Annex 27. Fact Sheet Croatia

Transcription

1 Annex 27. Fact Sheet Croatia 1. Introduction The market failures of agricultural risk sharing instruments in transition economies like Croatia restrict the potential for efficient risk management and consequently generate a highly uncertain business environment. Apart from hail insurance, other forms of agricultural insurance products and hedging instruments are of limited supply. Additionally, risk and low profitability often constrain external funds inflows resulting in fewer investments and deteriorating the farm s income stability and competitiveness. Agricultural insurance is a relatively unimportant (or neglected) risk management tool in Croatian agriculture. According to some data, not more then 3% of agricultural land (or of the production on that land) is insured. About 30% of the area is under industrial crops, (oil rape, soy, sugar beet, sunflower and similar) is insured. It is followed by grain (14%). In permanent crops (taking into account only modern types of orchards) and vineyard insurance, coverage is about 10%. Insurance coverage as the ratio between number of insured animals and statistically recorded shows that in the case of cattle and pigs the ratio is about 13% while in the case of poultry it reaches about 23%. According to the Croatian Financial Services Supervisory Agency (HANFA) data average annual gross premium (period ) in crop insurance was 51 million kunas. The average damages were 44 million kunas. Gross premium in livestock production was 21 million kunas while average damages were 19.5 million kunas. Together crop and livestock insurance had a share of only 2% (year 2004) in the group property insurance and about 17% in the sub-group other property insurance. Damages caused by natural disasters by and large mostly affect agricultural productions. The following data also advocates for a greater importance and use of agricultural insurance. Average annual damages (losses) in the last two decades caused by metrological and hydrological occurrence like drought, hail, frost, floods and similar were 254 million US$. About 80% of losses were caused directly while indirect losses were caused by atypical events such as forest fires, glides, plant and animal epidemics and some technical and technological accidents. They are also responsible for the death of fifteen people annually on average (Meteorological and Hydrological Service of Croatia). In order of importance the causes of damage were droughts 38%, storms and hail 20%, earthquakes 12%, frost 8%, floods 7%, fires 7%, other 2% and combinations 6% (period , Meteorological and Hydrological Service of Croatia). In order to enhance farmers participation in the insurance programs, the government subsidizes the insurance premium. It started in the year Government subsidies caused lower levels of public authority like the county and municipality to subsidize premiums for agricultural insurance. Such measures make agricultural insurance more affordable for farmers and influenced higher participation from their side. 633

2 Besides insurance, reports also discuss some issues of existing disaster ad-hoc aid. Aid is rather inefficient and cannot accomplish its main mission - grants in the case of disasters. On the other hand it - supplies reasons that could be used as grounds for loan repayment delays, tax deductibles, lower reference yields that serve as the base for production subventions, prolongation of the state land rent and similar. Disaster ad-hoc aid inefficiency, recently forced policy-makers to make some changes. The whole process is still undergoing. The hail suppression activities exist in Croatia. Such activities and their efficiency are subject to frequent discussion and dissidences. Material and data used in the study came from different sources. Surveys were used as the primary source of information. Insurance companies were contacted and asked for their data about agricultural insurance and their short and mid-term strategy toward agricultural insurance. As expected, only a few companies have sent some information. Received information is rather their views and perceptions on agricultural insurance with little or no tangible data. Therefore expert advice and estimation has been an important method. Secondary data are drawn from the Ministry of Agriculture, Forestry and Water Management and Croatian Financial Services Supervisory Agency. Also, statistic databases, publications, reports, web pages were also used. Currency used throughout the Report is Croatian kuna (kunas, HRK). Average exchange rate for the year 2005 was HRK/EUR= (Croatian National Bank). 2. Croatia- in brief The Republic of Croatia is situated along the Adriatic and is a Central European country. Its total surface covers 87,661 km 2, of which the mainland is 56,594 km 2 and territorial sea 31,067 km 2. The country is situated on the crossroads between Central Europe and the Mediterranean, in the vicinity of densely populated and developed European countries. Picture 1: Croatia 634

