Integrated Insurance & Risk Mitigation solution for diary farmers


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Integrated Insurance & Risk Mitigation solution for diary farmers

  1. 1. Technical Note Integrated Insurance & Risk Mitigation Solution for Dairy Farmers Technical Note Integrated Insurance & Risk Mitigation Solution for Dairy Farmers Anupama Sharma, Avishek Gupta, Jai Mohan M**Anupama works with IFMR Research’s Centre for Insurance and RiskManagement (CIRM). CIRM designs and disseminates formal risk managementsolutions for low income households in partnership with several risk carriersand design partners.Avishek works with a dairy supply chain focused company called the DairyNetwork Enterprises (DNE) which is being incubated by IFMR Ventures. DNEuses a combination of financial investments, technical support and businesslinkages to complete the dairy supply chain.Jai Mohan works with IFMR Rural Finance in new product development andprocess innovations. IFMR Rural Finance is working towards creating a networkof Regional Rural Financial Institutions called Kshetriya Gramin FinancialServices (KGFS).*The views presented in this technical note are solely those of the authors and do notin any way reflect the views of organizations they work for.
  2. 2. Technical NoteIntegrated Insurance & Risk Mitigation Solution for Dairy Farmers 2
  3. 3. Technical Note Integrated Insurance & Risk Mitigation Solution for Dairy FarmersCONTENTSBackground ...................................................................................... 5Issues in Cattle Insurance ............................................................... 5Desirable features of a Cattle Insurance product ......................... 7Cattle Insurance Product offered at KGFS ................................... 8Economics of Cattle Insurance .................................................... 10Role of stakeholders ...................................................................... 11Conclusion and Way Forward ..................................................... 13History of Cattle Insurance Products in India ............................. 15Screenshot of Herdman Software ............................................... 16 3
  4. 4. Technical NoteIntegrated Insurance & Risk Mitigation Solution for Dairy Farmers 4
  5. 5. BackgroundLivestock rearing is central to the livelihood and survival of millions Technical Noteof small and marginal farmers and landless agricultural labour across Integrated Insurancethe country, particularly in the dry land regions of India. As livestock & Risk Mitigationrelated activities help to maintain a daily inflow of income for these Solution forhouseholds, livestock economy is a source of self-insurance for Dairy Farmersfarmers. It also provides a diversified source of income and mitigatesthe uncertainties of seasonal income from their traditional sourceslike agriculture.Despite vaccination schemes and efforts to propagate livestock rearingby the government, livestock remains a risky business due to nonavailability of timely inputs for health care of animals1, lack of suitableeducation/training in rearing for skill development; inadequate financesand poor rural infrastructure for veterinary care. As the risk reductionstrategies have not developed well (in the form of proper vaccination,de-worming and curative measures) a key concern therefore remainswhether and how the poor in countries like India can be shieldedagainst risks faced by them on livestock for income. Many householdsare pushed into poverty once they lose their livestock to disease,scarcity of water and fodder and it is often impossible for them torebuild their stock.Of the livestock rearing the rural population is involved in, dairying isa predominant occupation of the people in rural India. As a result ofwhich, dairy cattle is the major livestock that small holders possess.Hence, a cattle insurance product is possibly the most widelyrecognized and most needed livestock insurance product.Issues in Cattle InsuranceCattle Insurance has been plagued by adverse selection and moralhazard leading to high premiums to cover the losses accrued and/orexpectation of losses. The major challenges faced by cattle insuranceproduct in India are:a) High Transaction Cost:! High incidence of fraud in claim settlement process: A number of fraudulent practices are rampant in the cattle insurance sector. As a result of the high incidence of fraud, the insurance companies are forced to adopt cautious measures at the time of policy issue and claim settlement. This leads to an increase in insurance premium making it unaffordable for dairy farmers.! Moral hazard: Cases of farmers letting animal die and claiming insurance is not uncommon. The skin and hide of the dead1 Report on 10th Five year plan by Planning commission of India, Chapter 5,section 5.2.17 “Livestock services” 5
