for further discussion.

4.17. Government should amend the law to permit insurance companies to set their own premium rates for each crop in each zone. Actuarial rating should be introduced to reflect differences in risk exposures between rayons in each oblast and possibly differences in technol-ogy levels and risk exposures between different types of farmers.31 In conjunction with revisions to the rating procedures, policy makers should study the merits of introducing an individual farmer bonus-malus system in the future. Farm-ers who have not submitted claims in the past would receive a premium discount at renewal, while farmers who have submitted frequent claims would receive loaded premium rates. Since the Fund for Financial Support for Agri-culture (FFSA) maintains a database of claims dating back to 2005, it would be a relatively sim-ple task to determine which farmers are eligible for a rate discount and which are subject to a rate increase.

4.18. For the purposes of valuing actual rev-enue in cases of partial crop losses, it is recom-mended that a preagreed unit value be specified in the policy wording at the time of contracting insurance. The reason for this proposal is to overcome the drawbacks of the current scheme, where partial losses are valued at the current lo-cal market price of the crop at the time of loss. Chapter 3 highlights the uncertainty this causes for insurers and government alike because they cannot assess their financial liability until losses are incurred. It is normal on any MPCI policy,

31 To adjust rates due to local farm-level factors, underwriters in Argentina typically select several fac-tors that influence risk exposures and are easy to verify in the event of a claim, including sowing dates, previous crop, type of tillage, type and texture of soil, and evidence of waterlogging. These factors are duly elicited in the application form, and each is given a score, which is then used to adjust premium rates up or down.


including LIC policies, to preagree and specify in the policy special conditions affecting the unit insured price that will be used to value crop out-put, which is usually based on historical aver-age farm-gate prices for each crop in each zone. Similarly, the current system is very unclear to farmers, who do not know how much of their

crop production and yield they have to lose be-fore the value of salvage falls short of the costs of production invested in growing the crop, thereby opening the policy for a claim. A preagreed sales price means that the farmer can calculate exactly how much yield he needs to lose in order to trig-ger a claims settlement.

box 4.1 recommendations for strengthening compulsory lic crop insurance policy

criteria for acceptance of risk or compulsion of cover. Even if government decides to maintain compulsory crop insurance for all producers in the short term, special consideration will need to be given to farmers located in Aktobe and WKO.

insured perils. Current coverage should be maintained to include loss or damage to crop production due to adverse weather events.

sales cutoff date. A policy sales cutoff date should be set, for example, April 1 or a date to be announced.

cover period. The cover period should be from the time of crop emergence and full stand establishment (for example, wheat at least 10 centimeters tall) through to completion of the harvest.

insured unit. The definition of the insured unit, which is currently defined as the “individual field,” should be strengthened. For small farms of less than 250 hectares, the IU could be defined as “the total area of all fields of the same crop grown in the same location or farm.”

sum insured. Government should amend the law to permit insurance companies to have the option to establish an agreed sum insured with each farmer according to the farmer’s own circumstances and crop insurance requirements.

premium rates. Government should amend the law to permit insurance companies to set their own premium rates for each crop in each zone. Actuarial rating should be introduced to reflect differences in risk exposures between rayons in each oblast and possibly differences in technology and risk exposures between different types of farmers.

bonus-malus system. Underwriters should introduce a bonus-malus system with the following objectives:

Introduce the rating of individual farmers within each rayon. Farmers who do not submit claims • would be rewarded with reduced premiums over time; farmers who submit frequent claims would be penalized with higher premiums to reflect their higher risk exposure.

Reduce the tendency of farmers to submit speculative claims notices in the hope of receiving an • indemnity. Farmers would only submit claims in cases where a major insured cause of loss has occurred that is likely to give rise to a settlement. This would reduce the costs of in-field loss assessment for the insurance companies.

basis of indemnity and claims settlement. In the case of a partial loss of area or yield, salvage (harvestable production) from the affected area should continue to be estimated in the field immediately prior to harvest. However, the crop sales price that is used to value the salvage should be preagreed based on an historical sales price for each crop in each rayon and stated in the policy wording. Where the value of salvage (crop revenue) falls short of the investment costs, the shortfall is indemnified.

Source: Authors.

106 Kazakhstan

increasing the sum insured levels

4.19. The current LIC policy does not provide adequate levels of protection to the majority of farmers. In most cases, farmers only purchase the cheapest “nominal costs” coverage, which for spring wheat is equivalent to about 10 to 15 percent of the value of the expected crop rev-enue. Increasing the levels of sum insured cov-erage would have implications for all stakehold-ers. For farmers, higher coverage would mean that the likelihood of receiving a claims pay-ment would be significantly increased and, in the event of a claim, the indemnity would be ad-equate to cover their production costs in full and to ensure that they can repay any credit due. The downside would be that they would have to pay higher premiums (see below for further discus-sion). For the private insurance companies and mutuals, increased coverage levels would have to be accompanied by actuarial rate increases, and, with the increased sum insured liability, it would be essential for the insurers to have a comprehensive reinsurance protection program in place. For government, the higher coverage levels would mean that budgetary allocations would have to be correspondingly higher to cov-er the 50 percent claims reimbursements. There is a need to set the sums insured in each rayon according to (a) the actual production costs of different types of farmers in each rayon and (b) the risk exposure in each rayon. For example, a sum insured of KZT 10,000 per hectare could easily be covered in North Kazakhstan (NKO) at a reasonable premium rate, but to provide the same high sum insured in Pavlodar or Aktobe would require extremely high premium rates.

revising the crop premium rating methodology

4.20. There is a need to revise the oblast-level crop premium rating methodology and to up-date the premium rates on an actuarial basis. The six-year long-term gross loss ratio at end-2010 was 140 percent (equal to a 70 percent loss ratio net of the government 50 percent claims reimbursement), suggesting that, on average, the

scheme has operated on a breakeven basis. The premium rates were last revised in 2008, and the scheme results deteriorated badly over the past three years, with an average loss ratio of 182 per-cent (91 percent net of the government 50 per-cent claims subsidy). In some oblasts, including NKO and Kostanay, the scheme performed very well, but in others, including Aktobe, WKO, and Zhambyl, it performed very poorly. The scheme is now severely underrated in these oblasts, and rates require adjusting on an actuarial basis.

4.21. The law specifies a system of minimum and maximum premium rates per oblast, but given the differences in risk exposures and claims experience between rayons, it is also recommended that a rayon-level rating system be introduced for the scheme. With up to six years of actual claims experience for each crop in each rayon or oblast, it is now possible to re-vise the premium rates and update them on an actuarial basis in each rayon. A simple actuarial analysis was conducted on the six-year actual premiums and claims at the rayon and oblast level to examine the rate changes that would be required to achieve a target loss ratio of 60 percent (after application of the government 50 percent claims subsidies) on the scheme. The re-sults of this analysis at the oblast level are sum-marized below, and the full results are presented by rayon in annex 4. The six-year actual results at the oblast level indicate that, on average, the current premium rates are adequate to generate a 60 percent loss ratio net of the government 50 percent claims reimbursement in Akmola, Ko-stanay, Kyslorda, and NKO. (However, caution should be exercised in interpreting the calcu-lated rates in Kyslorda because very little busi-ness has been underwritten in this oblast to date, and the results may not be representative of the real pattern of claims.) In order to achieve a 60 percent target loss ratio, very significant rate increases would be required in Aktobe (aver-age premium rate increase from 5.8 to 18.5 per-cent), in WKO (from 7.8 to 33.0 percent), and in Zhambyl (from 3.5 to 12.1 percent). Smaller actuarial rate increases would also be required in East Kazakhstan (EKO) and Pavlodar in or-


der to achieve a net loss ratio of 60 percent after government 50 percent claims subsidy (table 4.1 and figure 4.1).

4.22. Scheme managers should also examine the merits of introducing a bonus-malus sys-tem to adjust the premium rates charged to individual farmers according to their own in-dividual claims experience for each crop over the past six years. Since the system of obliga-tory crop insurance has been in operation for six years, it would be possible to introduce a bonus-malus system for adjusting the premium rates of individual farmers according to their own claims experience over time: low claimants would ben-

efit from lower premium rates, high claimants would be penalized through higher rates. The bonus-malus system would also help to reduce unnecessary loss assessment expenses for insur-ers.32 The crop insurance law would need to be

32 The bonus-malus system could also be de-signed to reduce the number of false claims and the costs of unnecessary loss assessment visits. In Bra-zil, Allianca do Brasil has successfully implemented a bonus-malus system to avoid this problem. Farm-ers automatically lose a 5% bonus at the renewal of the policy if they submit a loss notice on their policy (regardless of whether or not the loss qualifies for a claims settlement). Claims personnel must be trained to explain this to the insured.

table 4.1 adjustments in average premium rates to achieve an average 60 percent target loss ratio, by oblast

Oblast

Six-year actual average premium rate

(2005–10)

Six-year average loss

cost (2005–10)

Adjusted gross premium rate for 60% target

loss ratio (before FFSA intervention )

Adjusted net premium rate for 60% target

loss ratio (after FFSA intervention)

Implied % change in rate

required

Akmola 1.9 2.0 3.38 1.69 −13

Aktobe 5.8 22.2 36.97 18.48 217

Almaty 3.5 4.6 7.64 3.82 10

EKO 3.4 6.0 9.96 4.98 47

Karaganda 4.7 4.7 7.86 3.93 −16

Kostanay 1.7 1.3 2.10 1.05 −40

Kysylorda 5.2 0.1 0.15 0.08 −99

NKO 2.0 0.5 0.79 0.40 −80

Pavlodar 3.6 7.1 11.81 5.90 66

South Kazakhstan (SKO)

2.7 0.8 1.34 0.67 −75

WKO 7.8 39.6 65.94 32.97 323

Zhambyl 3.5 14.6 24.27 12.14 243

Total 2.4 3.4 5.65 2.82 17

Source: Authors based on crop insurance results for 2005–10.

108 Kazakhstan

amended to permit the introduction of a bonus-malus system.

4.23. If in the future farmers elect higher lev-els of sum insured under the salvage-based LIC policy, this would have important implications for rating. Under the LIC policy, if a farmer elects to insure a higher level of production costs, the threshold or breakeven yield for a given sales price of the crop increases. The risk of incurring an insured loss also increases with higher levels of insured or breakeven yield, and this means that higher premium rates would have to be ap-plied at higher levels of sum insured. Under the current rating system, the setting of maximum and minimum rates for each crop in each oblast may reflect the range of sum insured, from the low-technology, minimum costs of production package to the high-cost scientific technology package. However, the only systematic way to calculate the rate increases that would need to

accompany higher sums insured is through an analysis of yield variation at the rayon and, pref-erably, individual farmer levels. Such an analy-sis cannot be conducted on the past six years of claims experience.

measures to improve scheme profitability

4.24. The six-year results show that the finan-cial viability of the crop insurance scheme is being severely prejudiced by the inclusion of Aktobe and WKO, and the options for these two oblasts must be considered now if the scheme is to return to profitability. Chapter 3 shows that over the past six years Aktobe and WKO in west-ern Kazakhstan collectively accounted for only 4.8 percent of total scheme liability but contrib-uted 41 percent of total claims and had six-year long-term loss ratios of 381 and 507 percent, respectively. These two oblasts are severely af-

Figure 4.1 average actual premium rates and premium rates required to achieve a 60 percent loss ratio (net of government 50 percent claims subsidies), by oblast


0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Akmola

Aktob

e

Almat

yEKO

Karag

anda

Kosta

nay

Kysylo

rda

NKO

Pavlod

arSKO

WKO

Zham

bylTo

tal

Pre

miu

m R

ate

(%)

Actual Average Premium Rate

Adjusted Premium Rate 60% Target Loss Ratio (with government 50% claims subsidy)


fecting the financial viability of the national crop insurance program, and measures of controlling the claims costs in these two oblasts are urgently needed. Options presented below include (a) in-creasing government’s share of claims subsidies from 50 to 75 percent or even 100 percent in WKO and Aktobe and (b) removing these two oblasts from the crop insurance scheme and es-tablishing a separate government compensation mechanism for farmers in them.

“As If” Analysis with and without Aktobe and WKO

4.25. An “as if” analysis of the six-year re-sults shows that the actual long-term loss ratio would be reduced from 140 to 96 percent with the elimination of Aktobe and WKO and that, following the government’s 50 percent par-ticipation in claims, the program would have generated sound underwriting profits for the insurance industry. If Aktobe and WKO had not been included in the scheme since 2005, this would have reduced total premium earnings by 13 percent, but would have led to a huge sav-ings in claims costs for insurers of 40 percent of actual claims (or a reduction in claims of KZT

3.3 billion or US$22.0 million) and a reduction in the six-year long-term loss ratio from 140 to 96 percent. Following application of the govern-ment 50 percent reimbursement of claims, the “as if” loss ratio for the insurance would have been reduced to about 48 percent (table 4.2). As shown in figure 4.2, if Aktobe and WKO had not been included in the scheme, the performance of the scheme would have been significantly bet-ter in 2005 (loss ratio reduced from 119 to 71 percent), in 2009 (loss ratio reduced from 131 to 46 percent), and in 2010 (loss ratio halved from 261 to 136 percent). Notably in 2008 the “as if” loss ratio would have increased slightly from 156 to 180 percent because in this year the ac-tual claims in Aktobe and WKO were very low. These two oblasts (in common with much of the northern and central regions of Kazakhstan) were traditionally livestock-grazing regions that were converted to cereal (mainly spring wheat) production during Soviet times. The underly-ing problem in most of Aktobe and WKO is that soils are mostly poor and average annual rainfall is very low. In a normal year, rainfall is barely adequate for growing spring wheat in most of the rayons in these two oblasts. As such, these oblasts are very marginal for spring wheat crop

table 4.2 crop insurance accumulated six-Year results with and without aktobe and WKo, 2005–10

ItemWhole portfolio

(with Aktobe and WKO)Modified portfolio

(without Aktobe and WKO)% reduction

Number of policies 140,961 134,193 −5

Total insured area (hectares) 73,770,915 69,453,803 −6

Sum insured (KZT thousands ) 242,631,438 231,048,598 −5

Premiums (KZT thousands ) 5,861,958 5,102,670 −3

Average premium rate (%) 2 2 −9

Claim payments (KZT thousands ) 8,222,776 4,910,314 −40

Loss ratio (%) 140 96 −31

Loss cost (%) 3.39 2.13 −37


110 Kazakhstan

production, and no matter how a crop insurance policy is structured, it will always be very heav-ily exposed to loss and the technical and com-mercial premium rates that would have to be charged will be so high (an average commercial rate prior to application of government claims subsidies of between 37 percent in Aktobe and 66 percent in WKO) as to make the scheme commercially unviable in these two oblasts. There are, however, a few areas where spring wheat production is more stable and where crop insurance might possibly be considered in the future, albeit at very high rates. These include Taskalisky and Kaztalisky rayons, located in the southwest of WKO, and Karagaly and Martuk rayons, located in northern Aktobe.

Future Options for Aktobe and WKO

4.26. The first option is for insurance com-paies to continue underwriting the LIC scheme

in Aktobe and WKO on the understanding that the GRK will reimburse them for a higher percentage of claims in these two oblasts. Cur-rently government reimburses insurers for 50 percent of the value of all paid claims. Under this option, the GRK would agree to indem-nify a higher percentage of claims incurred in Aktobe and WKO only. According to the insur-ance industry, insurers have already asked gov-ernment to consider raising its share to 70 or 75 percent of total claims in these two oblasts in 2012. This study calculated the additional costs to government of financing (a) 75 percent and (b) 100 percent of claims in Aktobe and WKO based on an analysis of the past six-year actual claims and the assumption that government re-imburses exactly 50 percent of all claims in the other oblasts. Over the past six years, govern-ment’s 50 percent contribution to claims costs would have amounted to KZT 4.1 billion or an annual average of KZT 0.685 billion per year. If

Figure 4.2 annual loss ratio with and without aktobe and WKo, 2005–10


119%

70% 70%

156%131%

261%

71% 68% 65%

180%

46%

136%

0%

50%

100%

150%

200%

250%

300%

2005 2006 2007 2008 2009 2010

Loss

rat

io %

WITH Aktobe / WKO WITHOUT Aktobe / WKO


government would agree to increase its share of claims in Aktobe and WKO, the “as if” annual cost to government would increase to (a) option A, 75 percent claims share in Aktobe and WKO: KZT 0.823 billion per year or an increase of 20 percent, and (b) option B, 100 percent claims share in Aktobe and WKO: KZT 0.961 billion per year or an increase of 40 percent. Option B shows the maximum expected costs to govern-ment if it wishes to continue including Aktobe and WKO in the LIC scheme and assuming that the insurance companies act purely as ad-ministrators in these two oblasts, but do not ac-cept any claims liability. The “as if” 100 percent claims cost to government in these two oblasts would be an average of about KZT 550 million or US$3.7 million per year (see table 4.3). While this option may provide government a short-term solution that retains the support and underwrit-

ing capacity of the insurance industry and in-creases the profitability of the program after the government’s increased claims reimbursements, in the medium to long term it does not tackle the fundamental issue that commercial spring wheat crop insurance is not financially viable in most of the rayons located in Aktobe and WKO.

4.27. The second option for government to consider is whether to take Aktobe and WKO out of the crop insurance scheme altogeth-er and to establish a separate disaster relief scheme for producers of annual crops in these two oblasts. The argument for taking Aktobe and WKO out of the scheme altogether centers on the following: these areas (a) have marginal rainfall and are not suitable for growing annual grain crops and (b) are effectively uninsurable, with six-year long-term loss costs of 22 and 40

table 4.3 budgetary implications to government of increasing the claims compensation level from 50 percent to 75 and 100 percent of claims in aktobe

and WKo, 2005–10

KZT thousands

Option A: 75% government share of claims

Option B: 100% government share of claims

YearTotal paid

claims

Government 50% share of

claims

Cost to government

% increase Cost to

government% increase

2005 1,064,870 532,435 656,273 23 780,110 47

2006 477,670 238,835 244,427 2 250,018 5

2007 700,538 350,269 377,709 8 405,149 16

2008 1,709,623 854,812 869,927 2 885,042 4

2009 1,465,129 732,565 996,650 36 1,260,735 72

2010 2,804,945 1,402,473 1,794,519 28 2,186,565 56

Total 8,222,776 4,111,388 4,939,504 20 5,767,619 40

Average 1,370,463 685,231 823,251 20 961,270 40


Note: This analysis assumes that government’s share of total paid claims is exactly 50%. As discussed in chapter 3, over the past six years government’s share was slightly lower, at 47% of total claims.

112 Kazakhstan

box 4.2 options for streamlining and reducing the costs of policy marketing, preinspections, and loss assessment systems and procedures

introduce preinspections. Because the scheme is compulsory, preinspections should reduce potential antiselection and moral hazard, which are often associated with MPCI schemes. Moreover, few of the insurance companies have regional networks of trained field agronomists to conduct preinspections and loss assessment, and this task is likely to be prohibitively costly for small farm units. Finally, a system of sample preinspections should be considered for the large farms in northern Kazakhstan.

streamline loss notification and loss assessment procedures to make them more cost-effective. The law stipulates that five individuals (organizations) must be involved in field-level loss assessment, and this is a very costly exercise for each party. In addition, the composition of this committee is weighted against the insurer. It is recommended that loss assessment be simplified. In most countries, loss assessment functions are carried out exclusively by the insurer’s own trained loss assessors or by a third-party qualified loss adjuster, and the farmer attends the loss assessment exercise. The loss assessor adopts standardized procedures for estimating the amount of yield reduction or loss, and the farmer is required to approve or refute the assessed loss, in which case a second assessment is conducted. No other parties are required.

in Kazakhstan, farmers are required by law to obtain a meteorological report from the nearest meteorological weather station to prove that an insured event has occurred. This requirement does not seem relevant in the case of drought (which accounts for 95% of all losses to date), which is a progressive peril as opposed to being a specific event. It is recommended that this requirement be discontinued. Farmers should, however, be required to submit a loss notification report to the insurer within a specified period—for example, 48 hours for specific events (such as hail, flood, and autumn frost)—and to notify drought losses when these become apparent. Finally, a bonus-malus system should be introduced to dissuade farmers from submitting claims save where a major loss has occurred and is likely to lead to an indemnity.

use remote sensing to support in-field loss assessment. The NSA already uses remote sensing to estimate the sown area, production, and yield for the MoA and to monitor crop status during the growing season. It is recommended that managers of the crop insurance scheme review potential supporting roles by the NSA at the time of loss assessment.

review marketing and distribution channels with a view to reducing costs. Most policies are sold through local agents located in each oblast and subregion. The agents are currently paid 10% brokerage by law. Alternative crop insurance marketing and distribution channels should be promoted in order to reduce costs, including sales though cooperatives and farmer associations, input dealers, rural banks, and grain merchants.

support farmer education and training programs on crop insurance. In conjunction with the proposed improvements in operating systems and procedures, greater emphasis needs to be placed on farmer education and training programs that explain the basis of insurance and indemnity in the LIC program.

Source: Authors.

percent, respectively, and catastrophic losses ev-ery other year, with loss ratios as high as 1,000 percent in major drought years. It is therefore necessary for government to consider whether to continue promoting annual crops in these oblasts and to use a separate disaster relief fund to compensate farmers in severe drought years.

The cost of this program for Aktobe and WKO, assuming the same 100 percent original claims costs and compensation levels as under the cur-rent scheme, would average about KZT 550 mil-lion (US$3.7 million) per year, with a peak of about KZT 1.6 billion (US$10.7 million) in a very severe drought year, such as 2010.


measures to strengthen operating systems and procedures

4.28. In conjunction with the changes iden-tified to strengthen the LIC policy, a series of potential measures should be considered to im-prove underwriting and claims operating sys-tems and procedures and to reduce the costs of these operations. Box 4.2 summarizes some of the key operational areas that require strength-ening.

4.29. Loss notification procedures are cum-bersome and require the insured to obtain a weather report from the nearest meteorological station to validate that an insured event has oc-curred. While an event report might be used to prove that a specific peril such as frost or exces-sive rain leading to flooding has occurred (but not hail, as this is usually very localized), such a report is usually irrelevant in the case of a pro-gressive peril, such as drought, which is the ma-jor cause of loss in Kazakhstan, accounting for more than 95 percent of claims. It is recommend-ed that the loss notification procedure be contin-ued, but that the requirement for the insured to submit a meteorological report be dropped. This will require an amendment to the crop insurance law. The introduction of a bonus-malus system is also recommended to reduce the propensity of farmers to declare small losses and to declare only major losses that are likely to give rise to a claims settlement. This measure should reduce the number of in-field loss assessment exercises that need to be conducted and lead to cost sav-ings.

4.30. There is a need to review the in-field loss assessment procedures with a view to stream-lining this activity and making it more cost-ef-fective. Currently the law stipulates that once a loss has been notified by the insured farmer, rep-resentatives from five organizations must form a committee to assess the loss in-field. This com-mittee comprises one representative from the lo-cal administration, the FFSA, the local agent, the insurer, and the insured farmer. Each party is re-sponsible for covering its own costs of attending

and assessing the loss, and the process is very time-consuming, costly, and weighted against the insurer. In most countries, loss assessment is carried out exclusively by the insurer’s own trained loss assessors or by a third-party quali-fied loss adjuster, and the farmer attends the loss assessment exercise. No other parties are involved. The loss assessor adopts standardized procedures for estimating the amount of yield reduction or loss, and the farmer is required to approve or refute the assessed loss, in which case a second assessment is made; if the insured is still not satisfied with the outcome of the loss assessment, he is entitled to request arbitration. It is recommended that in Kazakhstan scheme management review the in-field loss assessment procedures and reduce the number of persons required to attend the loss assessment. In some countries, crop loss assessment functions are contracted out to specialist companies of loss adjusters. Although Kazakhstan does have certi-fied and approved companies of loss adjusters, at present none specializes in crop loss assess-ment; in the medium term, options for creating such specialist entities should be explored.

4.31. In the future, it may be possible to use remote sensing to aid the crop loss assessment process. The National Space Agency (NSA) has a very well-developed remote-sensing capability to provide crop monitoring at a resolution of the “individual field” in northern Kazakhstan, where fields tend to be much larger than in the south. There are many potential applications of the NSA’s crop-monitoring services for the existing crop insurance scheme, especially to determine yield at the farm level. It is recommended that management of the scheme meet with the NSA to review remote-sensing services that could po-tentially be provided for monitoring major loss events.

4.32. It is also recommended that policy mar-keting and distribution channels be reviewed with a view to reducing administrative costs. Currently most policies are promoted and sold by individual sales agents in each oblast and rayon, but potentially costs could be reduced if

114 Kazakhstan

these functions were channeled through rural aggregators such as farmer cooperatives, input dealers, and rural banks, including microfinance institutions (MFIs).

4.33. There is a need to accompany improve-ments in the design and implementation of the crop insurance scheme with education and training programs to raise the level of farmer awareness of the role of crop insurance in risk management. Many farmers do not appear to understand how the LIC policy works and are skeptical of the benefits of crop insurance. In parallel to the improvements in policy design, rating, and operational procedures, it is recom-mended that government provide support to commercial insurance companies and mutual in-surers to conduct crop insurance education and training programs.

measures to strengthen institutions

4.34. In the short term, finding ways to encour-age more private commercial insurance com-panies to support the crop insurance scheme is a major challenge. Several measures were identified that could be attractive to local insur-ers, including (a) the introduction of actuarially determined premium rates, (b) the implementa-tion of measures to reduce insurers’ liability in Aktobe and WKO, and (c) the implementation of measures to strengthen loss assessment pro-cedures and give insurers more direct control over this important function. However, in the medium term, it is also probable that insurers will insist on being given greater control over risk selection and underwriting if they are to join the scheme.

4.35. There is also a need to create a level playing field for commercial insurers and farmer mutual insurance associations. Mu-tual insurance associations should in the future be regulated under the Agency for Financial Market and Financial Institutions Regulation and Control and be required to follow the same guidelines with regard to capital requirements and insurance reserves as the commercial insur-

ers. Failure to do so creates biased competition and raises the chances that mutuals will fail to meet their financial obligations.

Financial and reinsurance considerations

4.36. Crop insurance companies in Kazakh-stan are very exposed to catastrophic losses on their retentions, and options for enhanced rein-surance protection need to be considered. The GRK currently provides free proportional rein-surance protection equal to 50 percent of claims to the private insurance companies and mutuals in Kazakhstan. However, neither the private in-surers nor the mutuals have any reinsurance pro-tection on their 50 percent retentions, and they are therefore very exposed to major systemic drought losses. Private insurance companies are better able to absorb and settle catastrophic loss-es than the mutuals because of their much larger size, formal requirements for capital and claims reserves, and diversified nonlife insurance port-folios, in which crop insurance only represents a very small fraction of their overall premium earnings and overall liability. However, there is still a need to design affordable reinsurance protection for the private companies on their 50 percent retentions through some form of stop-loss reinsurance protection. See figure 4.3)..

4.37. The farmer mutual crop insurance asso-ciations are very exposed to losses that exceed their members’ premium contributions, and ways of capping their exposure to catastrophic losses through some form of nonproportional or stop-loss reinsurance protection need to be developed. The mutuals are usually small, do not have reserves, and only underwrite crop insur-ance business. They have to settle claims out of the net premiums they receive from their mem-bers (which are typically on the order of 70 to 75 percent of gross premium after payment of acquisition costs and the mutual’s own adminis-trative and operating expenses); in years where the actual claims exceed the average, they are unlikely to be able to meet their liabilities in full. If the mutuals are to become a financially stable and viable alternative to private commercial


crop insurance, it is essential to put in place a formal risk layering and proportional or nonpro-portional risk transfer (reinsurance) program in order to cap their losses at somewhere between 70 and 100 percent of their premiums.33

4.38. In the short term, it is unlikely that the current scheme will be able to meet the stan-dards required by international reinsurers, and any nonproportional reinsurance solutions will probably have to be provided by the GRK. To date, the GRK has paid crop insurers a total of KZT 3.8 billion in 50 percent quota-share re-insured claims or an average of KZT 630 million per year. This section briefly reviews whether it would be more cost-effective for the govern-ment to support an excess of loss program or to finance premium subsidies or both.

33 In insurance terms this is referred to as gross net premium income, which is the original gross pre-mium the company has earned net of any policy can-cellations and returns of premium.

Simple Burning Cost Analysis for Government Excess of Loss Claims Cover

4.39. An “as if” analysis was carried out on the six-year actual claims under the assump-tion that, instead of providing 50 percent quo-ta-share reinsurance protection, government provided aggregate nonproportional excess of loss claims compensation for the crop insur-ance industry. This analysis assumes that, if government had not provided free 50 percent proportional claims compensation over the past six years, the insurers would have had to have charged premium rates that were twice as high to cover their 100 percent claims liability. There-fore, the actual six-year annual average premi-ums were doubled to represent the original gross premiums the insured would have had to have charged. Two “as if” claims scenarios were ana-lyzed. The first is that insurers retain claims up to 100 percent of the value of the original gross premiums (that is, up to 100 percent loss ratio) and that government provides unlimited protec-

Figure 4.3 structure of proportional (Quota-share) and nonproportional (stop-loss) reinsurance

Source: Authors.

Loss ratio = ∞Proportional quota-share Nonproportional stop-loss

Loss ratio = 100%

Loss ratio = 0%

50% insurance co

mp

any retentio

n

50% g

overnm

ent reinsurance

stop-loss reinsurance layer

insurer primary retention

116 Kazakhstan

table 4.4 “as if” analysis of costs to government of aggregate insurance industry excess of loss protection and Full premium rates charged to Farmers, 2005–10

KZT (thousands)

Scenario and year

Actual premium (with govern-

ment 50% claims reinsurance)

“As if” 100% gross premium (without government 50%

claims reinsurance)

Actual total paid claims

“As if” cost to government for losses in excess of 100% gross

premium

“As if” cost to government for losses in excess 70% gross pre-

mium

With Aktobe and WKO

2005 898,607 1,797,214 1,064,870 0 0

2006 684,722 1,369,444 477,670 0 0

2007 997,392 1,994,785 700,538 0 0

2008 1,093,232 2,186,463 1,709,623 0 179,099

2009 1,114,366 2,228,732 1,465,129 0 0

2010 1,073,639 2,147,278 2,804,945 657,668 1,301,851

Total 5,861,958 11,723,915 8,222,776 657,668 1,480,950

Average 976,993 1,953,986 1,370,463 109,611 246,825

Without Aktobe and WKO

2005 801,657 1,603,315 569,520 0 0

2006 673,999 1,347,999 455,304 0 0

2007 902,616 1,805,232 590,778 0 0

2008 916,678 1,833,355 1,649,162 0 365,814

2009 897,503 1,795,005 408,788 0 0

2010 910,218 1,820,435 1,236,762 0 0

Total 5,102,670 10,205,340 4,910,314 0 365,814

Average 850,445 1,700,890 818,386 0 60,969

Source: Authors based on FFSA insurance data.

tion for any losses in excess of 100 percent of gross net premium income (GNPI). The second is that, in recognition that insurers have to pay business acquisition costs (brokerage) and ad-ministrative and operating (A&O) costs out of their original gross premiums, which reduces the premium they retain to cover claims, the govern-

ment claims compensation program cuts in for any losses in excess of 70 percent of GNPI. A further assumption is that initially government excess of loss claims protection is provided free of charge to the insurers. Finally, the “as if” analysis was carried out with and without Ak-tobe and WKO. The main caveat of this analysis


is that the government excess of loss compensa-tion cover can only be analyzed on an annual aggregate industry-level basis and not by indi-vidual private commercial insurance company or farmer mutual insurance association. In prac-tice, individual companies underwrite different portfolios in different regions of the country and incur different ratios of premium to claims; the claims to the government stop-loss program would inevitably be higher than can be modeled under this simple “as if” analysis applied to the historical claims.

