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The Role Of Insurance In Risk Management And Investment Promotion Of Modern Agribusinesses (the Case Of Greenhouse Cultivation In Tehran Province)
Author: Mohsen Azari Aghviyeh, Gholamhossein Hosseninia And Mehran Rezvani
Publisher: International Journal of Management, Accounting and Economics
17 pages
One time payment: $0.00
Required subscription: Free
Language: English
ISBN: 2383-2126
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Providing food security, fulfilling the essential needs of the industrial sector, and creating employment opportunities are among the particular elements that have given rise to the significance of agriculture as one of the main economic sectors. Despite the importance of the agricultural sector in the country’s economy, activity and investment in this sector is different from other production and economic activities (Bingswanger, 1980; Anderson Foilion, 1992).

Risk management can enable the establishment and expansion of modern businesses in the agricultural sector. The objective of risk management is to mitigate the risks that will create obstacles in the way of production. Researchers have considered various strategies for risk management. For instance, (1) risk avoidance, (2) risk mitigation, (3) insurance, and (4) risk retention are among the most important risk management strategies. Insurance can be considered as one of the main risk sharing strategies.

Due to the low level of investment in the agricultural sector in spite of its importance in the country’s economy, and the role of insurance as one of the facilitating institutions for investment and the establishment of agribusinesses, the current research seeks to explore the role of insurance in risk management and investment promotion of agribusinesses.

Literature review

Risk management is one of the main elements of agriculture, such that the statesmen consider it as one of the objectives of agricultural sector policies. Risk management entails choosing among the existing alternatives in order to reduce the effects of risk. This requires a true understanding of risk that enables effective management during the loss occurrence, assessment of incidents and the interactions among risk changes, expected incomes, entrepreneurial freedoms, and other variables. 

Understanding some issues is essential to risk management: (1) risk event(s), (2) risk exposure, and (3) the cause of risk. In these situations, the risk mitigation strategies that can be employed include: (a) risk acceptance, (b) avoidance or elimination of risk, (c) risk transfer to another party, or (d) risk control. A risk that is not well identified and/or properly assessed hinders an investment opportunity and is considered a weakness in investment in the agricultural sector (Miller, 2008).

In order to develop agricultural risk management frameworks in the national level, Agricultural Risk Management Team (ARMT) provides technical assistance and capacity building services for customers. ARMT’s approach to the development of risk management frameworks, typically involves the following sequence (World Bank, 2013):

  • Risks assessment and prioritization: It is comprised of analysis of the major agricultural risks and their prioritization, based on probability of occurrence and severity of losses.
  • Market Risks: Risks such as commodity and input price volatility, exchange rate and interest rate volatility, counterparty/default risks are usually categorized in the market level. However, they have backward linkages to the farm gate, thereby affecting all stakeholders and shareholders.
  • Enabling Environment Risk: Changes in government or business regulations, macro-economic environment, political risks, conflicts, trade restrictions, etc. are major enabling environment risks that lead to financial losses.

Adoption of agricultural risk management frameworks by client countries could lead to high resilience and reduced vulnerability of the agricultural sector. ARMT helps client countries develop such frameworks through its technical assistance activities, which will result in the following concrete outcomes:

  • Overall analysis that identify the main risks and solutions, including the roles of different stakeholders in risk management.
  • List of investments, technical assistance, and policy issues required to implement the framework.
  • Filtering mechanisms to help prioritize interventions.
  • Institutional framework (developed with a client) to operationalize the risk management strategy.

Based on the investigation of previous research, the following elements can develop or hinder the greenhouse units.

Socio-cultural factors: appropriate cultural contexts (Hall, 2003), consumption culture (Hall, 2003; Satari Far, 2006), economical conditions and people’s purchasing power, customs, inappropriate financial foundations (Koupahi, 1994; Satari Far, 2006), aspiration for economic progress and capital investment, cooperation spirit.

Infrastructural factors: weather and climate, the geographical location of the place, land size and direction, road system and transportation, backup services and power supply networks (water, electricity, and fuel) (Barzegar and Allahyari, 2005), information reception systems.

Management and human resource factors: the manager or owner’s level of education and expertise (Safely and Hall, 2003), the method of workforce selection and recruitment, general training and awareness of the specialized issues of the greenhouse industry workforce, the market of products, inputs, and information resources alongside having accounting and auditing systems, cost and revenue management, leadership ability (Brom Fild, 2003), success factors including goal, plan, faith, and resilience.

Production technology factors: pest control, structural standards, heating and cooling systems, type of structure (Heravi, 2005), greenhouse covering, ventilation system, control systems, irrigation systems, type of harvest, harvest system, light and carbon dioxide adjustment system (Brom Fild, 2003).

Economic factors: existence of consumption and demand market (Koupahi, 1994; Hall, 2003), investment funding, economic motivations, funding resources, establishment costs, installments and payback period, variable and current costs, sales price and production risk.

Regulations and governmental support factors: factors related to commercial and market issues, consumer characteristics, existence of consumption and demand market for the product, diversity and quality of the product, planning for responding to the needs of consumers, harvest, maintenance, and supply systems, transportation and distribution systems, promotion, sales management and pricing, distance from the sales and consumption market, production input supply market (Esna Ashari, Harikiess, and Zokayi Khosroshahi, 2008; Safely, 2003; Hall, 2003).

According to Ortmann and Colleges (1995), the risk production sources include government policies, revenue fluctuations, access to credit, public rules and regulations, and cost fluctuations. They also introduce marketing, insurance, financial, cost reduction, and life assurance strategies as risk management strategies in their study.

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