EXPERIENCES WITH CROP INSURANCE IN INDIA

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1 EXPERIENCES WITH CROP INSURANCE IN INDIA Risks and Agricultural Insurance Evolution Insurance in India Performance of Yield and Weather Index Based Insurance Gap Between Supply and Demand for Insurance Concluding Remarks and Way Forward

2 Major Risk of Indian Agriculture High dependence on weather Up to 80% of variability in crop yields is attributable to weather Less than 40% of net sown area irrigated Affects adoption of improved crop production techniques because of high risks and low margins Extreme weather events in India (cold wave, drought, fog, heat wave, tropical cyclones, floods) Market and production risks make income unstable Access to formal financial services is limited

3 INCREASING VOLATILITY IN AGRICULTURE AND NEED FOR STABILITY The volatility of agricultural growth has been increasing (CV =1..1, and =1..6), which is six times more than the CV of overall GDP growth. Volatility arises due to various risks such as Production risks( weather, natural disasters, biological environment),market, Infrastructure, Policies and institutions, Politics etc. Agriculture is both, provider of food security and a source of livelihood, Its significance to the Indian state cannot be judged by the traditional yardsticks of economic contribution alone Growth in agriculture is at least two to three times more effective in reducing poverty than the same growth emanating from nonagrarian sectors and failure of agriculture leads to high distress

4 AGRICULTURAL RISK MANAGEMENT Approach Example Mitigation Coping Transfer Diversification of crops and livestock; resistant seeds, irrigation,avoidance of risky practices, and crop calendars etc Improving the resilience to withstand and manage events, through ex-ante preparation and making use of informal and formal mechanisms Insurance,which is a market based mechanism works best,if mitigation is at optimum level

5 WHY INSURANCE FOR RISK MANAGEMENT Traditional coping mechanisms and adaptation strategies like drought proofing are not always effective against aggregate climatic risk. Sub-optimal risk management strategies fail to protect the households in the eventuality of covariate adverse shocks and catastrophic idiosyncratic shocks. The vulnerability of resource poor farmers and landless agricultural labourers is aggravated by the multitude of uninsured risks in such conditions. It is imperative to design risk management systems to stabilize crop incomes by attenuating seasonal and inter-annual variability Production risk is most critical. Crop losses arising from production shortfalls/ crop output failure wipe out farm profits/price rise, and trigger a condition of distress.

6 EVOLUTION OF CROP INSURANCE SCHEMES IN INDIA Insurance Scheme Year Rain insurance scheme (Concept) 1920 Crop Insurance Bill and a Model Scheme 1965 Comprehensive Crop Insurance Scheme (CCIS) 1985 National Agriculture Insurance Scheme (NAIS) Modified National Agriculture Insurance Scheme (MNAIS) Weather Based Crop Insurance Scheme (WIBCIS) Pilot Coconut Palm Insurance Scheme (CPIS) National Crop Insurance Programme (NCIP)- consisting of MNAIS, WBCIS and CPIS 2013

7 AREA-YIELD INDEX INSURANCE IN INDIA Area-yield index insurance(ayii) An insurance where the indemnity is based on the realized (harvested) average yield of an area such as block/subdivision/ district etc. Major Area Yield Index Schemes Out -scaled in India: Comprehensive crop insurance scheme(ccis) National agricultural insurance scheme(nais) Modified national agricultural insurance scheme (MNAIS) to 2013 as pilot;2013- regular scheme as part of NCIP

8 PERFORMANCE OF CCIS, NAIS AND MNAIS (GOI,2014) Sum Insured (SI) (B Rs) Premium(P) (BRs) Claims (C) (B Rs) Claims Ratio (C/ P) Loss Cost (C /SI) ( % ) CCIS (28 seasons) NAIS (26 Seasons) MNAIS(6 Seasons)

9 NAIS: STATE-WISE BUSINESS STATISTICS: ,(FIGURES ARE IN MILLION) State Andhra Pradesh Farmers Insured Area Insured Farmers Benefitted Farmers Benefitted (%) Gujarat Karnataka Maharashtra Rajasthan Bihar All India Average=26.45 %

10 PROBLEMS ENCOUNTERED IN OPERATION OF YIELD BASED INSURANCE SCHEMES Crop cutting experiment issues: High number in MNAIS, and areal spread CCEs difficult to manage/administer; ensuring data reliability problematic. -Probability of loss based rationalization of CCEs number; Use of GPRS-enabled and camera-fitted hand-held devices and smart phones/mobile phones to record CCEs Premium related issues: High premium under MNAIS; Bundling of risks for fixing premium. No-claim bonus is absent -Better to identify the most critical risk and other risks may be covered as additional benefits! Consideration to no-claim bonus be given Adverse selection :Though reduced,but still exists. - Introduce multi year/season insurance contracts of 2-3 years at some discount in premium.