4.40. With Aktobe and WKO included, the government-funded aggregate industry excess of loss compensation with a priority of 100 per-cent of GNPI would have incurred only one claim in the six-year period—KZT 0.66 bil-lion in 2010 (average of KZT 110 million per year); with a priority of 70 percent of GNPI, it would have incurred two claims—a small one in 2008 and another in 2010—with total stop-loss claims of KZT 1.5 billion (average of KZT 347 million per year). As shown in table 4.4, if Aktobe and WKO had been excluded, a priority of 100 percent of premium “aggregate” excess of loss compensation cover would not have in-

curred any claims in the past six years; a priority of 75 percent would have incurred only one small claim in 2008 of KZT 0.27 billion. However, great caution must be exercised in interpreting this simple six-year aggregate “as if” analysis. First, it is based on only six years of data and, although it includes 2010, which was a very se-vere 1-in-50-year drought and biases the results, even more severe 1-in-100-year losses could oc-cur. Second, the aggregate analysis excluding Aktobe and WKO is unrealistic and masks the reality that individual insurance companies and mutuals would have incurred losses in excess of 100 percent of their premium on their own regional crop insurance portfolios over the past years. The analysis is presented to illustrate the option of capping industry losses in catastrophe years through some form of government catas-trophe claims compensation.

Indicative Rating for Aggregate Stop-Loss Reinsurance Protection

4.41. As an extension of the simple six-year “as if” analysis, some preliminary modeling was conducted for spring wheat (which accounts for more than 95 percent of the obligatory crop in-

table 4.5 rating analysis for aggregate stop-loss protection for obligatory lic crop insurance scheme: spring Wheat cover only

Option Limit (% of TSI) XS. Priority (%TSI)

Stop-loss premium

(%TSI)Amount (KZT

billions)

With Aktobe and WKO (total sum insured: KZT 41.8 billion)

Priority 70% of GNPI

96.56 xs 3.44 0.75 0.313


95.09 xs 4.91 0.64 0.266

Without Aktobe and WKO (total sum insured: KZT 39.2 billion)


96.65 xs 3.35 0.66 0.271


95.22 Xs 4.78 0.57 0.225

Source: Authors.

118 Kazakhstan

surance portfolio) to estimate the layering and pricing on an aggregate stop-loss protection cover for the existing LIC scheme. This analy-sis used simulation techniques to calculate more than 5,000 iterations of the expected aggregate losses (loss costs or loss ratios) over the entire scheme. The results of the simulation exercise were then used to estimate the value of claims in excess of the specified priorities (assuming 70 and 100 percent priorities and the provision of full-value reinsurance protection for claims in excess of these priorities). Appropriate loading was then added to the calculated technical rates to cover reinsurers’ expected costs and profits. The results of this stop-loss rating analysis are presented in table 4.5 for the two priorities with and without Aktobe and WKO. While caution must be exercised because this is a preliminary rating analysis, it is considered robust and sug-gests that the costs of providing full-value (that is, up to 100 percent of the total sum insured) aggregate stop-loss protection in excess of 100 and 70 percent priorities would be on the order of KZT 0.27 billion and KZT 0.31 billion per year, respectively.

Premium Subsidy Considerations

4.42. With the switch from 50 percent propor-tional reinsurance to nonproportional reinsur-ance and the parallel need for insurers to dou-ble their premium rates, the GRK may need to consider whether farmers can afford these rate increases or whether it will be necessary to in-troduce premium subsidies. In order to illustrate the potential costs of premium subsidies, the six-year analysis was expanded to include both the aggregate industry-level stop-loss reinsurance protection and 50 percent premium subsidies. Over the past six years, government’s 50 percent of claims liability averaged KZT 685 million per year, but in severe drought years, such as 2010, government’s 50 percent claims share was much higher, at KZT 1.4 billion. If Aktobe and WKO had been excluded from the scheme, govern-ment’s 50 percent quota-share claims reimburse-ment would have been reduced to an average of KZT 409 million per year. This compares with

the “as if” average annual costs to the GRK of stop-loss protection and 50 percent premium subsidies of between KZT 850 million and KZT 911 million per year (table 4.6).

4.43. It is recommended that the GRK study very carefully the issues surrounding premium subsidies before deciding whether to switch from the current system of claims subsidies to premium subsidies. In the current system, gov-ernment compensates 50 percent of the claims costs and then caps premium rates at approxi-mately 50 percent of the technically required rates. In some regions of the country, current premium rates are above the actuarially required rates, and in other parts of the country actual rates are far too low. On the one hand, this re-sults in distorted crop insurance price signals in the market; on the other hand, the 50 percent claims compensation does not provide local in-surers with the required catastrophe protection on their retained claims. Finally, international reinsurers are not willing to support an under-priced scheme. While the authors are very cau-tious about recommending premium subsidies, it would be preferable in Kazakhstan to have an actuarially rated and commercially priced pro-gram and for government first to decide whether to provide financial support in the form of pre-mium subsidies or nonproportional stop-loss re-insurance protection (in the short term) and then to promote the participation of international re-insurers (in the medium term).

4.44. In conclusion, while further analysis is required to study the options for introduc-ing a government-financed nonproportional stop-loss reinsurance program for individual private and mutual insurers, this option has potentially large benefits. The most important benefit would be the guarantee that, if a mutual or indeed a private commercial insurer incurred catastrophic losses in excess of its premium and reserves, the government would indemnify these losses rather than having the insurer default on its obligations to farmers. However, the impli-cations for insurers of moving to a nonpropor-


tional reinsurance program would be that they would have to charge actuarially determined rates (rates would have to be roughly doubled on average), and this move would likely prove to be

very unpopular with farmers unless government were to subsidize premiums. Issues relating to the provision of premium subsidies are reviewed further at the end of this chapter.

table 4.6 “as if” analysis of costs to government of aggregate insurance industry excess of loss compensation scheme and assumed 50 percent premium subsidies, 2005–10

KZT (thousands)

Scenario and year

“As if” 100% gross premium

(without government 50% claims reinsurance)

“As if” cost to govern-ment for losses in excess of

100% gross premium

“As if” cost to government for losses

in excess of 70% gross premium

Government 50%

premium subsidies

Total cost to government for losses in excess

of 100% premium + 50% premium

subsidies

Total cost to government for losses in excess of 70% premium + 50% premium

subsidies

With Aktobe and WKO

2005 1,797,214 0 0 898,607 898,607 898,607

2006 1,369,444 0 0 684,722 684,722 684,722

2007 1,994,785 0 0 997,392 997,392 997,392

2008 2,186,463 0 179,099 1,093,232 1,093,232 1,272,331

2009 2,228,732 0 0 1,114,366 1,114,366 1,114,366

2010 2,147,278 657,668 1,301,851 1,073,639 1,731,307 2,375,490

Total 11,723,915 657,668 1,480,950 5,861,958 6,519,625 7,342,908

Average 1,953,986 109,611 246,825 976,993 1,086,604 1,223,818


2005 1,603,315 0 0 801,657 801,657 801,657

2006 1,347,999 0 0 673,999 673,999 673,999

2007 1,805,232 0 0 902,616 902,616 902,616

2008 1,833,355 0 365,814 916,678 916,678 1,282,491

2009 1,795,005 0 0 897,503 897,503 897,503

2010 1,820,435 0 0 910,218 910,218 910,218

Total 10,205,340 0 365,814 5,102,670 5,102,670 5,468,484

Average 1,700,890 0 60,969 850,445 850,445 911,414


120 Kazakhstan


4.45. This section explores a set of issues and options for the GRK to consider during the transition to a market-based crop insurance system. These center on the introduction of in-dividual grower MPCI, either as a complement to or as a substitute for the current LIC policy, and the introduction of commercial international reinsurance. It is assumed that crop insurance will continue to be obligatory for farmers during this interim phase. This is a decision that GRK will have to review with the local stakeholders. Moreover, it is assumed that Aktobe and WKO will no longer be included in the crop insurance scheme because spring wheat cannot be com-mercially insured in these two oblasts or in any of the individual rayons. It is assumed that farm-ers in these two oblasts will be protected by a separate disaster relief mechanism, but details of this separate program were not considered fur-ther under the current feasibility study.

interim measures to crowd in the private commercial insurance companies

4.46. Government is keen to reform the com-pulsory crop insurance program to encourage greater participation by private commercial in-surers. The past six years have seen an exodus of private commercial insurers from the Kazakh-stan insurance scheme, and if the scheme is to remain viable, this exodus must be halted now. Indeed, measures need to be taken to crowd in as many of the private commercial insurers as possible if the scheme is to diversify its range of crop insurance products and to offer other class-es of agricultural insurance cover, including for livestock, forestry, and possibly aquaculture. In the short term, it is predicted that excluding Ak-tobe and WKO will encourage nonlife insurance companies to join the crop insurance scheme. This section discusses market-oriented mea-sures, including the introduction of new crop in-surance products, starting with individual grow-er MPCI, actuarially determined premium rates,

and support in the form of premium subsidies and nonproportional reinsurance by government (and possibly by international reinsurers). It is expected that these market-oriented measures will encourage insurers to sign up for the crop insurance program.

4.47. In addition, measures must be taken to ensure that the farmer mutual crop insurance associations will remain in the Kazakhstan crop insurance scheme, but only if they are able to meet their financial liabilities in full. As noted in the previous section, in 2010 some mutual crop insurers were not able to meet their financial liabilities in full and, where claims exceeded their net premiums, were forced to pro rata down each claimant’s paid claim. Such actions contravene the purpose of contracting crop insurance and erode farmers’ confidence in the program. Therefore, measures are needed to ensure that suitable excess of loss reinsurance is in place.

introduction of new crop insurance products and programs

4.48. There is a need to offer more choice of crop insurance products in order to satisfy the risk transfer requirements of different types of producers growing different types of crops located in different agro-climatic regions of Kazakhstan. For the past six years, Kazakhstan has implemented a single LIC multiple-peril crop insurance policy for grains, oilseeds, fibers (cotton), and some leguminous and root crops. While the LIC product is suitable for grains, oil-seeds, and other field row crops, it is not suitable for most horticultural and fruit crops, especially those that have multiple or staggered harvests. Furthermore, the product is poorly suited to ir-rigated crops. If Kazakhstan is to develop a vol-untary crop insurance market that is demand driven and meets farmers’ risk management and risk transfer needs, it will be necessary to start investing in the design and rating of new crop insurance products.

4.49. Under this World Bank feasibility study, risk assessment and product design and rating


analyses were conducted to assess the potential for introducing four new types of crop insur-ance products into Kazakhstan, including both traditional indemnity-based products and new index-based products. These products include individual grower MPCI, which is reviewed in this chapter, and three products that are covered in chapter 5: traditional crop hail insurance, area-yield index insurance (AYII), and weather index insurance (WII).

individual grower mpci for Kazakhstan

Features and Challenges for Introducing MPCI

4.50. There are a number of drawbacks of the LIC multiple-peril yield-based crop insur-ance product that Kazakhstan’s insurers have underwritten for six full years. Although one of the principal attractions of the LIC policy is that it does not require accurate yield data on in-dividual growers, there are several drawbacks, which are highlighted in chapter 3: (a) farmers dislike the product because it does not provide them with a clearly established loss of yield guarantee that they can understand, (b) the basis of indemnity is complicated and highly depen-dent on the prevailing market price for the crop at the time of loss, and (c) the product is com-plicated to rate accurately for different levels of LIC sum insured.

4.51. Given the insurance industry’s experi-ence with underwriting the LIC yield-based policy for the past six years, it would be rela-tively simple to make the transition from this cover to a more standardized individual grower MPCI policy. The crop insurers of the LIC pol-icy have gained considerable experience in un-derwriting loss of yield MPCI and in conducting in-field loss assessment to establish actual yields and the amount of loss. This experience would enable them relatively easily to design, rate, and implement individual grower MPCI.

4.52. An individual grower MPCI product is different from the LIC policy in several impor-

tant respects. First, a preagreed insured yield is valued at the time of policy subscription (the insured yield is usually calculated as a percent-age of the individual farmer’s historical average or normal crop yield or the local area average yield). Second, a preagreed unit valuation price is applied to the insured yield to calculate the sum insured. Third, loss assessment involves measuring the actual yield and comparing it to the insured yield; the amount of shortfall is then indemnified at the preagreed valuation price. Basing insurance and indemnity on loss of yield is potentially much more transparent and under-standable for farmers, and loss assessment is also much more objective, as it measures yield loss rather than comparing the expected shortfall in production costs to the estimated value of the remaining crop (salvage revenue).

4.53. The international experience with MPCI is that the product is very popular with farmers, but on account of the high premiums associated with it, most schemes are dependent on govern-ment support in the form of premium subsidies. The international literature on MPCI highlights several drawbacks of voluntary schemes, includ-ing antiselection and moral hazard, the difficulty of establishing average farmer yields and corre-sponding premium rates, the high costs of pre-miums, which require government support in the form of subsidies, and the often very high costs of individual grower in-field loss inspection and assessment. While these drawbacks are indeed very valid, they apply as equally to the existing LIC policy in Kazakhstan. Currently issues of antiselection are less of a problem because the scheme is obligatory for all farmers, but because it is a loss of yield multiple-peril scheme, it shares the drawbacks of other MPCI schemes.

4.54. In Kazakhstan, the main challenges for introducing individual grower MPCI concern the procedures for establishing an individual grower “normal average yield” for a given crop and the basis on which to establish an in-sured yield as a percentage of the average yield. With the possible exception of the United States, very few countries maintain accurate time-series

122 Kazakhstan

databases on the crop production and yields of individual farmers. MPCI is, however, the most popular crop insurance product with farmers, and it is widely underwritten by commercial insurance companies throughout the world, in both developed and developing countries. In most countries, insurers use regional (county, district) historical crop production and yield data to establish an average yield and then an insured yield or optional insured yield as a percentage of the regional average yield. Where high lev-els of insured yield coverage are offered—for example, 75 percent or greater of the regional yield—this may lead to major antiselection by farmers whose average yields are normally be-low the regional average, usually on account of their below-average technology and lower use of inputs. In Kazakhstan, most farmers except for the very big production enterprises are un-likely to be able to provide data on their histori-cal individual crop yields by field and by farm for the past 10 years or more. It is therefore pro-posed that MPCI be developed on the historical rayon-level yield data that, in the case of spring wheat, are available for up to 17 years and can be disaggregated by type of farmer into produc-tion enterprises and commercial farms, if re-quired. In Kazakhstan antiselection is less of an issue because the maximum insured yields that are offered do not exceed 30 to 40 percent of the rayon average yield; only in exceptional cases where average yields are very stable within a rayon might 50 percent coverage be provided.

4.55. In Kazakhstan the methodology adopted by the National Agency of Statistics (ARKS) for sampling and recording crop sown, harvest area, and yields at the rayon level is consid-ered to be accurate and could form the basis on which to design either an individual grow-er MPCI cover or AYII, at least in the case of spring wheat. Under this study, a detailed review was conducted in the eight main grain-producing oblasts of the rayon-level crop area, production, and yield data for spring wheat for the past 17 years. It was concluded that these data are accurate and can form the basis for the design and rating of either an individual grower

MPCI cover or an area-yield index cover.

4.56. A further challenge pertains to the rat-ing procedures for MPCI cover when indi-vidual grower yield data are not available and rayon-level yield data have to be used. MPCI rating is based on a statistical analysis of varia-tion in time-series yields. The individual grower MPCI rating exercise for Kazakhstan was based on 17 years of rayon-level spring wheat annual yields for production enterprises, commercial farmers, and the rayon for both groups of farm-ers. The rating methodology involved cleaning and detrending the rayon average yields and estimating the average expected yield for each rayon based on the average yield for the last five years. Insured yield coverage levels of between a minimum of 10 percent and a maximum of 40 percent of the rayon level’s expected yield were then selected, and the losses for each coverage level were simulated 5,000 times to establish the pure loss cost rates. In order to estimate the higher variability in yield between farmers, the coefficients of variation around mean yield were increased by a factor of 15 percent. These were then adjusted to include catastrophe loadings, to derive the technical rates, and to determine the indicative commercial premium rates for a target 60 percent loss ratio that would need to be charged to individual spring wheat farmers in each rayon.

Insured Yields and Sum Insured

4.57. Under an MPCI policy, the sum insured contains two elements: an insured yield and an agreed unit valuation price. The analysis of variation in 17-year spring wheat yields found these to be so variable that the maximum insured yields that could be offered to farmers in individ-ual rayons were no more than about 40 percent of the expected yield. For the purpose of this ex-ercise, spring wheat was valued on the basis of the average national wheat prices for the period 2008 to 2010: KZT 3,120 per centner. However, any unit valuation price could be used, based on the costs of production per centner and the final sales price.


table 4.7 example of the calculation of the sum insured for an mpci policy: spring Wheat grown in akkol rayon, akmole oblast

Item and type of farmer Production enterprise Commercial farm Overall

Expected yield (centner per hectare) 8.9 8.1 8.7

Insured yield coverage options (centner per hectare)

10% coverage 0.9 0.8 0.9

20% coverage 1.8 1.6 1.7

30% coverage 2.7 2.4 2.6

40% coverage 3.5 3.2 3.5

50% coverage 4.5 4..0 4.3

Unit insured value (KZT per centner) 3,120 3,120 3,120

Sum insured (KZT per hectare)

10% coverage 2,761 2,515 2,702

20% coverage 5,522 5,029 5,404

30% coverage 8,284 7,544 8,106

40% coverage 11,045 10,059 10,808

50% coverage 13,806 12,574 13,510

Source: Authors.

table 4.8 estimated total sum insured for the compulsory mpci crop insurance scheme, by coverage levels and oblast

Insured yield coverage level

Oblast 10% 20% 30% 40% 50%

Amount insured (KZT millions)

Akmola 10,985 21,970 32,956 43,941 54,926

EKO 1,181 2,361 3,542 4,723 5,904

Karaganda 1,346 2,691 4,037 5,383 6,729

Kostanay 14,786 29,573 44,359 59,145 73,931

NKO 13,216 26,432 39,648 52,864 66,080

Pavlodar 910 1,821 2,731 3,641 4,552

Total 42,424 84,849 127,273 169,697 212,121

Amount insured (US$, millions) 293 585 878 1,170 1,463

Source: Authors based on ARKS rayon-level spring wheat production data.

124 Kazakhstan

4.58. Under the MPCI policy, there is more flexibility in offering farmers optional cov-erage according to their circumstances and higher levels of coverage than under the cur-rent LIC policy. Chapter 3 showed that, under the LIC policy, farmers elected the lowest nor-mative cost level of sum insured of about KZT 3,500 per hectare for spring wheat in 2010, equivalent at the prevailing sales price of wheat to an underlying insured yield of about 1 centner per hectare or 10 to 15 percent of the average yield of the crop. One of the major objectives of the MPCI policy would be to offer farmers the option to purchase higher levels of coverage up to 40 percent of the expected rayon yield. An example of the calculation of the insured yield and sum insured is given in table 4.7 for spring wheat in Akkol rayon, which has an overall expected yield of 8.7 centners per hectare. At the maximum 40 percent insured yield cover, the farmer would have an insured yield of 3.5 centners per hectare; at the given unit insured price of KZT 3,120 per centner, the sum insured would be equivalent to KZT 10,808 per hectare. The 40 percent coverage level would afford the farmer about three times the current LIC protec-tion. Conversely, in those rayons where farmers achieve much higher average yields of spring wheat, the levels of insured yield coverage and sums insured would be correspondingly higher. The maximum expected yield in any one rayon is 17.29 centners for commercial producers in Mendikara rayon in Kostanay, and in this case the 40 percent coverage level is equivalent to 6.9 centners per hectare, with a sum insured of KZT 21,578 per hectare. The spring wheat in-sured yields and sums insured were calculated separately for production enterprises, commer-cial farms, and overall in all the rayons and are presented in annex 4.

4.59. The total sum insured (TSI) of the scheme would be significantly higher if these proposals were adopted, assuming that all farmers continued to purchase MPCI cover—that is, if the individual grower MPCI program continued to be obligatory for all spring wheat farmers. Table 4.8 provides some illustrative

estimates of the total sums insured that would apply across the six eligible oblasts (Aktobe and WKO being eliminated from the scheme).34 The actual 2010 TSI for the obligatory scheme was KZT 47.3 billion (US$326 million). Under an MPCI program, at 20 percent coverage across all rayons and an average unit valuation price of KZT 3,120 per centner, the TSI would increase to KZT 84.8 billion (US$585 million). At the highest level of coverage—50 percent—the to-tal scheme liability would rise further to KTZ 212 billion (US$1.46 billion). With the proposed higher levels of sum insured and total scheme liability, expected claims would also rise; there-fore, it is very important to examine the expected losses that might occur.

MPCI Rating Methodology and Indicative Premium Rates

4.60. The statistical rating methodology used in this study to establish individual grower MPCI rates conforms to the MPCI rating pro-cedures that are adopted by the insurance in-dustry. The rating procedures were based on an analysis of variance in the rayon-level 17-year yields and were adjusted to reflect the higher variation of disaggregated individual farmer yields in spring wheat by multiplying the coef-ficient of variation by 1.15. Full details of the individual grower MPCI rating procedures are contained in annex 2 and annex 4.

4.61. The rates presented in this report are in-dicative of commercial premium rates for a 60 percent target loss ratio, but the final decisions over rates will be taken by insurers and their reinsurers. The burning cost or pure premium rates were calculated for each level of insured yield coverage, and a very conservative catas-trophe or reserve load was added to derive the technical rates for each coverage level from 10

34 For the purposes of this analysis, the average sown area of spring wheat per rayon for 2008 to 2010 was used to establish the TSI in each rayon, each oblast, and in total.


to 50 percent of expected yield. The technical rates were grossed up by 40 percent to achieve a conservative target loss ratio of 60 percent. The indicative commercial rates for spring wheat by rayon and coverage level are presented in an-nex 4, and the MPCI rating tool and database are available to the key stakeholders on request. Finally, the commercial premium rates derived under this study are high not only because of the underlying yield variability, but also because of the conservative loadings applied; if this scheme passes to the detailed design and planning stage, there should be room to analyze, for example, the actual A&O costs of insurers. If these are found to be lower than assumed under this study, it will be possible to reduce the 40 percent gross-up to a more reasonable level.

4.62. A comparison was made of the aver-age premium rates that are actually charged on the obligatory LIC scheme and the com-mercial premium rates that would be charged under the proposed MPCI program. The LIC

premium rates are, in effect, subsidized by a fac-tor of 50 percent because of the government 50 percent claims reinsurance program. These rates were doubled to reflect the six-year average full (100 percent) commercial premium rates that in-surers would have had to have charged if there had been no government financial support for claims. The average full rates per oblast would therefore range from an average low of 3.5 per-cent in Kostanay to a high of 9.4 percent in Kara-ganda (table 4.9). The rayon-level MPCI indica-tive commercial premium rates for spring wheat with a 60 percent target loss ratio for 20 percent coverage would range from an average low of 3.6 percent for NKO (and are in fact lower than the existing LIC average rates in this oblast) to a high of 7.1 percent in Pavlodar on account of the much higher yield variability in the Pavlodar rayons. At the higher level of 30 percent insured yield coverage, the commercial premium rates in most rayons would exceed 8 percent. The one exception is NKO, where 40 percent cov-erage could be offered at relatively affordable commercial premium rates of about 10 percent.

table 4.9 actual average rates and indicative average commercial premium mpci rates for a 60% target loss ratio

premium rates (%)

LIC scheme ratesNew MPCI commercial rates for spring wheat

(insured yield coverage level)

Oblast

Six-year average LIC

premium rates (50% rates)

“As if” 100% full LIC

premium ratesa

10% 20% 30% 40% 50%

Akmola 1.9 3.9 1.5 4.8 8.9 13.6 18.4

EKO 3.4 6.8 2.5 6.9 12.0 17.3 22.7

Karaganda 4.7 9.4 1.8 5.6 10.2 15.2 20.4

Kostanay 1.7 3.5 1.4 4.6 8.7 13.2 17.9

NKO 2.0 4.0 1.1 3.6 6.7 10.3 14.1

Pavlodar 3.6 7.1 2.1 6.2 11.1 16.3 21.5

Total 2.2 4.4 1.4 4.5 8.3 12.6 17.1

Source: Authors based on FFSA insurance data and ARKS rayon-level wheat yield data. a. “As if” full premium rates assuming no government 50% claims payment subsidies.

126 Kazakhstan

At the highest level of 50 percent insured yield coverage, the commercial premium rates in most rayons would exceed 15 percent, being in some cases (such as in Karaganda, EKO, and Pavlo-dar) above 20 percent of TSI.

4.63. If the scheme continues to be obligatory for all farmers, the estimated total commercial premium income generated by the individual grower MPCI cover for spring wheat would increase significantly. Applying the commer-cial premium rates to the TSI corresponding to each coverage level indicates that 100 percent premium for a scheme that insures all eligible spring wheat grown in the six oblasts may be on the order of KZT 3.8 billion (US$26.1 million) at the 20 percent coverage level, rising to a total premium of KZT 36 billion (US$251 million) at the 50 percent coverage level (table 4.10).

4.64. This analysis also suggests that the gov-ernment may need to consider introducing pre-mium subsidies as an alternative to its current practice of subsidizing 50 percent of claims in order to make crop insurance more affordable to farmers. The potential costs to government

of switching its current 50 percent of claims re-insurance to 50 percent premium subsidies are shown in table 4.11, assuming that the scheme continues to be underwritten on 100 percent of spring wheat area. The fiscal implications for government are that, if the levels of insured yield protection and sums insured are increased, the corresponding premium subsidies will also increase significantly, as shown by the illustra-tive cost of KTZ 1.9 billion for 50 percent pre-mium subsidies at the 20 percent coverage level. See further discussion at the end of this chapter.

MPCI Probable Maximum Loss Estimates

4.65. Spring wheat production in Kazakhstan is very exposed to drought losses, and, with the increase in insured yield coverage and sum insured under the proposed individual grower MPCI scheme for spring wheat, it is very im-portant that the probable maximum loss (PML) exposures be quantified and a risk financing and reinsurance strategy identified. Under the current risk modeling exercise for spring wheat MPCI cover, the PML associated with return pe-riods of up to one in 250 years was calculated for

table 4.10 estimated commercial mpci premium for coverage of 10 to 50 percent for compulsory scheme covering all eligible insured acreage


Oblast 10% 20% 30% 40% 50%

Premium (KZT millions)

Akmola 165 1,056 2,949 5,956 10,088

EKO 30 163 424 819 1,341

Karaganda 24 149 411 819 1,370

Kostanay 210 1,366 3,844 7,803 13,267

NKO 142 943 2,659 5,420 9,290

Pavlodar 19 113 302 593 978

Total 589 3,790 10,590 21,410 36,334

Premium (US$ millions) 4.1 26.1 73.0 147.7 250.6

Source: Authors based on ARKS rayon-level spring wheat production data


table 4.11 Fiscal cost to government of 50% premium subsidies on mpci program


Oblast 10% 20% 30% 40% 50%

Cost (KZT millions)

Akmola 82 528 1,475 2,978 5,044

EKO 15 81 212 410 670

Karaganda 12 75 205 409 685

Kostanay 105 683 1,922 3,902 6,634

NKO 71 472 1,330 2,710 4,645

Pavlodar 10 56 151 296 489

Total 295 1,895 5,295 10,705 18,167

Cost (US$ millions) 2.0 13.1 36.5 73.8 125.3

Source: Authors based on ARKS rayon-level spring wheat production data.

table 4.12 estimated probable maximum loss for mpci Wheat scheme, by level of coverage

Coverage

Item 10% 20% 30% 40% 50%

Total sum insured (KZT millions)

42,424 84,849 127,273 169,697 212,121

PML (% of TSI)

1 in 10 years 0.41 2.09 5.62 10.85 17.13

1 in 50 years 3.13 10.83 19.79 29.14 37.93

1 in 100 years 5.43 16.80 28.70 39.17 46.98

1 in 250 years 10.80 25.99 38.71 46.96 54.42

PML (KZT millions)

1 in 10 years 175 1,777 7,153 18,414 36,336

1 in 50 years 1,329 9,191 25,191 49,444 80,456

1 in 100 years 2,304 14,251 36,524 66,463 99,652

1 in 250 years 4,581 22,051 49,268 79,688 115,428

1-in-100-year PML (%) 391 376 345 310 274

1-in-100-year PML (US$) 15.9 98.3 251.9 458.4 687.3

Source: Authors.

128 Kazakhstan

each coverage option from 10 to 50 percent of average rayon yield; the results are summarized for an obligatory scheme in table 4.12 and figure 4.4. The analysis suggests that, for a maximum 50 percent coverage level, the expected losses could be on the order of KZT 36.3 billion (17 percent of the value of the TSI) for a 1-in-10-year loss, and KZT 99.7 billion (47 percent of TSI) for a 1-in-100-year loss, equivalent to a loss ratio of about 274 percent.

Implications for MPCI Reinsurance

4.66. Given the exposure of spring wheat pro-duction to catastrophic drought in Kazakhstan, it is extremely unlikely that the insurance sector will be willing to assume the increased liabili-ties implied under the proposed MPCI program unless government is willing to provide reinsur-

ance support for this initiative. Currently gov-ernment provides 50:50 quota-share reinsurance protection to the private commercial and mutual crop insurers, but this protection does not cap their exposure to catastrophic losses. Therefore, for the purposes of this study, some preliminary analyses were conducted for nonproportional stop-loss reinsurance protection for the spring wheat MPCI program.

4.67. Some preliminary modeling was con-ducted to establish the indicative pricing for aggregate stop-loss reinsurance protection for the spring wheat MPCI program. The modeling was conducted assuming full-value protection and priority levels of 70, 100, and 150 percent of GNPI for the four levels of MPCI insured yield coverage. The results of this analysis are summarized in table 4.13, and further details of

Figure 4.4 estimated pml for mpci Wheat scheme, by level of coverage

Source: Authors.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

1 50 100 150 200 250

PML Loss of Investment coverage under three different price scenarios (in Loss Cost)

10% Coverage 20% Coverage 30% Coverage

40% Coverage 50% Coverage


the methodology used, which draws on accepted reinsurance industry stop-loss pricing methods, are presented in annex 4. The analysis shows that for losses in excess of 100 percent of GNPI, the full-value stop-loss reinsurance pricing would be on the order of KZT 991 million (26.14 percent of GNPI) for 20 percent coverage, rising to KZT 5.8 billion (16 percent of GNPI) for 50 percent coverage. If the lower 70 percent of GNPI prior-ity were adopted, the aggregate stop-loss pricing would be correspondingly higher.

4.68. In practice, unless the crop insurers form a single pool, the pricing of stop-loss rein-surance cover would have to be conducted for each individual insurance company and mutu-al insurer. This would have to be done accord-ing to the size and distribution of each insurer’s portfolio and the level of insured yield coverage in each region.

4.69. During the transition to a more market-based crop insurance program, it is possible that the larger commercial crop insurance companies may be able to seek reinsurance support from international reinsurers, either on a nonproportional stop-loss basis or as a combination of proportional and nonpropor-

tional reinsurance. In order to gain access to in-ternational reinsurance capacity, the individual insurance companies would need to demonstrate that they have (a) financial ability and adequate solvency margins to sustain losses, (b) a core crop insurance underwriting and claims man-agement team, (c) a balanced MPCI portfolio with adequate geographic spread (and indeed reinsurers may insist on sum insured limits per oblast or region to ensure accumulation control); (d) commercial premium rates for each level of insured yield coverage that are technically de-rived and contain both catastrophe loading and margin to cover A&O costs and profit margin; and (e) the necessary in-field preinspection and crop loss assessment staffing systems and proce-dures to control risk and adjust losses in a timely and accurate fashion.

4.70. While some commercial insurers may be able to meet the requirements of international reinsurers, it is unlikely that, at present, any of the farmer mutual crop insurance companies will be able to meet these requirements. In the short term, it is likely that government will need to provide nonproportional reinsurance cover.

4.71. Finally, while the nonproportional stop-

table 4.13 indicative pricing for aggregate stop-loss reinsurance for the Wheat scheme, by coverage level


Item 10% 20% 30% 40% 50%

Stop-loss reinsurance premium (KZT millions)

Priority 70% of GNPI 242 1,115 2,675 4,948 7,930

Priority 100% of GNPI 227 991 2,243 3,895 5,845

Priority 150% of GNPI 208 829 1,711 2,664 3,515

Stop-loss reinsurance premium (% of commercial premium GNPI)

Priority 70% of GNPI 41.14 29.42 25.26 23.11 21.82

Priority 100% of GNPI 38.59 26.14 21.18 18.19 16.09

Priority 150% of GNPI 35.24 21.88 16.15 12.44 9.67

Source: Authors.