  6. 6. animal are sold off resulting in a net positive income from death of the animal. Technical NoteIntegrated Insurance ! High operational cost: Operational factors like issuance of policy & Risk Mitigation cover and settlement involves a lot of paper work and is Solution for manpower intensive. This increases cost of issue of a single Dairy Farmers insurance cover which in turn affects the premium charged. b) Lack of information: ! Absence of dependable historical data on mortality rates in different locations: Neither government departments nor insurance companies have actual data pertaining to the mortality of milch animals year-wise. The little data that is available with the public insurers is not digitized and hence not in a usable form. ! Lack of information about the coverage of Vaccination Programmes: Though a lot of government and non-government programmes actively promote preventive cattle healthcare, concrete data is not available on their coverage. Hence, the benefit of such programmes is not passed on to the farmers in the form of reduced premium for cattle insurance. c) Unfavorable Coverage terms: In the conventional cattle insurance products, the cover for cattle insurance often does not begin immediately on payment of the premium. Moreover, it takes around 40-60 days to get the claim settled in the event of death of an animal. The initial periods of non-coverage and delay in settlement ends up exposing the farmers to financial shocks which the cattle insurance products actually try to provide protection against. d) Poor risk reduction strategies: Due to financial and operational constraints, at times, Government institutions are not able to deliver most of the preventive livestock support services like, vaccination and de-worming. Though the government understands that there is a compelling need to improve dairying and animal husbandry sector, the efforts are very thinly spread. All this increases the risk perception and experience of insurers leading to a high premium. e) Demand related challenges: Ability and willingness to pay the insurance premium is a major area of concern which is aggravated by the high premium rates for cattle insurance. The unwillingness to pay is again due to lack of awareness about the benefits of taking the product. 6
  7. 7. Desirable features of a Cattle Insuranceproduct Technical NoteAs evident from the previous sections, there is a need to revisit the Integrated Insuranceexisting product structure and delivery of the Cattle Insurance product. & Risk MitigationThe product envisaged should blend innovation in both product Solution for Dairy Farmersand processes leading to a comprehensive risk mitigating tool forthe dairy farmers. Such a product should enable access to dependableinformation for insurance companies, access to preventive healthcareservices for farmers, utilization of electronic setup for fast processingand should reduce moral hazards by multiple procedural and productrelated innovations.Taking all of the above into consideration, an innovative cattleinsurance product has been developed which is now being offeredby HDFC Ergo GIC Ltd through Kshetriya Gramin Financial Services(KGFS) in partnership with a local Dairy Healthcare Services enterprisesupported by the Dairy Network Enterprise (DNE). A brief introductionto the different entities involved in the delivery of the product isgiven below.Kshetriya Gramin Financial Services (KGFS) are localized financialservices entities promoted by IFMR Rural Finance2 which providehigh quality financial products and services in remote rural parts ofIndia. Their customer centric model entails that they develop a deepunderstanding of their customers so as to offer customized financialproducts and services. The geographical focus enables them todevelop a deep understanding of the needs of the customers anduse the same to offer relevant financial products to their customers.Each rural branch of KGFS, which serves a population of 2000households3, is manned by two or three Wealth Managers (WM).The Dairy Network Enterprise (DNE) is a dairy supply chain focusedcompany being incubated by IFMR Ventures4. The DNE is trying toimprove access to finance for dairy enterprises. This might entailsupply chain interventions such as training, technology support andbusiness linkages.Dairy Healthcare Services Provider is a DNE accredited local entitywhich partners with the KGFS to provide support for criticaloperational aspects of the product like cattle registration, assessingthe health of animals, and delivery of preventive healthcare facilitiesat the farmer’s doorstep. The DNE trains the personnel and equipsthem with the necessary devices required to perform the tasks.2 IFMR Rural Finance is a Brand Name of IFMR Holdings Pvt Ltd, whollyowned subsidiary of IFMR Trust.3 For More details on KGFS , please visit - For More Information please visit - 7
  8. 8. HDFC ERGO General Insurance Company Limited is a 74:26 joint venture between HDFC Limited, a Housing Finance Institution and Technical Note ERGO International AG, the primary insurance entity of Munich ReIntegrated Insurance Group. & Risk Mitigation Solution for Dairy Farmers Cattle Insurance Product offered at KGFS While designing a livestock product for KGFS, the major objective was to reduce adverse selection and moral hazard coupled with introduction of risk reduction methods. It was ensured that the product addressed all the concerns and short comings of the current offering to the best extent p ossible and hence be more relevant to the rural households. The salient features of this insurance product are listed below: a) Use of Radio Frequency Identification (RFID) tag for tagging: Electronic RFID tags are being used for the purpose of identification of cattle. The RFID tags are uniquely coded as per ICAR5 standards. The usage of RFID tag permits