3 Croatia has three different climate types due to its interesting geographical position, which results in a wildlife diversity, as well as various livelihood and economical conditions. The central part of Croatia has a typical continental climate. The Mediterranean climate prevails on the Adriatic cost and partly further in the hinterland. This is the area of horticultural production like vineyards and olive trees, vegetables and fruit growing (peach, figs, sour cherries, etc). South Dalmatia, in valley of the Neretva river, tangerines and kiwis are grown. The mountain area of Croatia spreads from Lika and Gorski Kotar to the Dinara Mountain. Beside wood and timber industry, sheep farming exists. Crop production is limited to the socalled Karst fields, According to the latest Population Census 2001 the total population of Croatia was 4,437,460. Table 1: Croatia- economic indicators Area (square km) 56,538 56,538 56,538 Population (million) 4,442 4,439 4,439 GDP (million HRK, current prices) 198, , ,031 GDP (million EUR, current prices) a 26,234 28,395 30,949 GDP per capita (in EUR) 5,906 6,397 6,972 GDP - year-on-year rate of growth (in %, constant prices) 5,3 3,8 4,3 Average year-on-year inflation rate b 1,8 2,1 3,3 Exports of goods and services (as of % GDP) c 50,1 50,1 49,4 Imports of goods and services (as of % GDP) c 57, ,4 External debt (million EUR, end of year) d 19,811 22,781 25,541 External debt (as of % GDP) 75,5 80,2 82,5 External debt (as of % exports of goods and services) 150, National currency: Croatian kuna (HRK) Exchange rate on 31 December (HRK: 1 EUR) 7,6469 7,6712 7,3756 Average exchange rate (HRK: 1 EUR) 7,5634 7,4952 7,4002 Unemployment rate (ILO, persons above 15 years of age) e 14,3 13,8 12,7 Employment rate (ILO, persons above 15 years of age) e 43,1 43,5 43,3 a, Calculated by applying the average annual exchange rate (HRK/1 EUR) to the GDP in kuna terms. b, Inflation rate was measured by the RPI in the period, From 1999 on, it is measured by the CPI. c, Preliminary data. d, External debt indicators for 2002 and 2003 are shown on a gross basis, while the indicators for 2001 do not include interest arrears and accrual interest, hybrid and subordinated instruments, repo transactions of banks and the CNB, deposits of international financial institutions with the CNB, and one-sided effects of the secondary bond market. e, Employment and unemployment rates as at November 1996 and as at June

4 Sources: Croatian Bureau of Statistics, Ministry of Finance of the Republic of Croatia and Croatian National Bank The croatian territory is administratively divided into counties. Each county is an administrative and political unit that comprises several cities and municipalities. Croatia has 21 counties (including Zagreb with a special status), 121 cities and 422 municipalities. Some of the main economic indicators for the period are presented in table Agriculture in Croatia Agricultural production is a very important sector of the Croatian economy. Agriculture is, however, confronted with a large number of problems caused both by external factors such as war damage, high levels of imports of agricultural products, an inefficient market system, restrictive taxes and internal factors like an unfavourable educational and age structure of farmers and poor managerial skills. Today the majority of the Croatian agricultural holdings are characterized by small and fragmented land, which is a major limiting factor to the increase of their competitiveness. Croatia is marked by various geographical and climate regions that favours a diverse agricultural production with a wide range of products. Nevertheless, during the 1990s, agricultural production decreased significantly due to the war and transition to a market economy. Plant production has been increasing continually since 1995, but cattle production is still 30% lower than in Table 2: Basic indicators in the Agricultural Census 2003 (1 June 2003) Total Agricultural households Business entities Number of units 449, , , Utilized agricultural land, ha 1,077, , , Average number of hectares of utilized agricultural land Average number of hectares of utilized agricultural land for units using more than 1 ha Number of bovine animals, total 488, , , Number of pigs, total 1,924, ,726, , Number of sheep, total 768, , , Number of goats, total 203, , Number of poultry, total 15,989, ,477, ,511, Source: Agricultural Census Croatian bureau of Statistics 636

5 Croatia has a total of 3.15 million hectares of agricultural land. About 2 million hectares of the total are arable land while the rest consists of pastures, moors, reeds and fish farms. Arable land and gardens prevails in the agricultural land structure with a share of 46.4%. It is followed by pastures (36.6%), meadows (12.9%), orchards (2.2%) and vineyards (1.9%). With about 82% of the cultivated land and in a slightly more than 80% of livestock land, private ownerships dominate. The 2003 Census of Agriculture indicates that the total agricultural land was 1.07 million hectares out of which 84% was in the ownership of family holdings. The remaining 16% was in possession of legal business entities, partly privately owned, partly state owned. Plant production is one of the most important sectors of agriculture in terms of land use, food and fodder production, Grains and oil-crops representing the main cultures in Croatia. Vegetables are grown on 200 thousand ha (about 10% of all arable land and gardens) which is insufficient with respect to the needs and potentials. The most important vegetable crops are potato, cabbage, tomato, onion, peppers, cucumber, salad, and carrot. In the production structure potatoes covered almost half of the vegetable production surface (63,000 ha). Production in greenhouses is not significant. Orchards occupy about 68,000 ha or 2.2% of agricultural land. This is a small portion given Croatia s favourable climatic and pedologic conditions and its tradition in growing continental and Mediterranean fruits. About 95% of orchards are in the ownership of family agricultural holdings making this production fragmented and unproductive, with significant variations in yield and quality. Apple, peach, sour cherry and walnut as well as olive and mandarine are the major crops. Out of the overall market demand for some twenty fruits, Croatian production covers the needs in mandarines only. Table 3: Aggregated agricultural production (average ) unit Production Grains t 3,155,449 Oil crops* t 185,247 Vegetables t 920,713 Fruits t 145,092 Meat t 211,584 Beef t 39,383 Pork t 99,876 Poultry t 66,970 Mutton t 5,355 Milk mil, lit, 670 Sugar t 154,793 Vegetable oils t 46,153 *soy, sunflower and oil rape Source: Central Bureau of Statistic,

