Agricultural Insurance of Iran

IN THE NAME OF GOD

Preface

      Since his creation, man has always changed the balance of nature and the

 Eco-system to his own benefit in order to provide for food and shelter. Through time, the increase in population and limitations of natural resources on the terrestrial globe have thus created irretrievable problems. In this respect, crop insurance is one remarkable solution to the problem of maximum utilization of limited resources within the agricultural sector of an economy which is based on agriculture as the main axis of development. Crop insurance may be regarded as the necessary means to reach the ultimate goal in the agricultural sector, which is the increase of the total volume of crop, livestock, and other agricultural productions, on the road to gradual gaining of self- sufficiency in the sector.

Introduction

      Crop insurance is designated to make the insured producer to transfer the major portion of his growing risk to multi-peril crop insurance which, in turn, spreads the risk among many producers throughout time.

The producer's farming operation is stabilized as the insurance allows the prediction of a given amount of income at a specified time by either actual production or payment of indemnity. Aiming for high yield per hectare, crop insurance enables a producer to invest additional money necessary to obtain increased production per hectare. The result of the implementation of the insurance scheme in the agricultural sector is that this sector is coming to resemble other industries in the felt need for risk transfer mechanisms that will at least provide protection against certain natural catastrophic risks, and help the fluctuations in the inherently unstable cash flows of agricultural industries.

      It is needless to say that crop catastrophes often necessitate government grants, loans, or other assistance to affected producers. Many farmers increase their borrowing power through the use of crop insurance. Hence, in a year of crop failure, crop insurance provides an alternate source of income to meet loan payment obligations.

History of Crop Insurance in Iran

A. Background:  Iran with an amplitude of 165 million hectares has a noticeable variety of weather conditions, with enormous changes of temperature, during different seasons of the year. Therefore, it holds an appropriate ground for the growth of various tropical, semi-tropical, and temperate productions. Considering the above facts, the total land can be civilized as follows:

Table 1

The Topographic Distribution of Land Area in Iran

      Variety in climate and weather conditions has made agriculture, unlike any other economic activity, subject to unknown natural hazards which can neither be predicted nor prevented. Therefore, the chief characteristic of agricultural activities is their very direct connection with the nature.

This means, with the occurrence of unfavorable natural conditions, the farmer is faced with a decrease in the level of production and total yield which, in turn, will not only create an income deficiency but, if repeated, will also deprive a producing farmer or livestock breeder from any possibility of a future investment in the field. In order to prevent a crop disaster from rapidly turning into a financial disaster for a farmer or farm family, crop insurance can be regarded as a chief preventive-protective measure which can play a vital role in safe-guarding the farmers production line. Crop catastrophes often necessitate government loans, grants, or other financial assistance to affected producers. In a year of crop failure, crop insurance provides an alternate source of income to meet loan payment.

     On the other hand, it is helpful to know that studies have shown that Iran has been introduced as the tenth country, in the world, most prone to calamities and natural hazards. In other words, out of 40 different kinds of natural calamities, glibly registered, 31 of them happen to occur in Iran.

 B.Formation of the Agricultural Products Insurance Fund:     The insurance of agricultural products has been under consideration in Iran since 1970 when studies began by the former Ministry of Agricultural Production and Consumer Products. In 1974, plans were drawn by the Ministry of Cooperatives and in April 1976 the Agricultural Products Insurance Law was taken to the Ministry of Commerce and then to the Central Bank of Iran for implementation. However, no positive action was taken. In December 1979, following the Islamic Revolution, a Bill was passed to establish the Relief Fund for Damaged Agricultural Units.

     At the same time, the previous laws of 1974 were nullified. However, Article 5 of the 1979 legislation allowed for planning of a final bill establishing the actual fund.

      The present Agricultural Products Insurance Law was enacted in 1983 and provided legislative basis for the Agricultural Products Insurance Fund as it is currently constituted. The preparation of the Bill followed studies by the Ministry of Economic Affairs and Finance, the Ministry of Commerce, the Central Bank of Iran, the Agricultural Bank, the Central Insurance, and some other insurance companies. At the same time a committee was formed to tackle the detailed technical and organizational programmers for the Insurance Fund, holding regular meetings since 1981 at the Agricultural Bank.