130 Kazakhstan

loss reinsurance model illustrated in table 4.13 assumes a single excess layer providing full-value cover, in practice very few international reinsurers would be willing to offer unlimited protection. They will normally insist on a lay-ered reinsurance program with capped liability, and for higher levels of catastrophe risk, it may be necessary for government to assume liability (see the end of this chapter for further discus-sion).

phase 3: transformation into a Fully commercial crop insurance scheme

4.72. This section presents proposals for a vol-untary commercial public-private agricultural insurance partnership for Kazakhstan, a cen-tral feature of which would be the formation of a crop coinsurance pool system, backed up by international reinsurance. This section presents a series of options and recommendations for the GRK and key stakeholders to consider for the introduction of voluntary agricultural insurance in Kazakhstan, the creation of a crop insurance pool system designed to encourage participation by the private commercial insurance companies, and the introduction of a specialist agricultural insurance entity to act on behalf of the pool that is capable of developing and implementing new classes of agricultural insurance. The pool would be supported by a commercial reinsurance pro-gram that would be placed with international re-insurers. The roles of government and the FFSR are also explored, and it is likely that their roles will center on financial support in the form of premium subsidies and possibly catastrophe re-insurance protection.

transition from obligatory to voluntary crop insurance

4.73. As part of the transition to a market-based crop insurance system, policy makers in Kazakhstan will need to consider making crop insurance voluntary. As previously noted, Ka-zakhstan is one of a small minority of countries to adopt obligatory crop insurance and almost unique in trying to implement obligatory crop

insurance through the private commercial insur-ance sector.

4.74. In the short term, if crop insurance is made voluntary, it is likely that there will be a major reduction in demand while the farm-ing sectors adjust to the realities of a demand-driven voluntary crop insurance system. At this stage, it is not possible to predict how great the contraction in demand by farmers will be, but it is likely to be significant. Under a voluntary system, crop insurers will be free to select which types of farmers, which crops, and which regions they are willing to underwrite.

4.75. The Law on Compulsory Crop Insur-ance will need to be amended to reflect the new requirements of a voluntary PPP crop insur-ance scheme in Kazakhstan. According to the roles that government plays in supporting this scheme, the law will need amending, for exam-ple, to focus more specifically on government financial support in the form of proportional or nonproportional reinsurance and potentially pre-mium subsidies.

4.76. Under a future voluntary crop insurance program, Kazakhstan insurers will need to link crop insurance with other rural services—for example, input supplies (seeds, fertilizers)—and with seasonal crop credit provided through the banking system. In many countries, public sector provision of crop credit is closely linked with crop insurance, and banks make their lend-ing conditional on the farmer having crop insur-ance in place at the time of receiving his loan. In other words, crop insurance is mandatory for credit recipients and voluntary for noncredit recipients. Normally such crop credit–linked programs make the bank the first beneficiary on the crop insurance policy in order to ensure that any indemnity is used to repay the outstanding amount of loan; any balance on the insurance settlement is then paid to the farmer. Countries that operate compulsory crop credit insurance programs include Mexico (where both commer-cial crop loans and small farmer group loans are insured on a compulsory basis), India (where the world’s largest national area-yield crop credit in-


surance scheme, which is implemented through the public sector Agricultural Insurance Compa-ny of India, AIC, covers about 25 million small-holder farmers per year), the Philippines (where public sector crop credit provision is again conditional on the farmer having an individual grower MPCI cover in place through the paras-tastal agricultural insurer, the Philippines Crop Insurance Corporation). See Mahul and Stutley (2010) for further details on countries with link-ages between crop credit and crop insurance.

rationale for creating an agricultural insurance pool

4.77. In Kazakhstan under the third phase of transformation to a market-based crop in-surance system, it is recommended that policy makers review the potential to form a coinsur-ance pool specifically dedicated to underwrit-ing a national agricultural insurance portfolio under a suitable private-public partnership. In countries where insurance markets are develop-ing and there is little or no tradition of crop or livestock insurance or rural insurance infrastruc-ture, a pool coinsurance program may be a much more attractive and cost-effective proposition for commercial insurance companies than trying to operate independently.

4.78. The potential benefits of an insurance pool include the ability to underwrite a much broader and larger book of business and the potential to achieve a much better geographic spread of risk than if each company were op-erating independently. Other benefits include economies of scale in the costs of developing new products and programs, underwriting risks, and adjusting claims when a single lead coin-surer is appointed (or a separate management underwriting unit is created) to implement the business on behalf of the pool members. There are also major potential cost savings in the pur-chase of reinsurance protection for a pooled co-insurance program. Potential drawbacks include a possible reduction in competition and in the range of products, services, and premium rates offered by the pool. Details on the benefits and limitations of pools are contained in box 4.3.

4.79. Coinsurance pools for agricultural in-surance have proved to be very popular with private and mutual insurers in many countries. Notable among these are the Agroseguro pool in Spain,35 the TARSIM pool in Turkey, the live-stock insurance pool in the Philippines, the hail insurance pool in Austria, and various other pool arrangements in China, Malawi, Mongolia, and Ukraine.

4.80. The rationale for forming a coinsurance pool in Kazakhstan centers on several key fac-tors. These include the following:

A very small number of private commer-• cial companies are currently supporting this scheme, and government needs to attract commercial insurers if crop insurance is to remain a viable proposition in Kazakhstan. LIC/MPCI crop insurance is a catastrophe class of business, and many insurance com-panies are reluctant to risk their capital on it. Under a pool agreement, individual com-panies can choose to participate with very small shares of the overall risk.

The start-up investment costs are prohibi-• tively high for individual insurance compa-nies, which must create their own internal crop underwriting and claims departments and then develop regional networks of mar-keting and sales agents, crop inspectors, and loss assessors to administer the scheme. Pools offer the opportunity to create a sin-gle centralized insurance underwriting and claims management and loss assessment capability (often termed a managing under-writer company, MUC) and, for individual members of the pool, to contribute to the costs of running the MUC, while benefiting from the advantages of economies of scale in fixed and variable costs.

35 Agroseguro stands for the Agrupación Española de Entidades Aseguradoras de los Seguros Agrarios Combinados (Spanish Group of Insurance Entities of the Combined Agrarian Insurance).

132 Kazakhstan

C• ommon standards are lacking at the re-gional level in the underwriting of crop risks, especially with regard to the in-field loss assessment capabilities of individual insur-ance companies and farmer mutual insurance associations. Under a pool agreement, the managing underwriter would be responsible for coordinating all underwriting and loss adjustment activities and for ensuring that common standards are adopted throughout the country.

A lack of consistency in crop rating and com-• petition is driving crop insurance premium

rates down to unsustainable levels. Under a pool agreement, all insurers would issue standard crop insurance policies and would adopt the same premium rates for each crop in each zone and region.

It is difficult to arrange commercial interna-• tional reinsurance protection for individual Kazakhstan insurance companies with very different underwriting standards and portfoli-os. Under a pool agreement, the MUC would purchase a single reinsurance program, and it would be much cheaper to transact a single reinsurance contract for the pool.

box 4.3 benefits and limitations of coinsurance pool arrangements

benefits. Economies of scale can be realized by operating as a single entity with shared (pooled) A&O functions, leading to cost savings due to the following:

• Reduced staffing requirements (fixed costs)

• Shared costs of product research and development, actuarial, and rating

• Reduced costs of underwriting and claims control and loss adjustment.

Cost advantages are realized because the pool is able to purchase common account (pooled) reinsurance protection rather than each company trying to place its own reinsurance program. This leads to advantages due to the following:

• Stronger negotiating position with reinsurers

• Larger and more balanced portfolio and better spread of risk

• Reduced costs of reinsurance due to pooled risk exposure

• Reduced transaction costs (reinsurance brokerage).

Companies do not have to compete on rates in a soft market, and the pool has the ability to maintain technically set rates. Most pools operate as the sole insurance provider or monopoly (for example, Austria, Senegal, Spain, and Turkey), so there is no competition on pricing.

The pool has the ability to maintain underwriting and loss adjustment standards. Under a pool monopoly arrangement, the MUC can ensure that common and high standards are maintained in the underwriting of crop and livestock insurance and in the adjustment of claims. Where companies compete against each other for standard crop insurance business, loss adjustment standards often vary between companies.

limitations. The pool may act as the sole agricultural insurer, resulting in lack of competition in the market in terms of the following:

• Range of products and services offered

• Range of perils insured

• Regions where agricultural insurance is offered or the type of farmer insured

• Premium rates charged by the pool.

Source: Authors.


institutional Framework for a ppp agricultural insurance pool

4.81. The proposed agricultural insurance pool would involve the active participation of the public and private sectors. The institutional framework proposed for the pool is outlined in figure 4.5, which draws on the experiences of the Spanish and Turkish agricultural insurance pools (see annex 5). The functions of each of the key stakeholders are discussed below.

4.82. The Agency for Financial Market and Financial Institutions Regulation and Control would play an important legal and regulatory role in this scheme. The agency would be re-sponsible for amending the current law to make crop insurance a voluntary class of business and to permit insurance companies to design and rate their own agricultural insurance policies. The law should be amended to create an enhancing framework for agricultural insurance that per-mits new classes and products such as livestock and forestry insurance to be added in the future. The legislation should also be modified to reflect government’s supporting roles, including possi-bly financial subsidies on premiums and catas-trophe claims reinsurance.

4.83. The MoA would continue to play a cen-tral role in the policy and planning for agri-cultural insurance in Kazakhstan and would represent government’s fiscal interests in sup-porting the scheme. It is proposed that the MoA, through its Department of Strategic Planning, would represent the GRK’s interests in the agri-cultural insurance scheme and be responsible for planning the three-year and annual agricultural insurance plans and budget in conjunction with the FFSA and the private insurance industry. The MoA could also play support research and development into new agricultural insurance products and programs.

4.84. The FFSA would continue to act as the main public sector implementing agency. Cur-rently the FFSA is responsible for participating in the adjustment of field-level crop insurance

claims, in maintaining a database of individual grower crop insurance and claims, and in set-tling the government’s 50 percent share of crop claims to the insurance companies. In the future, it is recommended that the FFSA’s roles no lon-ger include participation in field-level loss as-sessment, but that its functions be expanded to include the following:

Coordination with the crop insurance pool’s • Managing Underwriting Company in the development of the technical studies re-quired for the design of new crop, livestock, forestry, and aquaculture insurance policies and programs

Management of the government’s financial • fund for the support of agricultural insur-ance and disbursement of funds (including, as appropriate, premium subsidies and ca-tastrophe reinsured claims payments) to the MUC on behalf of the pool coinsurers

Maintenance of databases on crop insurance • underwriting and claims

Provision of information and advice to • farmers.

4.85. The central feature of the proposed sys-tem would be to create an agricultural coinsur-ance pool for nonlife insurance companies that would underwrite all classes of agricultural insurance business. The agricultural insurance pool would be a legally constituted insurance company with paid-up capital contributed by each participating nonlife insurer. It would re-port to and be supervised by a board of direc-tors, which would coordinate the activities of the pool coinsurers with government departments.

4.86. It is proposed that the coinsurers also create a separate MUC. This MUC would be re-sponsible for underwriting the scheme on behalf of the coinsurers and for handling premiums and claims on behalf of the pool coinsurers. It would also negotiate reinsurance on behalf of the pool coinsurers.

134 Kazakhstan

Functions of the pool coinsurers and the managing underwriting company

Agricultural Insurance Pool

4.87. It is proposed that participation in the agricultural insurance pool be open to all non-life private insurance companies in Kazakh-stan. The local stakeholders would also need to decide whether to open up participation to the farmer mutual crop insurance associations, so long as they could meet the minimum capital requirements of the pool and comply with other

norms and conditions of the general insurance act and amended agricultural insurance law.

4.88. Spain has one of Europe’s oldest and largest agricultural insurance pools, formed in 1980. There are currently 28 coinsurers in the Agroseguro pool, which includes both pri-vate and mutual insurance companies, includ-ing Mapfre Insurance and Reinsurance Com-pany, Spain’s largest insurance company, and the Spanish public sector catastrophe reinsurer, Consorcio de Compensación de Seguros. The largest shareholder in the pool is Mapfre, with a

Source: Authors.

Figure 4.5 organizational Framework for the proposed crop insurance pool

Find for Financial Support to Agriculture (FFSA) Ministry of Agriculture

Agency for Financial Market and Financial Institutions Regulation and Control

Farmers Associations, Cooperatives, Rural Banks and other Aggregators Large Farmer production Enterprises

Small and Medium Farmers


Financial Support: premium subsidies,

catastrophe, reinsurance

Policy, planning, research and development

Insurance legal and regulatory

International Reinsurers

Pool Management Board

agricultural insurance pool

Kazakhstan Non-Life Insurance Companies

Farmer Mutual Crop Insurance Associations


shareholding of more than 15 percent; the small-est coinsurer has less than a 1 percent share in the pool. Size of shareholding is therefore not a bar to participation. Each company’s share of annual agricultural insurance premiums and li-ability is determined according to its percentage share in the pool during that underwriting year. Participation in the pool is completely volun-tary, and insurance companies are permitted to join and leave the pool after completion of an underwriting campaign (year). In order to main-tain continuity, in practice companies agree to join the pool for a three-year period. In Turkey the TARSIM agricultural insurance pool has 22 members, but each insurance company has equal shares in the scheme.

4.89. It is recommended that the Kazakhstan agricultural insurance pool be constituted on lines similar to those of the Spanish model. In Spain, participation in the pool is voluntary, in-dividual insurance companies are permitted to hold different shares in the company, and each company’s share of premiums and claims is pro-portional to its shareholding, as opposed to any other criteria (for example, the amount of premi-um the companies individually collect and cede to the pool). Finally, the concept of requesting companies to sign up for a period of three years should also be considered to ensure stability.

4.90. Under the market-based pool for crop insurance, it is hoped that the participation of private insurance companies will be high and that shares in the pool will be fully subscribed. The principle of a coinsurance pool is that 100 percent of the liability is divided between the subscribing members according to preagreed underwriting limits and risk retention limits of each company. If, however, the scheme cannot be fully subscribed in the start-up phase, govern-ment could consider becoming a coinsurer for a limited period of time.


4.91. There are two main options for manag-ing the agricultural insurance pool. The first

is for the coinsurers to appoint a lead coinsurer to manage the business on behalf of the mem-bers. The second is for the coinsurers to create a separate limited-liability company owned and funded by the pool members, with its own core team of underwriting and claims management staff, an equipped office, and regional capability to administer and implement loss assessment.

4.92. In Spain and Turkey, agricultural in-surance programs are implemented on behalf of the pool coinsurers by specialist managing companies, established by and reporting to the pool coinsurers. In Spain, Agroseguro is a limited-liability company formed by the pool insurers in 1980 to transact agricultural insur-ance and to manage claims and indemnify losses on behalf of the coinsurers. Agroseguro started with a very small team of agricultural underwrit-ers, claims managers, loss assessors, and office support staff; today it has grown into Europe’s largest agricultural insurance management com-pany, underwriting more than 260,000 agricul-tural insurance policies and a further 30,000 livestock, forestry, and aquaculture policies generating total premiums of US$864 million in 2010. In 2010 Agroseguro had a full-time com-plement of about 75 permanent staff based in its headquarters in Madrid and in each of the 14 au-tonomous regions. It has a general management unit, a legal department, and regional branches as well as core operational departments respon-sible for (a) product research and development, (b) production and communication (underwrit-ing), (c) claims administration and loss assess-ment, (d) administration and accounting, and (e) organization and information technology sys-tems. As such, it functions as a very professional commercial managing company on behalf of its coinsurers. Agroseguro’s internal A&O costs are financed out of earned premiums on the ag-ricultural insurance business it writes on behalf of the pool: in 2010 its internal A&O expenses amounted to 3.55 percent of total earned premi-ums (Agroseguro 2011). In Turkey, the agricul-tural insurance pool is managed by TARSIM, a private corporation established in 2005 by the insurance companies to carry out all the un-

136 Kazakhstan

derwriting and claims adjusting and settlement tasks of the pool in accordance with the Agricul-tural Insurance Act of 2005 (Bora 2010; Uçak and Berk 2009).

4.93. In Kazakhstan, it is recommended that, in conjunction with the formation of an agricul-tural insurance pool scheme, the participating coinsurers also approve the establishment of a managing underwriting company. Initially this company would only require a small full-time staff, including a general manager (who should be an experienced nonlife insurance expert), an agricultural insurance underwriter (who should have experience under the current crop insur-ance scheme), a claims manager, a crop loss as-sessment manager (who would be responsible for coordinating the field-based loss assessment activities), a small number of junior underwrit-ers, data analysts, and database specialists, and accounting and other back-up support staff. The MUC should also have a small permanent staff capable of managing the program, especially claims notification and loss assessment proce-dures in each region or oblast of Kazakhstan. It is recommended that the MUC assume responsi-bility for all product design and rating, crop un-derwriting and policy issuance, and management of premiums, through to being responsible for claims, loss assessment, and claims settlement. The MUC should report regularly and submit premium and claims bordereau accounts to the pool coinsurers’ management committee.

operating systems and procedures

4.94. Under the proposed agricultural insur-ance pool, the participating insurance com-panies (coinsurers) would be responsible for marketing the MUC-approved crop insurance policies at agreed premium rates. The proposed operating systems and procedures are shown in figure 4.6. Both in Spain and in Turkey, Agrose-guro and TARSIM, respectively, are responsible for the design and rating of crop (and livestock and other) insurance policies and in setting com-mercial premium rates for each region. The pool coinsurers are exclusively responsible for all policy promotion, marketing, and sales using ei-

ther their own networks of sales agents or farmer associations, cooperatives, individual brokers, banks, and other channels of distribution. In Spain, the companies market the Agroseguro policies on their own paper, and they receive a preagreed commission to cover policy market-ing. All policies are placed with Agroseguro, and all premium net of commissions is pooled by Agroseguro. A key principle of the Spanish system is that the shares of premium and liabili-ty are determined by each company’s sharehold-ing in the pool at the start of the underwriting campaign and not by its actual share of policy sales and volume of premium generated. It is proposed that the same procedures apply to the Kazakhstan pool—namely, pool members would be responsible for all policy marketing and sales, they would receive an agreed com-mission for transacting this business on behalf of the pool, premiums net of commission would be paid over to the MUC, and each member’s share of liability would be based on its share in the coinsurance pool and not its volume of sales. In this way, all pool members would share equally in the pool of risks in different regions of Kazakhstan.

4.95. The MUC would be responsible for un-dertaking product design and rating, underwrit-ing and risk acceptance, claims administration, and loss assessment and for negotiating com-mon account reinsurance protection on behalf of and reporting to the pool coinsurers. The MUC would design and rate standard crop in-surance products and policies, which would then be approved by the insurance regulator. Once approved, the policies would be marketed by the pool coinsurers at the MUC agreed premium rates for each crop and risk zone. As such, in-surance would not compete on the basis of pre-mium rates, but rather on the quality of services to farmers. The MUC would be responsible for handling premiums and for settling claims on behalf of the pool.

4.96. Loss notification and loss assessment procedures would be streamlined and strength-ened under the proposed system and would fall under the direct control of the MUC. The MUC


would be responsible for establishing a regional network of part-time crop loss assessors in each oblast and rayon. These part-time loss assessors would receive intensive training in crop loss as-sessment procedures and in the use of standard-ized loss assessment procedural manuals, which would be designed by the MUC (possibly with support from the MoA and the FFSA). In the start-up phase of the program, it is likely that a national network of about 40 to 50 trained loss assessors would be adequate to manage the ex-pected volume of crop losses, so long as these teams were properly funded and had access to transport and communications.36 The loss as-

36 This recommendation is based on the Spanish system, where Agroseguro maintained a network of about 350 crop loss assessors in 2010 who adjust-ed nearly 95,000 claims or an average of about 275

sessors would report to and be controlled by the MUC regional representative.

4.97. Farmers or their agents would be re-sponsible for communicating losses (potential claims) to the MUC local or regional office. Wherever possible, they would use web-based or cell phone reporting systems. In order to reduce the propensity for farmers to submit claims for minor losses that fall within their self-retention, it is recommended that a bonus-malus system be introduced (see chapter 3 for further details).

4.98. The losses would be adjusted by the MUC-approved loss assessors and would no longer involve the formation of a five-person

claims per adjuster (Agroseguro 2010).

Source: Authors adapted from Burgas 2007.

Figure 4.6 operating systems and procedures for the proposed crop insurance pool

payment of premium

policy promotion marketing

& sales

communication of losses

loss assessment and payment of claims

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Kazakhstan: proposed operating procedures Flow chart

138 Kazakhstan

rayon-level committee. The only persons who would be required to attend the loss assessment would be the approved loss assessor, the farmer (insured), and, at the farmer’s request, his lo-cal agent. The loss assessor would be required to complete a standard loss assessment form in the field, to estimate the amount of crop loss or yield reduction, and to confirm whether this loss is above or below the threshold that would give rise to a claim. The farmer would then be required to countersign the field loss assessment form and to confirm his agreement or not with the assessed result. Where the farmer does not agree with the assessment, he would first be en-titled to a second assessment conducted in the presence of a third party; if at this stage there is still no agreement, arbitration procedures would apply. If the farmer agrees with the assessed results, the loss assessment would then be for-warded to the MUC for processing, to be either closed (losses below the threshold for a claim) or adjusted and settled (losses above the threshold for a claim). The MUC would be responsible for settling claims to each claimant either directly or through local distributers, as agreed.

government support

4.99. As part of the switch to a market-based agricultural insurance pool system in Kazakh-stan, the role of public sector support for this scheme should be reviewed. To date, the GRK’s main support for the obligatory crop insurance scheme has been in the form of free quota-share reinsurance of 50 percent of the incurred claims, but this is likely to change under the transition to a market-based scheme. There is now a con-siderable body of literature on the different ways in which governments around the world support crop insurance, and this section briefly reviews some of the roles the GRK might play in the fu-ture.37 A summary of the potential roles that gov-ernment might play is presented in box 4.4, and

37 For a recent review of government support for agricultural insurance in more than 65 countries, see Mahul and Stutley (2010).

these roles are considered below in the context of Kazakhstan.

Legal and Regulatory Issues

4.100. The GRK can facilitate a review and amendments of the crop insurance law to sup-port the introduction of the voluntary agri-cultural insurance pool into Kazakhstan. As previously reported, the current law will require a comprehensive review and amendments to fa-cilitate the introduction of voluntary commercial crop insurance. In this process, the GRK may wish to review the Turkish Agricultural Insur-ance Act of 2005, which led to the introduction of the subsidized TARSIM agricultural insur-ance pool.

Data and Information Systems

4.101. There may be important roles for the GRK to play in enhancing data and informa-tion systems for crop insurance in Kazakhstan. If the insurance sector is to design new crop in-surance products and programs, it will increas-ingly need to have access to time-series crop production and yield data, weather data, and remote-sensing data. Government can facilitate the access to these data. In addition, the GRK has already identified a need to increase the den-sity of weather stations if it is to introduce WII. The Second Agricultural Post Privatization As-sistance Project (APPAP II) contains a subcom-ponent with funding to invest in weather sta-tions. Furthermore, if AYII is to be introduced in the future, the insurance sector will need to col-laborate closely with the MoA and the ARKS to obtain accurate estimates of area (rayon) yields at the time of harvest. See chapter 5.

Product Research and Development and Access to Data

4.102. Governments can assist the private insur-ance sector by conducting research into the de-mand for new agricultural insurance products and providing access to crop and weather data and statistics. Such data are essential if insur-ers are to design and rate new products and poli-


box 4.4 roles for government in supporting agricultural insurance

legal and regulatory framework. One of the most important functions for government in facilitating agricultural insurance markets is to establish an appropriate legal and regulatory framework and, where necessary, to enact specific agricultural insurance legislation.

data and information systems. Time-series data and information on crop production, yields, and climate are essential for the design and rating of any traditional crop insurance product or new weather index product. Governments can provide an invaluable service by creating national databases and then making these databases available to all interested private commercial insurers, either free of cost or at concessionary rates.

product research and development. Among the major start-up costs for any new crop or livestock insurance program are the design (including the design of loss assessment procedures), rating, and pilot testing of new products and programs. Such costs may be prohibitive for individual private commercial insurers, especially in developing countries. In such situations, there is justification for government to provide financial support for product design and rating, especially where the products and rates are then made available to all interested insurers.

education, training, and capacity building. Governments can play an important role in new agricultural insurance programs by supporting (a) farmer awareness and education programs and (b) capacity building, workshops, and technical training programs for key agricultural insurance staff.

catastrophe risk financing. Agricultural insurance often has to protect against catastrophic perils of flooding, drought, and windstorm in crops and outbreaks of epidemic diseases in livestock. Most insurance companies do not have adequate capital to retain their catastrophe risk exposures, and they typically purchase some form of contingency financing or reinsurance protection. For new companies, which typically do not have large amounts of capital and have not yet built up claims reserves, the ability to retain risk is usually low; they typically need to purchase quota-share treaty reinsurance and then to seek nonproportional reinsurance protection on their retention. In start-up situations where the insurance company does not have an established track record and loss history, the costs of reinsurance protection may be very high. In such situations, government support for the reinsurance program may be highly cost-effective.

public sector premium subsidies. Premium subsidies are the most widely practiced form of government support for agricultural insurance and are used by more than two-thirds of countries that have some form of agricultural insurance. Governments justify the provision of agricultural insurance premium subsidies on the grounds that they make insurance more affordable for farmers, particularly small and marginal farmers, and thereby increase the rate of adoption and uptake of agricultural insurance. However, premium subsidies have major drawbacks: they disproportionately benefit larger farmers to the detriment of small and marginal farmers, they tend to promote moral hazard by encouraging crop production in high-risk regions, they are very difficult to reduce or withdraw once introduced, and they represent a major cost to government.

Source: Authors.

cies. In Spain, the State Agricultural Insurance Body and the MoA plays a central role in as-sisting Agroseguro with the development of new products and programs. In Kazakhstan, the MoA and the FFRS could perform a similar and very important role going forward. Also the Hydro Meteorological Service (KHM) and the NSA are likely to have very important roles in the provi-

sion of needed data and information and in the future development of WII and remote-sensing-based insurance products and programs.

Education, Training, and Capacity Building

4.103. On the basis of this study, there appears to be an important role for the GRK to play in

140 Kazakhstan

strengthening insurance awareness and edu-cation training programs for farmers. Govern-ments can play a key role in supporting aware-ness and education programs and providing capacity building for farmers as well as work-shops and technical training programs for key agricultural insurance staff. In Kazakhstan, crop insurers have given relatively little priority to explaining the role of insurance and the opera-tion of the LIC policy. Government, through the MoA and other rural institutions, could provide financial and logistical support for farmer-level crop insurance education. Insurance company staff will also need specialist training in product design, actuarial and rating, underwriting and claims administration, and loss assessment sys-tems and procedures. Similar training also needs to be provided to staff in the banks, MFIs, and suppliers if these organizations get involved as delivery channels or agents.

Catastrophe Risk Financing

4.104. In Kazakhstan under the PPP, it is likely that government will continue to play an im-portant role in supporting the risk-financing insurance and reinsurance program. In many countries, government is actively involved in the reinsurance of agriculture. Government acts as a catastrophe reinsurer (either directly or indi-rectly through a national reinsurance company) in Brazil, Canada, China, India, Kazakhstan, Korea, Spain, and the United States. In Kazakh-stan, it is proposed that commercial international reinsurance of the pool scheme be introduced. It is, however, likely that the GRK will need to continue supporting the reinsurance program on a catastrophe basis, at least in the short term. This subject is reviewed further below.

Premium Subsidies

4.105. Premium subsidies are the most widely practiced form of government support for agri-cultural insurance and are used by more than two-thirds of countries that have some form of agricultural insurance. Globally, average premium subsidy levels are on the order of 50

percent of the full cost of premium, but in some countries (including Italy, Portugal, Spain, and the United States), governments provide subsi-dies as high as 75 to 80 percent of the premium. Premium subsidies are, however, very contro-versial for several reasons. The provision of non-discriminatory premium subsidies is regressive because subsidies disproportionately benefit the larger farmers to the detriment of small and mar-ginal farmers. Also subsidies that cover a large part of the overall premium tend to promote moral hazard, whereby farmers grow high-risk crops that attract high premium subsidies in re-gions that are not technically suited to the crop. Once premium subsidies have been introduced, it is politically very difficult to reduce or with-draw them, and in many of the countries that op-erate nondiscriminatory premium subsidies, the fiscal costs to government are extremely high.

4.106. In Kazakhstan, it is unlikely that volun-tary crop insurance will take off without gov-ernment support for premium subsidies. Since the introduction of obligatory crop insurance in 2005, the insurance companies have, in effect, received 50 percent premium subsidies through the government’s 50 percent share in claims. Under the proposal to increase the level of crop insurance coverage and to introduce actuarially determined rates, the crop insurance premiums that farmers will have to pay will have to in-crease significantly going forward. It is likely, however, that, under a voluntary crop insurance program, very few farmers will continue to buy crop insurance unless this is accompanied by premium subsidies. It is therefore suggested that government switch the bulk of its financial sup-port out of 50 percent quota-share reinsurance and into crop insurance premium subsidies. The cost implications are considered below.

Financial and reinsurance options

4.107. The proposal assumes that the pool man-agers will purchase international reinsurance protection (nonproportional and possibly pro-portional as required) at fully commercial re-insurance rates and that the GRK will provide


financial support in the form of crop insurance premium subsidies and possibly catastrophe reinsurance. The possible financial and reinsur-ance options for the Kazakhstan agricultural in-surance pool are presented in figure 4.7. Some preliminary estimates are made for the volun-tary MPCI program of the potential demand for cover and the associated premiums and liability based on the assumptions presented in this chap-ter, along with provisional estimates of the costs of premium subsidies and some comments on a structured risk financing and risk transfer pro-gram for Kazakhstan.

Financial Estimates

4.108. It is currently very difficult to estimate the future demand for crop insurance under a voluntary commercial crop insurance scheme. There are considerable uncertainties over the fu-ture demand for voluntary commercial crop in-surance. In practice, demand will be influenced by farmers’ demand for and acceptance of the existing and new crop (and livestock) insurance

products that are introduced, the commercial premium costs, farmers’ ability or willingness to pay for crop insurance, the levels of premium subsidies offered by government, and decisions over whether to link crop insurance to crop credit.

4.109. Some provisional financial estimates of total sum insured, premium, and costs of pre-mium subsidies to government were calculated for the spring wheat MPCI program over the next five years. The model assumes an average 40 percent coverage level and uptake rates over the next five years under a voluntary program starting in year 1 with 10 percent uptake and ris-ing to 50 percent uptake after five years. These are optimistic assumptions. On this basis, total scheme liability in year 1 might be on the order of KZT 17 billion (US$113 million), rising by year 5 to KZT 85 billion (US$567 million), and commercial premium in year 1 might be nearly KZT 2.1 billion (US$14.0 million), rising to KZT 10.7 billion (US$71.3 million) by year 5. The estimated costs to government of premium

Source: Authors.

Figure 4.7 Financial Flows of the proposed crop insurance pool

Kazakhstan Financial Flows

payment of premium

payment of claims

Premium subsidies

Fund for Financial support to agriculture, FFsa

Farmers

international reinsurers

KazaKhstan agricultural

insirance pool

Catastrophe Reinsurance

Commercial Reinsurance

142 Kazakhstan

subsidies assuming a 50 percent premium sub-sidy level would be nearly KZT 1.07 billion (US$7.1 million) in year 1, rising to KZT 5.35 billion (US$35.7 million) by year 5. Estimates are also provided for subsidies of 25 and 65 per-cent of premium (table 4.14).


4.110. The associated financial liability that the pool coinsurers would need to protect through a combination of insurance and reinsurance was also modeled for 1-in-100-year and 1-in-250-year probable maximum loss scenarios. In year 1 for 10 percent uptake of the MPCI scheme, the 1-in-100-year PML liability was estimated at KZT 6.6 billion (US$44 million), rising to KZT 33.2 billion (US$221 million) by year 5 (assuming 50 percent uptake). It is recom-mended that this be the minimum level of pro-tection that the pool scheme management should

protect through a risk financing and reinsurance program; if a more conservative level of protec-tion is required, management could consider the 1-in-250-year PML estimates (table 4.14).