6 Livestock production in the Republic of Croatia is a particularly important branch of agriculture in which many producers are involved. Small production units, especially in cattle and swine production as well as in sheep, goat and horse keeping are dominant. In poultry production, big production units having special large-scale production of poultry meat and eggs are the norm. Cattle production is Croatia s main branch of livestock breeding and one of the most important branches of overall agricultural production. The ownership structure is dominated by family holdings in terms of the number of cattle, particularly cows and pregnant heifers. Croatia has a long-standing tradition in pork production. This segment is organized mostly at small production units, on family farms, within the activities of the mixed family holdings. Not many farms are specialized production units with up-to-date technologies and standard compliant (some family farms and big farms of legal entities). Most of poultry production as a livestock segment employs high production technologies and is self-sustainable. The production is organized in big production units of few producers who sometimes cooperate with specialized family farms, especially for poultry meat production. Self- sufficiency estimation is a common global indicator, which shows the level in which the national production satisfies the national market needs. Self-sufficiency analyses shows deficiencies of the most important agricultural products, especially in the case of mutton, pork, beef, milk, vegetables and fruit. Surplus is evident in the case of wheat, sugar, maize, wine and eggs. Croatian agriculture is at a very critical point where it will decide about its future direction. It should be mentioned that EU pre-accession funds and other measures designed in order to improve farm competitiveness are questionable in the current state of risk management and risk sharing markets. 3. General Framework 3.1. Legal framework of the insurance market in Croatia With the aim of establishing market relations, the Republic of Croatia has brought the first Insurance Act at the beginning of 1994, which has been updated several times in recent years by the amendment published at the beginning of 1997, at the end of 1999 and at the beginning of The newest Insurance Act was brought in December Under this law, insurance company management boards must have at least two members, and at least one member must have residence in the Republic of Croatia. The new Insurance Act, the Law on Mandatory Insurance on Public Roadways, the Financial Services Supervisory Authority Act (governing the supervision of insurance companies, brokers, agents, security companies and pension funds) and the Law of Obligations (with provisions relating to insurance policies as well as common provisions for non-life and 638

7 personal insurance) entered into force on 1 st of January All four laws represent greater harmonization with EU requirements and/or an improvement in existing regulations. Establishment of insurance companies Natural persons and legal entities may establish insurance public limited companies. Their individual holding with voting rights may amount to a maximum of 15% of total voting shares. Special approval by the Insurance Companies Supervisory Authority is needed for holdings that exceed over 15%. Other types of insurance companies may also be established under the Insurance Act: mutual insurance companies, captive insurance companies, public law insurance companies, insurance and re-insurance pools and branches of foreign insurance companies. Initial Authorised Capital and Activities The amount in domestic currency that must be paid when establishing an insurance public limited company or a branch of a foreign insurance company may not be less than: o o o o HRK 22,5 million (EUR 3,1 million) for life-insurance; HRK 15 million (EUR 2,06 million) for a single type of non-life insurance; HRK 22,5 million (EUR 3,1 million) for more than one type of non-life insurance; HRK 22,5 million (EUR 3,1 million) for re-insurance Control and Supervision The Croatian Agency for Supervision of Financial Services (HANFA) was established on November 28th 2005 (Official Gazette 140/05) as a legal adherent of the Insurance Companies Supervisory Authority. It issues operating licenses and monitors whether insurance companies carry out business activities according to the economic principles and regulations of the insurance branch. The Agency may revoke the license for some or all insurance activities if the insurance company does not comply with legal provisions. List of some important acts of the insurance framework: Insurance Act (Official Gazette No. 151/05); Obligations Act (Official Gazette No. 35/2005) Foreign Exchange Act (Official Gazette No. 96/2003) Health Insurance Act (Official Gazette No. 117/03) Automobile Liability Insurance Premiums and Comprehensive Road Vehicle Insurance Premiums Tax Act (Official Gazette No. 150/02) Money Laundering Prevention Act (Official Gazette No. 142/2003) 639

8 List of law acts that are closely connected with risks in agriculture, and risk management tools including agricultural insurance: Law on protection from natural disasters (Official Gazette No. 73/97) Methodology for estimation of natural disasters (Official Gazette No. 96/98) Law on protection and rescue (Official Gazette No. 170/04) Law of hail suppression (Official Gazette No. 53/01) Law on state subsidies for agriculture, fishery and forestry (Official Gazette No. 87/02, 117/03 and 82/04) Regulations on subsidies for insurance against damages in agriculture, fishery and forestry (Official Gazette No. 47/03, 6/04) 4. Market conditions The insurance business in Croatia has a strong impact on the total economic development in the country and it substantially contributes to the stability of the financial system. The dynamism of this sector ranks the insurance business among the sectors with the highest development potential. Total insurance premiums increase twice as fast as the average economic growth in the country, with life insurance growing almost four times faster (CCE, 2005). The insurance share of the Croatian financial sector s total assets is 5.4%, which is the third-largest share, after banks (79.3%) and leasing companies (6,3%). The insurance industry s share of gross domestic product is 3% (Banka, 2006). Currently, there are 26 licensed insurance and two re-insurance companies operating in Croatia. Table 4: Number of insurance and re-insurance companies in Croatia Year Source: Insurance Companies Supervisory Authority: Insurance market in Republic of Croatia, IX./

