Role of Government in Agriculture Risk Mitigation & Expansion of Insurance in India

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1 Role of Government in Agriculture Risk Mitigation & Expansion of Insurance in India Kolli N Rao 4 th October

2 OVERVIEW India: The Agriculture Setting India: Agriculture Insurance Architecture Agriculture Insurance Support Global Overview India: Support to Agriculture Agriculture Insurance Why Government Support? 1 1

3 India - Agriculture Setting 2 2

4 Indian Agriculture: The Setting 145 million hectares of cultivated land 120 million farm holdings Agrl. GDP estimated at INR trillion in (approx. US $ 325 billion) Agriculture sustains ~ 70% population; provides employment to 48.9% ( ) 62% farmers own less than ONE hectare 1.16 Hectare Average Farm-holding size Nearly 3/4 th 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 3 3

5 India - Agriculture Insurance Architecture 4 4

6 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 (10) are allowed, and enjoy same level of government support as Public Insurance Company (AICI) 5 5

7 Agriculture Insurance Support Global Overview 6 6

8 Agricultural Insurance Overview (2011) 7 Agricultural Insurance Premiums: Geographic Distribution Europe, US$ 4,000 Mio (19%) USA & Canada, US$ Mio (56%) Asia, US$ 6,600 Mio (23%) Africa, US$ 180 Mio (0,7%) LAC, US$ 770 Mio (3%) Aus & NZ, US$ 160 Mio (0.7%) (Source: World Bank) ESTIMATED-2014 Premiums : US$ billons USA, China, and Canada: 66% of the premium volume BRIC countries are fastest growing (US$ 7.5 billons) MPCI is the most important agricultural insurance product 7

9 8 Government expenditures in agricultural insurance-2011 Estimated Government Expenditures in Agricultural Insurance: Geographic Distribution Europe: US$ 1,500 Mio (37% of the total Agricultural Insurance Premiums) USA & Canada: US$ 8,600 Mio (63% of the total Agricultural Insurance Premiums) Asia: US$ 3,300 Mio (50% of the total Agricultural Insurance Premiums) Africa: US$ 1 Mio (3% of the total Agricultural Insurance Premiums) LAC: US$ 260 Mio (36% of the total Agricultural Insurance Premiums) Australia & NZ: US$ 0 Mio (0% of the total Agricultural Insurance Premiums) In average, the estimated public sector expenditures in agricultural insurance (US$ 11.5 billions) accounting for 59% of the total premiums written worldwide in 2009 (Source: World Bank) 8

10 Agriculture Insurance - Penetration 9

11 India Government Support to Agriculture 10 10

12 India: Government s Support to Agriculture 1. Input Support Fertilizer Irrigation Power Credit Insurance 2. Price Support Minimum Support Price Market Intervention Scheme 3. Infrastructure Support Rural Roads Warehouses & Cold storage Market Structure 4. Export Support 11 11

13 India: Government s Support to Agriculture Total Agriculture & Food Support: INR billion ( ) Fertilizer : INR billion ( ) Irrigation: ~ INR 140 billion ( ) Power: INR 323 billion ( ) Credit: INR 130 billion ( budget) Agrl. Insurance: INR Annual Average Budget: INR billion (XII Plan period); INR Annual Average: INR billion (XI Plan period) Food & Price Subsidy: INR 1290 billion ( ) 12 12

14 Insurance Penetration 13 13

15 Index Insurance: Numbers Program Farmers (Millions) Hectares (Millions) Sum Insured (US $ Millions) Premium (US $ Millions) Program Nature NAIS Adminstered WBCIS Actuarial MNAIS Actuarial TOTAL Source: Government of India NAIS Figures are Provisional (AIC) Note: 1.The sum Insured and premium size for was approx. US $ 12.5 billion and US$ 800 million, respectively 1.The sum Insured and premium size for was approx. US $ 14 billion and US$ 825 million, respectively 14

16 Agriculture Insurance Government Role 15 15

17 16 Rationale for Government intervention in agricultural insurance To Manage Natural Disasters To Mitigate the adverse impact of Climate Change Rationale for Government Intervention in agricultural insurance To stabilize income in rural areas To ensure Food Security To avoid ad-hoc disaster payments To have budget stability To use it as tool for rural development 16

18 17 Why government support to agricultural insurance is needed? Why government support to agricultural insurance is needed? Systemic Nature of Risk High Frequency of catastrophe events Information Asymmetries Lack of Insurance culture Existence of market failures Insurance industry capacity constraints High Cost of agricultural insurance Farmers affordability issues The above Constraints are most applicable to Developing Countries! BUT. The highest levels of Government Financial support to Agricultural Insurance are found in High Income Countries (North America and Europe) 17

19 Potential roles of the Government in providing support 18 to agricultural insurance Potential Government roles in supporting agricultural insurance Provide Legal & Regulatory Framework Enhancing Data & Information Systems Education and Capacity Building Linking with Other government programs Research & Development (Products) Public Premium Subsidies Catastrophic Risk Sharing / Risk Financing 18

20 Contact Kolli N Rao

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