4.111. It is assumed that, in the future, the agri-cultural insurance pool will purchase common account stop-loss protection from internation-al reinsurers in order to protect the program against catastrophic losses. It is likely in the initial stages that international reinsurers will only be willing to provide layered stop-loss re-insurance protection in order to limit their liabil-ity to catastrophe claims and that the GRK may therefore need to participate in the structured risk financing program by providing catastrophe reinsurance for low-frequency but high-severity losses. An example of layered insurance and re-insurance is presented in figure 4.8.

4.112. For the proposed spring wheat MPCI

table 4.14 Five-Year estimates of voluntary mpci uptake, total sum insured, premium income, and costs of premium subsidies (40% coverage level)

KZT millions

MPCI 40 % coverage and 100%

uptake

MPCI uptake

ItemYear 1 10%

Year 2 20%

Year 3 30%

Year 4 40%

Year 5 50%


Total commercial premium 21,410 2,141 4,282 6,423 8,564 10,705


25% of premium 5,353 535 1,071 1,606 2,141 2,676

50% of premium 10,705 1,071 2,141 3,212 4,282 5,353

65% of premium 13,917 1,392 2,783 4,175 5,567 6,958


1 in 100 years 66,470 6,647 13,294 19,941 26,588 33,235

1 in 250 years 79,688 7,969 15,938 23,906 31,875 39,844

Source: Authors.


05

101520253035404550

Mino

rSm

all

Med

iumLa

rge

Catas

trophic

Goverments

Risk Transfer

Type of Event

Siz

e o

f th

e Lo

ss

Risk Pooling

Risk Retention

Reinsurers

Insurance Companies

Cooperatives/Mutuals

Agricultural Producers

Figure 4.8 example of agricultural risk layering

Source: Mahul and Stutley 2010

Figure 4.9 illustrative stop-loss reinsurance program for mpci Wheat program at 30 percent coverage level

Source: Authors.

government of Kazakhstan layer 3, 100% xs 200% gnpi

international reinsurers layer 2, 50% xs 150% gnpi

international reinsurers layer 1, 50% xs 100% gnpi

agricultural insurance pool primary retention

loss ratio % gnpi

300%

200%

150%

100%

0%

144 Kazakhstan

program and 30 percent coverage level, figure 4.9 presents an illustrative commercial insur-ance and stop-loss reinsurance program. This program is intended to provide layered protec-tion to the pool coinsurers for losses in excess of 100 percent priority up to a maximum 300 percent loss ratio (300 percent of GNPI). The 300 percent loss ratio is equivalent to a loss of about 35 percent of the total sum insured and is equivalent to an expected 1-in-200-year PML. Under this scenario, the international stop-loss reinsurers would provide layered protection for two layers: layer 1, 50 percent in excess of 100 percent of GNPI; layer 2, 50 percent in excess of 150 percent of GNPI, while government would come in with catastrophe reinsurance protec-tion for losses in excess of 200–300 percent of GNPI. In year 1, assuming 10 percent uptake of the MPCI spring wheat program and 30 percent

coverage level, the pricing would be 3.9 percent of GNPI for layer 1; 2.7 percent of GNPI for layer 2; and 3.4 percent of GNPI layer 3.38

4.113. It is unlikely that international reinsur-ers agree to reduce the pool’s priority to less than 100 percent of GNPI. In this instance, the pool may also elect to reduce its exposure by reinsuring some of its primary retention on a proportional or quota-share treaty basis. These and other risk-layering options will be devel-oped further in the design and planning stages of a commercial crop insurance program for Ka-zakhstan.

38 At 10 percent uptake, GNPI would be equivalent to KZT 1.492 billion (US$10 million).


5.1. In Kazakhstan, there appear to be both a need and opportunities for risk differentia-tion and product development. Under the ma-ture agricultural insurance programs found in countries such as Australia, Canada, Spain, and the United States, the markets are highly devel-oped and differentiated in terms of the range of crop, livestock, forestry, and aquaculture insur-ance products they provide to different segments of the farming community and in terms of the perils that are underwritten. In the case of crop insurance, products generally range from simple named-peril crop hail or frost covers through to individual grower multiple-peril crop insurance (MPCI) policies and new index-based products. Currently in Kazakhstan a single loss of invest-ment costs (LIC) policy providing a low level of costs-based protection is compulsory for all peasant farmers and agribusiness enterprises, irrespective of whether the product meets their risk management needs, and this probably ex-plains why many farmers are dissatisfied with the existing scheme.

5.2. As part of this World Bank study, an as-sessment was conducted of the potential to de-sign and implement new crop insurance prod-ucts. These products include named-peril frost and hail cover, area-yield index insurance (AYII), and weather index insurance (WII) for specific types of Kazakhstan farmers and for different re-gions according to the key risk exposures. This chapter presents the findings of this assessment for these new types of crop insurance products, describing the features, indicative sums insured, and premium rates for each product. Where pos-sible, it also offers provisional estimates of the potential demand for each product.

named-peril crop insurance

5.3. Crop hail was the second most important cause of insured claims on the obligatory crop insurance scheme for the past six years. Hail is a moderate-to-severe problem in many parts of Kazakhstan, with peak months of exposure oc-curring between May and July (chapter 2). Over the past six years, hail was the second most im-portant cause of loss after drought, accounting for about 2.5 percent of the total area lost due to insured perils. On the basis of field visits, it appears that, under a voluntary scheme, farmers in some regions may want hail-only insurance. This section presents some preliminary recom-mendations for the design and rating of a spring wheat hail policy for Kazakhstan.

Features, advantages, and disadvantages of named-peril crop insurance

5.4. Crop hail insurance is the world’s old-est form of crop insurance. The product is very standard and well understood and is exten-sively applied to the insurance of wheat and a wide range of cereal, horticultural, and tree fruit crops. Single-peril hail insurance is the simplest and best-known type of indemnity-based crop insurance; it has operated for more than 100 years in Argentina, Australia, Europe, New Zea-land, and North America. Today there is a large body of accumulated experience with crop hail insurance and indemnity products. Wordings are readily accessible through international associa-tions of hail insurers, premium rates can initially be set based on international experience, and so

chapter 5: Opportunities for New Crop Insurance Products

146 Kazakhstan

long as suitably high each and every loss (EEL) deductibles (or franchises) are maintained, the rates are generally not high. Finally, standard-ized damage-based loss assessment procedures can be accessed from the international hail as-sociations and training can be provided to local staff.

5.5. Crop hail insurance is distinguished from the Kazakhstan LIC policy in that the insurance and indemnity system is based not on the “loss of crop yield” but rather on the “percentage hail damage” caused to the crop. Under a damage-based indemnity system, phys-ical loss or damage to the crop is measured in the field soon after a specific loss as a result of an insured peril, and the claim is usually settled shortly after the time of loss. Normally the dam-age is measured as a percentage loss, and this percentage is applied to an agreed sum insured (for example, incurred production costs or oth-er agreed value) for the crop. The sum insured may be adjusted downward if actual produc-tion is found to be below the normal produc-tion potential for reasons that are not insured, for example, poor crop establishment. A de-ductible is usually applied to the loss expressed as “percentage damage,” although this can be a fixed value. This method is most applicable to programs with a single or limited number of discrete-event perils (for example, hail, wind-storm, and frost). A worked example of the basis of insurance and indemnity for hail insurance is given in annex 6.

5.6. A named-peril (hail) damage-based in-demnity policy has key advantages. First, there is no need to collect time-series data on indi-vidual grower production and yield with which to establish a normal average yield and then an insured yield because the policy uses damage-based indemnity rather than loss of yield. Sec-ond, the sum insured can be set according to an agreed value per acre based either on production costs or on production costs plus an element of the expected gross profit margin; it can also be set according to a revenue valuation based on the farm-gate sales price of the crop times the ex-

pected output. Finally, loss adjustment is based on estimated percentage damage to the crop ac-cording to its growth stage, and this procedure is usually easier and cheaper to implement than yield-based loss assessment.

5.7. Insurers are generally willing to in-sure hail damage because it is considered a nonsystemic or noncatastrophe class of crop insurance business and is not subject to anti-selection by farmers. Many crop insurers are very reluctant to offer MPCI loss of yield cover against drought, flood, windstorm, and flooding because of the systemic or catastrophic nature of these perils. Conversely, hail is usually a rela-tively high-frequency but low-severity peril, and as long as the insurer can achieve a geographic spread of risk, it is not subject to catastrophic losses. Hail is usually an unforeseeable and un-predictable event; unlike drought cover, it is not subject to antiselection and or moral hazard.

5.8. Damage-based crop insurance and in-demnity policies also have several drawbacks. First, the product is best suited to specific perils that cause obvious and easily measured damage to the crop, such as hail or wind and sometimes frost or excessive rain, but it is not suitable for progressive perils that affect the crop over time, such as drought, and where losses can only be measured objectively in terms of yield reduction or loss. Second, the product is not suitable for other perils such as flood. Indeed, flood is not included as a single peril on traditional indemni-ty-based crop insurance policies because of the problems of antiselection.

considerations for the design of spring Wheat cover in Kazakhstan

5.9. Hail insurance is a very flexible class of insurance that can be designed to provide farm-ers with a wide range of options and choices. Key features of a hail policy for spring wheat are reviewed below, and options for the design of this cover are presented in box 5.1.

5.10. Hail insurance can be designed to pro-


box 5.1 possible Features of a named-peril hail policy in Kazakhstan

insured crop. Spring wheat is insured during the cover period against physical loss or damage due to the action of direct hail damage. This policy does not insure against loss of quality (price downgrading) in spring wheat.

basis of insurance and indemnity. Named-peril hail is a percentage damage–based policy.

Insured perils. For hail, the insured peril is direct physical damage or loss to the insured crop. In addition, physical loss or damage caused by wind associated with hail may be considered an optional peril, subject to the payment of an additional premium.

cover period. The crop is covered from the time of emergence and full stand establishment (defined as 10 centimeters in wheat) through to the completion of harvest. Cover may be purchased at any time between the opening and closing dates of cover, subject to a waiting period of 24 hours from the time of payment of the premium up to the time of inception of hail cover.

insured unit. The insured is obliged to declare and insure all of his fields of spring wheat grown in the same rayon. The insured may choose to insure all of his fields of spring wheat as (a) a single insured unit (whole-farm basis) or (b) separately by field (field-by-field basis).

basis of sum insured. A fixed amount in KZT per hectare, which the insured may elect based on his coverage requirements. This amount may range from costs of production per hectare through to a maximum level based on the average crop revenue value for spring wheat in that rayon, as specified by the local department of the Ministry of Agriculture (MoA). The total sum insured (TSI) will be calculated by multiplying the sum insured per hectare by the area (in hectares) of each and every insured field declared by the insured and summing the total.

basis of indemnity. Indemnity is based on either the gross value of loss or policy excess. (a) Gross value of loss is equal to the sum insured times percentage hail damage. Where the percentage damage exceeds the policy excess, giving rise to a claim, the indemnity is equal to the sum insured times (percentage damage minus policy excess), or the net value of claim. Policy excess is applied on an EEL basis in each insured unit as defined. Excess options include percentage damage deductible (for example, 6 percent EEL), percentage damage franchise (for example, 6 percent EEL), or a fixed-value amount (deductible or franchise; for example KZT 10,000 EEL).

loss notification procedure. The insured is responsible for notifying the insurer of a hail event that is expected to exceed the policy excess (deductible or franchise) within 48 hours of its occurrence.

loss assessment procedure. In-field loss assessment uses standard procedures to measure the area damaged by hail and to assess the average percentage hail damage in each insured unit.

underinsurance and overinsurance (of spring wheat area). In the event of a loss, if it is discovered that the insured has underdeclared his or her spring wheat sown area by more than 5 percent of the total area, the insurer retains the right to apply the “law of average” to any claims settlement. In the case of overinsurance, the maximum amount payable in the event of a total loss is the actual assessed cultivated area times the agreed per hectare sum insured and subject to the policy excess.

exclusions. All perils apart from hail (and wind, which is optional) are excluded.

other key conditions. The insured must declare and insure all of his spring wheat grown in the same rayon; premium is payable prior to inception.

Source: Authors.

148 Kazakhstan

vide a very high level of crop revenue protec-tion if requested by the insured. The sum in-sured for crop hail insurance is very flexible, as it is not dependent on an insured yield per se. Insurers will generally permit farmers to insure their crops against a minimum level equivalent to the costs of production per hectare or amount of crop loan per hectare through to a maximum valuation based on gross revenue (yield times expected market sales price). In Kazakhstan, in principle, a spring wheat grower achieving an average yield of about 15 centners (1.5 metric tons) per hectare could insure 100 percent of his expected wheat revenue against hail, or a value of about KZT 45,000 per hectare (at the current sales price for wheat of about KZT 3,000 per hectare).

5.11. Hail insurance can be marketed both before and during the crop-growing season right up to the time of harvest. Because hail is considered an unforeseeable and unpredictable event, many hail insurers will permit farmers to purchase cover at any time during the growing season, subject to a waiting period of 24 or 48 hours. This is in contrast to loss of yield poli-cies that insure against drought, where a sales cutoff period of usually a month prior to sowing is required to avoid preexisting conditions and potential antiselection.

5.12. Hail insurers may allow the farmer to choose to insure only a part of his total fields and total cultivated area. In the start-up phase of a new crop hail insurance program for spring wheat in Kazakhstan, it is, however, recom-mended that, in order to achieve volume and a spread of risk, farmers should be required to declare and insure all of their fields and farms planted with the same crop located in any one rayon.

5.13. The insured unit for the purposes of loss adjustment can also be very flexible under a crop hail policy. There are many options for defining the insured unit (IU) for a crop hail pol-icy—namely, the area of the insured crop over which the damage is estimated and the policy

excess is applied. At the highest level of aggre-gation, the IU can be defined on a whole-farm basis as the entire area of the same crop grown in the same farm or location. Conversely, insurers may agree to offer insurance on a field-by-field basis, in which case, the IU is the individual field. Finally, some insurers agree to offer crop insur-ance on an acre-by-acre basis, such that any area within a field subject to damage that exceeds the policy excess is eligible for an indemnity. For Kazakhstan spring wheat, it is recommended that insurers offer optional covers for whole-farm insurance and on a field-by-field basis.

5.14. It is conventional on a hail policy to apply a first-loss excess (deductible) that is retained by the insured. The objective of the policy ex-cess is to eliminate small hail losses, which are very time-consuming and costly for the insurer to adjust and would rapidly erode the premium reserved to pay hail claims. It is intended to in-demnify only severe hail losses that are of eco-nomic consequence to the insured. The excess is usually applied on the basis of each and every hail loss event and can take several forms:

A percentage damage deductible, which is 1. deducted for the gross assessed percentage damage. An example would be a 6 percent deductible that is applied on an EEL basis. If the assessed damage amounted to 5 per-cent, this would fall below the deductible and there would be no claim. If the assessed damage was 15 percent, the net damage would be 9 percent (15 percent minus 6 per-cent deductible), which would be applied to the sum insured.

A percentage franchise, which is sometimes 2. termed a “qualifying franchise.” If the as-sessed damage amounted to 5 percent and a franchise of 6 percent applied, there would be no indemnity, as the damage would be below the 6 percent franchise. However, for the example of 15 percent damage, which would exceed the 6 percent qualifying fran-chise, the damage would be indemnified from the ground up or in full, and the in-


sured would receive an indemnity of 15 per-cent damage applied to the sum insured.

A fixed-value excess. On some policies, 3. rather than apply a percentage damage ex-cess, a fixed-value excess (for example, KZT 10,000 EEL) is applied either as a franchise or as a deductible. In this case, the gross value of the assessed hail damage would have to exceed KZT 10,000 to give rise to a claim.

5.15. From a loss assessment perspective, some hail insurers prefer to apply a deduct-ible as opposed to a franchise. The operation of a franchise places very high demands on the need for accurate in-field assessment of per-centage damage. For example, with a 6 percent franchise, where the percentage hail damage is light and where sampling error means that the assessed damage could be anywhere from 4 to 8 percent over the IU, farmers tend to dispute any assessment that falls below 6 percent and would give rise to a claim in full. Conversely, with a 5 percent deductible that is deducted from the assessed damage, the level of precision required when assessing low levels of hail damage is less demanding.

5.16. Crop hail deductibles or franchises are commonly on the order of 3 to 6 percent for ce-reals, but in areas of high exposure to hail risk they may need to be correspondingly higher. In much of Europe, Latin America, and North America, hail deductibles are between 3 and 5 percent EEL. In Argentina, the industry has fol-lowed a standard hail policy for wheat with 6 percent franchise for many years. In some parts of the world with a high hail risk exposure, de-ductibles may, however, need to be higher, on the order of 10 percent or greater per event.

5.17. Crop hail damage assessment proce-dures for wheat are very well developed. Stan-dard hail loss assessment procedures have been developed by the Argentine, European, South African, and U.S. crop hail insurers, and these manuals of procedures should be readily acces-

sible to crop hail insurers in Kazakhstan, who can adapt them to their own conditions.

hail exposure and preliminary rating considerations

5.18. Hail is usually a localized phenomenon that seldom accumulates over wide areas; as such, it does not pose the same catastrophe ex-posure as systemic perils such as drought. Hail is often a relatively high-frequency (that is, it oc-curs every season), but low-severity (it tends to be localized) class of crop insurance business.

5.19. In order to design and rate a crop hail insurance program, it is necessary to obtain data on three key parameters: hail exposure, hail hazard, and hail severity. In some coun-tries, hail exposure data are available from me-teorological stations in the form of the number of recorded hail days per month, but because hail is a localized phenomenon, this may not be representative of hail occurrence at the re-gional level. In Kazakhstan, information from the Hydro Meteorological Service (KHM) for selected weather stations on the frequency of oc-currence of hail by month for the period 1990 to 2010 shows that the peak hail months are from May to July (figure 5.1). While exposure data are readily available for the cultivated area and value of spring wheat per rayon and oblast, there is very little recorded information in Kazakhstan regarding hail severity and damage. For these reasons, a simple hail damage simulation model was developed for spring wheat in Kazakhstan in order to generate hail rates for each oblast.

5.20. A simple hail rating simulation model was developed for spring wheat in Kazakhstan using industry-approved hail-rating methodol-ogy. The model was developed for 13 sample weather stations in selected rayons in the oblasts of Akmola, Kostanay, North Kazakhstan (NKO), Pavlodar, and South Kazakhstan (SKO). The model combines exposure data for each rayon during each month of the growing season with the hazard model (frequency of occurrence of hail by month), a hail severity index from low

150 Kazakhstan

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Janu

ary

Febru

ary

Mar

chApril

May

June Ju

ly

Augus

t

Septe

mber

Octob

er

Novem

ber

Decem

ber

Freq

uenc

y o

f o

ccur

ence

(% o

f ye

ars)

Kostanay Average Akmola Average Pavlodar Average SKO Average

Figure 5.1 Frequency of occurrence of hail in Kazakhstan, by oblast, 1990–10 (21 Years)

Source: Authors based on KHM data (figures taken from table 2.1).

5.6%6.7%

4.1%3.1%

3.9%2.8%

7.5%

5.5%5.8%

2.6%4.4%

12.9%

2.0%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Akmola

- Sch

uchin

sk

Akmola

-Egin

dykol

Akmola

-Ste

pnogo

rsk

Kosta

nay D

iyevs

kaya

Kosta

nay-

Kos

tana

y

Kosta

nay K

ushm

urun

Kosta

nay M

ikhail

ovka

NKO- Balk

ashin

o

Pavlod

ar A

ktog

ay

Pavlod

ar Z

holbold

y

Pavlod

ar.M

ikhail

ovka

SKO Kaz

ygur

t

SKO Shim

kent

Ave

rag

e p

rem

ium

rat

e (%

)

Figure 5.2 average rayon-level commercial hail rates for spring Wheat in a sample of oblasts and rayons

Source: Authors based on crop hail incidence data provided by Arka Consulting.


to very severe, and a hail vulnerability model. These models were then combined to simulate hail percentage damage with 10,000 iterations and to estimate the average burning cost or pure loss cost for each station or rayon. The average loss cost was then adjusted for a 6 percent hail franchise and grossed up by an assumed factor of 20 percent to derive average commercial hail rates for each sample rayon. These rates are sum-marized in figure 5.2 and annex 6. These rates are preliminary and will require further analysis if a commercial crop hail scheme is launched in Kazakhstan in the future.

5.21. The preliminary hail rating for spring wheat in selected rayons in Kazakhstan sug-gests that it should be possible to design hail cover at affordable rates to producers. For the 6 percent franchise, average rates vary from about 2.5 to 3.5 percent in the lowest hail-risk regions, up to 5 or 6 percent in the medium hail-risk re-gions, and as high as 7.5 percent in Mikhailovka rayon in Kostanay and 12.9 percent in Kazgurt rayon in SKO. In the next stage, it would be use-ful to validate these relative hail rates with local agricultural specialists in each oblast and rayon who are familiar with hail exposure and hail damage in wheat.

conclusions on crop hail

5.22. Crop hail insurance should be relatively easy to design and implement in Kazakhstan as a commercial crop insurance product. Since this is a noncatastrophe crop insurance product, it should be relatively easy for the crop insur-ance companies and possibly the farmer mutual insurance associations to underwrite this prod-uct with limited access to reinsurance protec-tion. Because the average rates for single-peril hail insurance are potentially considerably lower than the individual grower loss of yield covers (the LIC policy or MPCI and the AYII product), there is also more potential to market this cov-er to Kazakhstan farmers on a voluntary basis and without the need for government premium subsidies. It is likely that the demand for single-peril crop hail insurance for spring wheat will be quite low in the initial stages of implementa-

tion of this product, as hail risk exposure is not as widespread as drought risk exposure. There would be an important start-up cost—namely, the costs to design suitable crop hail loss as-sessment procedures for Kazakhstan and then to identify a core of loss assessors who would receive specialist training in assessing hail loss in wheat. Finally, it is likely that there will be demand for hail insurance for other crops, for example, cotton and horticultural crops grown in southern Kazakhstan; over time, there should also be potential to develop and expand a crop hail portfolio in Kazakhstan.

area-Yield index crop insurance

5.23. On the basis of this feasibility study, it appears that there may be considerable poten-tial in Kazakhstan to design and implement AYII as an alternative to or a complement of the existing individual grower LIC and pro-posed individual grower MPCI programs. Outline proposals are presented below for a pro-totype area-yield index product and a program for spring wheat grown in Kazakhstan, but fur-ther design work will be required if the insur-ance companies decide to proceed with the pilot testing and implementation of this product. It is assumed that AYII would be introduced as a voluntary program. Further details of the AYII product are contained in annex 7.

5.24. The prototype spring wheat AYII prod-uct presented in this section excludes Aktobe and West Kazakhstan (WKO) and their rayons because their risk exposures are commercially uninsurable. The AYII program presented in this section therefore relates only to the six main wheat-growing oblasts of Akmola, East Ka-zakhstan (EKO), Karaganda, Kostanay, NKO, and Pavlodar. Although Aktobe and WKO are excluded, government may wish to use AYII to provide disaster compensation to farmers in these two oblasts. For this reason, coverage lev-els, insured yields, and indicative premium rates are presented separately for Aktobe and WKO in annex 7.

152 Kazakhstan

Features, advantages, and disadvantages of aYii

5.25. AYII represents an alternative approach to MPCI insurance that aims to overcome many of the drawbacks of traditional individ-ual grower MPCI insurance. This product does not indemnify crop yield losses at the individual field or grower level; rather, it makes indemnity payments to growers according to yield loss or shortfall against an average area yield (the in-dex) in a defined geographic area (for example, the total area sown with spring wheat in a single rayon). An area-yield index policy establishes an insured yield, which is expressed as a per-centage (termed the “coverage level”) of the his-torical average yield for each crop in the defined geographic area, such as a rayon, that forms the insured unit. Farmers whose fields are located within the IU may purchase optional coverage levels, which typically vary between a minimum of 50 percent and a maximum of 80 percent of the historical average yield. The actual aver-age yield for the insured crop is established by sample field measurement (usually involving crop cutting) in the IU, and an indemnity is paid by the amount that the actual average yield falls short of the coverage level purchased by each farmer.

5.26. An example of the basis of insurance and indemnity for an AYII cover for spring wheat is shown in figure 5.3. For this example, Bulandinski rayon in Akmola was selected. It is assumed that the actual five-year area average yield of spring wheat is 10 centners per hectare in Bulandinski rayon and that all farmers are of-fered the same coverage level of 70 percent of the average yield or 7 centners per hectare. The unit sum insured is KZT 3,210 per centner, giv-ing a standard sum insured of KZT 22,470 per hectare. Three farmers, each with total planted area of 1,000 hectares, purchase cover. It is a moderate drought season, and farmer A achieves an actual average yield on his land of 7 centners per hectare; farmer B incurs more severe losses and achieves 5 centners per hectare; and farmer C achieves only 3 centners per hectare on aver-

age. However, under the AYII cover, the policy does not indemnify each farmer according to his own losses, but rather according to the reduc-tion in actual average yield at the rayon level. In this example, the rayon actual average yield is 5 centners per hectare, and therefore the yield loss is 2 centners per hectare (7 centners minus 5 centners), with an indemnity payment of KZT 6,420 per hectare. Each of the insured farmers therefore receives the 2 centners per hectare indemnity over his 1,000-hectare farm, valued at KZT 642,000 per farmer, in spite of the fact that farmer A does not suffer any yield shortfall against the rayon-level 70 percent cover, while farmer C incurs a shortfall of more than 2 cent-ners per hectare.

5.27. AYII works best where farmers’ crop production systems, technology levels, output, and yields in the defined IU are relatively ho-mogeneous. It also responds best to systemic risks such as drought that tend to affect farmers’ production and yields in the same way across wide geographic areas. In Kazakhstan, spring wheat crop production systems are relatively homogeneous at the rayon level, but, as chap-ter 4 shows, there are differences in the level of technology used and the average production and yields obtained by the two categories of wheat producers: production enterprises and commer-cial farms. As AYII is intended as a catastrophe product, in principle, the differences in technol-ogy and yield between these two categories of farmers should not negate the use of this crop insurance tool. See below for further discussion of homogeneity of spring wheat production at the rayon level in Kazakhstan and the issue of basis risk.

5.28. In Kazakhstan, a key potential advan-tage of AYII over individual grower MPCI is the ability to offer higher levels of insured yield coverage at lower rates because losses are ad-justed against an area-yield index and not at the level of the individual farmer. Chapter 4 shows that, although individual grower MPCI is technically feasible in Kazakhstan, the very high variability in crop production and yields means


that the maximum coverage level that can be of-fered to growers at affordable premium rates in most rayons is only between 20 and 50 percent of average yield. AYII indemnifies losses ac-cording to yield variation or loss at the area lev-el—in this case the rayon—and, because the ag-gregate rayon-level crop production and yields year-on-year are relatively stable, it should be possible to offer higher coverage levels of 30 to 70 percent and even higher in some regions and at more affordable rates for AYII than for indi-vidual grower MPCI.

5.29. The AYII approach minimizes moral hazard and antiselection and lowers the costs of administration and loss assessment, which offers the potential for insurers to reduce the premium costs charged to farmers. As the poli-

cy responds to yield loss at the level of the coun-ty or rayon and not at the level of the individual farmer, no farmer can influence the yield indem-nity payments, which minimizes antiselection and moral hazard. Administrative costs are also greatly reduced because there is no need for pre-inspections on individual farms and loss assess-ment is not conducted on an individual farmer and field-by-field basis, but rather according to a preagreed random sampling of crop yields on plots within the IU. These cost savings can be passed on to farmers in the form of lower crop insurance premiums.

5.30. The main drawback of an AYII policy is “basis risk” or the potential difference between the insured area-yield outcome and the actual yields achieved by individual insured farmers

Source: Authors.

0

1

2

3

4

5

6

7

8

9

10

11

Farm A Actual Yield = 7

centner/ha


centner/ha


centner/ha

Yie

ld (M

t./h

a)

Area-Yield Index Insurance Payout Examples

Actual Yield

Production enterprise rayon-level expected yield

Production enterprise rayon-level actual yield

PE Rayon Level Guaranteed Yield

Farmer Actual LossArea-yield Index Pavouts

Insurance payouts = 2 centner per hectare

Figure 5.1 Frequency of occurrence of hail in Kazakhstan, by oblast, 1990–10 (21 Years)

insurance contract conditions

insured peril. All-risk policy

crop. Spring wheat`

rayon. Bulandinski in Akmola

type of farmer. Production enterprise

production enterprise’s five-year rayon-level average expected yield (eY). 10 centners per hectare

production enterprise’s rayon-level guaranteed yield at 70% coverage (gY). 7 centners per hectare

agreed price (ap). KZT 3,210 per centner

sum insured. KZT 22,470 per hectare

insured unit area (iua). Farm A, B, and C, each with 1,000 hectares and identical TSI of KZT 2.25 million

production enterprise’s rayon-level actual average yield (aY). 5 centners per hectare, but farmer A’s actual yield (AYA) = 7 centners per hectare; crop loss = 0 centners per hectare. Farmer B’s actual yield (AYB) = 5 centners per hectare; crop loss = 2 centners per hectare. Farmer C’s actual yield (AYC) = 3 centners per hectare; crop loss = 4 centners per hectare.

insurance payout calculation (ipc). If AY < GY, then IPC = (GY – AY) * AP* IUA. IPC = (7 centners per hectare minus 5 centners per hectare) times KZT 3,210 per hectare times 1,000 hectares = KZT 6,420 per hectare or KZT 642,000 per farmer. AYII provides payouts to all the farmers situated in the area selected as the insured unit

154 Kazakhstan

within the insured area. Basis risk arises when an individual grower incurs severe crop yield losses due to a localized peril, such as hail or flooding of a nearby river, but, because these lo-calized losses do not affect the average yield of the district or rayon, he does not receive an in-demnity. In addition, basis risk may arise where the crop production and yields of individual farmers are highly heterogeneous (different) in the same rayon, which will invalidate the use of an area-based approach. See below for further discussion of basis risk when farming systems, production, and yields within the insured unit are not relatively homogeneous.

5.31. AYII is potentially a flexible crop insur-ance product that can be implemented at the micro level for individual farmers or, alterna-tively, at the meso level for regional financial institutions. In Kazakhstan, there may be scope to design AYII both as a micro-level individual

grower product for medium to large wheat (or other cereal) producers and as a meso-level product to protect the loan portfolios of coopera-tives or microfinance institutions (MFIs) serving large numbers of small rural households in in-dividual rayons in southern Kazakhstan (further discussion in chapter 6).

international experience with aYii

5.32. AYII has been widely adopted for small-holder rice and wheat cropping in India and in areas where crop insurance is linked to season-al crop credit. India has operated a public sector AYII program for more than 30 years under its public sector National Crop Insurance Scheme (NAIS), which is implemented by the Agricul-tural Insurance Company of India (AIC), a pub-licly owned insurer that specializes in agricultur-al insurance. Crop insurance is compulsory for farmers who borrow seasonal production credit. Currently, this program insures about 25 million Indian farmers each year. In order to make crop insurance widely available at affordable prices to small and marginal farmers, the government has capped premium rates at about one-third of the actuarially required levels and then provided AIC with free stop-loss reinsurance protection. For food crops, reinsurance cuts in at a 100 per-cent loss ratio, while for commercial and horti-cultural crops, the priority is at a 150 percent loss ratio (figure 5.4). The program therefore shares several common features with the Kazakhstan LIC scheme, including obligatory cover, capped premium rates, and government support for rein-surance, although in Kazakhstan this is based on a 50 percent quota-share protection as opposed to the nonproportional stop-loss protection pro-vided in India. Although the NAIS has achieved very high levels of insurance uptake by Indian farmers, the scheme incurs major delays (often up to six months after harvest) in arriving at the estimates of actual area yield and in settling claims, and this delay is very unpopular with farmers. For the past five years, the World Bank has been working with AIC to strengthen and reform the NAIS scheme, transforming it into a market-based system, including (a) introduc-

Source: Authors.