9 By type of activity, there are five companies in life insurance, seven in non-life insurance, twelve companies that offer both life and non-life insurance and two re-insurance companies. Although most of the companies are registered as composite companies, for six of them life insurance represents their major activity, while the other six have large shares of non-life insurance products in their portfolio. The growth and stability of insurance markets were also influenced by integration processes in terms of mergers of insurance companies for joint performance on the market. In the last ten years Croatian insurance markets have been scientifically changed. In the middle of the nineties, there were sixteen insurance companies in Croatia while ten years after that the number has considerably changed. Half of them have continued operating under the same title. Some of them ceased to operate, some were merged while others were acquisitioned by stronger companies and do not exist any more as such. Most of them after they have been bought operate under the buyer s name (Prima became Grawe, Adriatic-Allianz, Sava- Triglav). Insurance company Grawe Hrvatska merged with Slavonija osiguranje and Adria osiguranje - Insurance Company Mediteran osiguranje merged with Jadransko osiguranje. The companies Wiener Stadtische osiguranje and Kvarner osiguranje merged into one insurance company and now they are operating under the name Kvarner Wiener Stadtische osiguranje. The newest insurance acquisitions are acquisitions of Helios osiguranje by KWSO and Libertas osiguranje by Generali. The total number of 26 insurance companies in Croatia is unrealistically high so it can be expected that a further integrations process will take place along with an increase in market share of the largest insurance companies. Despite a great number of insurance companies, the insurance market is highly concentrated. The top 5 insurance companies according to gross written premiums are Croatia osiguranje, Euroherz, Allianz, Jadransko osiguranje and Osiguranje Zagreb, Their market share in 2005 was 73,5% of total gross written premiums. Figure 1: Market insurance share by written premiums (2005) Croatia osiguranje Euroherz osiguranje Allianz osiguranje Jadransko osiguranje Osiguranje Zagreb Other Source: Banka magazine, January

10 The largest insurer Croatia osiguranje holds a 40% market share (Banka, 2006). It is the only remaining insurance company under state ownership. Although a leader, its market share has decreased steadily during the last several years. In 2006, the company has stopped this negative trend by changing its business strategy (Privredni vjesnik, 2006). The Croatian Government, which owns 81 percent of the company, announced a plan of privatization untill the end of There is also a possible scenario of joining Croatia osiguranje with the Croatian Post Bank also owned by the Government. Croatia osiguranje is a leader in agricultural insurance with a share in gross premium of about 70% in crop and 60% in livestock insurance. Croatia osiguranje has a long tradition in agricultural insurance and a strong network of branches all around the country with skilled and experienced employees (in most of the cases, trained agronomists). All insurance companies in Croatia are organized as joint stock companies and their founders are natural and legal persons from Croatia and legal persons from abroad. Nevertheless, the Insurance Act permits other organisational forms (captive, public or mutual insurance companies). The arrival of foreign investors in the domestic insurance market has also had an impact on the development of insurance activities. It has raised the competitiveness of Croatian insurance companies, improved and increased the quality and diversity of insurance products and services. Fourteen insurance companies are majority-owned by foreigner. However, foreign companies share of the total insurance portfolio considering written premium does not exceed 25%. However, their share of the life insurance portfolio is considerable, amounting to over 50%. Table 5: Ownership of Croatian insurance companies considering assortment (September, 2005) Non-life insurance Life insurance Composite insurance Re-insurance Total Majority owned by Croatian natural and legal persons Majority owned by foreign legal persons Total Source: CCE Banking and Finance Department. ( According to unaudited data, total written premiums of Croatian insurance in 2005 was 7,37 billions kunas, which is 10.9% higher then in 2004 (Banka, 2006). During the last five years the strongest increase of total written premiums was accomplished in the segment of life insurance. 642

11 Table 6: Gross written premium (000 kunas) /2004 index Life insurance ,79 Total non-life insurance ,85 automobile liability insurance ,37 road vehicles-comprehensive ,22 property insurance ,91 health insurance ,00 accident insurance ,54 Total ,91 Source: Insurance Companies Supervisory Authority- Table 7: Share of total written premiums by type of insurance (%) Year life ins, 16,8 18,1 20,7 22,25 23,68 25,79 Total non-life insurance 83,2 81,9 79,3 77,75 76,32 74,21 automobile liability ins, 34 32,7 31,9 32,26 31,86 30,56 road comprehensive ins, 10,3 11,3 12,2 11, ,81 property ins, 17, ,2 15,69 15,43 14,17 health ins, 6,3 6,4 3,1 1,72 1,92 2,55 accident ins, 7,3 7,1 7,15 7,39 6,91 6,39 other non-life ins, 7,9 8,4 8,8 8,9 8,2 8,73 Total Source: Insurance Companies Supervisory Authority, These positive trends were influenced by an increase in business activities of insurance companies and economic policy measures including stimulus measures by giving tax relief when taking out life and voluntary health policy. In 2005, life insurance premiums increased over 20% (written premiums were 1.9 billion kunas). Due to this, life insurance share in total insurance portfolio is, for the first time in Croatia, over 25% (25.8%). Nevertheless, it is considerably lower then in country members of the EU where life insurance holds more than over 40% of the insurance portfolio. In addition, currently, only