11 WEATHER INDEX BASED INSURANCE PRODUCTS EXPERIMENTED IN INDIA Weather index insurance is a financial product linked to a weather parameter (s) highly correlated to crop yield Weather index parameter Promoted by Total seasonal rainfall AIC during Kharif 2005 Weighted rainfall ICICI Lombard -2003and AIC-2004 and IFFCO Tokyo Multiple phase weather rainfall High temperature/low temperature ICICI Lombard,2004 AIC -IARI-2007,ICICI Lombard-2010 Weather insurance products lie at the crossover of agriculture, statistics, meteorology and economics, each of which is a specialized field

12 PERFORMANCE OF WIBCIS FROM TO (GOI,2014) Sum Insured (SI) (B Rs) Premium (P) (BRs) Claims (C) (B Rs) Claims Ratio (C/ P) Loss Cost (C /SI) ( % ) Kharif season Rabi Season

13 WBCIS: STATE-WISE BUSINESS STATISTICS: (FIGURES ARE IN MILLION) States Farmers Insured Area Insured Farmers Benefitted Farmers benefitted, (%) Andhra Pradesh Bihar Gujarat Karnataka Maharashtra Rajasthan All India=62 %

14 ISSUES AND MEASURES FOR UP- AND OUT- SCALING WIBCIS Confidence in weather data- Low density of weather station(77% farmers remained unsatisfied), low reliability and accuracy of weather data, from private, third party source. High basis risk. A system of accreditation, certification and quality monitoring of AWSs is required Improvement in product design- Incomplete agronomic data, which distorted pricing. Products need to be based on sound agronomic and statistical theory to achieve robust actuarial design and pricing Ex-ante investment behaviour- Shift to riskier, higher-yield production techniques- higher expected profits was expected,but no clear indication so far. Community based WIBCIS: More effective in case of small and marginal farmers, but out-scaling requires large number of dedicated organizations

15 WHY VAST MAJORITY OF INDIAN FARMERS ARE NOT INSURED? Low WTP Agri-insurance penetration (Premium/AGDP)=0.21 %

16 A CASE FOR COMPRESSIVE REVENUE ASSURANCE (RA) / INCOME PROTECTION (IP) PLAN More effective at stabilizing income A revenue-based program may also offer a simple way of assisting a wider variety of farms To match costs of risk protection with benefits and to base coverage on the market value of the item insured. Enhance possibilities to increase productivity and offset negative terms of trade trends. At country level high production sufficiency,but at household income sufficiency to improve access!

17 RESEARCH ISSUES NEEDING ATTENTION Whether insurance has improved household economy and livelihood opportunities to avoid distress? Has crop insurance promoted adoption of high risk- high income technologies? What is the price-value relationship of different schemes for lonee and nonlonee farmers? Why there is large gap between demand and supply of insurance products in spite of huge subsidies? Is it due to incomplete understanding of insurance purpose/ lack of suitable products/plethora of welfare programmes? Do farmers need something beyond production insurance?

18 LESSONS LEARNED IN AGRI-INSURANCE Technically demanding and requires in-country expertise Data requirement are exhaustive Long term data is a must Substantial investment in data base /infrastructure There is no universal insurance product-has to be modified as per need Bundling/packaging help reduce transaction cost-win win situation for the insurer and the insured Public-private partnerships are highly desirable-best use of technical expertise and financial resources Competition through multiple service providers- Results in lower premium Long term government commitment is a must- Crop insurance is partly government s responsibility

19 CONCLUDING REMARKS AND WAY FORWARD(I) Insurance alone cannot provide a sustainable solution to risk faced by smallholder s. Integrated approach including risk mitigation, risk transfer and risk coping is required. In developing countries insurance must be combined with credit. Success of agricultural insurance depends on spreading risks, which requires deep and extensive market penetration. If financial sustainability is the desired goal, then a balance has to be maintained between premium, subsidy and cap on SI. Otherwise insurance can lead to maladaptation. The knowledge gaps that lead to basis risk require continuous research efforts

20 CONCLUDING REMARKS ANS WAY FORWARD(II) Helping to avoid poverty trap and protection of bank credit is not enough. Real payoffs from insurance requires unlocking access to high-value markets, modern technologies and inputs, information, and credit. Community based insurance can help in deeper penetration. For small farm holdings, community based insurance through microinsurance provides better safety net and access to credit at low transaction cost. It has the potential to transform small farmers from subsistence to small scale commercial farming (eg contract farming). It will pay to build capacity at different levels within the country for large scale up- and out -scaling.

21 AN INSURANCE CONTRACT IS MORE DIGNIFIED AND RELIABLE THAN DEPENDENCE ON THE AD HOC GENEROSITY OF DONORS (PROVENTION CONSORTIUM / IIASA) Policies, technologies and institutions need attention for a win-win solution Thank you

22 TYPICAL RISK LAYERS: RETENTION, COMMERCIAL, AND CATASTROPHIC (CARTEL ET AL, 2014 )