Figure 5.4 government stop-loss protection for nais scheme in india

Loss ratio (%)

Food Crops

(70% of premium)

Commercial & Horticultural

Crops (30% of premium)

government of india and state

government stop-loss protection

aic retention

aic retention

150%

100%


ing actuarial rating, (b) switching government financial support from claims compensation to crop insurance premium subsidies, and (c) open-ing up the market to competition from local and international reinsurers. This modified NAIS program was formally launched in the rabi crop season 2010/11 in about 10 percent of the total NAIS command area; if successful, this market-based public-private partnership (PPP) system will be introduced gradually into all states of In-dia. See box 5.2 for further details.

5.33. Other countries that are operating AYII include, most notably, the United States (where the product is termed the Group Risk Plan, GRP). This product is also being researched in parts of Eastern Europe (Ukraine), Africa (Burkina Faso, Ghana, and Senegal), South America (Brazil and Peru), and Asia (Bangla-desh and Nepal).

5.34. In Ukraine, a subsidized AYII scheme was launched for winter wheat in 2003, but this scheme was poorly designed and imple-mented and has not taken off. In Ukraine, as in Kazakhstan, agriculture is an important sector, especially for the production of winter wheat, which is the leading export crop. Agriculture is very exposed to drought (for example, in 2003, 2005, 2007), spring frosts, strong winds, hail, and, for winter crops, “winterkill” (low temper-ature and freeze that damage the crop), which in 2003 caused catastrophic losses in more than 70 percent of the winter crops. During the So-viet period, Ukrainian state and collective farms were insured under the standard MPCI program that operated throughout the Soviet Union. Fol-lowing independence, there was no crop insur-ance until the early 2000s. Between 2001 and 2003, a local insurer, with the assistance of an international agricultural reinsurer, analyzed the

box 5.2 main Features of india’s mnais scheme for the rabi crop season, 2010–11

actuarial regime. The mNAIS scheme operates an “actuarial regime” in which the government’s financial liability is predominantly in the form of premium subsidies given to AIC and funded ex ante, thereby reducing the contingent and uncertain ex post fiscal exposure currently faced by the government under mNAIS and reducing delays in claims settlement.

up-front premium subsidies. AICI receives premiums (farmer collections plus premium subsidies from the government) and is responsible for managing the liability of the scheme through risk transfer to private reinsurance markets and risk retention through its reserves. It is financially able to operate on a sustainable basis.

on-account partial payment. The mNAIS product continues to be based on an area-yield approach, with a provision for an early partial payment to farmers (in season) based on weather indexes.

small insurance units. Crop-cutting experiments to assess crop yield are lowered from the block level to the village level to reduce basis risk (that is, the mismatch between the individual farmer’s actual crop yield losses and the insurance indemnity).

cutoff dates. Adverse selection is reduced through the enforcement of early deadlines for purchase ahead of the crop season.

additional benefits. Additional benefits are offered for the prevention of sowing, replanting, postharvest losses, and localized risk, such as hail or landslides.

early settlement of claims. mNAIS combines weather-based indexes for on-account partial payment of claims in case of adverse mid-season conditions, whereas area-yield indexes are used for final payment of claims. The final estimation of loss is based on area-yield measurement at the time of harvest using crop-cutting experiments.

Source: GFDRR 2010b.

156 Kazakhstan

possibilities for designing and implementing both individual grower MPCI cover for cereals and area-yield index insurance. There were ma-jor difficulties in designing and rating individual grower MPCI because, following the breakup of the state and collective farms, it was impossible to establish normal average or expected yields for the newly formed large-scale commercial enterprises or for small to medium producers. Similarly, there were difficulties in designing and rating AYII because, although relatively re-liable oblast-level historical data were available, it was difficult to obtain accurate time-series in-formation at the rayon level. Further difficulties included the fact that after independence aver-age crop yields at the rayon and oblast levels showed a major declining trend due to reduced use of fertilizers, and the time-series data had to be detrended carefully. A voluntary pilot AYII scheme was launched in 2003 with a pool of lo-cal insurers, backed by European reinsurers, but the scheme was not popular with farmers and suffered from poor implementation, especially in the adjustment of losses. The scheme has been discontinued. See box 5.3 for further details of the problems of Ukraine’s AYII pilot scheme. In the design of any AYII scheme for Kazakhstan, planners should learn from the lessons and expe-riences of Ukraine.39

39 Between 2003 and 2005, the private insurance sector in Ukraine also tried to develop crop weather index insurance, with limited success. For a very good review of the issues and challenges faced in

preconditions for the design of aYii for spring Wheat in Kazakhstan

5.35. There are several preconditions for the operation of AYII for spring wheat (and any other crops) in Kazakhstan. These include the following:

Homogeneous spring wheat–producing re-• gions or zones (the insured unit), with low variation in yield between farmers in the in-sured unit

For the defined IU, historical data on sown • area, production, and average yield in spring wheat for the past 15 years or more on which to establish the insured yield and technical rates

An independent and statistically accurate • system of measuring average spring wheat yields in the defined region or zone and on which to trigger claims payments.

5.36. AYII is only effective if individual farm-er spring wheat production systems and yields within a defined insured unit (the rayon) are relatively homogeneous. Basis risk occurs un-der an AYII program when spring wheat farm-ing systems are highly heterogeneous within the rayon in terms of type of soil, fertility, soil

Ukraine, see WFP and IFAD (2010).

box 5.3 aYii pilot crop insurance scheme in ukraine

crop area-yield insurance has been implemented poorly in ukraine. A pilot hybrid MPCI and AYII scheme was launched in 2003 for all major field crops. The rayon was the insured unit for the AYII cover. Indemnities were paid based on regional (rayon) statistical records (but apparently not on official statistical reports) and farm-level inspections of actual yield; the farmer had to provide proof that the reduction in crop yield was due to an insured peril. This meant that farmers had to obtain reports from a local meteorological station. Complicated and unclear loss assessment procedures meant that payouts were usually delayed for up to six months. Recently producers have lost interest in the AYII product, and insurers have been looking for other ways to insure crops.

Source: WFP and IFAD 2010.


moisture retention, and farmers’ use of technol-ogy and inputs and when these differences trans-late into highly variable yields of spring wheat among farmers in that rayon. Under an AYII cover where all farmers in the IU are treated the same and losses are paid against shortfall on the area average yield, the danger is that farmers who are located on the best soils and who use high levels of technology may receive an indemnity, although their actual yields are well above the rayon’s insured yield. Conversely, farmers using very low levels of technology and whose aver-age normal yields are well below the rayon av-erage yield may also receive an indemnity, even when they have not incurred any yield losses. This study sought to access data on individual farmer yield for the six selected rayons in Ak-mola, Kostanay, and Pavlodar to check for yield variability and basis risk under an AYII program operating at the rayon level. To date, however, it has only been possible to analyze spring wheat data for small samples of individual farmers in two rayons in Pavlodar and one in Kostanay. This analysis suggests that yield variability be-tween farmers in the same year is usually low enough to indicate that an AYII product could operate effectively with an acceptable level of basis risk. It is also notable from this analysis that in a good year (for example, 2009), aver-age yields are more similar between farmers in the same rayon, with coefficients of variation (CoVs) of about 20 to 25 percent: however, in drought years (2008, 2010), individual grower yields are more variable (CoVs as high as 40 percent or greater), and this may be explained by differences between farmers in their manage-ment of soil moisture through the use of mini-mum tillage, for example. See annex 7 for full details of this analysis of individual farmers’ yields and issues of basis risk in Kazakhstan.

5.37. In Kazakhstan, the National Agency of Statistics (ARKS) has an accurate system for measuring and reporting sown area, harvested area, production, and average yields for spring wheat at the regional (oblast) and zonal (ray-on) levels; 17 years of historical spring wheat data from 1994 to 2010 were available for the purposes of this study. Chapter 2 of this report

notes that Kazakhstan has a comprehensive sys-tem for measuring crop production and yields, and, in the case of spring wheat, it was possible to access 17 years of crop production and yield data at the rayon level for production enterprises, commercial farms, and in total. This time-series production and yield data enabled the design and rating of an AYII product for spring wheat that operates at the rayon level. The ARKS reports figures for sown area, production, and yields for spring wheat separately for production en-terprises, for commercial farms, and in total. The prototype AYII product presented in this chapter is based on a single rayon-level AYII product (that is, it is designed using combined crop production and yield data for both types of farms), but, if required, separate covers could be designed for production enterprises and for commercial farms, as the AYII rating tool has been programmed to determine insured yields and premium rates for both types of farms in all rayons and oblasts.

5.38. For the operation of AYII, it is necessary to have an independent, accurate, and timely system for measuring and reporting actual av-erage yields in each IU at the time of harvest and to indemnify insured yield shortfall below the actual area average yield on that basis. In India, which has the oldest AYII program in im-plementation, a national system of sample crop cutting in randomly chosen fields is used to cal-culate the actual average yield for each insured crop in each insured unit. While crop cutting is potentially a very accurate method of determin-ing average yield in the IU, its accuracy depends on having a statistically adequate number of sample crop cuts, which must be randomly sited in selected fields and, if properly conducted, is a very time-consuming and costly exercise. In India, the system only works because the state governments subsidize the costs of crop cutting for the insurance sector. In the United States, the GRP area-yield plan operates at the county level: county-level actual average yields are estimated by the National Agricultural Statistics Service from grain-elevator area, production, and yield reports, and no in-field crop cutting is conduct-

158 Kazakhstan

table 5.1 average area of spring Wheat per rayon (insured unit)

OblastNumber of rayons per

oblast

Average area per rayon (hectares)

Minimum crop area per rayon

(hectares)

Maximum crop area per rayon

(hectares)

Number of rayons with more than 10,000 hectares

% of total rayons

Commercial farms

Akmola 19 45,846 675 151,900 17 89

EKO 17 13,853 140 47,080 9 53

Karaganda 9 40,224 3,400 103,680 7 78

Kostanay 18 69,723 8,620 167,900 17 94

NKO 13 56,522 26,780 107,780 13 100

Pavlodar 11 21,664 520 108,560 7 64

Subtotal 87 41,305 140 167,900 70 80

Production enterprises

Akmola 19 150,300 520 317,600 17 89

EKO 17 10,856 160 27,780 7 41

Karaganda 9 31,364 80 130,220 4 44

Kostanay 18 142,661 900 369,120 16 89

NKO 13 178,658 86,480 430,400 13 100

Pavlodar 11 16,850 520 67,500 5 45

Subtotal 87 96,533 80 430,400 62 71

Overall (commercial farms and production enterprises)

Akmola 19 196,146 1,195 408,240 17 89

EKO 17 24,709 300 74,860 12 71

Karaganda 9 71,589 3,480 190,760 8 89

Kostanay 18 212,384 9,520 537,020 17 94

NKO 13 235,180 116,160 517,280 13 100

Pavlodar 11 38,513 1,300 176,060 6 55

Source: Authors.

ed. This county-level yield estimation procedure is considered accurate and impartial by both the insurance sector and the insured farmers.

5.39. Kazakhstan uses systematic sampling procedures for measuring actual average yields

at the rayon level at the time of harvest, and this could form the basis for indemnity under any rayon-level AYII scheme in the future. In Ka-zakhstan, the ARKS uses a multistage crop yield estimation procedure first to select villages and farmers who are differentiated into production


enterprises and commercial farms and then to select fields for in-field randomly selected crop cutting using 1 meter by 1 meter squares. Crop cutting is conducted immediately prior to harvest for all major grain crops, including spring wheat, the weight of the yield from each sample is ad-justed according to its moisture content, and the average yield in centners per hectare is calculat-ed. The crop cut yields for each type of producer are then averaged to estimate the average yields per rayon separately for production enterprises and commercial farms and then in aggregate for both types of farms in the rayon. Full details of the yield estimation procedures are contained in ARKS’s Guideline on Crop Yield Inspection Ar-rangements (ARKS 2004). This yield estimation procedure at the rayon level is considered to be impartial and accurate and could form the basis for indemnifying yield loss under a rayon-level AYII program for spring wheat.

considerations for the design of spring Wheat aYii cover

Area Insured Unit

5.40. For the operation of an AYII cover, it is necessary to have a minimum sown area of the insured crop in each insured unit (rayon). The setting of a minimum sown area is to avoid mor-al hazard or, in other words, to ensure that indi-vidual farmers are not able to influence the area-yield outcomes in the IU. In the United States, the minimum area is 15,000 acres (about 6,000 hectares) per county (Skees, Black, and Barnet 1997). In northern Kazakhstan, where there are some very large spring wheat production enter-prises, the criterion used under the current study was a minimum of 10,000 hectares per rayon based on the past five-year average sown area from 2006 to 2010 (combined sown area for production enterprises and commercial produc-ers). The size of spring wheat insured unit varies hugely across the six oblasts and the 73 (84 per-cent of total) qualifying rayons, with more than 10,000 hectares of spring wheat. Overall, EKO has the smallest insured units, with an average area per rayon of spring wheat of slightly less

than 25,000 hectares, while NKO has the larg-est, with an average of about 235,000 hectares per insured unit (table 5.1).

Insured Yield Coverage Levels

5.41. AYII policies typically offer optional levels of insured yield coverage of between a maximum of 90 percent and a minimum of 50 percent of the average area yield. In India, the NAIS has traditionally offered three coverage levels, 60, 80, or 90 percent of the past five-year average yield in the IU. The decision over which coverage level will apply in an IU is based on the coefficient of variation around the mean yield, such that in IUs with a low CoV, the maximum 90 percent coverage level is applied, and in IUs with a high CoV only 60 percent coverage is of-fered. Under the U.S. Group Risk Plan, farmers may select from optional coverage levels of be-tween 50 and 90 percent of the county’s average yield. In Kazakhstan, it is proposed that the in-sured yield for an AYII program be set as a per-centage of the most recent five-year actual aver-age yields from 2006 to 2010. On account of the very high variability in yield in some oblasts and rayons, it will, however, be necessary to offer coverage levels as low as 20 percent or as high as 80 percent of the rayon’s five-year average yield in some oblasts and rayons. For this reason, rates were calculated for a wider range of coverage levels, from 10 percent through to 80 percent of the rayon five-year average yield (termed the expected yield). The rayon spring wheat insured yield coverage levels for a minimum of 10 per-cent up to a maximum of 80 percent of the past five-year average yield are shown by oblast and by rayon in annex 7.

Insured Values and Sum Insured

5.42. Under an AYII policy, the insured crop yields can be valued either on a cost of produc-tion basis or on a farm-gate sales price basis. In India, the NAIS commonly sets the sum insured according to the amount of credit provided to the farmers. In the United States, the GRP permits farmers to insure their selected coverage level

160 Kazakhstan

at up to 150 percent of the reference sales price. In Kazakhstan, the sum insured could be based on any valuation criteria requested by farmers, from a costs of production valuation through to an expected revenue valuation. However, unlike the United States, it is recommended that the maximum unit sum insured value not exceed 100 percent of the expected farm-gate sales price for the crop. For the purposes of this exercise and to maintain consistency with the MPCI policy out-lined in the previous section, the past three-year average September sales price for spring wheat of KZT 3,210 per centner was used.

5.43. The estimated sums insured for a spring wheat AYII program assuming 100 percent in-surance uptake in the six oblasts and an aver-age 50 percent coverage level would be on the order of about KZT 212 billion (US$1.41 bil-lion). The estimated sums insured for the spring wheat AYII program by oblast and in total for coverage levels of between 10 percent and a maximum of 80 percent are shown in table 5.2. Under the assumption of 100 percent uptake of the AYII product for spring wheat, at the 10 per-cent coverage level, the total sum insured (TSI) would be about KZT 42.4 billion (US$283 mil-lion), rising to a very significant KZT 339 bil-lion (US$226 billion) at the maximum 80 per-cent coverage level. However, under a voluntary AYII program the actual uptake rates would be much lower, and the TSI would be correspond-ingly lower than the figures for 100 percent up-take.

Rating Methodology and Indicative Premium Rates

5.44. A preliminary estimation of the techni-cal and commercial premium rates for an AYII program for spring wheat is presented in this report, using internationally accepted AYII crop rating methodology. Annex 7 presents full details of the rating methodology used to establish the rayon-level technical rates for an area-yield index policy for spring wheat. These rates are based on an analysis of variance in the ARKS’s 17-year rayon-level annual sown area,

production, and yield data and for coverage lev-els from a minimum of 10 percent up to a maxi-mum of 80 percent of rayon-level five-year av-erage yields (2006–10). The procedure adopted involved detrending the 17-year actual yields for spring wheat in each rayon and simulating the estimated yield shortfall at each level of insured coverage from 10 to 80 percent over 5,000 it-erations (years) to derive the average pure loss cost rates for each rayon. The pure loss cost rates were then smoothed, and a “security load” was added based on the calculated probable maxi-mum loss (PML) to derive the technical rates for each rayon and each coverage level. Finally, for the purposes of this rating exercise, the techni-cal rates were grossed up by 30 percent to derive indicative commercial premium rates for a tar-get 70 percent loss ratio. The 70 percent target loss ratio was designed to allow the participat-ing insurers to cover their acquisition costs and administrative and operating (A&O) expenses and to provide a reasonable profit margin. In practice, the insurers and their reinsurers will be responsible for estimating their costs and profit margins and for setting their target loss ratios ac-cordingly. Since the costs of loss assessment are considerably lower for AYII than for individual grower MPCI, the gross-up used in this rating exercise is correspondingly lower for AYII, at 30 percent, than for MPCI, at 40 percent. See chapter 4.

5.45. Indicative commercial premium rates for AYII cover are presented in this report, but these rates are merely illustrative, and insurers and their reinsurers will make the final deci-sions about rates. The AYII commercial premi-um rates for spring wheat for a 70 percent target loss ratio are presented in annex 8 by rayon for each level of insured yield coverage. The aver-age rayon rates in each of the six oblasts as well as the average percentage premium rates and corresponding value of the premiums are pre-sented in table 5.2. The average rates for spring wheat vary from a low in NKO to a high in Pav-lodar and EKO; in most oblasts, premium rates become very expensive for coverage levels that are greater than 50 percent of the rayon five-year


table 5.2 estimated total sum insured and indicative commercial premium for spring Wheat aYii program, by level of coverage

OblastInsured yield coverage level (% of rayon average expected yield)

10% 20% 30% 40% 50% 60% 70% 80%


Akmola 10,985 21,970 32,956 43,941 54,926 65,911 76,897 87,882

EKO 1,181 2,361 3,542 4,723 5,904 7,084 8,265 9,446

Karaganda 1,346 2,691 4,037 5,383 6,729 8,074 9,420 10,766

Kostanay 14,786 29,573 44,359 59,145 73,931 88,718 103,504 118,290

NKO 13,216 26,432 39,648 52,864 66,080 79,296 92,512 105,728

Pavlodar 910 1,821 2,731 3,641 4,552 5,462 6,372 7,283

Total 42,424 84,849 127,273 169,697 212,121 254,546 296,970 339,394

Indicative commercial premium for 70% loss ratio (%)

Akmola 0.24 1.03 2.43 4.52 7.07 10.34 14.26 18.69

EKO 0.74 2.25 4.50 7.41 10.72 14.64 19.03 23.67

Karaganda 0.33 1.31 3.05 5.58 8.62 12.28 16.48 21.09

Kostanay 0.24 1.01 2.38 4.42 6.93 10.17 14.04 18.44

NKO 0.17 0.73 1.70 3.14 4.85 7.17 10.15 13.80

Pavlodar 0.38 1.50 3.36 5.96 8.97 12.62 16.75 21.14

Total 0.24 0.98 2.28 4.20 6.52 9.52 13.16 17.35

Indicative commercial premium for a 70% loss ratio (KZT millions)

Akmola 26 226 799 1,987 3,885 6,813 10,968 16,429

EKO 9 53 159 350 633 1,037 1,573 2,236

Karaganda 4 35 123 301 580 991 1,552 2,271

Kostanay 36 299 1,055 2,615 5,124 9,021 14,537 21,817

NKO 23 192 675 1,662 3,206 5,682 9,390 14,594

Pavlodar 3 27 92 217 408 689 1,068 1,539

Total 101 833 2,903 7,131 13,837 24,234 39,087 58,885

Source: Authors. See annex 7 for full details.

162 Kazakhstan

average yield. Assuming 100 percent uptake, the corresponding commercial premium for an aver-age 50 percent coverage level would be about KZT 14 billion (US$95 million).

5.46. In order to interpret these rates, it is use-ful to consider a maximum premium rate that farmers might be willing to pay assuming there are no premium subsidies above 10 percent. The analysis clearly shows that in NKO, where crop yields are generally very stable, AYII insur-ance could be offered for high coverage levels of up to 70 percent at affordable premium rates of less than 10 percent. In Akmola and Kostanay, farmers could be offered coverage levels up to about 60 percent of average rayon yields under the assumption of a 10 percent maximum pre-mium rate. However, in Pavlodar, where spring wheat yields are more variable, only a maximum of 50 percent coverage could be provided, and in EKO coverage as low as 40 percent would be needed to avoid exceeding the 10 percent com-mercial premium rate. Annex 7 shows which maximum cover levels could be offered for less than 10 percent commercial premium in each rayon in each oblast.

coverage levels, affordable premium rates, and demand for voluntary aYii insurance

5.47. Under a spring wheat AYII program for Kazakhstan, the coverage level in each rayon should be set in accordance with (a) the under-lying exposure to and frequency of risk and (b) the commercial premium rate that the targeted farmers can afford. In order for a crop insur-ance scheme to be both affordable for farmers (premium rates of no more than 5 to 10 per-cent) and sustainable, the insured yield cover-age should be set at a level where payouts are no more frequent than about one in seven to one in 10 years. Where AYII coverage levels are set too high and the commercial premium rates are also too high, farmers are discouraged from pur-chasing crop insurance, and the scheme cannot achieve the economies of scale and premium volume necessary to be sustainable over time.

On the basis of the feedback obtained during the focus group meetings in Kazakhstan, it appears that most farmers consider the current premium rates charged on the obligatory LIC scheme (av-erage of about 2.4 percent for the subsidized rate and average of about 4.4 percent for the full rate, assuming no government 50 percent claims sub-sidies) to be too expensive. It was not possible in the limited time available in the panel meetings to conduct any formal assessment of demand for AYII insurance.

5.48. If a voluntary AYII program is to be launched in Kazakhstan, scheme management will first need to conduct a detailed study of demand in order to quantify farmers’ interest in purchasing voluntary AYII and the cover-age levels and premiums they are willing to pay. This demand assessment study should be designed to provide a clear picture of farmers’ ability and willingness to pay for voluntary AYII and the coverage levels and sum insured values they wish to insure. This study may also provide useful feedback on the need for government pre-mium subsidy support.

government support for premium subsidies

5.49. If government were to elect to provide premium subsidy support, farmers would be able to choose either to insure at higher cover-age levels or to reduce their costs of purchasing AYII cover. If government were to provide 50 percent premium subsidies, the AYII premium rates would be much more affordable, as shown in table 5.3. The recommended study on AYII demand would also enable estimates to be made of the TSI for a pilot AYII scheme, the estimated premium income, and therefore the estimated costs to government of a 50 percent premium subsidy (or other level of premium subsidy to be determined).

operational considerations

5.50. For the operation of a spring wheat AYII cover, the key requirement would be to


formalize the procedures for estimating actual average yield in each rayon where insurance is offered. It is recommended that the insur-ance companies enter into a formal agreement with the ARKS to provide the results of their crop-cutting yield estimates for each rayon. It is essential to minimize the delay in publishing these rayon-level area-yield estimates after the harvest in order to settle claims to farmers in rayons where the actual average yield falls short of the insured yield. A common criticism of the AYII program in India is that it often takes be-tween six and 12 months for state-level govern-ments to publish the results of their annual crop-cutting experiments. In the meantime, farmers need to purchase seeds and fertilizers for the next season and to pay for land preparation and sowing activities; they cannot wait 12 months to receive their indemnities. In Kazakhstan, the ARKS should be able to make the results of its crop-cutting surveys available prior to the start of the next spring wheat season. It is also likely that, under an AYII scheme, insurers and their reinsurers would wish to put in place indepen-dent monitoring systems to verify the actual av-erage crop yields in the insured rayons.

5.51. It will also be necessary to provide farm-er education and training in the operation of AYII. Given the fact that AYII does not provide insurance and indemnity at the individual farmer level, but according to losses at the rayon level, it is essential that the principles of this cover be clearly explained to farmers under a program of farmer education and training.

5.52. Distribution channels should be inves-tigated under any pilot AYII program in the future. Currently in northern Kazakhstan, most crop insurance is marketed through sales agents located in each oblast and rayon. Alternative channels for marketing and administering AYII crop insurance should be investigated, including through farmer associations and cooperatives, rural banks, and input suppliers. The potential for crop credit–linked insurance also merits in-vestigation.

5.53. There may also be opportunities to market AYII not only to individual farmers and joint-stock companies and cooperatives, but also to banks and input suppliers in each rayon as meso-level financial protection. In

table 5.3 average indicative commercial premium rates for spring Wheat aYii cover net of government 50 percent premium subsidies, by oblast and level of coverage

OblastCoverage level

10% 20% 30% 40% 50% 60% 70% 80%


Akmola 0.12 0.51 1.21 2.26 3.54 5.17 7.13 9.35

EKO 0.37 1.12 2.25 3.71 5.36 7.32 9.51 11.83

Karaganda 0.16 0.65 1.53 2.79 4.31 6.14 8.24 10.55

Kostanay 0.12 0.51 1.19 2.21 3.47 5.08 7.02 9.22

NKO 0.09 0.36 0.85 1.57 2.43 3.58 5.07 6.90

Pavlodar 0.19 0.75 1.68 2.98 4.48 6.31 8.38 10.57

Total 0.12 0.49 1.14 2.10 3.26 4.76 6.58 8.68

Source: Authors.

164 Kazakhstan

this instance, the cover would be designed to provide business interruption cover to the lend-ing institution in the event that a catastrophic drought in a named rayon(s) prevents farmers from repaying their loans, forcing the lender to reschedule or write off its loans in that rayon(s). In addition, such a cover might be attractive to regional input suppliers who provide seeds, fer-tilizers, and plant protection chemicals to farm-ers on credit against repayment at the time of the wheat harvest.

estimated pml and implications for reinsurance

5.54. Some preliminary estimates of the PML that might be expected under an area-yield in-dex program for spring wheat in Kazakhstan are presented in figure 5.5 and table 5.4. For a 50 percent coverage level the 1-in-100-year PML would be about 24 percent of TSI or a loss of KZT 51 billion (US$343 million), as-suming 100 percent uptake of the scheme. This

would be equivalent to a loss ratio of about 370 percent. For the highest 80 percent coverage level, the 1-in-100-year PML would be about 45 percent of TSI or a loss of KZT 152.7 billion (US$1.02 billion), assuming 100 percent uptake. This would be equivalent to a loss ratio of about 259 percent.

5.55. Some indicative reinsurance pricing was conducted for the spring wheat AYII program. This analysis was conducted assuming (a) ag-gregate reinsurance protection over the entire spring wheat insured area assuming 100 per-cent uptake, (b) three priority levels of 70, 100, and 150 percent of gross net premium income (GNPI), (c) reinsurance that would provide full-value protection up to 100 percent of TSI in ex-cess of these priority levels, and (d) insured yield coverage levels of 10–80 percent of the rayon five-year average yield. Under these assump-tions, table 5.5 shows that, for the 100 percent of GNPI stop-loss reinsurance option, full-value protection, and 50 percent coverage level, the

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

1 50 100

150

200

250

Loss

co

st (

%)

Return period (years)

"10% Coverage"

"20% Coverage"

"30% Coverage"

"40% Coverage"

"50% Coverage"

"60% Coverage"

"70% Coverage"

"80% Coverage"

Figure 5.5 estimated pml for the aYii spring Wheat scheme, by level of coverage

Source: Authors.


stop-loss pricing would be on the order of 26.09 percent of GNPI or KZT 3.6 billion (US$24.0 million). The 100 percent of GNPI stop-loss re-insurance option and full-value protection for the highest 80 percent coverage level would cost approximately 18.01 percent of GNPI or KZT 10. 6 billion (US$67 million). If the stop-loss protection priority were lowered to 70 percent of GNPI, the aggregate stop-loss pricing would

be considerably higher.

5.56. A layered risk financing program could also be developed for the AYII program involv-ing both private insurers and reinsurers and the GRK as a catastrophe reinsurer. Such a risk financing program could be structured along exactly the same lines as the stop-loss reinsur-ance cover illustrated in chapter 4 for individual grower MPCI.

table 5.4 estimated 1-in-100-Year pml for the aYii spring Wheat scheme assuming 100 percent uptake

ItemCoverage level

10% 20% 30% 40% 50% 60% 70% 80%

PML (% of TSI) 1.11 4.53 10.04 17.40 24.29 31.84 39.15 44.99

PML (KZT billions) 0.5 3.8 12.8 29.5 51.5 81.0 116.3 152.7

PML (US$ millions) 3 25 85 197 343 540 775 1,018

1-in-100-year PML loss ratio (%)

466 461 440 414 372 334 297 259

Source: Authors.

table 5.5 indicative pricing for aggregate stop-loss reinsurance for a Full-value aYii spring Wheat program

Item and priority Insured yield coverage level (% of rayon average expected yield)

10% 20% 30% 40% 50% 60% 70% 80%

Stop-loss reinsurance premium (KZT millions)

70% 54 349 1,046 2,295 4,297 7,112 10,733 15,157

100% 52 326 948 2,005 3,609 5,693 8,084 10,606

150% 49 295 820 1,634 2,764 4,008 5,078 5,731

Stop-loss reinsurance premium (% of GNPI)

70% 53.90 41.86 36.04 32.18 31.05 29.35 27.46 25.74

100% 51.43 39.13 32.66 28.12 26.09 23.49 20.68 18.01

150% 48.19 35.48 28.25 22.91 19.98 16.54 12.99 9.73

Source: Authors.

166 Kazakhstan

Financial estimates for a voluntary aYii portfolio

5.57. Some provisional financial estimates were calculated for AYII cover for spring wheat assuming a voluntary program and 5 percent incremental uptake rates per year over the next five years. Under the assumptions of a 50 per-cent insured yield coverage level and 5 percent uptake per year over the next five years, the total sum insured might rise from KZT 10.6 billion in year 1 with corresponding premium income of KZT 692 million, to KZT 53 billion after five years, with premium income of KZT 3.5 billion. The costs to government of different levels of premium subsidies (ranging from 25 to 65 per-cent of premium) are shown in table 5.6. These uptake estimates are extremely ambitious for a voluntary insurance scheme and will need to be refined following the recommended study on AYII demand.

conclusions on aYii

5.58. AYII for spring wheat is technically and operationally feasible in Kazakhstan. However, until further research has been conducted on the potential demand for this cover, it is very diffi-cult to predict likely uptake rates under a volun-tary crop insurance program.

5.59. AYII for spring wheat could be under-written either as a micro-level individual farm-er cover or as a meso-level product designed to protect the seasonal loan portfolio of agencies that are lending to cereal producers (banks, in-put suppliers, or MFIs) in Kazakhstan. There are two advantages in offering area-yield index insurance at a meso level or aggregate product. The first is that basis risk would be much less of a concern than under an individual grower program. The second is that the transaction costs would be lower for this coverage than for indi-

table 5.6 Five-Year estimates of voluntary aYii uptake, total sum insured, premium income, and costs of premium subsidies (50 percent coverage level)

AYII 50% coverage level

at 100% uptake

AYII crop insurance uptake scenarios

ItemYear 1

5%Year 2 10%

Year 3 15%

Year 4 20%

Year 5 25%

Total sum insured (KZT millions) 212,121 10,606 21,212 31,818 42,424 53,030

Commercial premium (KZT millions)

13,837 692 1,384 2,076 2,767 3,459

Cost of GRK premium subsidies (% of premium)

25% 3,459 173 346 519 692 865

50% 6,918 346 692 1,038 1,384 1,730

65% 8,994 450 899 1,349 1,799 2,248


1 in 100 years 51,516 2,576 5,152 7,727 10,303 12,879

1 in 250 years 70,634 3,532 7,063 10,595 14,127 17,659

Source: Authors.


vidual farmer micro-level insurance.

5.60. Meso-level AYII cover may be an effec-tive tool for governments to operate for small family farms in southern Kazakhstan. This op-tion is reviewed further in chapter 6.

