Agriculture insurance hotspot: Kazakhstan

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1 Agriculture insurance hotspot: is one of the largest grain producers and exporters in the world. However, drought frequently endangers large parts of the country and is the number one threat to farmers.

2 has the most volatile rate of agricultural production in central Asia, mainly due to regular droughts and its low-input production system. Improved financial protection through insurance would allow farmers to invest more in production and could reduce the volatility of their income. State-subsidised crop insurance programmes are in place, but do not always give farmers the protection they need. Swiss Re sees opportunities for additional innovative insurance solutions.

3 Crop production In terms of area, is the ninth largest country in the world, and one of the largest grain producers and exporters. Grain exports are also an important source of foreign currency for. Its recent economic boom is primarily driven by oil and gas. However, it is vital that the country diversifies through agricultural production, given the high volatility in commodity prices seen recently. Land use % % Arable land (22.9 m ha) Other land (58.7 m ha) Forest area (3.3 m ha) Permanent meadows (185 m ha) Source: FAO STAT The main cash crop is grain (spring/ winter wheat, barley). The export value of grain counts for 85% of agricultural exports. Grain is produced in Northern where, in the 1950s, over 15 million hectares of steppe was turned into farmland. Cold winters, dry and hot summers, strong winds and a low-input environment lead to relatively low and highly volatile yields. Crop production value Other crops such as potatoes, tomatoes and watermelons are mainly produced by small and medium-sized crop farmers in the more densely populated southern part of the country around Almaty, which benefits from irrigation water from the nearby mountains USD m Grain (1085) % Potatoes (395) Tomatoes (260) Cotton (187) Watermelons (111) Sunflower seeds (105) Rice (94) Source: FAO STAT Swiss Re Agriculture insurance hotspot 1

4 Crop production Yield per hectare (index number, year 2000 = 100) Wheat Watermelon Potato 250 Tomato 200 Index Source: FAO STAT Fertilizer consumption (nitrogenous, potash, phosphate) and yields 10 8 France 6 Yield T/Ha 4 Ukraine Romania Poland Russia 2 Australia Fertilizer Kg/Ha Source: FAO STAT 2 Swiss Re Agriculture insurance hotspot

5 Drought 25% Harvest years effected by drought Swiss Re estimate Drought is the biggest threat to agriculture in. The high frequency of severe droughts results in a large fluctuation in yields and unpredictable earnings for farmers. As irrigation is not cost efficient in large parts of the country, droughts endanger the development of the agricultural sector as a whole. And, due to climate change, both the frequency and impact of droughts are expected to increase in the future. Swiss Re Agriculture insurance hotspot 3

6 Drought Probability of < 125 mm rain between March and September Severnyy Akmolinskaya Oblast Pavlodar Zapadnyy Aktyubinskaya Oblast Qostanay Vostochnyy Atyrau Qaraghandy Mangghystau Qyzylorda Yuzhnyy Zhambylskaya Oblast Almaty % Source: GFK Geomarketing. Swiss Re estimates 4 Swiss Re Agriculture insurance hotspot

7 Low-input production systems 1.2 t/ha Average wheat yield in 4.9 t/ha Average wheat yield in Poland Source: FAO STAT Grain production in Northern is characterised by a low-input environment and low yields. The lack of irrigation and fertilizer, minimal ploughing and the use of older field machinery lead to yields that often do not exceed 1 tonne/ha. By offering farmers additional financial protection and support, we can encourage them to invest in more modern production systems and higher inputs. This would increase both yields and farmers income over the long term. Crop insurance programme FFSA Law 533-II In 2004 established a crop insurance system called Fund for Financial Support of Agriculture (FFSA), which is based on government subsidies and a private-public partnership. Key features Coverage of loss of investment cost Compulsory for all crop growers 50% subsidies on paid claims Defined rates per region Loss adjustment in the field No deductibles All weather perils Rates around 2.5% Annual premium around USD 6.3m World Bank Study 2011 In 2011 the World Bank conducted an extensive study on the functioning of the crop insurance programme. The study showed that some of the features are not working as they should. We list here the main drawbacks identified. Source: World Bank, Insurance Feasibility Study October 2011 Drawbacks Only a small part of farmers income is protected Expensive loss adjustment procedures in the field No pre-surveys and risk selection by insurance companies Average loss ratio around 140% High losses in two provinces jeopardise the economic viability of the programme Private insurance companies have ceased support Not all losses could be paid as the programme ran out of funds Swiss Re Agriculture insurance hotspot 5

