Public Support to Revenue Insurance and Income Safety Public Support to Revenue Insurance and Income

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Transcript of Public Support to Revenue Insurance and Income Safety Public Support to Revenue Insurance and Income

  • Photo Competition KANAT –רחובות \שגיא פייס : צלם -זריחה מעל שדה חיטה: שם התמונה

    Public Support to Revenue Insurance and Income Safety Nets

    Muamar Haj Yehia, Yael Kachel

    Seminar ENPARD 18-19.5.2016

    Ministry of Agriculture and Rural Development

  • Risk in Agriculture

    Ministry of Agriculture and Rural Development

    Farmers are exposed year round to a variety of risks:

    • market-related: such as price variations • non-market-related: such as unfavorable weather,

    pests, and diseases

     Such risks make agricultural production unstable, affecting the income and welfare of agricultural producers

     reduced long-term productive investments in agriculture

  • Factors Affecting the Demand for Agricultural Crop Insurance in Israel :

    Ministry of Agriculture and Rural Development

    • Liberalization of agricultural sector

    • The WTO regulations exempting governments from their subsidy reduction commitments, with regard to assistance to agricultural insurance

    • Farming becoming steadily more commercialized, with greater levels of financial investment.

    • New insurance products: creation of an insurance program that replaced disaster relief by the government

  • KANAT is the main provider of agricultural insurance in Israel

    Ministry of Agriculture and Rural Development

    • Founded in 1967 as a government company

    • KANAT ownership is held equally by the government and 14 marketing boards and farmers organizations

    • KANAT insures most of the crops and the livestock produced in Israel.

    • KANAT doesn’t pay dividends to the stockholders

    • Government subsidies of premiums to farmers and subsidies of reinsurance for KANAT

    Part of this presentation is based on a presentation provided by KANAT

    /http://www.kanat.co.il

    http://www.kanat.co.il/ http://www.kanat.co.il/

  • KANAT provides two main insurance schemes :

    Ministry of Agriculture and Rural Development

    KANAT offer two main lines of insurance: 1. Multiple Peril Crop Insurance (MPCI) – ביטוח נזקי טבע

    provides protection against a loss in yield due to unavoidable, naturally occurring events (e.g. hail, frost, flood( • Basic Insurance (collective) • Full Coverage Insurance (optional)

    2. Natural Disaster Insurance (NDI) – ביטוח אסונות טבע

    provides protection against a loss in yield due to unavoidable, naturally occurring events which are not covered under MPCI, including pests and diseases:

    • Basic Insurance (collective) • Full Coverage Insurance (optional)

    80%

    35%

    % government participation in insurance premiums

  • Revenue Protection Insurance

    Ministry of Agriculture and Rural Development

    Revenue insurance for rainfed wheat:

    • provides protection against a loss of revenue caused by price decrease, low yields or a combination of both

    • coverage guarantees an amount based on the individual producer’s actual production history or area production history

    • The price protection is established based on wheat prices on the Chicago stock market

  • Realized Risk Distribution (2006 - 2015)

    Ministry of Agriculture and Rural Development

  • Premium Income Distribution by Agriculture Branch (2015)

    Ministry of Agriculture and Rural Development

    Arable Crops, 8%

    Vegetables & Flowers,

    32%

    Livestock, 22%

    Orchards, 39%

  • Government subsidies for agricultural insurance and compensation payments

    Ministry of Agriculture and Rural Development

    0

    50

    100

    150

    200

    250

    2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

    M ill

    io n

    N IS

    Natural disasters: Compensation

    Natural disasters: Support for premium payments

    Natural damages: Compensation

    Natural damages: Support for premium payments

  • Revenue Insurance as a Substitute for Crop Insurance and Distortionary Support Policies

    Prof. I. Finkelshtain, Dr. Z. Bar-Shira, M. Haj Ihie, M. Rosenberg

    Department of Environmental Economics & Management, the Hebrew University of Jerusalem

    We appreciate: I. Financial Support from the Chief Scientist Fund of the Agricultural Ministry, II. Kanat (Israeli provider of crop insurance) for data provision and students’

    fellowships, III. The Research and Economic division of the Ministry for the analysis of farms’

    records data. IV. BARD for funding the extension of the research project (with Prof. Barry

    Goodwin).