5.61. Farmers’ demand for and willingness to pay for AYII crop insurance will also have to be studied further before any decisions are made to proceed with the design of an AYII program. This feasibility study identified a very low level of interest in the obligatory LIC crop insurance scheme by farmers, and it is probable that this would apply equally to voluntary crop insurance in the future. It is recommended that a formal study be conducted to assess demand for AYII for crops. The experience of India, Ukraine, and the United States may provide useful lessons for the design of AYII in Kazakhstan.

crop Weather index insurance

5.62. The analysis carried out in this feasibility study shows that developing WII contracts for hedging the drought exposure of spring wheat in the north of Kazakhstan is technically feasi-ble. However, challenges in the possible scale of implementation, in the commercial viability, and in farmers’ interest in WII may limit the scope of application of this class of insurance products. The details of the analysis are presented in this section, but further research is needed if the in-surance companies decide to proceed with the pilot testing and implementation of this product. It is assumed that WII will be introduced as a voluntary program. Further details of the WII product are contained in annex 8.

Features, advantages, and disadvantages of Wii

5.63. The essential feature of weather index-based insurance is that the insurance contract responds to an objective parameter (for exam-ple, measurement of rainfall or temperature) at a defined weather station during an agreed-up-

on time period. The parameters of the contract are set so as to correlate, as accurately as possi-ble, with the loss of a specific type of crop by the policyholder.40 All policyholders within a defined area receive payouts based on the same contract and measurement at the same station, eliminat-ing the need for field loss assessment. WII is best suited to weather hazards that are well correlated over a widespread area and where weather and crop yield are closely correlated. The strongest relationships typically involve a single crop, a marked rainy season, and no irrigation. WII is less useful where more complex conditions ex-ist. Localized risks (such as hail) or areas with microclimates (for example, in mountainous areas) are not suitable for WII. Similarly, the scope for WII is limited where crop production is affected by many or complex causes of loss or where pests and diseases are major influences on yields. For a given environment, other insur-ance products may be more appropriate (such as area-yield index insurance or named-peril crop insurance). These conditions are present in the north of Kazakhstan, making a feasibility analy-sis worth pursuing.

5.64. As for AYII, basis risk is the key con-straint of WII. “Basis” can be defined as the difference between the loss experienced by the farmer and the payout triggered by the weather index. It could result in a farmer experiencing a yield loss without receiving a payout or receiv-ing a payout without experiencing a loss. WII works best where losses are homogeneous in the defined area and highly correlated with the weather peril. A more detailed description of the strengths and weaknesses of WII is provided in annex 8.

5.65. WII can be retailed at different busi-ness levels. At the micro level, the policyholders (the insurer’s customers) are individual farmers, households, or small business owners who pur-chase insurance to protect themselves against po-

40 The material presented in this section was adapted from IFAD (forthcoming).

168 Kazakhstan

tential losses caused by adverse weather events. At the meso level, WII can be used to cover the exposure of entities such as financial service providers, farmer associations, input suppliers, and processors from potential losses caused by adverse weather events. At the macro level, WII can aid governments and relief agencies in de-velopment and disaster management.

international experience with Wii

5.66. The majority of WII experience has been with micro-level applications and rainfall defi-cit (drought). To date, many initiatives have been piloted, but only in India has a market-based scale-up of WII taken place. Table 5.7 summa-rizes the experience in the countries where WII has been piloted.

Weather and agricultural data for Wii

5.67. WII relies on historical and current weather data that should adhere to specific quality requirements. In order to meet require-ments for a commercial WII insurance and rein-surance transaction, a recommended guideline is that there be at least 20 years of historical daily data and that missing data not exceed 3 percent

of the total daily data set. In addition, reliable and trustworthy ongoing daily collection and re-porting procedures should be assured.

5.68. Beyond the quality of data, it is critical to define the boundaries of the area(s) covered by the weather station(s) so that WII contracts can be written for specific areas tied to a specific station. A general rule of thumb is to consider a specific WII contract marketable within a 20 ki-lometer radius of the weather station; however, the applicable area may be smaller or larger, and case-specific evaluation must be carried out. In general terms, the more the terrain varies, the more the acceptable distance from a station de-creases.

5.69. Agricultural data and information are the second part of the WII contract design equation. The most relevant information to be collected is data on productivity (yield), but a clear description of the agricultural production practices carried out in the areas of interest is also necessary. Unfortunately, yield data series of adequate length, sufficient quality, and at the appropriate level of disaggregation are generally not available. However, lack of quality yield data does not pose as large a problem as lack of

table 5.7 international experience with Weather index insurance at different levels of aggregation

Level of aggregation Description Example

Micro

Weather-indexed insurance for smallholder farmers; more than 30 projects in about 25 countries; scale-up only in India

China, Ethiopia, Ghana, India, Kenya, Malawi, Nicaragua, the Philippines, Thailand, Ukraine

Meso

Weather-indexed portfolio hedge for rural financial institutions that lend to poor farmers; programs are too new to assess scale-up and sustainability

Ghana, Peru, Vietnam (under development)

Macro

Weather insurance or weather-indexed contingent credit line for governments or international organizations; major scale-up achieved in Mexico across most states in the past decade

Ethiopia, Malawi, Mexico (both AYII and WII), Caribbean states risk pool for hurricanes and earthquake

Source: Dick 2009.


good weather data, since it is still possible to find alternative approaches to estimating yield vari-ability. One possibility is to simulate synthetic yield data series through plant-growth models.

design of Wii contracts

5.70. The objective of contract design is to capture the relationship between the weather variable and the potential crop loss and to se-lect the index that is most effective in providing

payouts when losses are experienced, reduc-ing basis risk as much as possible. The set of possible index combinations is unlimited, and numerous structures have been developed in the relatively short history of WII. One of the most commonly adopted structures is that of a continuous payout triggered and limited by a cumulative measure of the weather variable (for example, rainfall) for each stage of crop growth. See box 5.4 and figure 5.6.

box 5.4 payout parameters in a Wii contract

Using the drought coverage case represented in figure 5.5 as an example, the parameters that characterize an incremental payout structure can be defined as follows:

• trigger. Threshold above or below which payouts are due. Payments are due when the calculated value of the index is below the trigger level (300 millimeters).

• exit. Threshold above or below which no additional incremental payout is applied. The maximum pay-out is paid if the calculated value of the index is equal to or below the exit threshold (100 millimeters).

• tick. Incremental payout value per unit deviation increase from the trigger. With a maximum payout (the insured sum) of US$200, a trigger of 300 millimeters, and an exit of 100 millimeters, the monetary value of each deficit millimeter of rainfall below the trigger is US$200 divided by (300 millimeters–100 millimeters) or $1 per millimeter.

Source: Authors.

0

50

100

150

200

250

1 51 101 151 201 251 301 351 401

Pay

out

(US

$)

Trigger: 300mm

Exit: 100mm

Figure 5.6 payout structure of a Wii contract for drought

Source: Authors.

170 Kazakhstan

Weather data and infrastructure in Kazakhstan

5.71. As highlighted in chapter 2, the World Bank feasibility study team carried out a de-tailed review of the meteorological network managed by the KHM. The weather data pro-vided by the KHM enabled an in-depth assess-ment to be conducted of weather risk in the selected spring wheat production areas and the development of WII contract structures.

5.72. The continuity of historical data pro-vided by the KHM is generally of good qual-ity. For the purpose of this feasibility study, the World Bank gained access to daily rainfall and minimum and maximum temperatures from 10 weather stations located in seven rayons listed in table 5.8 and portrayed in map 5.1. The rate of missing data is generally very low (less than 1 percent). In particular, the amount of missing rainfall observations is in line with the record of missing temperature observations, and this indicates overall good management of weather sensors, as events leading to missing observa-

tions may be caused by general problems at the weather station level.

5.73. Over most of the country, the seasonal precipitation cycle is of mid-range rainfall in-tensity, with a cycle distributed relatively uni-formly throughout the year. Therefore, rather than marked seasonal distribution and erratic patterns, as seen in many other regions of the world, average humidity and total seasonal cu-mulated precipitation seem to be the main con-cerns for the farming environment. Given this hydrological precondition, the thermal regime also plays a relevant role. Combined hydrother-mal indexes are in common use in agro-mete-orological monitoring in Kazakhstan and were adopted in this study for the design of WII pro-totypes. See the following sections and also ap-pendix C in annex 8.

5.74. An analysis of the last 25 years of data found no significant rainfall trend, but did find a weak but statistically significant temperature trend. The analytical results of the trend analy-sis are presented in appendix D of annex 8. An

table 5.8 selected Weather stations and statistics on available Weather data

Weather station Rayon OblastNumber of

years

% of missing daily rainfall observations

% of missing daily temperature

observations

Diyevskaya Auliyekolski Kostanay 26 0.0 0.0

Kushmurun Auliyekolski Kostanay 26 0.6 0.6

Kostanay Kostanayski Kostanay 26 0.0 0.0

Zholboldy Aktogayskiy Pavlodar 26 1.2 1.2

Aktogai Aktogayskiy Pavlodar 26 0.2 0.2

Mikhailovka Zhelezinski Pavlodar 26 0.0 0.0

Bolkashino Sanytausky Akmola 26 0.0 0.0

Schuchinskoye Enbekshildersky Akmola 26 0.0 0.0

Stepnogorsk Enbekshildersky Akmola 26 0.3 0.3

Tolebiysky Tasarik Sko 29 0.0 0.0

Source: Authors based on KHM data.


important step in the design of weather index in-surance programs is to check for the existence of long-term tendencies in key atmospheric param-eters that would affect the price and effective-ness of the contracts. A detailed trend analysis for 10 weather stations in the target rayons was carried out. This analysis, which is presented in appendix C of annex 8, found no significant trend in annual rainfall. Instead, average annual temperature is increasing slightly in almost all of the analyzed weather stations. Since all indexes adopted for the contract design depend mainly on cumulated rainfall and temperature trends do not seem to affect the developed structures, tem-perature detrending was not carried out. Nev-ertheless, careful handling of issues related to weather trends is recommended for the design of contracts for commercial use.

5.75. Drought exhibits a systemic pattern across the north of Kazakhstan. The detailed correlation analysis carried out at the weather station level indicates that, in the test areas se-

lected, weather patterns may be comparable at low scale (the rayon level) and become more heterogeneous at the oblast level (see table 5.9). As expected, higher correlations are noted for weather stations that are closer in distance and, roughly, in the same rayon. In general, intra-oblast variability of weather patterns seems to be more pronounced.

5.76. Although from a climatological point of view correlations between weather data col-lected at the rayon-level distance are very high, when referring to the potential coverage of the territory for WII purposes, different evaluation criteria must be applied. Even though Kazakh-stan’s climatic conditions seem appropriate for relaxing the 20–25 kilometer radius rule as the criterion for identifying the scale at which WII can be retailed, the average distance between weather stations is too great to assume that the current network could provide comprehensive coverage of northern Kazakhstan. As illustrated in the maps presented in appendix A of annex 8,

map 5.1 Weather stations analyzed in the Feasibility study

Source: Authors’ elaborations on Google Earth.

Note: Weather stations are identified by the red markers. Rayons selected for the analysis under the feasibility study are highlighted in light gray shading (rayon names are in yellow).

172 Kazakhstan

distances between contiguous weather stations start from a minimum of 70 kilometers, which is probably too large for implementing a scheme of full micro-level WII coverage of the entire territory.

5.77. In conclusion, the excellent quality of weather data provided by the KHM complies with all of the requirements for designing and operating WII. However, although this applies to the areas surrounding the specific weather stations analyzed, full-scale implementation of a micro-level (farm-level) WII program may be hindered by the relatively low density of the weather station network. In the medium term, it may be possible to overcome these structural constraints through efforts to improve the den-sity of the weather station network. In the short term, however, widespread full-scale implemen-tation of WII at the farm level does not seem to be realistic. Potential implementation of WII contracts at the meso or macro levels, which may be less influenced by the density of the weather station network, could have greater chances of being rapidly implemented.

agricultural data

5.78. As discussed in chapter 2, the ARKS col-lects annual average yield data for spring wheat at the rayon level. Given the excellent quality of the historical yield reports, it was possible to use the official ARKS yield data for developing WII prototypes for the selected case studies.41 The rayon annual average yield series that were provided span the period from 1990 (or 1991 in some cases) up to 2010.

5.79. Rayon yield reports provide average yield series for two categories of farms: production enterprises and commercial farms. While in the case of AYII, the analysis was carried out for the two separate classes of farms, in the case of

41 In WII this is not a common feature, as the de-veloping countries in which these kinds of insurance products are tested often do not have sufficiently good agricultural statistics. In such cases, informa-tion collected in the field and crop modeling ap-proaches are used to reconstruct the required crop loss history.

table 5.9 correlation matrix for cumulated precipitation (January to august) in selected Weather stations

Oblast and rayon

Kostanai

Oblast and rayon

Pavlodar

Oblast and rayon

Akmolinsk

Diy

evsk

aya

Kus

hmur

un

Kos

tana

y

Zho

lbol

dy

Akt

ogai

Mik

hailo

vka

Bak

lkas

hino

Sch

uchi

nsko

ye

Ste

pno

gors

k

Kostanai Pavlodar Akmolink

Diyevskaya — 72 78 Zholboldy — 54 27 Baklkashino — 78 59

Kushmurun 66 — 66 Aktogai 49 — 70 Schuchinskoye 61 — 59

Kostanay 60 59 — Mikhailovka 43 60 — Stepnogorsk 46 51 —

Source: Authors based on KHM data.

Note: In each oblast section of the table, the “shaded values” (top-right corner) correspond to correlations between cumulated seasonal precipitation, while “unshaded values” (bottom-left corner) correspond to correlations between de-viations of 10-day cumulated rainfall with respect to the average seasonal cycle. Subtracting the average seasonal cycle from the cumulated time series helps to identify more accurately the degree of homogeneity among weather patterns in an area. Similar seasonal cycles, typical of any region, may lead to overestimating weather pattern similarities.


WII, in order to identify one specific relation-ship between weather and yield, the two types of records were aggregated in a single rayon yield series.

5.80. Drastic reductions in yield performance were recorded during the early years of Ka-zakhstan independence. At the end of the 1990s, more intensive production technology again be-came available and production levels improved significantly. In order to avoid overestimating the impact of weather elements on yield losses in the periods of low-production performance, data from 1990 (or 1991) to 1998 were recen-tered at the mean level of the 1999–2010 period. See appendix D in annex 8 for more details.

5.81. As discussed in preceding sections, in or-der to capture the impact of weather variability on spring wheat production in the six select-ed rayons of northern Kazakhstan, the KHM provided data from nine weather stations that

were considered representative of the selected production environments. Since not all of the selected spring wheat–producing rayons host a main weather station, weather measurement points from neighboring rayons were adopted. Table 5.10 provides a list of all production ray-ons and the weather stations selected to repre-sent their weather patterns. The maps presented in appendix A of annex 8 provide a geographic representation of such information as well as a full list of weather stations in the north of Ka-zakhstan.

contract design

5.82. The design of WII contracts for cov-ering the drought exposure of spring wheat production in the north of Kazakhstan were designed on the basis of the methodology de-veloped by the Agriculture Risk Management Team (ARMT) of the Agricultural and Rural Development (ARD) Department of the World

table 5.10 selected rayons and representative Weather stations

Oblast and selected rayonStation selected to represent the

weather pattern of the rayonRayon in which weather stations

are actually located

Akmola

Bulandinsky WS Bolkashino Sandytausky

Enbekshildersky WS Schuchinsk Burabaisky

WS Stepnogorsk Stepnogorsk

Kostanay

Auliekolsky WS Diyevskaya Auliekolsky

WS Kushmurun Auliekolsky

Altynsarinsky WS Kostanay Kostanay

Pavlodar

Aktogay WS Zholboldy Aktogay

WS Aktogai Aktogay

Zhelezinsky WS Mihailovka Zhelesinsky

Source: Authors.

174 Kazakhstan

Bank.42 Specific additional indexing procedures were developed for the spring wheat environ-ment of northern Kazakhstan. In the contract design activities, three weather indexes were adopted: cumulative precipitation, hydrothermal ratio (HTR), and humidity factor (K).

5.83. The cumulative precipitation index can be defined as the sum of all recorded precipita-tion across a specific time period. It is one of the most common indexes adopted in the index ap-proach to insuring agricultural drought. In many contract structures for cereal crops, crop life is divided in phases (usually three) on the basis of the different water requirements of the differ-ent phenological phases. Accordingly, specific indexes are developed for each phase of crop growth. Given the specific agroclimatic condi-tions of Kazakhstan, breaking up the phases did not add value to the contract performance, and, therefore, a single cumulative precipitation in-dex was adopted.43 An additional feature of the northern Kazakhstan production environment is that precipitation preceding the sowing period (mainly in the form of snow) may have a role in crop growth.44

5.84. The two other indexes adopted in the design of contract structures for northern Ka-zakhstan (HTR and K) take into account both

42 The concepts and operational details of the methodology are described in the web-based train-ing material available at www.agrisktaining.org.

43 This finding is quite intuitive and is related to the fact that, in the north of Kazakhstan, the demand for water evaporation from the soil and plant transpira-tion (together defined as “evapotranspiration”) is low-er than in many of the semiarid countries where WII is usually implemented. Hence, water can be stored in the soil for longer periods of time, making crop growth less dependent on the conjectural precipita-tion level.

44 This is again different from the case of semiarid countries where at the start of the crop life the soil water balance is approximately zero and the onset of the rainfall season replenishes soil water reserves. In Kazakhstan snowmelt provides significant water resources that can be stored by the soil.

precipitation and the contribution of tempera-ture to plant growth. They are commonly used in Kazakhstan to identify drought conditions and therefore were selected for drought index-ing purposes.45 Both indexes are structured as a ratio between cumulated daily rainfall and cu-mulated average daily temperature. The differ-ences in the two indexes are related to the pe-riods across which the weather parameters are cumulated and to the weighting factors applied to the cumulated measures. The exact specifica-tions of the HTR and K indexes are provided in appendix C of annex 8.

5.85. Table 5.11 summarizes the findings of the contract design activities carried out for de-veloping drought protection products for spring wheat in northern Kazakhstan. As indicated in preceding sections, daily precipitation and tem-perature data from nine weather stations were made available for capturing the variability in spring wheat yield in six rayons in three oblasts of northern Kazakhstan. Accordingly, nine WII prototypes, one for each of the available rayon–weather station combinations, were developed.

5.86. The case studies were useful for assess-ing the technical feasibility of WII for spring wheat in Kazakhstan. In seven of the nine cases it was possible to model a drought-yield rela-tionship. Out of these seven cases, three struc-tures performed excellently, three performed less well but were still considered acceptable, and one was not acceptable. In two of the nine cases, it was not possible to define a meaningful drought-yield index.

5.87. For the majority of the rayon yield–weather station combinations, it was possible to develop meaningful index structures. This indicates that using WII to cover spring wheat’s drought exposure in the north of Kazakhstan may be technically feasible.

45 The analysis of hydrothermal indexes draws ex-tensively on a detailed study by Baisholanov (2011).


5.88. Although it would be necessary to verify the dynamics of each specific yield-drought in-dex relationship, the diverse performance re-corded in the various cases reflects the fact that the different weather stations may be more or less representative of the average meteorologi-cal conditions of the wheat production areas. If it becomes evident that the location of the weather measurement point with respect to the production area is the reason for poor contract performance, specific corrective actions can be

table 5.11 performance of drought index contract prototypes

Farm location (oblast and

rayon)

Reference weather

station (rayon and weather

station)

Overall perfor-mance

Average yield

(centner per

hectare)

Selected index

Maximum payout (KZT per hectare)

Indicative premium

rate

Basis risk

index

Kostanay, Auliekoski

Auliekoski, Kushumurum

High 9.2 HTR 19,000 13.7 18

Kostanay, Altynsarin

Kostanay, Kostanay

High 11.6Cumulative precipitation

24,000 16.8 41

Akmola, Enbelshiderski

Stepnogorsk, Stepnogosk

High 10.8 K 23,000 15.2 50

Akmola, Enbelshiderski

Schuchinsk, Schuchinsk

Medium 10.8 K 23,000 14.9 86

Pavlodar, Aktogay

Aktogay, Aktogay

Medium 6.1Cumulative precipitation

13,000 20.9 90

Pavlodar, Aktogay

Aktogay, Zholbody

Medium 6.1Cumulative precipitation

13,000 24.2 86

Akmola, Bualindiski

Sandytauski, Bodkashino

Medium-low

9.1 K 13,000 3.1 67

Pavlodar, Zhelesinski

Zhelenovsky, Mikhailovka

Low 8.4 — 26 0.0 0.0

Kostanay, Auliekoski

Diyevkaya, Diyevkaya

Low 9.2 — 26 0.3 0.3

Source: Authors.

Note: — = Not available. Color coding is as follows: yellow = modeling successful and high-to-medium prototype per-formance; brown = modeling successful and medium-to-low prototype performance; grey = modeling not successful. The prototypes were calibrated in order to trigger payouts for yield observations that fall below 65% of the average rayon yield level. For this reason, maximum payout levels vary according to rayon average yields. For the other simulations car-ried out in the study, the price reference used to convert yield into revenue losses was KZT 3,210, corresponding to the average of the reference wheat prices in 2008, 2009, and 2010.

yellow brown grey

undertaken. In particular, developing synthetic rainfall and temperature data sets through a grid-ding analysis may provide the additional data reference points needed for carrying out the risk assessment and contract rating procedures.46 In

46 Such an approach has been piloted in Mexico, where Agroasemex, a parastatal insurance and re-insurance company, has developed a methodology using reanalysis techniques to obtain a simulated se-ries of weather variables. Similar activities are under

176 Kazakhstan

combination with the gridding analysis, targeted network upgrading activities, like the installa-tion of new automatic weather measurement equipment, could then provide the means for settling WII contracts.

5.89. Two of the nine contract structures are presented in figures 5.6 and 5.7.47 The two contract structures presented constitute the two extremes of the range of technically accept-able structures. All of the contract structures were developed and calibrated for a coverage level of 65 percent of the average rayon yield.48 The contract presented in figure 5.7 refers to the drought-index structure developed for the

development in various other countries.

47 Graphical representations of the other structures are presented in appendix F in annex 8.

48 In WII the yield coverage level is a purely indica-tive measure used only for calibration purposes. In fact, payouts are triggered only by specific realiza-tions of the weather indexes, regardless of the actual recorded yield level.

Altinsarin rayon on the basis of data collected at Kostanay weather station. The graph shows that the potential payouts that the index would have provided in the last 25 years match very closely with the average spring wheat revenue losses suffered in the Altinsarin rayon. The contract presented in figure 5.8, which refers to the case of Aktogayskiy rayon, uses data collected at Ak-togai weather station and shows a relatively less well-performing match between losses and pay-outs. While all major drought losses are matched by a payout (the 1999 revenue loss, in yellow on the graph, was attributable mainly to a locust at-tack), the size of the payouts does not cover the corresponding losses exactly, and unnecessary payouts also would have been triggered by the contract. Accordingly, the lower performance of the contract for the Aktogayiskiy case is indicat-ed by the significantly higher value of the basis risk index (90 versus 43 percent for the Altinsa-rin contract).49

49 The “basis risk index” was developed in order to indicate the approximate mismatch between the

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

1986

1987

1988

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010K

ZT

per

hec

tare

Cumulated Rain Payout Revenue Loss

1991

1992

1993

1994

1995

1996

1997

1989

1990

1998

1999

2000

Figure 5.7 historical performance of drought index contract for spring Wheat in altynsarin

Source: Authors.

Note: Rayon = Altinsarin; weather station = Kostanai; indicative yield level coverage = 65%; index = cumulative precipi-tation, March 1–July 20; trigger = 95 millimeters; exit = 30 millimeters; contract maximum payout = KZT 24,000; basis risk index = 41%; reference gross premium = 16.8%.


5.90. As indicated in table 5.11, indicative gross premium rates of the technically accept-able contract structures range from 13.7 to 24.2 percent. The potential costs of using WII con-tracts for insuring against drought may be very high, and the different case study areas have dif-ferent exposures to drought risk.50

5.91. While the basis risk index calculated for

loss suffered and the potential payouts. It is defined as the ratio between (a) the sum of the absolute val-ues of the difference between payouts and revenue losses and (b) the sum of payouts. Such an index has no actuarial value or rating function and should be considered an approximate reference for comparing the performance of different index contracts.

50 The premium rates suggest a progressively in-creasing exposure to drought moving from Kostanay to Akmola and then to Pavlodar. While this seems to be in line with the other findings of the study, con-tracts developed for Pavlodar (Aktogayskiy) may have relatively lower performance and, consequently, the higher premium rates may also be factoring in the need to provide higher payouts in order to capture all potential losses.

each of the contract structures indicates the potential match between payouts and historical average yield losses in a specific area, basis risk also has a spatial component, generated by the deviations in individual farm yields from the aggregate average yield on which the weather index is calibrated. This dimension influences the ability of the contract to compensate the po-tential policyholder in the appropriate measure. In this respect, in order to provide some empirical indications of the degree of spatial basis risk, the local project team collected detailed information on the 2008, 2009, and 2010 yield performance of commercial farms and production enterprises located within a radius of approximately 20 to 25 kilometers from the Kostanay, Aktogayskiy, and Mikhailovka weather stations. The data are presented in appendix G of annex 8.

5.92. Figures 5.9 and 5.10 provide an “as if” scenario in which mismatches between 2010 farm-level losses and the 2010 WII payouts are calculated for both commercial farms and production enterprises operating in the sur-roundings of Kostanay weather station. Devia-

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

1986

1987

KZ

T p

er h

ecta

re

Payout: K Payout: GTK

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Yield reductiondue to locust attack

Figure 5.8 historical performance of drought index contract for spring Wheat in aktogayskiy

Source: Authors.

Note: Rayon = Aktogayskiy; weather station = Aktogai; indicative yield level coverage = 65%; index = cumulative precipitation, March 1–August 31; trigger = 150 millimeters; exit = 50 millimeters; contract maximum payout = KZT 13,000; basis risk index = 90%; reference gross premium = 20.9%

178 Kazakhstan

tions for both farm typologies oscillate between +14 percent and −30 percent of average yields, indicating a relevant variability in the effective-ness of compensating farm-level losses.51 While it is clearly not possible to draw any statistically significant conclusions from this simple elabo-ration, the exercise indicates the potential pres-ence of a relevant dimension of basis risk. It also highlights the importance of carefully evaluat-ing the spatial component of basis risk that is embedded in farm-level WII products.52

meso, macro, and reinsurance applications of Wii in northern Kazakhstan

5.93. As discussed, WII can be retailed at different business levels apart from the indi-vidual farmer or micro level. It can be retailed at the meso level to cover the exposure of enti-ties such as financial service providers, farmer associations, input suppliers, and processors from potential losses caused by adverse weather events or at the macro level to aid governments and relief agencies in development and disaster management. The use of index insurance by na-tional or regional governments (macro level) is discussed in chapter 6.

5.94. One specific meso-level application of WII could be the use of index contracts as re-insurance coverage for insurance companies involved in agricultural insurance programs.

51 It would have been interesting to replicate a sim-ilar analysis for the Aktogay and Mikhailovka weather stations, but the data collected in the surroundings of Aktogay are incomplete, and it was not possible to develop an acceptable WII contract structure for Mikhailovka. The farm-level data for Mikhailovka, also presented in figure A7 of annex 7, seem to be less variable than the Kostanay farm-level data.

52 As an additional caveat, what may be considered acceptable in terms of basis risk may also depend on the actual farmers’ experience with agricultural insurance. Farmers who have been used to being compensated on the basis of in-field loss adjustment procedures may be more sensitive to the potential impact of basis risk.

As indicated in chapter 4, crop insurance com-panies in Kazakhstan are very exposed to cata-strophic losses on their retentions, and options for enhanced reinsurance protection need to be considered. The GRK currently provides free proportional reinsurance protection equal to 50 percent of the claims to the private insurance companies and mutuals in Kazakhstan. How-ever, neither the private insurers nor the mutuals have any reinsurance protection on their 50 per-cent retentions; they are therefore very exposed to major systemic drought losses.

5.95. In this respect, insurance companies could use WII structures similar to the ones designed in this feasibility study to hedge the drought exposure of their agricultural under-writing portfolios. The analysis carried out in this study shows that it is possible to structure drought insurance products for spring wheat production by calibrating weather indexes on rayon-level yield records. These structures could technically form the basis of a reinsurance trans-action.

5.96. From the reinsurance industry’s point of view, provided that the usual assurances on the reliability and independence of weather measurement are available, WII contracts are usually considered attractive because they are transparent, free of asymmetric information problems, and easy to manage. If the WII con-tracts are structured appropriately, Kazakhstan insurance companies should be able to access international reinsurance markets for WII pro-tection.

5.97. In order to test the performance of re-insurance applications of the WII contracts developed in this study, a simulation scenario was carried out in which hypothetical WII re-insurance payouts and actual indemnities paid by the current LIC scheme for drought were compared. Two caveats are relevant for putting this exercise in the right perspective:

Given the remarkable difference in coverage • levels, in order to provide comparable pay-


-30%

-20%

-10%

0%

10%

20%

1 2 3 4 5 6 7 8 9 10

Commercial Farms

Figure 5.9 mismatch for the 2010 payout for commercial Farms operating in the range of 20–25 Kilometers from Kostanay Weather station

Source: Authors.

Note: The bars represent the positive or negative deviation between the 2010 actual loss and the 2010 WII payout divided by the average 2008–10 yield of each commercial farm. The total 2010 wheat-growing area covered by the 10 commercial farms amounted to 14,520 hectares.

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

12 3

45 6 7

Production Enterprises

Figure 5.10 mismatch for the 2010 payout for production enterprises operating in the range of 20–25 Kilometers from Kostanay Weather station

Source: Authors.

Note: The bars represent the positive or negative deviation between the 2010 actual loss and the 2010 WII payout divided by the average 2008–10 yield of each production enterprise. The total 2010 wheat-growing area covered by the seven production enterprises amounted to 104,424 hectares.

180 Kazakhstan

outs, only a fraction of the LIC area covered should be reinsured with WII contracts. In this respect, the share of area covered under the LIC scheme to be reinsured was set at 5 percent.53

Indemnities provided by the LIC scheme are • influenced by the level of wheat prices, and this clearly weakens the link between the impact of drought on crop production and LIC indemnities.54

53 In the large majority of policies sold in the LIC scheme, coverage is roughly equivalent to 10 percent of the yield level, while the drought index structures were calibrated to cover losses below 65 percent of the average yield level.

54 When wheat price levels are high, the yield threshold falls, and, conversely, when wheat prices are low, the yield threshold rises. Hence, depend-ing on the price level, a different aggregate indem-

5.98. Figure 5.11 provides a graphical repre-sentation of LIC indemnities and potential cor-responding WII reinsurance payouts. Although payouts and indemnities do not match perfectly, WII structures would have provided relevant payments in the main drought-driven loss events.55 In addition, table 5.12 shows that the total amount of WII hypothetical payouts across the four rayons and over the five-year history are in a comparable range, indicating that, for the area and time frame examined, the reinsur-ance coverage of WII would have yielded rea-sonable results.

nity amount for any specific drought event may be achieved. See chapter 3 for more details.

55 In this framework it should be considered that, within acceptable boundaries, insurance companies may be less financially sensitive than individual farms to mismatches between loss and payouts.

- 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000

2006

2008

Altinsarin - WS Kostanai 2010

2006

2008

Auliekolsky - WS Kushmurun 2010

2006

2008

Enbekshilderskiy - WS Stepnogorsk 2010

2006

2008

Aktogayskiy - WS Aktogai 2010

Indemnities paid under current LIC scheme (KZT)

Hypotetical WII payouts with 5% of LIC area reinsured (KZT)

Figure 5.11 lic indemnities and hypothetical Wii reinsurance payouts, 2006–10

Source: Authors based on FFAS data.


table 5.13 indicative cost of Wii reinsurance of lic drought exposure

Rayon Weather station

Indicative gross premium for WII

at 65% coverage level

(KZT per hectare)

Area insured under

current LIC scheme

(number of hectares)

2.5% of LIC area insured (number of hectares)

Cost of 2.5% of LIC area

WII reinsurance coverage

(KZT)

Premium collected in LIC scheme (KZT)

Altinsarin Kostanai 4,042 174,922 4,373 17,675,868 10,930,646

Auliekolskiy Kushmurun 2,637 161,783 4,045 10,665,544 6,252,665

Enbek-shilderskiy

Step-nogorsk

3,439 47,811 1,195 4,110,551 3,657,782

Aktogayskiy Aktogai 2,678 740 19 49,543 253,448


Note: Given that 50% of LIC indemnities are paid by the GRK, the percentage of the LIC area to be covered by WII rein-surance can be reduced by the same proportion and set at 2.5%.