 Legislative Basis      The Agricultural Products Insurance Law of 1983 allows for the establishment of the Agricultural Products Insurance Fund with the following main features:

 a)   The Fund is established, according to the Law of 1983, within the framework of the Agricultural Bank, which, in turn, is responsible for the implementation of the insurance program.

b)   The Fund is financially independent (initial capital: RLS. 1billion) which has now increased to 13.5 billion and a legal entity allowing management under provisions pertaining to public companies.

c)   The Fund has a General Assembly, a Technical Committee, and a Board of Directors. The Managing Director of the Fund is simultaneously the Managing Director of the Agricultural Bank.

d)   The initial capitalization was Riles. 1,000,000,000 to be increased in accordance with the Articles of Association on approval of the General Assembly. Thus, it has now increased to almost 13.5 billion Riales.

e)   Budget allocation for premium subsidy is allowed following approval of the General Assembly and the Board of Ministers.

f)   The Law of 1983 allows for the gradual withdrawal of the Relief Fund, and the transfer of resources as well as the functional operations to the Insurance as the Fund becomes operational for each product in each region throughout the country.

g)   The Funds Articles of Association allows for coverage of crops, livestock, poultry, bees, fish, silkworms, forestry and pasture, orchards, and other fields as it is determined by the Fund and introduced by way of regulations.

 Administrative Organization    The Insurance Find is administered through a Head Office in Tehran, 29 provincial Directorates and a total of more than 1750 Agricultural Bank branches throughout the country.

    The Minister of Agriculture (Jahad-e-Keshavarzi), as the head of the Fund’s General Assembly is responsible for the administration of the program through the Board of Directors. The Board of Directors has five members. It determines the Funds policies and has to approve the terms and conditions offered in the insurance contracts which, in turn, need to gain final approval of the General Assembly. The Head office, although separately located, is administered within the general framework of the Agricultural Bank, hence creating a good opportunity for close collaboration and exchange of views.

     The provincial Directorates are responsible for the coordination of the Bank's branches located within the province for both banking transactions and insurance activities. The latter are directly supervised by a provincial expert who, in turn as the provincial coordinator, is responsible to the Head Office. Given a higher priority to the introduction and execution of insurance programs, particularly in the sensitive matter of extension to the rural community, the heavy workload has fallen mainly on the Agricultural Bank’s branch managers as well as the experts and field surveyors.

     It has enabled some of the most experienced people living in the rural areas to actively participate in the introduction of new ideas of crop insurance. The successful liaison with farmers is the result of the positive experience gained from both mutual trust and cooperation with the Bank staff.

 Insured Crops      The main objective of the Insurance Fund is to eventually insure all the major strategic crops of the country. The insurance scheme began in 1984 with cotton, in the northern province of Mazandaran, and sugar beet in the north western province of Khorasan. Gradually the insurance activity for these two products, along with other products, was extended throughout the country. Strategic crops which are now under coverage are as follows: cotton, sugar-beet, soybean, rice, wheat (irrigated and dry), potato, onion, corn, sunflower, and colza. On the other hand, orchard products which gain benefit from the insurance program are grape, date palm, citrus fruits, apple, tea, pomegranate, almond, and pistachio. By the end of the nation's Third Five Year Socio-Economic Development Plan (2000-2004) sugarcane, grains and cereals (irrigated and dry), vegetables, summer crops, maize (fodder), Lucerne, clover, esparcet, sesame, peanut, tobacco, flax and hemp, green house products (summer crop and vegetables), ornamental and in-door flowers and plants are to gradually gain coverage.

     As far as orchard products are concerned, in addition to those already covered, walnut, saffron, caraway, fruits such as pear, apricot, peach, cherry, and strawberry… etc as well as hazelnut, barberry, olive, fig, kiwi, banana, mango and persimmon are all under feasibility study in order to actively become part of the insurance scheme.