faster and error free reading of tag number and also enables immediate electronic recording of cattle data. RFID tags are cheaper and more convenient than other methods of unique identification like retina identification. It is, however, costlier than options like bar coding. Usage of bar coding for the purpose of cattle identification is limited by the fact that any scratch on the surface of bar codes or dirt accumulation would impair readability of the tags. The same RFID tag is being used to store data on details of the cattle with respect to healthcare, breeding, feeding. This would enable recording of entire history of cattle around the unique code which would lead to future benefits in cattle valuation and breed improvement. b) Health services along with cattle insurance: Each cattle is guaranteed access to basic preventive healthcare measures in the form of de-worming and vaccination required to maintain the health of the animals a year. A detailed history of de-worming, vaccination and health records of the animals is maintained in dairy health and productivity management software called Herdman6 which has been customized to suit the needs of the cattle insurance product. 5 International Committee for Animal Recording (ICAR) is an international body which aims to promote the development and improvement of the activities of performance recording and the evaluation of farm livestock. 6 Herdman is Dairy Cattle Health and Productivity software developed by Infovet. DNE worked with Infovet to build the insurance and RFID modules in the software. 8
  9. 9. Figure 1: Process flow of Cattle Insurance Technical Note Integrated Insurance & Risk Mitigation Solution for Dairy Farmersc) Use of electronic cattle registration and real time data upload system: The registration of animals is taken care of by the health and productivity management software that has been customized for use. This reduces the paperwork in the issuance of the policy and thereby reduces the operational cost.d) 85% coverage: Upon death of the cattle, only 85% of the value of cattle is paid out. This acts like a deductible in health insurance and is expected to minimize the risk of moral hazard like letting the animal die.e) Integration of systems: The process is designed in such a way that the Dairy Health and Productivity Management Software of DNE, the Customer Management system (CMS) of KGFS and the policy issuance system of HDFC Ergo are integrated real-time so as to enable an on the spot issuance of cattle insurance policy – A first time in this market in India.f) Claim Settlement Process: Should there be a claim upon death of the animal; the KGFS WMs play an important role in verifying the genuineness of the claim and coordinating submission of documents. This expedites the claim settlement process making the claim settlement take place within 72 hours of the death of the animal. This process reduces the long Turnaround time (TAT) for settlement that exists in the products available in the market. 9
  10. 10. Economics of cattle insurance Technical Note Insurance Premium charges:Integrated Insurance & Risk Mitigation The cattle insurance that are currently offered by most insurers are Solution for in the range of 4% to 5% for a one year policy and are around 12% Dairy Farmers for a 3 year policy. Due to the risk mitigation mechanisms and cost reduction mechanisms proposed in this product, a reduction in the premium has been made possible. The product offered at KGFS is priced at 2.9% for a year and 7% for 3 year policy. Table 1.1: Comparison of existing and the IFMR-HDFC product cattle insurance product Value of cattle Existing IFMR-HDFC Products Products (Rs.) For 4%7 5% 7 All Inclusive8 Premium Premium (Rs.) (Rs.) (Rs.) 10000 400 500 510 15000 600 750 655 20000 800 1000 800 25000 1000 1250 945 Dairy Healthcare charges: It is a common practice for the veterinary doctor’s to charge anywhere between Rs.100- Rs.150 for a visit to the doorstep of the farmer. In order to get the cattle vaccinated outside the schedule of the Government would require the farmers to take the animals to the nearest veterinary dispensaries. This not only results in inconvenience and loss of wage but the farmer also incurs cost in carrying the animal to the nearest veterinary dispensary. In cases where the vaccination is done by a private veterinary doctor, the farmer has to arrange for at least 10-15 more cattle to get vaccinated at the same time or else one farmer will have to bear the cost of the entire bottle which costs anywhere between Rs.140-Rs.180 for one vaccine. In case, the cattle is not vaccinated and it gets affected by any of the diseases it may result in permanent reduction in milk productivity along with treatment charges and sometimes even death. The Dairy healthcare package provides two vaccines and two de- wormers at the doorstep of the farmer over the period of a year for a total cost of Rs.220. 7 Does not include charges for the doctor or other processing charges which varies between Rs.100-Rs.200. 8 The charge is inclusive of the premium and the Healthcare Package charges. The package includes not just vaccines and de-wormers but also includes charges for the doctor and the RFID tag charges. This charge is for coverage of 85% of the value of animal. 10