12 20% of Croatian citizens have life insurance policies. Furthermore, compared to the more developed countries, Croatia has a lower value of life insurance policy per capita (58.7 USD). Therefore, insurance companies consider that the Croatian insurance market will significantly grow having a great selling potential. Slowly but constantly, life insurance becomes more frequent form of investing, after real estate investment and bank deposits investments. A permanent increase of written premiums is also reached in the segment of non-life insurance. The total amount of non-life written premiums in 2005 was 5.47 billion kunas, which is 7.9% more then in Although this growth is weaker, it was considerably higher then in 1999 and 2000 when the annual increase was 3-4%. Among the non-life insurance portfolio there is still the domination of obligatatory insurance. The highest share is automobile liability insurance with a share of 30.6% of total written premiums in Furthermore, large share exist in; property insurance 14.2%, road vehicles comprehensive insurance 11.8% and accident insurance 6.4%. Figure 2: Share of written premium by type of insurance (2005) other non-life ins. 9% life ins. 26% accident ins. 6% health ins. 3% property ins. 14% road comprehensive automobile liability ins. 30% Source: Insurance Companies Supervisory Authority In the period from January-September 2005 non-life insurance companies achieved technical profit of HRK million, while at the same time life insurance companies recorded technical profit of HRK million. Within the first nine months in 2005 the net financial result of the insurance sector in Croatia was a profit of HRK million which is an increase of 10.7% compared to the previous year. 644

13 5. General features 5.1. Insurance products available Agricultural insurance in Croatia is completely market based and optional for Croatian farmers. On a strictly commercial basis, farmers can insure their crops or livestock with the insurance companies. The Croatian insurance companies mostly offer hail insurance as a separate product or a combination of named-perils including frost and storm in addition to hail coverage. They also offer livestock insurance. In both cases, crops and livestock are guaranteed on market value. More then 90% of the premium resulted from the basic insurance coverage of hail, fire and lightening. Other, additional (like frost) or complementary coverage is very rare. In livestock insurance basic coverage (death caused by illness or accidence, emergency slaughtering and euthanasia) also prevails. Although a long list of livestock, animals and pets are subject to insurance, only a few, economically the most important ones, are of some significance in terms of number and premium. Those are cattle, pigs and poultry. Similarly, in crop production industrial crops and grains are of higher importance while fruit, vineyards, vegetables are relatively insignificant in terms of insured area and of somewhat more importance in terms of premium and insured sum. The premium system in crop production is determined by disaster, type of crop, insured sum, risk classes, insurance period, franchise, past insurance records, and payment methods (cash discount or paying in instalments). Crops are usually divided into classes according to crop susceptibility. Lower susceptibility to disasters mean belonging to a lower group (for example: root and tuber crops), while the most susceptive crops like fruit, wine grapes, planting materials and tobacco are in the higher premium groups. Risk classes are areas selected based on their loss history in the last three years. Loss result from 70 to 120% (Loss/premium) makes situation neutral. Less then 70% of the loss in the last three years cause area to go down one risk class while loss ratios higher then 120% makes the area go up one risk class. Therefore, premium depends on two dimensions: premium group and risk class. Premium rates through those two dimensions hold values from 0.5 to 25% or even higher in the case of additional quality insurance. Premium rate together with the insured sum gives the premium the farmer has to pay. The insured sum is the product of the expected yield and price and it is a matter of agreement. The integral franchise is usually 5%, meaning that a loss below it would not be reimbursed. Farmers could use another franchise from 5 to 15%. Franchise is computed per crop. In the case of a franchise the discount on premium could reach 50%. Premium discounts are possible in the case of a) multi-annual insurance (5% discount if insured will constantly use insurance for the period of 5 to 10 years, 10% discount for a 645