      Moreover, by the end of the Third Five Year Plan, agricultural production factors will also be brought under insurance coverage in all the main fields. Currently, studies are undertaken to assess the insurance feasibility of such factors as agricultural and livestock machinery, rural buildings and constructions, rural workshops, in-door fish breeding units, irrigation installations, water-pump engines, life and accident insurance of the staff, transport and road insurance (beehives, livestock, etc.)

 a-Insured Perils: Agriculture in Iran is extremely varied due to the change of climatic, topographical, and soil factors within the country. Due to these various climatic conditions, the risk factors facing farmers are aloe significantly different.

The chief perils covered which cause serious losses to the farmers are: flood, hail, storm, windstorm, heavy rainfall, frost, frost-bite, and earthquake. Drought is so far included only in those insurance programs which are launched by the Fund for the protection of wheat (irrigated and dry), barley, tea, rice, cotton, as well as, forestry and pastures.

b-Rating Structure: the Agricultural Products Insurance Fund operates upon formulas which are technically designated on the basis of valid information (data and statistics) obtained from respective ministries and organizations.

   This information includes factors such as the rate and the probability of occurrence of perils over a period of at least five years, the weighed average yield, and the production cost per

hectare, the loss cost, the loss ratio … etc.

c- Basis of Indemnity and Methods of Settling Claims: The basis of calculation is the evaluation of losses incurred at the time of the occurrence of damage visa-à-vies the total production cost per hectare. Evaluation of the loss incurred and the payment of indemnity is done, as said before, by experts stationed at the regional offices is the Agricultural Bank network.

 Livestock, Poultry, and Aquacultural Insurance      Following the necessary studies, the Fund began in 1994 its activities in the field of strategic livestock insurance by providing protective coverage initially for dairy cattle stationed at industrialized units. This step, similar to any of the Fund’s other endeavors, was first taken on the basis of a pilot program which only included those units located in the province of Tehran but was then extended all across the country.

     Along with dairy cattle, farmed aquatics (cold-water fish and warm-water fish), rural herd (sheep and goat), pure bred Iranian horses, honeybees and their respective hives, camel, shrimp, registered bull, native and hybrid cow, cattle raising units, and breeding centers have also been able to profit from the Fund’s insurance activities.

     Sheep and goat are the two chief types of rural herd, which, benefit from the Fund's protective measures, the raisers of which usually belong to one of the sectors lowest income groups.

      In the field of poultry insurance, the Fund covers all industrial units, in which such brands as ancestor, parent, layers, and broilers are respectively bred.

       Additionally, in order to take yet another step in safeguarding the national wealth, through the preservation of the nation’s valuable genetic reserves, the Fund launched its program in the field of horse insurance. Pure bred Iranian horses of which the three most significant types are Arabic, Turkman, and Kurdish have gained insurance protection.

 a-Insured Perils:In the field of livestock insurance, as well as poultry, aquaculture, rural herd, houses and ... etc. The Funds protective measures are taken on all-risk, or multi-peril basis, in addition to such natural hazards as flood, heavy rainfall, arson, and earthquake.

     In other words, any unpredictable accident or disease is covered except for the diseases against which precautionary vaccination is available. Another exception is chemical water pollution in the case of aqua cultural insurance.

In livestock insurance there is no closing date for applications and insurance takes effect upon the payment of premium to the Fund. The endurance period of contract is twelve months and it is, of course, renewable at the end of each period. As in crop insurance, government's share (subsidy) in premium payment is an encouraging factor in the successful execution of the scheme on a voluntary basis.

 b-Rating Structure: The rating structure in all the above mentioned fields of activity is based upon such factors as the rate of occurrence, the production cost, the loss ratio … etc. For instance, in the case of livestock insurance (dairy cattle) such factors as the rate of mortality, the current value of the animal, the rate of occurrence of hazards which lead to obligatory slaughter… etc are taken into calculative consideration.

c-Basis of Indemnity and Methods of Settling Claims:

    In the fields of livestock, poultry, horse breeding, rural herd, aqua cultural insurance …etc. (like in crop insurance); the evaluation of the losses incurred is carried out by teams including experts and veterinary doctors. The latter are employed by the Fund to perform duties in various related regions. Likewise the payment of indemnity is done by the Agricultural Bank’s network throughout the country operating as the executive elbows of the Fund.