5.99. Despite the reasonable performance in terms of covering the drought exposure of in-surance companies, the financial dimension of the WII approach to reinsuring the LIC scheme seems to be out of scale and outside any accept-able insurance logic. Table 5.13 compares the amount of premium collected in the history of the LIC scheme in the selected rayons and the hypothetical cost of WII-based reinsurance cov-erage. The cost of the WII coverage is signifi-

cantly higher than the amount of premium col-lected by the LIC scheme. Despite any potential difference in the pricing methodologies adopt-ed (including savings generated by adopting a portfolio rating approach) and any discount of-fered by willing reinsurance partners, the order of magnitude of the two variables is difficult to reconcile.

5.100. In conclusion, the findings of this analy-

table 5.12 aggregate lic indemnities and hypothetical Wii reinsurance payouts

KZT (millions)

YearIndemnities paid under current

LIC scheme Hypothetical WII payouts with

5% of LIC area reinsured

2006 4,555,320 —

2007 — —

2008 78,545,211 70,351,578

2009 13,999,618 —

2010 98,577,822 88,897,508

Total, 2006–10 195,677,971 159,249,086

Source: Authors based on FFAS data.

Note: — = Not available.

182 Kazakhstan

sis show that adopting WII reinsurance in the context of the current LIC framework does not make commercial sense. At the same time, they reinforce the findings of chapter 3, which show that LIC is severely underrated. If the current LIC system is revised and made into an actuari-ally sound crop insurance scheme, a new evalu-ation of the use of WII contracts for reinsurance purposes might lead to different conclusions.

remote-sensing approaches to developing index insurance

5.101. In order to find new approaches to of-fering crop insurance in Kazakhstan, solu-tions based on satellite-measured data could be also investigated. The use of remote-sensing approaches in agricultural risk management has become more popular in recent years. Satellite data can be used to estimate precipitation levels and reflection indexes, to measure energy bal-ances, and even to run crop models. The bulk of the current commercial applications of remote-sensing indexes measure pasture growth through reflection indexes such as the normalized differ-ence vegetation index (NDVI) and related trans-formations. However, research on the use of sat-ellite information to estimate crop yield is under way and could soon provide interesting results (see, for example, Rosema et al. 2010).

5.102. Kazakhstan capacity in remote-sensing technology is remarkable, and specific agri-cultural applications have already been devel-oped. The entity responsible for such activities is the National Center of Space Research and Technologies (NCSRT) of the National Space Agency (NSA). Among its various activities, the NCSRT operates a satellite-based crop monitor-ing system for the Ministry of Agriculture. The activities of the NCRST in this field include es-timation of spring soil water content, estimation of spring crop acreage, control of cereals sowing date, and empirical models for crop state assess-ment and grain production forecasting.

5.103. So far, the work carried out by the NC-SRT has mainly sought to forecast production. However, the NCSRT holds the expertise need-

ed to explore the feasibility of using remote-sensing technology for insurance applications that are currently adopted or under develop-ment in insurance schemes in other countries. Hence research exploring the potential role of the NCRST in supporting the development of index insurance is recommended.

operational considerations

5.104. Whether the GRK or the insurance in-dustry decides to consider the adoption of WII contracts in the agricultural insurance pro-gram of Kazakhstan, it is recommended that additional research be conducted to investi-gate the technical and commercial specificities of WII. Depending on the targeted application level, the research agenda may have different objectives.

5.105. For micro-level applications, a deeper understanding of the level of spatial basis risk in spring wheat production is required. Such an understanding would indicate the effective-ness of WII insurance products in compensating farm-level losses, and this information would help insurers to understand the level to which farmers would be prepared to accept payouts that do not exactly match the losses they experi-ence in the field.

5.106. The most effective way to learn about the potential of WII products is to develop pilot tests in which a WII supply chain is set up and prototype contracts are designed and retailed. Although, as mentioned, micro-level WII is not a realistic alternative to the current agricultural insurance scheme in the short term, conducting pilot tests could provide significant insights on its possible uses in the future. Even if not imple-mented at full scale, WII may still prove to be a useful risk management tool to be adopted on a case-by-case basis, where the required condi-tions apply.56

56 For example, in cases of large operations or co-operative units that have good historical data on yield


5.107. For a meso-level application, a useful in-vestigation would be to carry out a larger-scale analysis aimed at determining the number of rayons in which the proposed cover would be technically feasible. In fact, the analysis carried out in the feasibility study showed that out of the nine cases examined in the north of Kazakh-stan, the proposed cover was acceptable in six, not acceptable in one, and impossible to model in two.

5.108. The results of this analysis highlight the need to generate synthetic historical data sets for rating purposes and to install additional weather measurement devices for contract monitoring and settling.

5.109. In general terms, if Kazakhstan’s stake-holders decide to promote the use of WII, a suggested action would be to set up a technical unit or a working group to address the techni-cal dimension of WII program development, which individual insurance companies gen-erally cannot handle. Such a working group would need to combine the expertise of agrono-mists, agro-meteorologists, and insurance ex-perts and would greatly benefit from the partici-pation of the GRK. Should the coinsurance pool discussed in chapter 4 be developed, it would be the ideal seat for a technical unit on WII.

potential roles of the government in enabling Wii

5.110. From a WII perspective, it is possible to list what the development community has come to consider as useful public actions that govern-ments and international donors can carry out to support the development of WII programs (see IFAD and WFP 2010). The following list summarizes these actions:

Improve weather station infrastructure and • data systems

and have access to representative weather data.

Fund agro-meteorological research leading • to product design

Provide technical assistance for training and • product development

Facilitate the development of an enabling • legal and regulatory environment

Facilitate access to reinsurance•

Support regular monitoring, evaluation, and • impact studies.

conclusions on Wii

5.111. The analysis carried out in this feasibil-ity study indicates that WII for spring wheat in the north of Kazakhstan is technically fea-sible.

5.112. Despite the positive technical findings, the actual density of the weather measurement network does not make full-scale implementa-tion of farm-level WII a realistic option in the short term. While potential action to address this constraint may be undertaken, for the time being WII should not be considered a readily implementable alternative to the current LIC in-surance scheme.

5.113. In addition, the high potential costs of WII products developed in the analysis and a preliminary analysis of basis risk suggest that further research is needed to assess the poten-tial interest of farmers in such an alternative insurance approach. WII could also be applied as reinsurance to cover the drought exposure of insurance companies. However, the analy-sis carried out for this study found that adopt-ing WII reinsurance in the context of the cur-rent LIC framework does not make commercial sense. Should the current LIC system be revised to become an actuarially sound crop insurance scheme, a new evaluation of the use of WII con-tracts for reinsurance purposes might lead to dif-ferent conclusions.

184 Kazakhstan

6.1. The final section of this report presents some of the international lessons and experi-ence on strategies and programs to address the agricultural risk transfer and insurance needs of small farmers in Kazakhstan. These lessons may be applicable to the small household mixed crop and livestock farming sectors, which are mainly located in southern Kazakhstan. This section also draws, where possible, on the find-ings of a short visit to one wheat-growing area in Tole-bi rayon in South Kazakhstan (SKO), where many farmers work either small peasant farms or semisubsistence household plots.

identification of appropriate crop insurance products

6.2. To date, crop insurers in Kazakhstan have offered a single loss of investment costs (LIC) crop insurance product mainly to medi-um and large cereal producers located in north-ern Kazakhstan, and there has been very little debate about the appropriateness of this prod-uct for small and marginal farmers in southern Kazakhstan. While the LIC product is suitable for grains, oilseeds, and other field row crops, it is not suitable for most horticultural and tree fruit crops, especially crops that have multiple or staggered harvests. Furthermore, the product is designed to protect against catastrophic losses equivalent to more than 75 or 80 percent of ex-pected crop revenue. Although this type of cover might be of interest to large cereal producers, it is not necessarily appropriate for small subsis-tence farmers, which require food security.

6.3. A wide range of crop insurance products is available internationally, and this report rec-

chapter 6: Tailoring Crop Insurance to the Needs of Lower- Income Smaller Farmers

ommends that in the future Kazakhstan’s crop insurers should aim to develop and introduce several of these alternative crop insurance products. The products that are recommended for individual farmers are described in table 6.1. They include named-peril (hail) crop insurance, multiple-peril crop insurance (MPCI), loss of yield insurance, and nontraditional index prod-ucts, such as area-yield index insurance (AYII) and weather index insurance (WII).

6.4. Named-peril crop hail insurance could be offered for cash crops, such as cotton, if there is an appreciable exposure to hail risk. See also chapter 5 for comments on crop hail opportunities in Kazakhstan.

6.5. Individual grower MPCI is often not considered suitable for small and marginal farmers because of the very high costs of ad-ministering such policies and the associated high costs of premiums. The very high costs of administering MPCI policies are associated with the need to conduct preinspections in order to minimize antiselection and moral hazard and the requirement to conduct time-consuming and costly in-field loss assessments. While econo-mies of scale can be achieved on large insured units with several thousand hectares of insured crop, the administrative and operating (A&O) costs of insuring small and marginal farmers are prohibitively high.57 In addition, the very high

57 This point was made by the CEO of Kazakh-stan’s largest crop insurance company, who noted that, because of the very high costs of administering crop insurance, his company could only insure large production enterprises.


premium rates on MPCI policies, which are of-ten on the order of 7.5 to 15 percent, make this cover unattractive to small farmers unless ac-companied by very high government subsidies of premiums.

6.6. AYII is considered a more appropriate product for small and marginal farmers be-cause of the reduced costs of administering and adjusting this type of cover. AYII does not require preinspections or individual farmer and field loss assessment and is therefore a less cost-ly product for an insurer to offer to small and marginal farmers. India is the main country that has implemented AYII on a massive scale, link-ing it to crop credit for small and marginal farm-ers. The program currently benefits more than 25 million producers each year. The Indian AYII program is, however, more of a socioeconomic support program: it incurs very high financial losses and is only sustainable because of very high levels of government subsidies.

6.7. The suitability of AYII for small farmers located in southern Kazakhstan will need care-ful consideration. As noted in chapter 4, one of

the preconditions of AYII is that farming sys-tems in the defined area (insured unit) must be fairly homogeneous, conditions that are found in northern Kazakhstan where rain-fed spring wheat is the main crop, is cultivated with very stable planting and harvest dates, and produces relatively homogeneous yields. Agricultural production in southern Kazakhstan is, however, much more diversified within each rayon, with a mix of rain-fed and irrigated agriculture and much smaller and more scattered plots of main-ly winter sown cereals, horticultural crops, and cotton. AYII for winter wheat may not be ideally suited in these regions due to the much less ho-mogeneous cropping systems and mix of rain-fed and irrigated agriculture.

6.8. Crop weather-index insurance was first introduced into India 10 years ago, where it was hailed as a micro-insurance product ideally suited to the needs of India’s poorest and most marginalized farmers. WII has been promoted for small and marginal farmers in developing countries because it has the potential to address correlated risk affordably and is less challenging to operate than traditional individual farmer in-

table 6.1 classification of agricultural crop insurance products

Type of product Payouts Availability

Indemnity-based agricultural insurance (payouts based on the actual loss at the insured unit level)

Named-peril % of damage Widespread

Multiple-peril loss of investment costs

Yield loss or loss of investment costs

Eastern Europe, Kazakhstan, Mexico

Multiple-peril loss of yield Yield loss guarantee Widespread

Index-based agricultural insurance (payouts based on an index measurement)

Area-yield index Area-yield loss Brazil, India, United States

Crop weather index insurance Weather index payout scaleCanada, India, Malawi, Mexico, United States

Crop revenue insurance (payouts based on yield measurement and crop prices)

Crop revenue insurance Yield and price loss Limited to the United States

Source: Authors.

186 Kazakhstan

demnity-based crop insurance products. WII has achieved some degree of scale-up by the private insurance sector in India and been introduced on a large scale as a compulsory crop credit insur-ance cover by the Agricultural Insurance Com-pany of India (AIC), the public sector crop in-surer. WII is now being pilot tested in about 25 countries in Asia, Africa, and Latin America, but to date none of the micro-level individual farmer crop insurance programs has achieved sustain-ability and scale-up.

6.9. In southern Kazakhstan, WII is only suitable for rain-fed agriculture. Given the fact that much of agriculture in southern Kazakhstan is irrigated, WII policies that insure against ex-cess or deficit rainfall are not suitable. For ex-ample, in Tole-bi rayon, nearly 60 percent of the annual sown area of 758,000 hectares is ir-rigated. High-value horticultural and vegetable crops and cotton tend to be grown on irrigated land, while cereals are grown on nonirrigated land. A further factor that will need to be studied carefully is the drought risk exposure. In Tole-bi rayon technical staff noted that drought is not an economic risk exposure in rain-fed crops; other factors including pests and diseases that are not indexable under a WII policy are more important.58

Farmer segmentation and crop insurance

6.10. Individual farmer crop insurance is most effective when the farmer is a commercial pro-

58 In this respect, the feasibility study team as-sessed the possibility of structuring a WII contract for winter wheat production in the neighborhood of the Tasaryk weather station in the Tole-bi rayon. However, information provided by local stakeholders seemed to overestimate the potential impact of drought on wheat production in the area. On the basis of the data analyzed, the lowest yield recorded (drought related, according to wheat producers) was higher than 70 percent of the average yield reference. With a drought risk of such a small magnitude, drought index insur-ance may not offer much protection.

ducer who grows a crop(s) for sale and invests in purchased inputs and services, often using formal credit. Where the farmer is a commercial producer and uses credit to purchase seeds and fertilizers and plant protection chemicals, the farmer faces a financial risk in the event of ad-verse climatic conditions leading to crop failure, and risk transfer through the purchase of crop insurance is often justified. For large producers of commercial crops, individual grower MPCI or named-peril crop insurance may be a suitable product (figure 6.1).

6.11. Individual farmer crop insurance is of-ten appropriate for commercial and semicom-mercial farmers. In Kazakhstan, private insurers are targeting the larger commercial agribusiness enterprises because of the lower unit costs of dealing with these farmers and the higher vol-ume of premium generated by each bound risk.

6.12. The insurance companies, however, face major challenges in implementing crop insurance for smaller semicommercial farm-ers on an individual farmer-by-farmer basis because of the very high costs of delivering and administering insurance on small farm units. In Kazakhstan, the main clients of the farmer mutual crop insurance associations are small to medium farmers. Given their low overhead costs and proximity to their members, mutuals are much better placed than private companies to offer crop insurance to smaller commercial and semicommercial farmers. For these smaller semicommercial farmers, index insurance (both AYII and WII) may be a more viable solution than traditional MPCI (figure 6.1).

6.13. Traditional individual farmer crop in-surance is often appropriate for commercial and semicommercial farmers, but not for sub-sistence farmers. There is much evidence today that traditional individual farmer MPCI does not work for small and marginal farmers and usual-ly ends up being heavily subsidized by govern-ment. Few small subsistence farmers producing food crops for on-farm family consumption can afford crop insurance—hence government inter-


vention to make crop insurance more affordable through premium subsidies. In Kazakhstan, crop insurance is unlikely to be a useful interven-tion for the very small rural households that are mainly subsistence producers.

6.14. For subsistence farmers, it may be much more cost-effective for governments to exam-ine alternative food security mechanisms and social safety nets or, where they elect to use in-surance, to consider some form of macro-level weather index program to permit early pay-ments in the event of a major natural disaster. To date, several countries, including Ethiopia, Malawi, and Mexico, have designed macro-level rainfall deficit index cover that provides national or regional governments with immediate cash li-quidity following a natural disaster and enables the government to provide an early response.

tailoring crop insurance for different client levels

different levels of aggregation

6.15. Crop index insurance (including both AYII and WII) is potentially a very flexible in-

strument that can be designed to transfer risk at various levels. It can transfer risk either at the individual farmer level, which is termed micro-level insurance, or at an intermediate level of aggregation, as financial business interruption protection for banks and other lending organi-zations such as cooperatives and microfinance institutions (MFIs), which is termed meso-level insurance. It also is an instrument that region-al and national governments can use to insure against major systemic perils such as drought, windstorm, freeze, and flooding (macro-level insurance).

6.16. In the past decade, WII has been heavily promoted as an individual farmer micro-level insurance product. However, relatively little re-search and development effort has been conduct-ed to find meso-level and macro-level solutions. Micro-level WII has been heavily promoted in developing countries as a low-cost (in terms of administrative costs) product that is ideally suited to the needs of resource-poor farmers, and it is being implemented or pilot tested in about 25 countries in Asia, Africa, and Latin America (see table 5.7 in chapter 5). This product is typi-cally designed to insure against systemic perils of “too much rainfall” (excessive rainfall and

Source: Adapted from Skees et al. 2009.

Figure 6.1 suitability of crop insurance products for different types of Farmers

commercial Farmers

semicommercial Farmers

subsistence Farmerssocial programs

mcpinamed

peril index insurance

Medium/large farm units• Mechanized production• Access to credir• High Levels inpit use• Product for sale•

Smallholder farmers• Some assets• Some access to credit• Part consumption, part sale•

Very small, no land• Ver few assets• Subsistence farming•

188 Kazakhstan

flooding) and “too little rainfall” (drought), and the premium rates associated with it are typi-cally on the order of 7.5 to 10 percent or higher, which is generally not affordable for the targeted resource-poor farmers without government pre-mium subsidy support. The scale-up of private sector WII in India has been achieved in part because of premium subsidies, while the public sector WII program has sold several million pol-icies because it is linked on a compulsory basis to seasonal credit. No other country that is op-erating voluntary micro-level WII has achieved commercial scale-up to date.59

6.17. Crop index insurance can also be used as a meso-level instrument to protect rural bank lending (loan portfolio or business interrup-tion protection). From the bank’s perspective, farmers who have crop insurance protection are less likely to default on their loans in the event of a major weather-induced crop failure. It also means that, in the event of a major regional loss, the bank’s loan portfolio is protected, enabling the bank to remain solvent, to reschedule farm-ers’ loans, and to continue lending. Claiming on a crop insurance policy and rescheduling loans are generally much more acceptable to a bank than having to resort to the courts to recover their debts. Since 2010, meso-level WII pilot ini-tiatives have been launched in Peru and Ghana, linked to regional bank lending to agriculture. The Peruvian product is a catastrophic El Niño–induced excessive rain leading to flood policy that uses a sea surface temperature index to trig-ger indemnities, while the Ghanaian product for rural banks is linked to deficit or excessive rain-fall (Skees and Murphy 2009; Stutley 2010). In addition, in Vietnam, an innovative flood index product linked to regional bank lending to rice farmers is awaiting launch (Skees and Hartell 2008).

6.18. At a regional or national level, there ap-

59 For an up-to-date review of the current status of crop and livestock WII projects around the world, see WFP and IFAD (2010).

pears to be an important role for linking disas-ter risk management with an ex ante macro-level weather index or AYII insurance policy.60 To date, several countries, including Ethiopia, Malawi, and Mexico, have designed macro-level rainfall deficit index covers to provide national or regional governments with immediate cash li-quidity following a natural disaster and to enable the government to provide an early response. Mexico is the only country that, to date, has used AYII as a macro- or state-level crop insurance product for small and subsistence farmers (see below for further discussion). There appears to be considerable scope for using macro-level in-dex products to provide small subsistence farm-ers with a social safety net; commercial crop insurance is not necessarily an appropriate or cost-effective mechanism for them.

Key organizational and operational differences between micro-, meso-, and macro-level insurance

6.19. There are some key structural and op-erational differences between a micro-level in-dividual farmer crop insurance scheme, a me-so-level crop insurance scheme purchased by a financial lending institution, and a macro-level regional or countrywide program purchased by a state or national government. Under a micro-level program, the individual insured is the farmer who pays a premium (which may or may not receive government subsidy support) and receives a claims payment in the event of a loss. Where micro-level crop insurance is linked to crop credit, the lending institution is usually listed as the first beneficiary in order to ensure that any claims settlement is used to repay the amount of loan; the farmer then receives any balance on the claim (figure 6.2).

6.20. Under a meso-level crop insurance pro-gram, a financial lending institution would

60 For a comprehensive review of the links be-tween disaster risk reduction and index insurance, see Warner et al. (2009).


typically be the insured policyholder and would purchase crop insurance to protect its crop loan portfolio against catastrophic climatic losses. Under the meso-level option, the lending insti-tution (for example, a rural bank or MFI) would declare its total agricultural loan acreage in each region (municipality) and the level of cover-age it wishes to insure under the crop insurance policy in each municipality. The bank or MFI lending to agriculture would purchase a single aggregate policy to protect its loans and would be responsible for paying the premium. In the event of a claim in any or all insured regions, the losses would be computed and the bank or MFI would receive an aggregate claims indemnity. The bank or MFI would then decide whether or not to pass on any of this indemnity payment to the individual farmers to whom it lends seasonal crop production credit. If the bank or MFI elects to pass on some of the indemnities to farmers, it may also require them to share in the premium costs. The major advantage from an insurance viewpoint is that the bank or MFI would be able to accept a higher degree of basis risk associated

with the proposed area-yield index or WII prod-uct than individual farmers.

6.21. Under the operation of a macro-level policy, the insured policyholder is typically the state (regional) government or national gov-ernment. Under the Ethiopian and Malawian macro-level WII rainfall deficit products, the national governments are the policyholders, and the covers are designed to trigger ex ante disas-ter relief payments to the national government. In Mexico since 2003, the state-level govern-ments have purchased state-level catastrophe drought WII cover and state-level AYII catastro-phe insurance (seguros catastróficos) protection for specific target audiences of small subsistence farmers located in specific regions and growing specific crops. These farmers are too small to participate in the private commercial crop in-surance programs or public sector small farmer group loan and crop insurance programs. The state governments are the policyholders, and they pay 100 percent of the costs of premiums. In the event of a claim, the state governments

Source: Dick 2009.

Figure 6.2 organizational structures for micro- and meso- or macro-level crop insurance

micro level insurance program meso/macro insurance program

Insurer Insurer

Policies, premiums, claims



aggregator sets the payout rules

Distributorpolicycholder is aggregator (e.g. processor, bank)

policyholder is Farmer Farmers

190 Kazakhstan

box 6.1 macro-level catastrophic climate contingency index-based insurance for state governments in mexico

objectives. To provide disaster relief assistance to small and marginal farmers affected by natural calamities

legal framework. The National Program for the Attention of Climatic Contingencies (PACC in Spanish) managed by the Ministry of Agriculture

main features. To provide disaster relief assistance to the farmers from a fund that is financed through the payouts generated by a macro-level agricultural insurance policy issued to the federal and state governments

target farmers. Small and marginal farmers (according to the definition provided by the Ministry of Agriculture) who suffer from the occurrence of nonrecurrent, unforeseen, and unpredictable climatic losses and have no access to any other type of financial insurance

covered perils. Drought, frost, hail, excessive rain, flooding, cyclones and tropical storms, and tornados

covered items. Rice, maize, beans, sorghum, barley, oats, wheat, rape, soybeans, peanuts, sugarcane, avocados, cacao, citrus, coco, passion fruit, coffee, apples, mangoes, nuts, pineapples, peaches, and plantains

mechanism of operation. Two types of assistance are offered: catastrophe insurance and direct support.

• catastrophe insurance. Federal and state government liabilities from the application of the disaster relief assistance to the farmers are transferred to the market through a macro-level in-dex-based insurance policy. The policy can be based on a weather index, an AYII, or an NDVI. The municipalities (rayons), the insured crops, and covered perils are selected by the federal and provincial governments ex ante of the inception of coverage and payment of the insur-ance premiums. The premiums are co-financed by the federal (75–90 percent) and the state (25–10 percent) governments. Assistance is equivalent to US$75 per hectare up to a maximum of US$1,500 for annual rain-fed crop (20 hectares) and US$750 per hectare for other crops (10 hectares). The waiting period to receive an indemnity is one to two months. The program is insured by commercial reinsurers and in the international market.

• direct support. Direct support is provided by the federal and state government when cata-strophic insurance is not available. The occurrence of the loss event is determined by the Na-tional Commission of Water (Conagua in Spanish). The direct support is co-financed in equal shares by the federal and state governments. Assistance is equivalent to US$75 per hectare up to a maximum of US$375 per hectare per farmer (5 hectares maximum). The waiting period to receive an indemnity is three to five months.

achievements.

• 8 million hectares are insured.

• 4.2 million head of livestock are insured.

• 3.2 million farmers are protected by the program.

• 30 of 38 states participate in the program.

Source: Authors from SAGARPA.


have a preagreed indemnity payment formula for distributing lump-sum indemnity payments from insurers and reinsurers to the target ben-eficiaries. See below for further discussion of Mexico’s macro-level crop index insurance pro-grams.

macro-level crop index insurance in mexico

6.22. In 2003 Agroasemex, the Mexican spe-cialist parastatal crop reinsurer, launched the first macro-level catastrophe drought crop in-surance index insurance program. Mexico is very exposed to catastrophic risk in agriculture, including drought (80 percent of natural catas-trophes), hurricanes (17 percent), excessive rain or flooding (2 percent), and frost (1 percent). Since 1995 the federal and state governments have operated a national natural disaster scheme under the FONDEN program, which is designed to provide financial compensation to small rural farming families who are not eligible for private crop and livestock insurance. Between 1995 and 2003, the federal government and state govern-ments paid out US$212 million and US$74 mil-lion, respectively, to small rural farmers under the program. In 2003 as part of the FAPRAC (Fund for the Care of Rural Population Affected by Weather Contingencies), government con-tracted Agroasemex to substitute the ex post di-saster compensation programs with an ex ante macro-level index insurance for catastrophic cli-matic perils (Agroasemex 2007).

6.23. Agroasemex launched the first pilot in 2003 as a drought insurance index cover for maize and sorghum grown in the state of Guanajuato. The first product was based on a drought index for five weather stations cover-ing an insured area of 75,000 hectares of rain-fed maize and sorghum produced by several thousand small subsistence farmers located in Guanajuato. In recognition of the difficulties for insurance companies to provide insurance cover to individual farmers, Agroasemex specifically designed an aggregate or macro-level policy that

was sold to the state government, which was then responsible for setting the indemnity rules for each farmer in the insured command area. Since 2003, the program has been massively scaled up, with the development of index prod-ucts based on (a) WII covers against drought, hurricane, and frost, (b) AYII covers providing all-risk loss of yield protection at a macro level, and (c) normalized difference vegetation index (NDVI) pasture drought cover for livestock pro-ducers. Currently 30 of the 38 state governments in Mexico purchase climate contingency protec-tion. For crops, 8 million hectares are insured, with 3.2 million small subsistence farmers pro-tected under the crop insurance programs; about 4.4 million head of livestock are insured under the NDVI pasture drought index program. Fur-ther information on the Mexican macro-level in-dex programs is presented in box 6.1.

a potential disaster relief contingency Fund for WKo and aktobe

6.24. Given the significant financial chal-lenges of the current LIC insurance scheme in WKO and Aktobe, an alternative way for the GRK to provide spring wheat producers with di-saster relief assistance could be to set up a pub-licly supported contingency fund that would be used to compensate farmers in case of extreme loss events. Drawing on the recent international experience—Mexico in particular—such a fund could be ideally protected through a specific reinsurance coverage that, on the basis of cus-tomized weather indexes, would trigger payouts in the event of adverse weather conditions and, therefore, replenish the fund. Contingency fund resources would be also used to pay for the cost of the reinsurance coverage.

6.25. The reference weather indexes could be developed at the rayon level. This would make it possible to have payouts triggered independent-ly by weather measurement carried out in each rayon or at the oblast level, with an index based on a basket of stations that would trigger a pay-out for the entire oblast (hence less frequently).

192 Kazakhstan

box 6.2 small Farmer production cooperatives in southern Kazakhstan

In Tole-Bi rayon, small farmers in one producer cooperative have devised their own solutions to crop production and purchase of crop insurance. The Berli Producers Cooperative in Tole-bi rayon was formed in 1993. It has 150 members, most of whom are active farmers owning a total of 2,100 hectares; of these, 600 hectares are cultivated with winter wheat. The average size of farm is about 5–10 hectares per member. Each farm is too small to produce wheat on its own. The cooperative has therefore formed a joint-stock company that rents the land from all the cooperative members and then farms it on a collective basis on behalf of the members, creating economies of scale in cultivating the land as a single aggregate farm. The members also receive a share of the profits at the end of the season, following the harvest and sale of the crops. The cooperative obtains obligatory LIC crop insurance each year through one of the farmer mutual crop insurance associations on the total area cultivated with wheat: for the mutual insurer, there are major advantages in dealing with a single entity rather than trying to insure 150 smallholder farmers, each with 5–10 hectares.

Source: Authors.

table 6.2 average premium per policy, by size of insured Farm

KZT per hectare

Farm insured area (hectares)

Premium 1 100 500 1,000 2,500 10,000

Premium (KZT)

80 8,000 40,000 80,000 200,000 800,000

Premium (US$)

0.53 53 267 533 1,333 5,333

Source: Authors based on average premium rate of the obligatory crop insurance scheme for 2005–10.

6.26. A critical element to be assessed would be related to the actual cost of reinsuring such a contingency fund. Given the very high drought exposure in Aktobe and WKO, reinsurance pay-outs would need to be frequent and therefore ex-pensive.

6.27. Depending on the estimated overall financial exposure of this protection scheme for WKO and Aktobe (see chapter 4) and the projected cost of dedicated reinsurance cover-age, the GRK should evaluate whether it would be more cost-effective to purchase reinsur-ance on the international markets or to guar-antee replenishment of the fund with its own resources.

organizational and operational systems for small Farmer crop insurance

low-cost delivery models

6.28. Insurance companies throughout the world face major challenges in trying to iden-tify cost-effective ways to deliver and adminis-ter agricultural crop and livestock insurance programs for small farmers. In Kazakhstan this problem is accentuated by the very low sums in-sured adopted under the obligatory crop insur-ance scheme. The average sum insured over the past five years was only KZT 3,287 (US$22) per


hectare, and the average premium rate was only 2.42 percent, generating an average premium of about KZT 80 (US$0.53) per insured hectare (table 6.2). Insurance companies need to reserve premium to pay for normal expected claims, but also to pay for business acquisition costs, sales agent fees, and their own A&O expenses. In Kazakhstan, sales agent fees are typically 10 percent of original premium, and the insurer’s O&A expenses may be a further 10–15 percent of premium. Table 6.2 shows that, on very small farm units of up to 100 hectares, the total av-erage premium earnings generated by a single policy are only about 53 hectares on average, which is far too low to cover the fees of a sales agent, let alone enable a commercial insurer to cover its A&O costs. This problem also applies on small and medium commercial farms from 100 to 1,000 hectares, where the total premi-um of about KTZ 80,000 (US$533) per policy would not be adequate to service the account on an individual farmer basis. Insurance companies therefore need to seek alternative, less costly ways of marketing and administering their poli-cies to this group of farmers.

6.30. In southern Kazakhstan, many of the small household farmers are organized into production cooperatives and rent out their land

to the cooperative management to farm on a joint-stock basis, and this brings economies of scale in purchasing crop insurance. Features of the joint-stock approach are described in box 6.2 for Berli Producers Cooperative. The land belonging to the 150 members is farmed as a single unit, and the farm managers purchase a single crop insurance policy for the cooperative. The joint-stock approach to farming is apparent-ly adopted by between 50 and 60 percent of all the farmer cooperatives in SKO. The extent to which this joint-stock approach to overcoming the scale problems for small farmer crop pro-duction and to contracting crop insurance could be replicated in other parts of Kazakhstan is not known.

6.31. Insurance companies can deliver in-surance products and services to small rural households and farmers in several ways. These are listed in box 6.3.