14 longer period; b) group insurance (for co-operations or contracted production); c) for the second crops on the same field in the same year; d) if the same crop is insured against perils from two different premium groups. In the cases from b) to d) the discount goes up to 20%. Although insurance companies usually do not apply bonus-malus system for crop insurance sometimes it is possible. For example, it could be applied in the case of multi-annual and group insurance. In livestock insurance bonus-malus is possible. Loss determination is simple but an expensive procedure. Loss determination is on a onetime basis or the more then one-time basis procedure depending on the loss, phonological stages and the period to harvest. Estimator (appointed by the insurance company) is responsible for loss determination. Steps in the procedure of loss determination are 1) preassessment (immediately after the risk event), 2) control (once during vegetation) and 3) final assessment. Percentage of yield loss multiplied by the insured sum, present the loss in monetary values. Loss determination is based on the sample criteria not the whole insured area. In the case quality is insured too, quality classes are encompassed in calculation in different percentage of their value. Loss amount depends also on the vegetation period in which risk occurred and possibility for replanting. The importance of livestock insurance is less then crop insurance. Basic risks covered by livestock insurance are death in consequences of illness or accidental, diseases and emergency slaughtering. Additional coverage includes stillbirth (cows and claves and mare and colt), therapy, quarantine, show and exhibitions. Premium in livestock insurance depends on: 1) animal species, 2) category of animal (fattening, breeding, egg production etc.), 3) level of risk, 4) insurance mode, 5) insurance coverage (franchise), 6) technical result (bonus- malus), 7) allowance and discount, 8) other basis according to the premium groups Levels of risk are a group of positive or negative factors that have influence on the animal (nutrition, transport, prevention). There are five levels of threat. They have been used for each of the premium groups. The specificity for particular animal species is indicated on premium groups. Using this premium system, insurance can be arranged as insurance on value or forms of insurance where the total annual animal production in large agglomerations is insured Due to this premium system, it is possible to insure particular tariff groups with participation of insured in damage (franchise). Tab for bonus-malus calculation Realized technical result Bonus and malus percentage < 70% Bonus 30% 5% 70%-100% Bonus 0% > 100 % Malus 5% - 30% 646

15 Bonus (decrease of premium) and malus (increase of premium) of each species and category of animal are determined according to the technical result. The technical result is a rate between liquidated damages and technical premium during the last three years. If the insured did not use the insurance during the last three years, bonus and malus could be set using the available period (one or two years). Rules that regulate the period for paying indemnity are prescribed in the insurance policy and generally it is within two weeks after the procedure of loss determination is finished. In the case of crops it is not before earliest time in which the crop would be ready to use in the case of no damage. The market failures of agricultural risk sharing instruments in Croatia restrict potential for efficient risk management and consequently generate a highly uncertain business environment. Apart from hail insurance, other forms of agricultural insurance products (index insurance, income or revenue insurance) and hedging instruments are of limited supply. Additionally, risk and low profitability often constrain external funds inflows causing fewer investments and deteriorating a farm s income stability and competitiveness. Although financial markets in Croatia exhibited impressive and fast growth rate, it still isn t the case in the rural financial market. Therefore government involvement in the agricultural insurance market seems to be necessary at the moment. Currently it is in the form of premium subsidies but other possibilities for government interventions in risk management market should be explored as well. In the year 2003 the premium subsidy programme for agriculture was established according to the Regulations on subsidies for insurance against damages in agriculture, fishery and forestry. According to the regulation the government subsidies 25% of the premium paid to the insurance companies. Participation in the program is open for all commercial farmers 1 Table 8: Premium subsidy 2004 (for 2003) 2005 (for 2004) 2006 (for 2005) Number of users Subsidy, kunas , , ,84 Source: MAFWM Premium subsidies increased the use of agricultural insurance as a risk management tool. But, the number of users (farmers that submitted request for subsidy) was still rather low compared with the number of commercial farms in the farm register (about 150,000). 647

16 Table 9: Agricultural insurance premium subsidy per production (2005) production Insurance policy, no Gross premium, kunas arable crop ,10 planting materials ,68 permanent crops ,35 livestock ,21 aquaculture ,18 TOTAL ,52 number of users 4583 Subsidy, 25% ,31 Source: MAFWM On the local level, counties also started with agricultural insurance subsidies. Some of the counties, like Zagreb County, subsidised other risk management tools like investment in hail nets. The level of subsidies depends on available budgets but in general do not increase past 25% of the paid premium. Municipality level subsides also can reach to 25%. All these subsides could be added together and total level of insurance premium subsides can in some areas reach 75%. Subsidies are paid directly to the producers while on the local level, in some places, subsides are paid to the insurance companies. As agricultural insurance is part of rural finance, one additional policy model will be mentioned here. It is in connection with insurance and is very important and relates to the role and influence of agricultural insurance on the lenders. It is the so called Capital Investment model. It is aimed at encouraging the development of business relations between commercial banks and farmers. It defines giving irretrievable capital to commercial family farms or natural and legal subjects registered in the Register of Farm Producers. The basic purpose of the model is that the Ministry of Agriculture and Forestry should award grants for investments to those commercial farmers who are entered in the Farm Register and who have been granted a commercial loan by a commercial bank for mid-term and long-term investments in agriculture, fisheries or forestry where the loan is not subsidized by funds from the state budget, the budget of local government units, regional government units or some other sources. Aids for investments are approved for commercial loans received and used for cattle breeding, setting up of permanent crops, forestation, Table 1. 1 The Law on state subsidy in agriculture, fishery and forestry based on minimal production capacity, classifies farms into commercial or non-commercial group and farms must register inside the register of country farms and estates or family estates. 648