 Forestry, Pastures, and Watershed Management

      In an effort to preserve the natural resources of the country, the Fund launched its insurance program in 1997 in favor of the nation’s forestry, pastures, and watershed management. Regarding their importance in the agricultural sector, the insurance scheme provides protective measures in order to safeguard the country’s vast forestry, and sizeable pastures, and watersheds against losses inflicted upon by nature, a major cause of which is drought. Pastures with the backing of approved executed projects, and forestry (one to five years old) located in the northern part of the country as well as the public investments in the biological section of watersheds are now all benefiting from insurance coverage. Moreover, second rate forest roads in the north, in addition to the reform and revival operations for the country’s pastures, are also part of the insurance program.

     At the same time, the insurance of the public investment in both forestry and pastoral by-precuts and in the mechanical section of watershed management are under study, so that if proven feasible, they too will be able to benefit from the insurance coverage.

 The Fund’s Operational Polices

     In a broad sense, the operational polices of the Fund are confined to two major spheres of activity. These are project evaluation and project execution.

 1-Project Evaluation: The Insurance Fund has established a Research Unit within its own staffing to appraise, evaluate, and monitor all aspects of the introduction of the insurance including financial, statistical, technical, and socio-economic impact.

     It was stressed that evaluation of the project is a high priority and this will concentrate on the main constraints of the farmer’s attitude and his positive understanding of the insurance program.

Research is undertaken continuously with its main objective being the study of feasibility of each and every strategic product for the sake of insurance coverage. The degree of confidence in any data information available has determined the requirement for testing any proposal for insurance coverage on a pilot scale prior to moving to wide-scale introduction.

2-  Project Execution: The executive policy of the Fund in all action fields include three main stages which are farmer enrollment and premium payment, damage occurrence and loss assessment, and compensation payment.

I)Farmer Enrollment and Premium Payment: Since the establishment of the Fund, the Government has been determined to subsidize premium payment. This has been a key incentive for farmers, livestock breeders, and orchard growers to take up insurance.

The amount of subsidy is subject to change from year to year according to the Government’s policies and plans for the agricultural sector. According to Islamic principles farmers cannot be compelled to accept the insurance scheme and therefore their participation is voluntary.

On the other hand, the premium rate is based on losses over specified number of years. The premium charged shall be adequate to cover losses and administrative expenses. Recently, for most of the insurable products several alternatives for premium payment has been formulated on the basis of their average yield and, therefore, the producer has more than one option to take according to his average production rate. This multiple rate system provides the producers with a variety of options and therefore creates a strong incentive for the producer to participate in the insurance program by picking the appropriate premium rate according to his production standards.

ii) Damage Occurrence and Loss Assessment:  A system of training has long been established for the field surveyors of the Fund at branch level for each insurance project. The field staff, as well as both the provincial and the central coordinators, responsible for the insurance affairs pertinent to areas involved in any project, normally take the relevant training course prior to the actual execution of the project.

          In general, the agricultural expert at branch level usually assesses the losses sustained in his area. This assessment is further supervised by provincial coordinator who, in turn, sends the assessment results to the Head Office for a final control exercised by the central coordinator.

iii)Compensation payment: In designating the scale of compensation applicable, the Fund analyzes the production means as well as the growing stages for each crop in addition to the cost of production inputs. As for livestock, the current average price per head is considered.

      The system of compensation payment has the following features:

        a)A standard sum insured per hectare or per head, which applies to all farmers and livestock breeders for that matter in the province.