8 Investments There has been significant investment in large-scale agriculture in in recent years, primarily fuelled by large domestic agro-holdings. Investments were also made by Russian, Saudi and European funds. In the near future, neighbouring China is expected to considerably increase its investments in. Foreign direct investment per capita (USD) Uzbekistan Kyrgyzstan 5000 Turkmenistan Tajikistan Source: Unctad Opportunities Insurance We see good opportunities to offer additional innovative insurance solutions against drought to farmers. Index-based insurance products, in particular, seem very suitable, given s homogeneous climate zones, crop mix and the availability of reliable weather and yield data. 6 Swiss Re Agriculture insurance hotspot

9 Index-based insurance Index-based insurance Contrary to traditional crop insurance where insurance payout is based on loss adjustment in the field, an index insurance payout is assessed by measuring an index that is a proxy for the actual losses. Advantages: Transparent products Faster payouts Reduced costs Limited anti-selection Index-based insurance products seem very suitable for. Weather index The insurance payout is based on weather data collected from weather stations. Farmers receive a payout when one or more weather parameters, such as accumulated rainfall, temperature, or soil moisture in a defined crop growing period, is above or below a pre-defined value. Area yield index The insurance payout is based on yield statistics provided by an independent statistical body. The payout follows when the realised average yield (eg in a county or other geographic unit) falls below a threshold yield, regardless of the realised yield on the insured farm. Remote sensing index Farmers receive a payout when an objective weather parameter derived from a satellite (such as rainfall and normalized differenced vegetation index (NDVI) for crop and livestock) deviates from a defined limit. NDVI Vegetarian Index June 2015 < 0.15 > 0.15 > 0.20 > 0.25 > 0.30 > 0.35 > 0.40 > 0.45 > 0.50 > 0.55 > 0.60 > 0.65 > 0.70 > 0.75 > 0.80 > 0.85 NDVI (June 2015) Source: GeoSys AgriQuest Solution TM Swiss Re Agriculture insurance hotspot 7

10 Summary As one of the largest producers and exporters of grain in the world, has a great economical interest in a vital agricultural sector and a stable agricultural output. Drought frequently endangers large parts of the country and is the number one threat to farmers. Insurance against drought can help farmers to stay in business and improves their access to bank loans. Investments in the production system can further increase yields and reduce volatility in farmers income. State-subsidised crop insurance programmes are in place, but do not always deliver the protection farmers need. We see opportunities for additional innovative insurance solutions. 8 Swiss Re Agriculture insurance hotspot

11 2015 Swiss Re. All rights reserved. Title: Agriculture insurance hotspot Authors: Marcel Andriesse, Hans Feyen Editing: Orla Harte Graphic design and production: Swiss Re Corporate Real Estate & Logistics/ Media Production, Zürich Infographics: Annie Wu, Swiss Re Communications Photographs: Getty Images, Swiss Re The entire content of this publication is subject to copyright with all rights reserved. The information may be used for private or internal purposes, provided that any copyright or other proprietary notices are not removed. Electronic reuse of the data published in this report is prohibited. Reproduction in whole or in part or use for any public purpose is permitted only with the prior written approval of Swiss Re and if the source reference [Swiss Re, Agriculture insurance hotspot: ] is indicated. Courtesy copies are appreciated. Although all the information used in this report was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the information given or forward looking statements made. The information provided and forward-looking statements made are is for informational purposes only and in no way constitutes Swiss Re s position. In no event shall Swiss Re be liable for any loss or damage arising in connection with the use of this information and readers are cautioned not to place undue reliance on forward-looking statements. Swiss Re undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Corporate Real Estate & Logistics/ Media Production Zürich Visit to download or to order additional copies of Swiss Re publications.

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