  11. 11. Role of stakeholdersThe role of each of the stake holders in this innovative product Technical Notedesign and structure are given below: Integrated Insurance & Risk Mitigation Solution forRole of KGFS Dairy Farmersa) Increasing awareness about product: KGFS on enrollment of a customer as its client collects all the details like, house hold cash flows, asset, liability details etc. So, they have the details pertaining to the livestock pertinent to all their enrolled customers in the area. This helps them to communicate all the details of the product to the relevant group of clients.b) Reduction in moral hazard: KGFS branches have a close local presence. Owing to this, the KGFS WMs have become an integral part of the social fabric of KGFS villages. This, together with the stress on Know Your Customer (KYC) norms makes KGFS a more effective agency in reducing cases of moral hazard.c) Customer verification: KGFS have Unique Reference Numbers (URN:) for all their clients. For all the cattle being insured with KGFS, the respective tag no’s are assigned to the URN of the client. This links the households with their livestock assets and acts as a double check.d) Funding for Cattle Insurance premium: KGFS on its part would advocate the benefits of the product and would fund the premium, if necessary through easily repayable small loans to the clients.e) Quick Claim Settlement: KGFS makes the payment to the client within 72 hours of intimation of the claim after the same has been admitted by HDFC Ergo. 11
  12. 12. Role of DNE Technical NoteIntegrated Insurance a) Maintenance of electronic platform for the & Risk Mitigation product: Solution for In order to enable on the spot issue of insurance policy, it was Dairy Farmers necessary to develop a system where the animal registration is done at the customer doorstep and the data reaches the insurance company in real time. A system was also required to track health and productivity related details of each animal to ensure that the basic preventive measures were being taken care of. The DNE has worked with partner Software Company and customized the Dairy Animal Health and Productivity Management Software which enables registration of animal and also enables real time upload of data for the insurance company to issue the policy. The software also maintains detailed records of preventive healthcare measures taken. Over a period, it would also have concrete data on mortality rates of insured animals. b) Training of Local Dairy Healthcare Services Provider: DNE trains the Local Dairy Healthcare Services Provider in performing the tasks of cattle registration, scheduling for vaccination and helps in setting parameters for the different activities to be performed by the local entity. c) Linkage for inputs and equipments: The DNE provides the linkages for the vaccines, de-wormers and other equipments required to the local dairy healthcare services provider. The DNE also takes care of the hardware and software requirements of the product. Role of Local Dairy Healthcare Services Provider a) Approval of Health Condition of dairy animal: DNE accredited veterinarian verifies the health of the animal. The veterinarian allows only healthy dairy animals to be tagged and issued insurance. The veterinarian also ascertains the age of the animal and records other identification details. 12
  13. 13. b) Tagging of cattle using RFID ear tags: In order to ensure that the each animal is identified with a Technical Note unique Identification number, ICAR certified RFID Ear Tags are Integrated Insurance being used instead of plastic tags. The tags have a unique code & Risk Mitigation which cannot be allocated to any other animal in the world. The Solution for RFID tag enables fast and error free recording of tag numbers Dairy Farmers and immediate recording of cattle details in electronic form. The same tag may be used for multiple uses like for Healthcare data recording, breeding data recording and other requirements for the same animal. Usage of such unique ID for identification of cattle is a step ahead in the direction of ensuring availability of complete history of cattle during its lifetime. This would lead to benefits like better suited premium rates and clear knowledge about valuation of each cattle in future. Moreover, the Dairy Health and productivity Management software has been designed in such a way that if the veterinarian has to issue cattle insurance or update data about vaccination being done on a particular animal, s/he has to visit the animal and read the tag. Only then can s/he update the data that the animal has been vaccinated. This reduces chances of veterinarian not administering vaccines but simply entering the data that the animal has been vaccinated while at his/her office.c) Dairy Animal Registration and maintenance of records: The Local Dairy Healthcare Services Provider is entrusted with the responsibility to register healthy cattle for the purpose of insurance. The details of the cattle are entered into an electronic form on the data entry device and uploaded whenever internet connection is available.d) Access to Preventive Healthcare Support: Dairy Healthcare Services Provider ensures that the customers are able to have easy access to preventive healthcare facilities like de-worming and vaccination at their doorstep. De-worming and vaccination acts as a basic preventive measure to reduce chances of animal mortality due to diseases. By adopting vaccination, the farmer is not only reducing chances of sudden loss of cash flows due to death of animals but also contributing to the confidence of the insurance company to offer the insurance products at a lower premium.Conclusion and Way ForwardThe Integrated Insurance and Risk Mitigation solution thus uses amix of product and process innovations to address the issues ofhigh transaction costs and information asymmetry, therebycontributing to significant reduction in premium and increasing the 13
