Peculiarities of insurance of agrarian enterprises’ activity

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PECULIARITIES OF INSURANCE OF AGRARIAN ENTERPRISES' ACTIVITY

Vitalina Yarmolenko

State Higher Educational Institution «Kherson State Agrarian University», Ukraine

Abstract

Purpose. The purpose of this research is to identify the specifics, condition and problems of the development of insurance activities of Ukrainian agrarian enterprises.

Methodology / approach. The methods of analysis and synthesis, due to which the diagnostics of the insurance segment in agriculture was conducted, were the basis of the methodological approaches in studying the state and dynamics of the agricultural insurance market. Abstraction for clarification of the essence and content of the concept of «agricultural insurance»; correlation and regression analysis for studying the factors of influence on the total volume agricultural insurance premiums; induction and deduction, generalization and formalization for the definition of the characteristics of insurance activities of agricultural enterprises.

Results. The essence, forms and types of insurance of activity of agrarian enterprises are considered. The problems and specifics of insurance business development of enterprises of agrarian sector of economy of Ukraine are revealed. The basic insurance products for agrarian enterprises are determined.

Originality / scientific novelty. Further development of identification of peculiarities and problems of development of insurance of activity of agricultural enterprises in the part of identification of basic insurance products and possibilities of their use was investigated.

Practical value / implications. The main results of the research can be applied in the practical activity of agricultural enterprises in order to minimize the risks of their functioning.

Key words: agriculture, insurance, agricultural insurance, agribusiness market, agrarian enterprises, insurance contract, insurance sum, insurance programs, insurance products.

Introduction and review of literature

It is said that today, that most companies are looking for effective ways to alleviate the risks of economic activity, especially as agricultural enterprises that operate under risky agriculture, which depends on weather and other unpredictable conditions [1]. At the same time, climate risks pose a threat to the function of the global food system and therefore also a hazard to the global financial sector, the stability of governments, and the food security and health of the world's population [2].

Moreover, in the conditions of protracted political and economic crisis, devaluation of the national currency, groundless state policy and a number of other factors caused the violation of effective work of the economic system of Ukraine. Under these conditions, stabilization of the situation can be achieved through the development and quality functioning of agriculture, which will provide solutions to the issues of improving its food and financial security [1]. Futhermore, agriculture is a promising branch of the country's economic development. But at the same time it is one of the most risky one, because the success of the industry depends largely on weather conditions. Prices for agrarian products are constantly increasing, so the loss or lack of harvest leads to significant material losses for producers and leads to the loss of benefits. Ukraine's accession to the WTO in 2008, the launch of the free trade zone with the European Union in 2016 sets new requirements for agricultural products, requires the creation of more competitive environment in the country. Reliable protection of producers of agricultural products from risks is provided by insurance.

Modern aspects of insurance business development of agrarian enterprises are covered in the works of many Ukrainian and foreign scientists, in particular E. Augeraud-Vйron, G. Fabbri, K. Schubert [3], V. D. Bazilevich [4], T. Lunt, A. W. Jones, W. S. Mulhern, D. P. M. Lezaks, M. M. Jahn, [2], N. S. Tanklevska [1] and others. However, taking into account the constant economic changes and turbulence in the development of the agrarian economy, the question of identifying the characteristics of insurance activities of agrarian enterprises remains relevant.

V.D. Bazylevych analyzes the actual problems of the theory and practice of insurance in the market conditions of economy, reveals the peculiarities of the development of the insurance business in Ukraine. Attention is focused on new types of insurance for our country [3]. T. Mieno, C.G. Walters, L.E. Fulginiti considered that the impact of crop insurance on changes in input use has attracted much attention by economists, while there are a number of studies on this topic, they frame moral hazard in inputs use in a static model. However, when agricultural producers are forward-looking, they would make input allocation decisions realizing that their decisions would affect their future actual production history [5]. insurance agricultural enterprise

Agroinsurance, according to Yu. V. Samoylyk, is a «kind of civil law relationship in protecting the property interests of individuals and legal entities involved in agricultural production in the case of certain events (insurance cases) identified by the insurance contract or current legislation ». According to her, the essence of «agri-insurance» consists in «compensation of losses of an agricultural producer caused by the influence of foreign economic instruments and adverse natural and climatic conditions responsible for this person» [6, p. 345-354].

