Rashad Ahmadov, Ph.D CEO, Azerbaijan Industrial Insurance Company 2.7.15 – Azerbaijan International Insurance Forum.

Agricultural Insurance

An Overview and Way Forward

Rashad Ahmadov, Ph.DCEO, Azerbaijan Industrial Insurance Company

2.7.15 – Azerbaijan International Insurance Forum

Executive Summary

• Azerbaijani Agri-Insurance is growing rapidly with profit offering opportunities for local and international markets

• Azeri government is supporting agriculture financing and insurance

• There are major best-practices around the world which can be implemented for further exploitation of the opportunity

Crop Production Animal products0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

2,51 2,68

5,19

2,452,75

5,20

2013 2014

Agricultural Production in AzerbaijanDecrease in crop compensated by animal products, slow growth in total

B AZN

Total Agr. Production

CAGR-2,4%

CAGR+2,5%

CAGR+0,2%

Source: Ministry of Agriculture Azerbaijan

• Agricultural corporations overtaking the dominance of individual farmerso Big investors are entering into agriculture business to

exploit opportunities. Individuals struggle compete.

• There is no established insurance pool in the marketo Unlike Turkey or other benchmarked countries there is

no established pool (eg. Turkey-Tarsim)

• Purchasing Insurance is compulsory if any financing is involved

• Insurance capacity is provided thru facultative reinsurance

• Loss adjustment is made by third parties due to lack of resources

Quick Snapshot on the Agri-IndustryDecrease in crop compensated by animal products, slow growth in total

Key Observations Financial Support

• Government and financial institutions has provided following support

• Concessional Loans

14.8 M AZN

• State Aid (2007 Fig)

20.1 M AZN

• Regulation states that purchaser will be supported when obtaining agricultural insuranceo Although not compulsory, government financially

supports agriculture insurance buyers

• Agricultural Insurance covers Crops, Animals, related equipment, etc

• Included covers are triggered in case of Fire, Flood, Hail, Lightning, Storm and etc.

Legislation on Agriculture – Insurance Government has issued legislation to protect agriculture investors

Key Observations

• Insurance contract must be issued as per legislation

• Insurance risk, terms and conditions must be as per legislation

• Minimum half of the premium must be paid by the insured to get financial aid from the government

• Insurance rate must be under government-determined rate

• Insured must provide relevant documents demonstrating ownership

Legislation on Agriculture – Financial AidCertain terms must be achieved to get financial aid from Government

Terms for Financial Aid

2011 2012 2013 20140

500,000

1,000,000

1,500,000

2,000,000

2,500,000

169,711

467,551 531,428

2,023,432

81,663 144,711 166,885 174,753

Insurance Premiums Paid Claims

48%

30%31%

8%

Loss Ratio

Agr. Animal Insurance performance over timeAn. Ins. Has grow 125% CAGR outperforming most of other insurance LoB

Agriculture (Animal) Insurance Performance 2011-2014

Despite growth, LR is lowest of

all times

K AZN

2011 2012 2013 20140

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000882

579,577

471,642 448,570

34,579 74,950

396,175310,523

Insurance premiums Paid Claims

4%

Loss Ratio

13%83%

69%

Agr. Crop Insurance performance over timeCrop. Ins. Slowed down in the recent period with a LR avg. 42%

Agriculture (Crop) Insurance Performance 2011-2014

K AZN

• Agri-Insurance is a relatively risky line of business due to its nature (high PML)

• Not easy to apply and obtain both financial aid and insurance cover due to lack of know-how of stakeholders

• Lack of local Underwriting skills

• Shortage of experts and loss adjusters, hindering courage of Insurance companies to write risk

• Level of know-how in farming, hardening taking precautions to avoid probable risks

• Extended risk exposure due to late harvesting

Current drawbacks on Agri-InsuranceKey Observations

Why do we need a structured Agriculture Insurance Market?

• Comprehensive offering of Insurance (like in every other industry) automatically adds value and brings certain standards

• Example 1: Farmers have to clear the land from salt to get insurance otherwise firms decline their request of cover

• Example 2: Vaccination of herds are required before insurance policy starts

• Insurance (due to the security being provided) will enable both farmers and corporations to invest and create value from agriculture which will result as positive balance in countries economy

Global Practices in Agriculture InsuranceExamples from the World

• Developed and developing countries with significant Agriculture ratio on GDP tend to cover their risks via Risk Pools

• Insurance companies do not share the risk of the created risk pool. They act as insurance agency and only benefit from the sales

• Governance and management of the risk-pool is done by a single unit (mostly appointed by the government)

• Although reinsurance covers the pool with high limits, extra-limits are provided by the State itself

SuggestionsHow to move forward

• Government shall promote agriculture insurance by providing more financial support

• General Agri-Insurance Conditions shall be improved by benchmarking other best-in-class practices around the world

• Additional risks and covers shall be inserted and some exclusions to be taken out, which will result in comprehensive protection to both farmers and corporations.

• Creation of a nation-wide risk pool can be setup

• Insurance must be compulsory for farms who gets financial aid

Thank you for your attention