        B) The sum insured is based on average yield and guaranteed product price as well as production cost per hectare. Compensation therefore covers part of the profit in addition to production costs based on farmers with an average yield. For livestock insurance, it is based on the current average price of the livestock.

        c) An escalating scale of compensation applies during the growth season based on input costs incurred at the time of loss. As for livestock, the various stages of growth from infancy onwards are considered. As price differs with age naturally an escalating scale of indemnity is applicable to the different stages of growth covering the loss at any certain age.

        d) Losses are compensated for immediately after their occurrence based on assessment of the percentage of damage inflicted on the crop or livestock. As the Fund’s representatives, the network of the Agricultural Bank, throughout the country, carry out the executive polices of the Fund at all three stages. Due to heavy work congestion at the first stage, assistance may be required from other organizations in the sector, which are in direct connection with farmers and livestock breeders, to provide staff for help with enrollment and premium collection. Otherwise, loss assessment and payment of indemnity is solely done by the Fund through Agricultural Bank's staff at branch levels who perform their duties according to the existing regulations and on the basis of confirmed standards.

 Insurance Period      For agricultural crops insurance takes effect upon the plantation of the crop and continues until the harvest. For each and every crop, expiration dates are determined after which new applications are not accepted in that year. The expiration date proceeds the usual period of plantation. As far as horticultural products are concerned, the insurance coverage is offered for fruit trees from the harvest of the last product up to twelve months. On the other hand, in livestock insurance there is no time limitation for application. Insurance takes effect upon the payment of premium by the insured to the insurer. The term of the contract is twelve months.

      In all fields, Government’s subsidy payment to the premium is an encouraging factor in the successful execution of the scheme on a voluntary basis.

 Crop Insurance in Perspective

 1)  Crop Insurance at large: Agriculture is a dominant sector in a large number of developing countries and accounts for a major part of their GNP. Not only it continues to be an important sector for employment but agricultural products are also important in the export field. Recognizing the importance of agriculture, the crucial role of agricultural insurance, as a necessary practice in the sector, must also be recognized. Agricultural insurance has an important role and is an essential activity in stabilizing financial fluctuations for those engaged in agriculture. In view of high risks involved in crop insurance, particularly in the event of a natural catastrophe, governments are to support, as a matter of policy, programs of crop insurance with appropriate resources. Since it is recognized that a large sector of the agricultural community consisting of subsistence farmers is and must be continuously supported in various ways, the importance of agricultural insurance, as a major example of that support, becomes more evident. Moreover, support for crop insurance including premium subsidies, continues to be provided by governments in certain developing economies.

      In urging governments to initiate measures in order to encourage the initiation and expansion of agricultural insurance, action may be necessary in certain areas such as:

      I) Creation of an appropriate economic, legislative, and fiscal environment congenial to the development of agricultural insurance.

    ii) Better enforcement of rules and regulations relating to agricultural production.

    iii) Development of skilled manpower in agricultural insurance through specialized training and education.

    iv) Creation of infrastructure for the accurate and timely collection of reliable data in respect of agricultural activities.

     In order to initiate insurance program from a stronger footing, governments must help in creating awareness and basic knowledge among the rural population about the benefits of crop insurance. Along with governments, cooperatives in addition to any other related organization or unit which is active in the agricultural sector in any give economy (developing or developed) must cooperate in enhancing the idea of crop insurance as an undeniable necessity in the promotion of the sector at large.

2)  The Agricultural Products Insurance Fund of Iran: With the establishment of the Agricultural Products Insurance Fund in 1984, the Government actualized one of its most successful and progressive projects in the agricultural sector through the introduction of crop and livestock insurance system. Skilled planning and considerable efforts have resulted in the overall adoption of the insurance scheme in the rural areas of Iran.

     The Fund is rapidly expanding its activities in all strategic fields. It has extended the active areas of insurance from 2 provinces to all 29 provinces of the country thus increasing the areas insured from 90,000 hectares in 1984 to nearly 6 million hectares at present.

    The range of products, both agricultural and horticultural has increased from cotton and sugar beet to 25 main products in addition to livestock, forestry and pastures.

    By efficient planning and sufficient effort to expand the cultural aspect of the insurance scheme, the Fund shall succeed in performing the difficult task of introducing the concept of insurance in newer fields within the rural community, and therefore enjoy, not only the benefits of the rapid development of the insurance program throughout the country, but also make the program a successful sample for others to follow.