Investigating the Role of Agricultural Insurance on Iran's Rural Economy with Focus on Agricultural Sector

The rural economy, especially its agricultural sector, is facing various risks and policies. Support tools, in such conditions, play an important role in maintaining its economic growth. Although the rural areas of Iran are the environment of industrial, service and agricultural activities, according to the share of employment and income sources of the villagers, the dominant economic activity in these areas is agriculture. For this reason, in comparison with industry and services, any changes that occur in the indicators related to the agricultural sector will have a greater impact on the level of development of the villagers. Risk and uncertainty are considered to be prominent features of economic activities. Risks can be of natural origin (natural risk) or economic origin (market risk). The agricultural sector is more susceptible to both natural and market risks than industrial and service activities. Examining the relationship between insurance and economic growth has shown that the insurance industry affects economic growth through 5 different channels (facilitating trade and commerce, effective risk management, strengthening financial stability, equipping domestic savings and support) in direct and indirect ways.

In this study, the Fully Modified Ordinary Least Squares (FMOLS) estimation method was used to investigate the effect of agricultural insurance on the value added of Iranian agriculture. The time period is the annual data of 1989-2019, and the required statistics are from the systems and reports available on the website of the Central Bank of Iran (www.cbi.ir), the website of the Iranian Statistics Center (www.amar.org.ir) and the website of the National Productivity Organization of Iran (www.npo.gov.ir). The penetration rate of agricultural insurance has been calculated using the available statistics. E-views software was used to estimate the desired regression model.

The results of the study have shown that statistically, the variables have positive and significant effects according to theoretical expectations on the economy of the agricultural sector of Iran:The agricultural net capital stock has a positive and significant effect on the value added of the agricultural sector (1.02); so that with an increase of one percent in the agricultural net capital stock, the amount of value added of the agricultural sector also increases by 1.02 percent. In fact, more investment and increasing the amount of capital stock provides the necessary platform for the expansion of production activities in the agricultural sector.The estimated coefficient for the agricultural labor force (0.04) indicates that the role of the agricultural labor force in the economic added value of this sector is positive, significant, but small. With an increase of one percent in the agricultural labor force, the amount of the value added of the agricultural sector also increases by 0.04 percent. Increasing the use of human resources, on the one hand, will lead to the timely performance of operations related to the production of products and its increase, and on the other hand, the use of skilled labor will increase the amount of production in this sector by increasing human capital.The positive and significant coefficient of the productivity variable of the net agricultural capital stock (1.03) shows that with a one percent increase in the productivity of the net capital stock in the agricultural sector, the amount of economic value added of this sector also increases by 1.03 percent. The effects of productivity of production factors, including capital, on economic growth and agricultural value added from two channels show an increase in production and a decrease in their respective costs, which is an expected issue in the evolving agricultural production method of Iran.The effect of agricultural labor productivity on the value added of the agricultural sector has become positive and significant (0.01). So that with a one-percent increase in the productivity of the agricultural labor force, the amount of value added of the agricultural sector will increase also insignificantly (0.01 percent).The variable of agricultural insurance penetration has a positive and significant effect on the value added of the agricultural sector (0.01). So that with an increase of one percent in the insurance penetration variable, the amount of value added of the agriculture sector also increases slightly (0.01 percent). The effect of agricultural insurance on its economic growth by compensating a part of production costs (in case of damages) and giving assurance to agriculture in the face of possible risks, preserves farmers' production incentives.

Considering the high share of agricultural activities in the total economic activities of rural areas of Iran, adopting any policy and implementing any type of action that will lead to the strengthening of value added and, as a result, the economic growth of the agricultural sector, will also strengthen the rural economy.The results of the estimation of the regression model of the value added of Iran's agricultural sector indicate a positive and significant effect of the desired variables (agricultural net capital stock, agricultural labor force, agricultural net capital stock productivity, agricultural labor productivity and agricultural insurance penetration coefficient) in the period of time. This is about the value added of agriculture and as a result, the economic growth of this sector.Although the positive effect of the penetration coefficient of agricultural insurance on the amount of value added and, as a result, the economic growth of Iran's agricultural sector during about three decades of the implementation of the agricultural insurance program, has revealed the importance of insurance in the process of economic growth of this sector, the low coefficient of its effectiveness (0.01 percent), can express several issues:Agricultural insurance in Iran has not yet adequately covered all agricultural products and assets.The amount of insurance support does not answer all the risks in Iran's agricultural sector (market and non-market).The implementation of the country's agricultural insurance programs and policies, despite the high share and extensive cost burden on the government's annual budget (for example, more than 3200 billion tomans in the 2021 budget to pay the government's share to the agricultural products insurance fund), is not targeted and it has encountered deviations in implementation.It should be noted that Iran's agricultural sector (as in many other countries), unlike the country's industry and service sectors, does not have the required capacity and infrastructure for the development of private insurance related to production, and the policy of agricultural insurance development until meeting the necessary conditions, should be carried out through the state sector and increasing its participation.It will be very necessary to adopt a set of policies and measures that prevent capital outflow from the agricultural sector in particular and rural areas in general (through improving the exchange relationship between the agricultural sector and rural areas with other economic sectors and urban areas).