The purpose of the article. The purpose of this research is to identify the specifics, condition and problems of the development of insurance activities of Ukrainian agrarian enterprises.

Results and discussion

Planning of various types of entrepreneurial activity, including agricultural production, is associated with risk. Risks arise at each stage of the enterprise's activity: during the preparation and execution of production plans, supply, sales, in assessing the market situation, in violation of terms of supply of raw materials and sales of products, etc [7]. Risk is a phenomenon that can not be avoided, therefore, each enterprise should develop a risk management system that arises or may arise and plan possible ways to minimize the negative impact of risk on their activities [8].

Insurance is one of the most effective methods of reducing the risk of impact on the results of the operation of the enterprise. Today, the insurance segment of the market in Ukraine is relatively young and is at the stage of formation. However, we can already state that insurance is one of the most important segments of market economic relations. It is insurance that is able to ensure not only security, stability, social guarantees in society through the mechanism of insurance protection, but in the long term can become an important mechanism for redistribution of investment resources and a mechanism for resolving the issue of employment for the population [4].

At the present stage of economic development of the country, insurance is one of the few branches of the economy of Ukraine, which in recent years has a significant stable annual increase in the volume of services rendered. In Ukrainian, the term «insurance» comes from the word «fear», in some ways echoing with European languages, in which the term comes from the words «confidence», «security», «prudence», etc. [9]. In today's insurance literature, in dictionaries and encyclopedias there are more than 20 different definitions of the notion «insurance». However, most scholars tend to make such a determination that insurance is a means of reimbursing damages to a natural or legal person through the distribution of payments between many individuals. Losses are compensated from the insurance fund that is at the disposal of the insurance company.

The content of insurance is a system of closed redistributive relations between its participants, the object of which is the formation at the expense of monetary contributions of the target insurance fund to cover from it the possible extraordinary and other losses of the insured or to pay cash to citizens in case of loss of their ability to work [10]. Obviously, V.D. Bazilevich believes that the economic content of insurance is that this type of human activity is aimed at protecting the property interests of legal and natural persons who have suffered in connection with the occurrence of insurance cases defined by the contract or insurance law at the expense of insurance funds formed by the participants insurance [4]. All these definitions confirm the diversity of the manifestation of insurance and the complexity of its unambiguous definition.

The notion of «classification» comes from the Latin classis - rank, class. The Latin root defines the «quintessence» of this concept, its most significant meaning: the division of objects of a certain set of common features with the formation of a system of classes in this set. Consequently, the classification is understood as the system of the subsystems of certain terms (classes) in a particular field of knowledge or human activity, used as a means for establishing interrelationships between these concepts (classes) [4]. Classification of insurance is carried out on various grounds. Often, insurance is classified according to historical, legal and economic characteristics. Classification of insurance on a historical basis is associated with the allocation of stages of development of certain types of insurance.

Insurance creates for all participants the level of rights, the opportunity to gain profit, the desire to take risks, gives confidence in the development of entrepreneurial activity, creates new incentives for increasing productivity and ensuring economic development. The importance of insurance continues to grow, as with the development of socio-economic relations both within and outside the country, scientific and technological progress is facing increasing risks, which can not be resisted without compensation guarantees. Due to a wide range of insurance, after the occurrence of an insured event, insurance payments are a reliable guarantee of economic security of legal entities and individuals [11].

The necessity of insurance of activity of enterprises is conditioned by the fact that losses occur more often from the actions of destructive phenomena which can not be controlled by a person. Given the risk nature of the functioning of any enterprise and the less risky people, there is a need to prevent the elimination and compensation of losses as a result of adverse events or risks [12].

