Agriculture Insurance in India

1. Agriculture Insurance in India

2. Crop Insurance market in India • 25 million out of 120 million farmers (20%) are insured under crop insurance schemes • 90% are loanee farmers. 10% penetration among non-loanee farmers • 2011-12 Weather Index Insurance – Perhaps the World’s largest weather-based crop insurance programme. 12 million farmers covered - Implemented in 16 states. • Area Yield Index Insurance - World’s largest Crop insurance programme, 18-20 million farmers covered Implemented in 25 states. • Government of India targets doubling the farmers’ coverage during 12th plan from 25 million to 50 million.

3. Background • Area Yield Approach suggested back in 50’s • Provinces mooted a proposal requesting GoI for financial assistance in the early 1960s. • Ministry of Food & Agriculture - examined the feasibility of crop insurance – Circulated a draft scheme to all the States – Not favored by states due to paucity of fund • Elaborate administrative machinery not available & paucity of resources – Each insured area to be divided into blocks with one Crop Insurance Inspector and 10 crop insurance sub inspectors. • Geographically homogeneous regions – Difficulty in delineating - absence of data on area-wise farming practices.

4. Background • GoI introduced a Crop Insurance Bill & a Model Scheme of Crop Insurance – referred to Dharam Narain Committee – stalled the progress. • Grounds – More emphasis on elements on “individual approach” • Breakdown of insurance principle – “ The number of claimants turns out to be nearly as large as that of the premium paying farmers”

5. Background • Admittedly, we came to consider it as second best as we found a crop insurance based on ‘individual approach totally impractical. Now, instead of making it impractical by importing into it elements of individual approach, we should accept it as the second best and agree to give it a fair trial”- Dandekar

6. Background • Mid 1980s onwards - Studies reflecting the dismal performance of all risk crop insurance programmes world-wide- Rainfall insurance suggested as a response to the unsatisfactory performance of crop insurance in the past decades. • CCIS in early Eighties • Modified into NAIS late nineties • A separate company constituted to implement the scheme • Further modified in 2010 as MNAIS • MNAIS is an Insurance Product and not a scheme

7. Background • World Bank (1992) – Drought insurance scheme for all rural households – All insured to pay the same premium and receive the same indemnity per unit of sum insured. • Pioneering work by J.S. Chakravarti (1920). • No insurance authority could ever maintain a supervising agency which would be able to watch and enforce that every insured field receives the required amount of care and attention at the hands of its cultivator. Unless some method can be devised by which this great difficulty is eliminated , a system of crop insurance would indeed be impossible”.

8. Background • “ A famine in India does not mean grain famine but money famine due to enforced unemployment of agriculturist owing to unfavorable seasonal conditions. An effective system of agricultural insurance by insuring the peasantry against serious pecuniary loss in respect of agricultural operations will render the country less liable to the ravages of famine. In this sense and to this extent agricultural insurance will also be famine insurance”  • First Weather Insurance product launched by private sector as an Insurance product • Govt. allocated subsidy to weather insurance

9. Present State : Area Yield Index Insurance • Area yield based approach. • Covers –Crops subject to availability of past yield data (10 years). • Mandatory for borrowing farmers/voluntary for others. • Capped premiums for FCOS (1.5-3.5 % of SI) and Actuarial rates for ACH crops. • Yields measured through Stipulated Minimum Crop Cutting Experiments (CCEs). • Ex-post financing for claims processing. (Not applicable in the modified version) • Guaranteed yield – 60%/80%/90% of past 3/5 yrs avg. • Sum Insured - amount of bank finance / value of guaranteed yield/ 150% of the value of Average Yield.

10. Area Yield Index Insurance • Guaranteed Yield TY = 3 year/5 year moving average yield X IL. • Linear trend resulting in low coverage and high premium rates. • Unusually good or bad years have high impact • Unrealistic uniform ILs/premium rates across the state. • Low coverage levels in areas with continuous adverse seasons. • Overstatement of yield in good years will increase premium rates despite low payment of indemnity. • Modifications • Detrended yield data • Moving Average Last 7 years yield data (excluding 2 calamity yrs).

11. MNAIS: Improvements over NAIS

12. WBCIS – Business Spread 2 mio 0.1 mio 15-18 mio 150 mio 6-8 mio 90 mio 0.2 mio 3-4 mio 4-5 mio 3-4 mio 5-6 mio 70 mio High 5-6 mio In terms of premium in $ mn 1-2 mio Low

13. State Specific Peculiarities

14. WBCIS – Market • States on the border line substitute WBCIS with MNAIS or NAIS • WBCIS claim ratios remain too low and the payoffs do not cover actual losses • States decide to reduce its subsidy burden by opting for MNAIS $ 800 mn weather insurance market $ 360 mn - Current weather insurance market $ 200 mn weather insurance market • States on the borderline bring more districts under WBCIS • More states bring horticulture crops under WBCIS • More competition pulls up the non loanee market

15. Rajasthan Termsheet

16. UP - Termsheet

17. Bihar Termsheet

18. Claim Settlement Mechanism • Over 2500 weather stations installed to settle weather insurance claims • Stations installed by approved third party administrators • AWS prototypes certified by the local Met department • State/provincial govts decide the no. of stations to be installed • Insurance Companies pay the data fees • Satlleite data being studied, fails to capture local variations • Crop cutting experiments to be independently audited by third party service providers

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