Kolli Rao Index Insurance in India

Keynote 3 Climate Risk and Agriculture - Case of Indian Crop Insurance

KOLLI N RAO, PhD Indian Crop Insurance Industry Expert (IRICS / Aon Benfield)

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OVERVIEW

§  India: The Setting §  Insurance Penetration §  Crop Insurance: Challenges §  Research & Way Forward

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The Setting

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§  1.2 billion population §  Agriculture sustains ~ 70% population §  120 million farm holdings §  62% farmers own less than ONE hectare §  145 million hectares of cultivated land §  1.16 Hectare Average Farm-holding size §  50% of area under cereals and millets §  Agrl. GDP estimated at US $ 285 billions (FAO, 2010) §  Nearly 3/4th Rainfall received over FOUR months §  Disparity in the rainfall distribution is so great – droughts and

floods occur at different parts of the country at the same period and in the same place at different periods

§  1/3rd country is mostly under threat of drought §  1/6th country prone to floods

Indian Agriculture: The Setting

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India: Architecture of Crop Insurance Implementation •  Almost 100% INDEX insurance •  YIELD index and WEATHER index dominate •  Credit linkage, and mandatory for borrowing farmers •  Risk covered is based on production cost (safety-net) •  Insurance acts as collateral, and lending agencies have the first

lien on claim •  Minimal distribution costs •  Claims process is automated •  Yield estimation is done by the provincial government agencies ,

and based on ‘single series’ •  Weather data comes from both public as well as private data

providers •  Private insurance providers (9) are allowed, and enjoy same

level of government support as Public Insurance Company (AICI)

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Insurance Penetration

Index Insurance: Numbers 2012-13

       Note: 1.The sum Insured and premium size for 2013-14 is expected at US $ 12.5 billion and US $ 800 million, respectively 1.The sum Insured and premium size for 2014-15 is expected at US $ 15 billion and US $ 1.30 billion, respectively

ProgramFarmers  (Millions)

Hectares  (Millions)

Sum  Insured  (US  $  Millions)

Premium                        (US  $  Millions)

Program  Nature  

NAIS 15.45 29.92 5892.35 195.67 Adminstered

WBCIS 13.23 18.39 4038.47 379.45 Actuarial

MNAIS 2.98 2.97 1149.20 125.10 Actuarial

TOTAL 31.66 51.28 11080.02 700.22Source:  Government  of  India NAIS  Figures  are  Provisional  (AIC)

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Research Findings

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Research Findings

§  Weather Index products analyzed across the competing insurance providers show significant differences in product design, pricing approach, and benefits offered

§  The correlation appears better for Kharif products where rainfall is the key component, and the Weather Index product is underpaying. In comparison, Rabi products, particularly the heat (temperature) parameter show a poor correlation between weather and yield, and Weather Index product often overpaying

§  42% probability of Weather Index products giving payout with NO visible Yield loss; Only 73% probability of Weather Index products giving payouts when Yield loss is 100%

§  Spatial basis risk arising out of lack of adequate density of weather stations appears significant for rainfall

§  The present Weather Index product is complex and fares poorly as an insurance mechanism. The payouts ate too frequent and too small

§  Farmers practicing crop production under irrigated conditions have shown higher interest in crop insurance

§  The awareness about crop insurance is primarily driven by the level of education, size of landholding and type of farming

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Challenges

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Key Gaps and Challenges of Index Insurance

General §  Lack of Insurance culture §  Parallel government programs §  Full Value not insured (under insurance) §  Localized losses

Yield Index §  Larger Insurance Unit size and Basis Risk §  Lack of historical yield data at a ‘smaller unit’level §  Yield estimations prone to manipulation and local politics §  Large number of Yield estimation surveys & Quality issues §  Delayed claim settlement

Weather Index §  Too small and too frequent payouts §  Lack of Structured approach to Product design §  Basis risk: Spatial and Product §  Product targeting Micro level §  Pricing and Weather Cycles

Some Technical / Research Solutions …  Yield Index §  Yield Audit systems (GPS enabled equipment to record key

processes, near real-time reporting of results) §  Use of Satellite Imagery to estimate yields (either to corroborate /

peer monitoring / replace manual yield estimations) §  Use of Technology to down-scale historical yields (sub-district to

cluster of villages for major crops for past 10 years) §  Savings linked insurance products (for promoting loyalty of farmers) Weather Index §  Crop Growth Models §  Agro-Climatic zone level Crop-wise Product Templates §  Standardization of Weather Equipment and Maintenance §  Virtual Weather station network at micro level §  Double Trigger Products §  Index Plus Products