Famous Ukrainian scientists V. D. Bazilevich and K. S. Bazilevich explain the need for insurance protection from the standpoint of the following aspects [4]:

1) natural - explains the need for insurance as a means of preserving material goods in the event of accidental, unpredictable, as well as predictable, but undesirable and unforeseen cases, for the purpose of distributing damages caused to individual citizens among many other members of society in order to reduce losses of victims;

2) economic - the creation of such a kind of human activity that would be based on the accumulation of financial means for the reimbursement of losses caused by the occurrence of harmful to health and (or) material well-being of events, both physical and legal persons, which creates favorable conditions for the uninterrupted process of social reproduction;

3) social insurance is a form (mode) of the participation of the state, employers and citizens in protecting the personal interests of citizens and thus creating conditions for ensuring social and political stability in society;

4) legal insurance is a kind of civil-law relations for the protection of property interests of citizens and legal entities in case of certain events (insurance cases) defined by the insurance contract or current legislation at the expense of money funds, which are formed from insurance payments of citizens and legal entities;

5) international - the elimination of national differences in the laws of different countries and the unification of ways to protect the interests of economic entities, on the one hand, and the development of such legal rules that would provide insurers with sufficient financial guarantees - on the other hand.

The agribusiness market in Ukraine began to develop actively in the early 2000 s. During these 17 years, Ukraine has twice attempted to introduce a system of state support, which directly affected the increase of agricultural insurance market indicators. Having analyzed the trends of the agrarian risk insurance market development in the period from 2005 to 2017, we can conclude that 2016 was the first year of recovery after prolonged stagnation. In 2017, the growing dynamics spread on more indicators [13]. Trends in the development of the market of agri-insurance can be seen from the data in Table 1 and in figures 1-2.

Thus, compared to 2016, the number of contracts increased by 164 contracts, which is 21 %. In 2017, 427 agreements were concluded - for the winter and 530 for the spring-summer period. The volume of collected insurance premiums in the hryvnia has increased for the third year in a row, in particular, in 2017, it grew by 30 % and amounted to 204.4 mln UAH. Also, in 2017, the volume of insurance premiums increased in dollar terms. In 2017 it amounted to 7.7 mln USD, which is 28 % more than in 2016. The total insured amount in 2016 was higher by 327 billion UAH than in 2017 [14].

Fig. 1. Dynamics of Ukrainian agricultural insurance market development

Sourse: formed by author according to [14].

Fig. 2. Trends in the Ukrainian agricultural insurance market for 2005-2017

Sourse: formed by author according to [14].

According to the index of the insured area, the championship belongs to Poltava (75.6 thousand hectares, or 11.5 %) and Khmelnytsky (75.3 thousand hectares, or 11.5 %), regions. According to them, there are Dnipropetrovsk (67.3 thousand hectares, or 10.2 %), Kharkiv (57.5 thousand hectares, or 8.7 %), Chernihiv (48.0 thousand hectares, or 7.3 %), Sumy (46.9 thousand hectares, or 7.1 %) and Ternopil (39.4 thousand hectares, or 6.0 %). The volume of collected awards in the oblast of Ukraine was in the following order: Poltava (33.7 mln UAH, or 16.5 %), Dnipropetrovsk (18.1 mln UAH, or 8.8 %), Sumy (17.8 mln UAH, or 8.7 %), Kherson (15.9 mln UAH, or 7.8 %), Khmelnytsky (15.6 mln UAH, or 7.6 %), Rivne (14.8 mln UAH, or 7.2 %), Mykolayivska (12.5 mln UAH, or 6.1 %) and Cherkassy (11.5 mln UAH, or 5.6 %) [14].

The analysis above gives grounds for forming a list of the main factors influencing the formation and development of agri-insurance. To key factors include:

1) factors directly related to agrarians (volume of plant production, profitability of plant growing), with sown areas (share of the insured area);

2) factors related to insurance companies (insurance premiums, the number of active agri-insurers, the number of agri-insurance contracts, level of payments, average tariff rate).

Table 1. Dynamics of insurance of agricultural crops in 2005-2017