17 developing and equipping of facilities for agriculture production, procuring of new equipment and mechanization for agriculture, building and equipping of facilities for storage of agricultural products and fish. The model can be described as attribution of 20 to 25 percent of the total investment and loan respectively. The maximum aid for investments can be 25% of the total value of the loan used but not more then 20% of the total investment value. 6. Coverage in the last years 6.1. Crop insurance coverage Importance of agricultural insurance according to its share in total property insurance (measured by gross premium) is relatively low. Maybe therefore data about agricultural insurance are scarce. Especially as it applies in the cases with regards to detailed data of a specific production area, production values and similar are requested. (?) Figure 3: Share of agricultural insurance in property insurance (2004) 0,64% 10,57% 1,72% 87,70% 1,09% Total non-life insurance Other non-life insurance Crop Insurance Livestock insurance Source: HANFA Hence, we have started with official data. It seems that the premium subsidy resulted in an increased premium in the year Such trends, even faster, continued in the year 2005 (gross premium of about 88 million kunas) and in 2006 as well. Table 10: Crop insurance, premium and damages ( ) Insurance Damages Number of policies Gross premium (000 HRK) Number Damages (000 HRK) , , , , , ,00 649

18 , , , ,00 Source: HANFA Loss ratio is above 1 (negative result) only in one year while in the other years it is below 1. Figure 4: Agricultural insurance gross premium and damages ( ) 70000, , , , , ,00 Gross premium (kn) Damages (kn) 10000,00 0, year Source: HANFA In order to present data per crop group of crops and livestock and to get a closer view in the situation we used data from Croatia osiguranje d.d., Ministry of Agriculture, Forestry and Water Management, Croatian Financial Services Supervisory Agency and expert advice as a final resort. Therefore, data below are not more then rough estimation. But such estimation could be assumed pretty accurate. Estimated data are the result of a survey conducted especially for this report and therefore we ll indicate it as the source of information. We ll shortly explain methodology. Croatia osiguranje d.d. is a leader in agricultural insurance and their data covers about two thirds of gross premium and damages. Croatia osiguranje d.d. share in gross premium in the period was 69%, 69%, 71%, 73% and 72% respectively. At the same period Croatia osiguranje d.d. share in damages was 83%, 83%, 88%, 90% and 88%. Based on the Croatia osiguranje data per crop type and livestock type we distributed the rest of the premium and damages on productions using different keys. Keys were largely based on the importance of specific crop and livestock types in other insurance companies portfolio. The average area under crop insurance is about 200 thousand hectares. Arable crops are the most represented. Grain crops with wheat and corn in particular and industrial crops with tobacco, oil rape, soy and sunflower hold more then 90% of insured area. Fruit in 99% of the cases refers to apple production. 650

19 Picture 2: Main insurance indicators (average ) 26,11% 0,56% Area 0,19% 1,32% 0,59% insured value 2% 4% 5% 1% 71,22% 30% 58% grain industrial crops vegetables grapes fruit other crops grain industrial crops vegetables grapes fruit other crops premium 12% 2% 18,60% 0,92% 23,47% 11% 37% 11,97% 2% 2,50% 42,54% 36% grain industrial crops vegetables grapes fruit other crops grain industrial crops vegetables grapes fruit other crops Source: Survey Expectedly, fruit, grape and vegetable has a larger share in insured value, premium and damages. The area under insurance has a slightly increasing trend. Real effects of premium subsidies are still not very evident but it resulted with higher growth in the following years. Use of crop insurance has been increased by policy actions toward incentives for investments in permanent crops as well. Picture 3: Area under insurance, ha ( ) grain industrial crops vegetables grapes fruit other crops Source: Survey 651

20 Table 11: Insurance indicators per crop groups ( ) Grain crops industrial crops vegetables grapes fruit other crops Total Insured sum (000 kn) , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,51 Premium, 000 kunas , , , , ,72 518, , , , , , ,89 685, , , ,48 786, , ,85 315, , , , , , ,40 664, , , , , , , , ,00 Damages, ha , ,36 105, ,62 495,83 40, , , ,55 257, ,89 446,04 74, , , ,31 33,92 725,89 486,19 7, , , ,93 197,47 636,55 633,24 82, , , ,93 158, ,93 147,80 9, ,15 Damages (000 kn) , ,61 638, , ,45 179, , , , , , ,03 184, , , ,44 552, , ,89 19, , , , , , , , , , , , , ,79 444, ,00 Source: Survey Fruit insurance is an especially sensitive insurance for insurance companies and fruit producers as well. Beside yield, fruit quality as a percentage of extra class fruits is even more important. Therefore, fruit quality insurance is necessary. But it is rather expensive (about 50% of the premium rate without quality included) and, on the other hand, according to the perceptions of producers do not cover fruit production enough. It means that fruit is not suitable for cooling and storing, the price is lower and producers lose customers in the year when damages occurred. Having negative results is repellent to insurance companies. In 652

21 addition, frost, the risk that regularly cause lots of damages on permanent crops, hardly satisfies conditions of insurability and insurance companies try to avoid insurance of that risk. Orchards established on positions that are unfavourable for fruits and lack of active frost protection like heaters, irrigation systems and similar makes risk management of crucial importance for fruit production Livestock insurance coverage Table 12: Livestock insurance Insurance Damages Number of policies Premium Number Damages (kn) , , , , Source: HANFA Livestock insurance is of somewhat less importance then crop insurance. It is mainly associated with production under contract like diary, meat processors (pigs, poultry and fattening cattle). 653