Full-Service Model

6.32. The traditional method—termed the “full-service” model—in which the insurance company assumes full responsibility for all in-surance functions would not be cost-effective for insurers of small farmers in Kazakhstan.

box 6.3 delivery models for small Farmer insurance (micro-insurance)

Full-service model. Commercial or public insurers provide the full range of insurance services, from initial development of the product, through distribution, to absorption of risk.

partner-agent model. Commercial or public insurers, together with MFIs or nongovernmental organizations (NGOs), collaboratively develop the product. The insurer absorbs the risk, and the agent markets the product through its established distribution network. This lowers the cost of distribution and promotes affordability.

community-based model. Local communities, MFIs, nongovernmental organizations, and cooperatives develop and distribute the product, manage the risk pool, and absorb the risk. As with insurance mutuals, there is no involvement on the part of commercial insurers.

provider model. Banks and other providers of microfinance can directly offer or require insurance contracts. These contracts are usually coupled with credit, for example, to insure against the risk of default.

Sources: ProVention 2006; Cohen and McCord 2003

194 Kazakhstan

Under the full-service model, the insurer bears the full costs of delivering insurance to farmers, including insurance awareness and education and policy sales and marketing (through either its own network of sales agents or commission brokers), and relies predominantly on sales to individual clients. Premiums are collected in-dividually by the company for the insured, and claims notification and settlement are managed directly by the insurer. This model is typically adopted by the private commercial crop insurers in Kazakhstan today under the obligatory crop insurance scheme. With average crop insurance premiums of about KZT 80 per hectare, this model is only feasible for large agribusiness en-terprises with several thousand insured hectares. It is not cost-effective for commercial compa-nies seeking to serve smallholder agricultural insurance in Kazakhstan.

Partner-Agent Model

6.33. In Kazakhstan, there may be consider-able potential for commercial insurers to en-ter into a “partner-agent” relationship with rural organizations (for example, cooperatives or MFIs) that have an existing rural distribu-

tion network and a large membership of farm-ers. Under a partner-agent model, the insurance company enters into a formal contractual agree-ment with the agent, in which the agent assumes responsibility for marketing and promoting the insurer’s policies to its members, for collecting premiums from the insured, and paying these over to the insurer, for notifying claims to the in-surer, and finally, in some cases, for distributing claims settlement payments to the insured (fig-ure 6.3). Usually, the insurer agrees to pay the agent a commission for its services. This model would potentially enable the private commercial insurers in Kazakhstan to deliver crop insur-ance more cost-effectively to large numbers of small and medium farmers. Such a model could also be used to deliver livestock insurance to the small mixed cropping and livestock farmers lo-cated predominantly in southern Kazakhstan.

6.34. The partner-agent approach has been successfully promoted for smallholder agricul-tural insurance in recent years in Africa, Asia, and Latin America and offers a potential win-win for both parties. For the insurance company, the distribution of its products through a rural institution (agent) offers the potential to reach

Source: Al Hasan 2007

Mainstream insurance

companies as partner

NGO/MFIs as insurance

agent

Potencial micro-

insurance clients

Figure 6.3 partner-agent delivery model for crop (and livestock) micro-level insurance

Partner-agent model for micro-level insurance

Develop product

Provide product, claims, & product

education

Underwriting

Premium


a large number of small farmers at low cost; for the rural institution, the agreement enables it to expand the range of products and services of-fered to its membership and, where the organi-zation is involved in the provision of agricultural credit, the potential to protect its loan portfolio with crop and livestock insurance.

Community-Based Insurance Model

6.35. The community-based model includes all forms of informal agricultural insurance that is underwritten by local communities, MFIs, and NGOs. This model has proved very popular in southern Asia (Bangladesh, India, and Nepal), where NGOs and MFIs have actively promoted livestock credit insurance for members over the past 20 years. This model is very similar to the provider model identified by ProVention (2006).

6.36. Farmer mutual insurance associations are a specific type of community-based private agricultural insurance organization and have

been heavily promoted by the Ministry of Agri-culture (MoA) in Kazakhstan since 2008 to un-derwrite the obligatory crop insurance scheme. This model is potentially very relevant to devel-oping smallholder agricultural crop and livestock insurance, but only if mechanisms for providing catastrophe reinsurance can be designed. This theme is explored further below using the Mexi-can Agroasemex Fondos program as a possible model that could be adapted for Kazakhstan.

Provider Model for Micro-Level Insurance

6.37. In many parts of Asia, microfinance in-stitutions provide their micro-lenders with mi-cro-insurance products and services, which are normally linked to credit. In Bangladesh, India, and Nepal, MFIs are the main source of loans for resource-poor urban and rural households. Many of the MFIs have also introduced their own inter-nal insurance funds, providing limited life insur-ance cover, health cover, maternity cover, and, in some cases, crop and livestock insurance. Most of these internal micro-insurance programs are

box 6.4 livestock insurance Fund in bangladesh

scope. The Livestock Insurance Fund, which is a component of the Community Livestock Development Program, compensates the owners of dairy cattle against mortality of their cows. Livestock mortality insurance is compulsory for dairy farmers who purchase cows or heifers on credit using microloans from the program. Insured animals include heifers, dairy cows, and beef cattle, but more than 70 percent of insured animals are dairy cows. The fund operates mainly in northwestern Bangladesh.

Features. The LIF is a community-based program that covers animal mortality due to disease, accident, and any cause outside the control of the owner. Insurance is provided as part of an integrated package that includes credit, technical assistance, vaccines and veterinary services, concentrate feeds and fodder, and milk marketing services. The guarantee amount (sum insured) is the loan amount or replacement cost. The premium rate is 3 percent (previously 2.5 percent) of the loan money deducted at source. A service fee of 2.5 percent of the value of loan is charged to the Livestock Development Fund in order to contribute toward veterinary services (animal inspections, vaccinations) and to cover salaries of veterinary staff.

results. Between 2001 and 2005, 4,250 animals were insured, with a mortality rate of 3.8 percent and an associated loss ratio of 75 percent. Between 2006 and 008, 7,015 animals were insured, with a mortality rate of 1.1 percent and an overall loss ratio of about 45 percent.

Key challenges. The Grameen livestock mortality product is not recognized under the Insurance Act 1938. It is not reinsured and is exposed to catastrophe claims (flood, cyclone, epidemic disease).

Source: Authors based on information provided by Grameen Bank, March 2009.

196 Kazakhstan

linked to credit on a compulsory basis—in other words, members who borrow microfinance are required to purchase life insurance cover for the duration of the loan. Farmers who borrow live-stock investment loans to purchase milk cows or buffalos are also required to insure the animals against death due to named perils or under all-risk individual animal insurance covers. In lim-ited cases, the MFIs also offer crop insurance.

6.38. Since 1999 in Bangladesh, the Grameen Fisheries and Livestock Foundation (GMFP), which is part of the Grameen Bank (one of the oldest MFIs in the world), has operated a live-stock mortality compensation scheme, termed the Livestock Insurance Fund (LIF).61 The LIF program insures against death of the dairy cow where this is “outside the control of the owner” and, in effect, is an all-risks livestock mortality policy. Insurance is provided as part of an inte-grated package under which Grameen veterinary and extension staff assist in the preinspection of the dairy cow or heifer and certify its health sta-tus. The animal is then routinely inspected and vaccinated by Grameen-trained veterinary staff, who also verify the cause of loss in the event of death. These measures lead to greatly reduced livestock mortality rates and the ability to levy very low premium rates for individual animal mortality cover. The sum insured is equivalent to the amount of loan taken out to purchase the cow, and the current premium is charged at a rate of 3 percent of the value of the loan. Coverage terminates once the loan has been repaid (usu-ally over a maximum of two years). In addition, a fee of 2.5 percent of the value of the loan is levied to cover the cost of veterinary services, vaccinations, and technical assistance. The pro-gram has operated for eight full years, during which slightly more than 7,000 dairy cows have been insured, with an average mortality rate of 2.8 percent. The LIF liability is totally retained within the GMPF, and the program does not car-ry any form of catastrophe reinsurance protec-

61 See http://www.grameen-info.org/grameen/GrameenMotsho/index.html.

tion; it is therefore very exposed to catastrophic losses (for example, flooding and epidemic dis-eases). See box 6.4. for further details of the GMPF livestock-credit insurance scheme.

6.39. In southern Kazakhstan, MFIs are very active in lending to small urban and rural households, and there may be opportunities to promote crop and livestock credit insurance through the MFIs. As of 2011, there are 1,769 registered MFIs in Kazakhstan, of which 711 are actively lending to individuals and legal entities. The total loan portfolio of the MFIs amounts to almost KZT 15 billion in personal loans to 85,379 persons and *KZT 425 million in legal loans to 110 legal entitles. Of the total of 711 ac-tive MFIs, 570 (80 percent) are classified as ur-ban and 141 (20 percent) are classified as rural, and their main clients are small farmers. It is not known what proportion of the total loan portfo-lio of MFIs is to farmers. There may, however, be potential to examine the role of protecting the MFI loans to small farmers and marginal crop and possibly livestock producers through credit insurance covers similar to those developed by MFIs in southern Asia.

mutual agricultural insurance as a solution for small and marginal Farmers in Kazakhstan

6.40. The farmer mutual insurance associa-tions have been heavily promoted by the GRK since 2008, and if their financial status could be strengthened, they might be the ideal vehicle for underwriting Kazakhstan’s small and mar-ginal crop and livestock producers. As shown in chapters 3 and 4, about 38 farmer mutual crop insurance associations are underwriting the obligatory LIC crop insurance scheme. Cur-rently, these mutuals have very limited finan-cial reserves, and none is formally protected by any form of insurance or reinsurance. The in-dividual mutuals are therefore very exposed to catastrophic losses that exceed their reserves. In the event that claims exceed their reserves, as happened in 2010, the mutuals have to pro rata down each claim settlement made to their mem-


bers who incur losses. International experience shows that, when catastrophe claims occur that cannot be paid by the mutual, this often leads to the collapse of the mutual.

6.41. If the mutuals are to remain solvent and to underwrite crop or livestock insurance for small and marginal farmers in Kazakhstan, ways of providing some form of catastrophe re-insurance protection must be developed. In the short term, it is unlikely that the private com-mercial insurance sector in Kazakhstan or inter-national reinsurers would be willing to provide excess of loss reinsurance protection to the mu-tuals. It is likely that such a program would have to be offered through the public sector. Given the experience of the Fund for Financial Support for Agriculture (FFSA) with administering the financial claims subsidies on the obligatory LIC program, the FFSA is well placed to adminis-ter some form of excess of loss program for the mutual crop insurance assoc0iations in Kazakh-stan.

6.42. Mexico has many years of experience with the operation of small farmer mutual crop and livestock insurance through the “fondos de aseguramiento” (self-insurance funds, SIFs) program, which is reinsured by Agroasemex, the national agricultural reinsurance company. The SIFs are legally registered, small-scale crop and livestock producer mutual companies whose primary function is to access group crop and livestock credit. The SIF program was originally conceived as a vehicle to provide small and mar-ginal farmers with access to credit; individually these farmers were too small to be eligible for credit, but collectively they could access group credit. As part of the agreement with the lending banks, the provision of crop and livestock credit is linked on a mandatory basis to crop and live-stock insurance.

6.43. Since 1990, Agroasemex has provided advisory support and training to SIF members to form and register SIFs. Agroasemex also as-sists the SIFs in accessing short- and medium-term production and investment credit and pro-

vides technical assistance and training on the design and rating of crop and livestock insur-ance policies and on loss assessment procedures. Agroasemex closely monitors the activities of the SIFs on a seasonal basis.

6.44. The SIF program has proved extremely popular with farmers in Mexico. In 2005 there were 176 functioning SIFs in 24 Mexican states, of which 159 were crop SIFs and 17 were live-stock SIFs. Table 6.3 shows that, in 2007 the SIFs insured more than 1 million hectares of crops and more than 4 million head of livestock (mainly cattle and pigs), generating Mex$647 million of premium (US$60 million; Agroasemex 2008). For crops, the policy is an individual grower MPCI cover that insures against either loss of the costs invested in the crop or loss of yield; for livestock, the policy is a herd-based catastrophe mortality and disease cover that carries very low average rates. The crop and livestock products underwritten by the SIFs are eligible for federal government premium subsidies, which average about 33 percent of the full premium. After 18 years of operation, the Mexican SIF program is a major agricultural insurance program for small and marginal farmers.

6.45. A key feature of the Mexican SIFs is the stop-loss reinsurance protection provided by Agroasemex to each SIF. Under the agreement between Agroasemex and the SIFs, Agroasemex is responsible for setting the premium rates for each crop and livestock program and for provid-ing stop-loss reinsurance protection. The SIF is entitled to deduct 25 percent of the original pre-mium to cover its A&O expenses. The SIF then retains an average 70 percent of the premium net of A&O expenses, equivalent to 52.5 percent of gross premium, to settle retained claims. The re-maining average 22.5 percent of gross premium is paid to Agroasemex as stop-loss reinsurance premium (figure 6.4).

6.46. In the event of a claim, the individual SIF is responsible for settling claims up to a loss ratio of 52.5 percent plus any claims reserves held over from previous years. Any claim in ex-

198 Kazakhstan

cess of this level is reinsured by Agroasemex. In turn, Agroasemex purchases stop-loss retroces-sion protection on the SIF program from inter-national reinsurers. In any underwriting year, if the SIF generates an underwriting surplus (prof-it), 30 percent of the surplus is added to a special claims reserve for catastrophic events and the re-maining 70 percent is allocated to a special fund, which may be divided among the SIF members

to invest in income-generating activities or to contribute toward crop and livestock insurance premiums.

6.47. Many of the features of the Mexican SIF program and the lessons learned over the past 20 years are relevant to the future expansion of mutual agricultural insurance in Kazakhstan. One of the key differences is that Kazakhstan

table 6.3 coverage by self-insurance Funds in mexico, 2007

Item

Insured area (thousands of

hectares) or number of insured animals

(thousands)

Total sum insured (Mex$

millions)

Total premium

(Mex$ millions)

Average rate (%)

Premium subsidy (Mex$

millions)

Premium subsidy

(%)

Crop 1,034.3 8,927.8 588.2 6.6 194.9 33

Livestock 4,106.6 15,154.9 59.0 0.4 19.0 32

Total n.a. 24,082.7 647.2 2.7 213.9 33

Source: Agroasemex 2008.Note: n.a. = Not applicable.

Source: Authors.

Figure 6.4 stop-loss reinsurance of self-insured Funds in mexico

agroasemex stop-reinsurance (22.5 % of gross)

siF retained (52.5% of gross)

siF administrative (25% of gross)

allocation of underwriting surplus

Special claims reserve, catastrophic losses 30%

Surplus for the Social Fund 70%

100%

77.50%

25%

allocation of original gross


does not have a public sector organization like Agroasemex to provide a combination of techni-cal assistance and, most important, reinsurance protection to the mutual insurers. This is a major issue that will need to be addressed in the pro-posal to introduce a more market-based agricul-tural insurance system based on a public-private partnership. One option for the GRK to consider is whether to use the FFSA as its implementing agency to provide technical support and, most important, formal excess of loss compensation protection to the mutuals along lines similar to those of the Agroasemex model. As a starting point to introducing such a program in Kazakh-stan, the mutuals would need to be effectively regulated and would need to adopt actuarially determined rating and standardized loss assess-ment systems and procedures.

identification of operational linkages to bundle programs

6.48. Agricultural insurance on its own is not a solution. Agricultural insurance can help to stabilize agricultural production and farm incomes in times of major production loss and also to modernize agriculture through its abil-ity to leverage access to credit, enabling farmers to purchase production-enhancing technology. However, agricultural insurance cannot be ef-fective if it is provided in isolation. It should be promoted only when other essential agricultural services, including training and extension, the timely availability of inputs (seeds, fertilizers, and pesticides), and efficient marketing chan-nels for agricultural outputs, are in place (Mahul and Stutley 2010).

6.49. Agricultural insurance is only one tool for mitigating the risks of agricultural produc-tion, finance, and supply chain relationships. Therefore, other measures and complementary investments are needed to ensure that risk is comprehensively managed and the value of in-surance is realized. In addition, without linking these insurance programs explicitly to finance, such as bundling the insurance with agricul-

tural production loans or inputs, many farmers will lack both the capital to pay the insurance premium and sufficient incentive to use scarce resources on risk management. Placing these products within complementary systems that have broader linkages can also facilitate simpler contract design, as other mechanisms can deal more efficiently with the uninsurable risks.

6.50. Experience shows that bundling agri-cultural insurance with the provision of rural credit and input supplies could offer major ad-vantages. The bundling of crop insurance with credit and input supplies has been shown to pro-vide a win-win situation for farmers, lending in-stitutions, and insurers alike. The farmer gains access to seasonal crop credit, lending institu-tions are more willing to lend to small farmers because their loans are protected by crop insur-ance, and the insurer benefits from (a) reduced antiselection, which in turn reduces the need for preinspections; (b) lower costs of marketing crop insurance; and (c) better insurance uptake and spread of risk than would normally be achieved under a purely voluntary program. Malawi has a program of bundled WII, credit and input sup-ply, and output marketing that is showing early promise.

6.51. In many parts of the world, public or private sector provision of credit to agriculture is protected by a compulsory crop insurance policy (crop credit insurance). The 2009 World Bank survey of agricultural insurance provision identified that, in 11 percent of the countries sur-veyed, public or private sector credit to agricul-ture is protected by compulsory insurance cover (Mahul and Stutley 2010). Examples of com-pulsory crop credit or livestock credit insurance schemes in Asia are found in India, the Philip-pines, Nepal, and Bangladesh. From an insurer’s viewpoint, there are major advantages to auto-matic or compulsory crop credit insurance: (a) antiselection is reduced, (b) there is less need for preinspections, (c) the costs of promoting and marketing the agricultural insurance program are reduced, and (d) the insurance uptake and spread of risk and premium volume are gener-

200 Kazakhstan

ally much higher than under a purely voluntary program.

6.52. There are advantages to making a scheme involving small farmers compulsory rather than voluntary, unless other circum-stances allow the insurer to avoid adverse selection and high administrative costs. Even with a compulsory scheme, worthwhile incen-tives must be built in to counter moral hazard. Operating an insurance scheme together with a credit program can offer the level of control that insurers require, reflecting the common interests of banks and insurers: a farmer who does not take out insurance will not be eligible for a loan. Loan applicants also normally go through an initial appraisal procedure that assists the lend-er in evaluating the management potential of the farmer.

6.53. Where agricultural credit and insurance are linked, there is a potential for the bank or MFI to lower its interest rates to the extent that climatic or natural risk exposures have been transferred to the insurance policy. In Ma-lawi’s weather-based crop insurance program and Mongolia’s livestock index-based insurance program, lending banks have reduced their in-terest rates to producers who agree to purchase drought index insurance.

6.54. Wherever possible, agricultural insur-ance should be led by demand, and the ideal situation is for farmers and service providers to reach a voluntary agreement to bundle in-put supply, credit, and agricultural (crop) in-surance. The bundled approach is much more acceptable to farmers than compulsory linkage of credit provision and insurance and offers a potential win-win situation for all parties. The farmer has timely and easy access to inputs of seeds, fertilizers, and credit, while the input sup-plier’s and credit provider’s financial exposure to climatic-induced crop failure and potential

nonrepayment is protected.

6.55. In Kazakhstan, one of the key objectives of the Law on Compulsory Crop Insurance was to link crop insurance with the supply of credit, subsidized seeds, fertilizers, and other govern-ment support programs. The obligatory ap-proach to crop insurance is, however, somewhat different from the voluntary bundled approach. It is not possible to report on whether the obliga-tory scheme in Kazakhstan has been successful in improving farmers’ access to seasonal crop production credit and to the subsidized govern-ment support programs.

conclusions

6.56. No single crop insurance product is best suited to the needs of individual small and mar-ginal farmers in southern Kazakhstan. If crop insurance is to be developed for this category of farmers, it will be necessary to study the risk exposures on a crop-by-crop and a location-by-location basis and to select the most suitable product for that situation. For example, crop hail insurance may be suitable for small cotton pro-ducers, while AYII might work best for rain-fed wheat producers.

6.57. For subsistence farmers in southern Kazakhstan, there may be potential to design macro-level (per rayon or oblast) catastrophe index products along lines similar to those of the Mexican FAPRAC program. Such pro-grams could be developed both for crops and for livestock.

6.58. A more detailed feasibility study is need-ed of the smallholder farming sector in southern Kazakhstan. Such a study would provide guide-lines and recommendations for the future devel-opment of appropriate crop and livestock risk transfer solutions.


7.1. This Chapter briefly looks at the fiscal im-plication of various crop insurance products on the GKR budget, in particular, (a) the cur-rent LIC system (As if analysis of replacing the current government participation on 50% of the total liabilities with 50% premium subsidies and providing an excess of loss protection in excess 100% of gross net premium income); (b) Spring Wheat MPCI program (Estimated Total Sum Insured, Indicative Commercial Premium and Fiscal Implications for different mechanisms of Government Support, by Level of Coverage; and (c) Spring Wheat AYII Program (Estimat-ed Total Sum Insured, Indicative Commercial Premium and Fiscal Implications for different mechanisms of Government Support, by Level of Coverage)62.

7.2. The figures presented in Tables 7.1. to 7.4 assume the same insurance penetration rates

62 Hail and WII were not included in this analysis, as they were developed on prototype base only.

(numbers of farmers and insured crop area per Rayon and Oblast) as actually achieved under the obligatory crop insurance scheme from 2005 to 2010. The financial analyses in Tables 7.5 and 7.6 assume a voluntary scheme with dif-ferent levels of uptake varying from 10% to 50% of the actual obligatory scheme levels.

7.3. With the assumption that under a fully market-based scheme, farmers will be permit-ted to purchase crop insurance on a voluntary basis, some estimates have been made in this report of the possible voluntary uptake rates for spring wheat over a five year period rising from 10% of the current obligatory insurance scheme uptake levels in year 1 to 50% uptake level by year 5. The results of this analysis are presented for the new voluntary individual grower spring-wheat MPCI program with 40% insured yield coverage level (Table 7.5) and for the new spring wheat AYII program with 50% insured yield coverage level(Table 5.6.), along with the estimated fiscal costs to government of different levels of premium subsidy.

chapter 7: Fiscal Implication of Various Insurance Products on the GKR Budget

202 Kazakhstan

table 7.1. adjustments in the current loss of investment average premium rates to achieve an average 60 percent target loss ratio, by oblast

Oblast

Six-year actual average premium rate

(2005–10)

Six-year average loss

cost (2005–10)

Adjusted gross premium rate for 60% target

loss ratio (before FFSA intervention )

Adjusted net premium rate for 60% target

loss ratio (after FFSA intervention)

Implied % change in rate

required

Akmola 1.9 2.0 3.38 1.69 −13

Aktobe 5.8 22.2 36.97 18.48 217

Almaty 3.5 4.6 7.64 3.82 10

EKO 3.4 6.0 9.96 4.98 47

Karaganda 4.7 4.7 7.86 3.93 −16

Kostanay 1.7 1.3 2.10 1.05 −40

Kysylorda 5.2 0.1 0.15 0.08 −99

NKO 2.0 0.5 0.79 0.40 −80

Pavlodar 3.6 7.1 11.81 5.90 66

South Kazakhstan (SKO)

2.7 0.8 1.34 0.67 −75

WKO 7.8 39.6 65.94 32.97 323

Zhambyl 3.5 14.6 24.27 12.14 243

Total 2.4 3.4 5.65 2.82 17



table 7.2. “as if” analysis of costs to government in order to replace the current participation on 50 percent of the agricultural insurance portfolio liabilities with an aggregate insurance industry

excess of loss compensation scheme and 50 percent premium subsidies, 2005–10

KZT (thousands)

Scenario and year

“As if” 100% gross premium

(without government 50% claims reinsurance)

“As if” cost to govern-ment for losses in excess of

100% gross premium

“As if” cost to government for losses

in excess of 70% gross premium

Government 50%

premium subsidies

Total cost to government for losses in

excess of 100% premium +

50% premium subsidies

Total cost to government for losses in

excess of 70% premium +

50% premium subsidies

With Aktobe and WKO

2005 1,797,214 0 0 898,607 898,607 898,607

2006 1,369,444 0 0 684,722 684,722 684,722

2007 1,994,785 0 0 997,392 997,392 997,392

2008 2,186,463 0 179,099 1,093,232 1,093,232 1,272,331

2009 2,228,732 0 0 1,114,366 1,114,366 1,114,366

2010 2,147,278 657,668 1,301,851 1,073,639 1,731,307 2,375,490

Total 11,723,915 657,668 1,480,950 5,861,958 6,519,625 7,342,908

Average 1,953,986 109,611 246,825 976,993 1,086,604 1,223,818


2005 1,603,315 0 0 801,657 801,657 801,657

2006 1,347,999 0 0 673,999 673,999 673,999

2007 1,805,232 0 0 902,616 902,616 902,616

2008 1,833,355 0 365,814 916,678 916,678 1,282,491

2009 1,795,005 0 0 897,503 897,503 897,503

2010 1,820,435 0 0 910,218 910,218 910,218

Total 10,205,340 0 365,814 5,102,670 5,102,670 5,468,484

Average 1,700,890 0 60,969 850,445 850,445 911,414


204 Kazakhstan

table 7.3. estimated total sum insured, indicative commercial premium and Fiscal implications for different mechanisms of government support for spring Wheat multiple

peril crop insurance (mpci) program, by level of coverage


Oblast 10% 20% 30% 40% 50%


Akmola 10,985 21,970 32,956 43,941 54,926

EKO 1,181 2,361 3,542 4,723 5,904

Karaganda 1,346 2,691 4,037 5,383 6,729

Kostanay 14,786 29,573 44,359 59,145 73,931

NKO 13,216 26,432 39,648 52,864 66,080

Pavlodar 910 1,821 2,731 3,641 4,552

total 42,424 84,849 127,273 169,697 212,121

Indicative commercial average premium rate at Oblast level for 60% loss ratio (%)

Akmola 1.5 4.8 8.9 13.6 18.4

EKO 2.5 6.9 12.0 17.3 22.7

Karaganda 1.8 5.6 10.2 15.2 20.4

Kostanay 1.4 4.6 8.7 13.2 17.9

NKO 1.1 3.6 6.7 10.3 14.1

Pavlodar 2.1 6.2 11.1 16.3 21.5

total 1.4 4.5 8.3 12.6 17.1


Akmola 165 1,056 2,949 5,956 10,088

EKO 30 163 424 819 1,341

Karaganda 24 149 411 819 1,370

Kostanay 210 1,366 3,844 7,803 13,267

NKO 142 943 2,659 5,420 9,290

Pavlodar 19 113 302 593 978

total 589 3,790 10,590 21,410 36,334

GoK Fiscal Implications for providing premium Subsidies to AYII Insurance Premiums (KZT million/year)

30% Subsidies 177 1,137 3,177 6,423 10,900

40% Subsidies 236 1,516 4,236 8,564 14,534


50% Subsidies 295 1,895 5,295 10,705 18,167

60% Subsidies 353 2,274 6,354 12,846 21,800

GoK Fiscal Implications for providing a ceiling on AYII Insurance Losses in excess of different Priorities (KZT millions/year)

Priority 70% GNPI 242 1,115 2,675 4,948 7,930

Priority 100% GNPI 227 991 2,243 3,895 5,845

Priority 150% GNPI 208 829 1,711 2,664 3,515


206 Kazakhstan

table 7.4. estimated total sum insured, indicative commercial premium and Fiscal implications for different mechanisms of government support for spring Wheat area yield index

insurance (aYii) program, by level of coverage

OblastInsured yield coverage level (% of rayon average expected yield)

10% 20% 30% 40% 50% 60% 70% 80%


Akmola 10,985 21,970 32,956 43,941 54,926 65,911 76,897 87,882

EKO 1,181 2,361 3,542 4,723 5,904 7,084 8,265 9,446

Karaganda 1,346 2,691 4,037 5,383 6,729 8,074 9,420 10,766

Kostanay 14,786 29,573 44,359 59,145 73,931 88,718 103,504 118,290

NKO 13,216 26,432 39,648 52,864 66,080 79,296 92,512 105,728

Pavlodar 910 1,821 2,731 3,641 4,552 5,462 6,372 7,283

total 42,424 84,849 127,273 169,697 212,121 254,546 296,970 339,394

Indicative commercial premium for 70% loss ratio (%)

Akmola 0.24 1.03 2.43 4.52 7.07 10.34 14.26 18.69

EKO 0.74 2.25 4.50 7.41 10.72 14.64 19.03 23.67

Karaganda 0.33 1.31 3.05 5.58 8.62 12.28 16.48 21.09

Kostanay 0.24 1.01 2.38 4.42 6.93 10.17 14.04 18.44

NKO 0.17 0.73 1.70 3.14 4.85 7.17 10.15 13.80

Pavlodar 0.38 1.50 3.36 5.96 8.97 12.62 16.75 21.14

total 0.24 0.98 2.28 4.20 6.52 9.52 13.16 17.35


Akmola 26 226 799 1,987 3,885 6,813 10,968 16,429

EKO 9 53 159 350 633 1,037 1,573 2,236

Karaganda 4 35 123 301 580 991 1,552 2,271

Kostanay 36 299 1,055 2,615 5,124 9,021 14,537 21,817

NKO 23 192 675 1,662 3,206 5,682 9,390 14,594

Pavlodar 3 27 92 217 408 689 1,068 1,539

total 101 833 2,903 7,131 13,837 24,234 39,087 58,885


GoK Fiscal Implications for providing premium Subsidies to AYII Insurance Premiums (KZT million/ year)

30% Subsidies 30 250 871 2,139 4,151 7,270 11,726 17,666

40% Subsidies 40 333 1,161 2,852 5,535 9,694 15,635 23,554

50% Subsidies 51 417 1,452 3,566 6,919 12,117 19,544 29,443

60% Subsidies 61 500 1,742 4,279 8,302 14,540 23,452 35,331

GoK Fiscal Implications for providing a ceiling on AYII Insurance Losses in excess of different Priorities63 (KZT millions/year)

Priority 70% GNPI64 54 349 1,046 2,295 4,297 7,112 10,733 15,157

Priority 100% GNPI 52 326 948 2,005 3,609 5,693 8,084 10,606

Priority 150% GNPI 49 295 820 1,634 2,764 4,008 5,078 5,731

table 7.5. Five-Year estimates of voluntary mpci uptake, total sum insured, premium income, and costs of premium subsidies (40% coverage level) for spring wheat

KZT (thousands)

Item MPCI 40 %

coverage and 100% uptake

MPCI uptake

Year 1 10%

Year 2 20%

Year 3 30%

Year 4 40%

Year 5 50%


Total commercial premium

21,410 2,141 4,282 6,423 8,564 10,705


25% of premium 5,353 535 1,071 1,606 2,141 2,676

50% of premium 10,705 1,071 2,141 3,212 4,282 5,353

65% of premium 13,917 1,392 2,783 4,175 5,567 6,958


1 in 100 years 66,470 6,647 13,294 19,941 26,588 33,235

1 in 250 years 79,688 7,969 15,938 23,906 31,875 39,844

Source: Authors (Figures taken from Table 4.14 page 92).

63 Priority: Is the threshold, defined as a percentage of the Gross net premium income, above which the Government assume full liability arising from any risk or any one event for losses. In practice the Government puts a cap on the losses.

64 GNPI: Gross Net Premium Income

208 Kazakhstan

table 7.6. Five-Year estimates of voluntary aYii uptake, total sum insured, premium income, and costs of premium subsidies (50 percent coverage level)

AYII 50% coverage level

at 100% uptake

AYII crop insurance uptake scenarios

ItemYear 1

5%Year 2 10%

Year 3 15%

Year 4 20%

Year 5 25%

Total sum insured (KZT millions) 212,121 10,606 21,212 31,818 42,424 53,030

Commercial premium (KZT millions)

13,837 692 1,384 2,076 2,767 3,459

Cost of GRK premium subsidies (% of premium)

25% 3,459 173 346 519 692 865

50% 6,918 346 692 1,038 1,384 1,730

65% 8,994 450 899 1,349 1,799 2,248


1 in 100 years 51,516 2,576 5,152 7,727 10,303 12,879

1 in 250 years 70,634 3,532 7,063 10,595 14,127 17,659

Source: Authors. (Figures tken from Table 5.6)


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