  • How Risky are Farmers’ Profits in Israel

    • Despite the advanced technology that characterizes the Israeli agriculture, the sector faces considerable technological and market risks.

    • The annual cost of natural damages to agriculture is estimated at more than 500 million NIS, about 5% of agricultural GNP.

    • The CV of typical daily price series is well above 30%.

    .

  • 0

    50

    100

    150

    200

    250

    300

    0.05 0.16 0.27 0.38 0.49 0.59 0.70 0.81 0.92 1.03 1.13 1.24 1.35 1.46 1.57 1.67 1.78 1.89 2.00 2.11 2.21 2.32 2.43 2.54 2.64 More

    # of Farmers at each Risk Level

    The Distribution of farms’ revenue C.V.s Based on a sample of 2,800 farmers 2005-13.

    • The annual revenue fluctuation of the median farmer is above 80%

    • The cost of the risk,

    quantified by the Arrow-Pratt Risk premium is 2 billion $, about 15% of total revenue.

    Revenue Risk

  • The CV of the Median Farmer increased from 0.2 to 0.7.

    0.00%

    20.00%

    40.00%

    60.00%

    80.00%

    100.00%

    120.00%

    0 .0

    8 0

    .1 5

    0 .2

    3 0

    .3 1

    0 .3

    8 0

    .4 6

    0 .5

    3 0

    .6 1

    0 .6

    9 0

    .7 6

    0 .8

    4 0

    .9 2

    0 .9

    9 1

    .0 7

    1 .1

    5 1

    .2 2

    1 .3

    0 1

    .3 7

    1 .4

    5 1

    .5 3

    1 .6

    0 1

    .6 8

    1 .7

    6 1

    .8 3

    1 .9

    1

    A cc

    um ul

    at ed

    % in

    th e

    P o

    p u

    la ti

    o n

    CDFs of C.V.s

    2009-2013

    2005-2008 Median Farmer

    Is the Risk Increasing?

  • Counter-Risk Support Policies

    • The extent of counter risk-support policies in Israel is limited.

    • Estimated at about 0.66% of agricultural revenue as compared to 1.2% in the OECD, 5% in the U.S. and 4% in Canada.

  • Comparing Insurance Programs at the Farm Level Methodology:

    • We examined plantation and citrus farms.

    • Estimated (log normal) distribution of prices based on series of wholesale prices and (Gamma) distribution of yield based on Kanat data.

    • Based on Sklar's theorem, a joint distribution (Copula) was constructed with varying correlation levels.

    • Assumptions: conservative levels of risk aversion (r=0.3), and negative but small correlation levels.

    Efficiency Index:

    Results:

    1) Revenue insurance yields .

    2) Whole-farm revenue insurance is 10% (20%) more efficient than crop- specific revenue (crop) insurance.

    Profits C.E.

    Insurance Cost 

     

    1.4 

  • WTO Revenue Insurance at the Sector Level Based on the above sample, the cost of providing revenue insurance to the sector at the maximal level which is allowed by the WTO (but indemnity< 1 million NIS) is about 1.1. billion NIS.

    0.00

    0.50

    1.00

    1.50

    2.00

    2.50

    0

    200,000,000

    400,000,000

    600,000,000

    800,000,000

    1,000,000,000

    1,200,000,000

    1,400,000,000

    0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

    N IS

    Cost-Benefit (WTO) whole Farm Revenue Insurance

    עלות הביטוח

    תועלת מהתכנית

    מדד יעילות

    0.7

    % of covered damage

    Insurance cost

    Change of C.E.

    Efficiency Index

    1.55 

  • Conclusions & Policy Recommendations • Farming in Israel is very risky business.

    • The magnitude of counter risk support policies of the Israeli government is low.

    • The return for 1 NIS investment in whole farm revenue insurance is about 1.5 NIS ( the rise in farmers’ C.E.)

    • The cost of providing whole farm revenue insurance for the entire sector is about 1 billion NIS, seems plausible as part of the general reform in support policies.

    • Recommendation: work with KANAT to expand the agricultural insurance programs in general and revenue insurance in particular.

  • Questions for Discussion - Insurance

    1. Importance of support for insurance: what are the costs and benefits?

    2. Whole fa