22 Table 13: Main indicators of livestock insurance ( ) cattle pigs poultry hoofed animal TOTAL Insured number , , ,49 294, , , , ,12 232, , , , ,53 151, ,86 Premium, kunas , , , , , , , , , , , , , , ,85 Damages, Number , , ,95 8, , , , ,02 7, , , , ,99 7, ,87 Damages, kn , , , , , , , , , , , , , , ,55 Source: Survey 7. Reinsurance Two reinsurance companies run business in Croatia. Reinsurance is privately based. According to the results of the survey non-proportional, stop-loss, reinsurance dominates. Reinsurance companies cover up to a certain amount of any part of total annual loss that exceeds an agreed deductible. Subject of coverage are damages caused by hail. Limits of coverage are divided in two layers: the first layer (30% technical premium above 120% of technical premium) and the second layer (50% technical premium above 150% of premium). Reinsurance rates are 6.9% of technical premium (first layer) and 2.4% of technical premium for the second layer. 654

23 8. Alternative risk management tools 8.1. Disaster aid The law on protection from natural disasters regulate actions (financial and other types of help) in the case of disaster. According to the law, disaster is a sudden and huge accident that severely interrupts everyday life, causes victims, property, infrastructure and/or environment damages in the extent higher then it is the local community s ability to eliminate consequences. Disaster could be caused by natural, technical, technological or biological events. By disaster earthquakes, 7 degree or more (Mercalli-Cancani-Seiberg scale), fire, floods, drought, hail, frost, high snow, snow drifts and avalanche, ice on the watercourses, land slides and similar phenomena which causes significant changes in everyday life are understood as a disaster. Figure 5: Structure of perils in the disasters 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% hail floods earthquake drought frost other Source: MAFWM To obtain aid some conditions should be satisfied. is the volume of direct damages must be higher then 20% of the local unit annual budget in the last year and the yield must be a minimum of 30% less than the three year average. Natural persons have a privileged right on disaster aid from the national budget sources while legal persons have it under special conditions. Most of the local governments do not have special budget item for disaster aid but they use current reserves for ad hoc aid. 655

24 Figure 6: Annual damages due to disasters , , , ,00 0, Source: MAFWM Average annual budget payment for disaster aid is about 18 million kunas. Year 2003 due to the extreme drought the government paid about 400 million kunas. But on the other hand, the loss assessment is much higher. Comparing loss and disaster aid payment it is evident that farmers get only a symbolic amount, namely about 2% of the total loss. Figure 7: Disaster aid as ratio between aid and estimated loss 25,00 20,00 15,00 % 10,00 5,00 0, Source: MAFWM The law and its goals are often criticisized. It is rather inefficient and can not accomplish its main mission - grants in the case of disasters. On the other hand it supplies reasons that could be used as a ground for prolongation of loan repayments, tax reductions, lower reference yields that serves as the base for production subventions, prolongation of the state 656

25 land rent and similar. The procedure in the case of disaster is complicated, slow, bureaucratic, time consuming and costly. Aid is more then symbolic and late. Coordination between local and national authorities is rather weak. The law on protection and rescue (Official Gazette No 170/04) replaced some parts of the law on protection from natural disasters. The above reasons have forced policy-makers to start with some changes and to try to improve the whole system. Modification of the system predicted some combination between insurance and government aid, kind of a catastrophic insurance. Modification alludes to government help which should cover from 25% of insurance premiums (to 50% in hillymountain areas, islands and areas of special state aid like less developed areas or areas damaged during the war). Counties, towns and municipalities, based on their financial strength, should also participate. And, of course, farmers with some percentage of the insurance premium! The whole process is still undergoing Hail suppression Croatia is settled in the mid latitudes of the Northern Hemisphere, and therefore is mainly exposed in summer months with a frequent occurrence of thunderstorms (20 years average is 76 days), especially in the continental part, between Drava and Sava rivers. Hail in this region is frequent with a high possibility for heavy damage. Mean number of days with hail is 34 and with damage from hail are 20 (Počakal, 2000). Within 22-years ( ) the average annual damage from weather disaster in Croatia amounts to 1,4 billion kunas. The most significant damages are caused by drought (39%). Damages caused by thunderstorm, hail, snow and frost amount to 31.2% (Molak, 2006). Starting from 1959, hail suppression was introduced to the entire territory of North Croatia (between the Drava and Sava rivers). It includes km 2 and is covered with 826 hail suppression stations. Today, hail suppression in Croatia is in force seasonally, from the 1 st of May till the 30 th of September. 9. Changes undergoing the system Croatian agriculture is at a crucial development point. European Union pre-accession process together with other external and internal economic processes urge for fast and rational development strategy. Agricultural premium subsidies at the national level started three years ago. Even though at that time a few counties had already started with similar subventions the real boom in premium subsidy on county and municipality level took place in the last two years. Today subsidies reach, on average, 50% and more in the majority of Croatia. For now it has positive effects and all indicators of insurance have been growing since the introduction of premium subsidies. Also, premium subsidies are still a relatively low budget expenditure (less than 1% of the national budget for agriculture). 657