  14. 14. efficiency of the product. As cattle is an important source of income for majority of KGFS clients, this product would act as a safety net Technical Note and protect the clients from financial shocks and provide supportIntegrated Insurance for buying cattle again. This product may also be seen as a protection & Risk Mitigation to KGFS loan portfolio when the animal is bought with a KGFS loan. Solution for The structure also demonstrates the value proposition that a co- Dairy Farmers ordinated effort of this nature can bring about to the customers served. Each of these stake holders mentioned would be keen to offer the product, process, technologies with entities/ agencies interested in knowing more about the product or replicating the product. For entities and individuals who are interested in replicating the product or interested in knowing more please mail to 14
  15. 15. Annexure 1 Technical NoteHistory of Cattle Insurance Products in India Integrated InsuranceThe Government of India pioneered the effort to create a market for livestock & Risk Mitigationinsurance with the help of Small Farmer’s Development Agency9 (SFDA) in 1971 Solution forand subsequently various schemes were launched at national level to provide safety Dairy Farmersnets for all livestock rearing farmers in the country. Though public insurers havebeen in this field for the past 35 years, there has little innovation in product structure.The Insurance cover remained restricted to death and Permanent Total Disability(PTD) only, but not for other insurable risks like cattle diseases, epidemics, andhence this market remains underpenetrated with less than 7% of cattle being insured.The table below gives the important developments in the Cattle Insurance relatedproducts chronologically: Table 1.2: History of Cattle Insurance related products Year Implementing Agency/program Remarks 1971 “Cattle insurance scheme” Nationalized banks began to finance by Small Farmer’s the purchase of cattle (i.e. credit linked development agency livestock insurance was provided) and agreed to collect premium from beneficiaries. Cover was for one year and premium was collected annually. 1983 “Cattle insurance policy” under Livestock and asset insurance was Integrated Rural Development extended to the poor along with the Program subsidized loans under IRDP. Cattle Insurance was bundled with the loan and hence was compulsory. This product was devised by General Insurance Company (GIC) and implemented through its four subsidiary agencies of GIC 1983 onwards. Premium charged was 2.25% (death) with extra charge of 0.85% for PTD. No age limit for cattle was prescribed specifically for this. 1983 Market agreement No subsidy was provided and was offered (Market agreement is an as a voluntary product. Was also offered to arrangement done when animals that were not purchased under government/insurance any schemes animals. Premium charged company has lesser was 2.85-4%. Cover was available at experience for the product given premium for milch cow of age and in this arrangement 2-8 years and buffalo of age - 3-12 years. livestock insurance was provided as retail product)9 All India Rural credit committee (1969) recommended establishment of an agency to assistsmall farmers who had not benefitted from gains of green revolution. And as a result SmallFarmer’s Development Agency (SFDA) came into existence, which started working in 1971-72. Programs based on agriculture and animal husbandry was started. SFDA provided subsidyto the extent of 25% to identify small farmers on capital investments and inputs. Loans fromcommercial and co-operative banks were made available. (Source: Rural development:Principles, Policies, and Management, By Dr. Katar Singh Edition: 2) 15
  16. 16. Year Implementing Agency/program Remarks Technical Note 1999 IRDA Inception of IRDA, liberalization ofIntegrated Insurance Indian insurance industry. & Risk Mitigation 2001 Private players registered ICICI Lombard, IFFCO-TOKYO, HDFC ERGO, Solution for on- Royal Sundaram registered as private Dairy Farmers wards insurers offering livestock insurance. 2005 Micro-insurance regulation, Micro-Finance Institutions (MFIs), 2005 Non-Government Organizations (NGOs) and Self-Help Groups (SHGs) can act as an agent for insurance companies to increase the penetration of insurance in the rural markets. 2005- “Livestock insurance scheme” Premium of the insurance is subsidized to the 2006 implemented by State tune of 50%; Premium not to exceed 4.5% for Livestock Development Boards annual policies and 12% for three year (SLDB and State Animal policies. Scheme is extended in 11th Five Year Husbandry Departments Plan (2007-2012) to cover entire country. Ref: “Livestock Insurance in India: A sector Review” by Dr.Anupama Sharma, CIRM, IFMR10 Annexure 2 Screenshot of Herdman Software 10 16