Livestock insurance lessons from the indian experience

Institute for Financial Management and Research
Centre for Insurance and Risk Management

Livestock Insurance: Lessons from the Indian Experience
Dr. Anupama Sharma1

This paper highlights the various challenges for 'massification' of livestock insurance in India. The study
incorporates the perspectives of insurers, delivery channels and the regulator on the issue. The author has
expressed her opinion and recommendations to overcome these challenges in the concluding section.

1
Dr. Anupama Sharma is a Consultant at CIRM and she can be reached at anupama.sharma@ifmr.ac.in. The views
expressed in this note are entirely those of the author and should not be attributed to the Institution with which she is
associated.

Contents

1. Risks to Livelihoods Dependent on Livestock ..................................................................... 8
2. Livestock Insurance Market ................................................................................................. 9
3. Current Supply and Regulation in India ............................................................................. 10
3.1.Government intervention and regulatory framework .................................................... 10
3.2.Risk carriers ................................................................................................................... 13
3.3.Product ........................................................................................................................... 14
3.4.Prevalent models for livestock insurance delivery ........................................................ 16
4. Product Design and Distribution Challenges ..................................................................... 23
5. Claims Settlement and Fraud Control ................................................................................ 30
6. Conclusions and Recommendations ................................................................................... 31
Annexure 1: A Brief on India’s Livestock Sector .................................................................... 35
Annexure 2: Chronological Events in Livestock Insurance in India........................................ 42
Annexure 3: List of Public Insurers in India ............................................................................ 44
Annexure 4: Brief on Private Insurers in India ........................................................................ 45
Annexure 5: Sample of Proposal Form .................................................................................... 46
Annexure 6: Sample of Health Certificate ............................................................................... 47
Annexure 7: Excerpts from Micro-Insurance Regulation of India, 2005................................. 48
Annexure 8: Cash Management and Technology .................................................................... 49

Acknowledgements

First and foremost, I would like to convey my deep gratitude to the Microinsurance Innovation
Facility at the International Labor Organization for anchoring the study, with special thanks to
Michal Matul for his persistent guidance.

This study could not have come into existence without getting vital information from various
general insurance companies in India. I am thankful to them for providing me relevant
information and support.

I acknowledge a debt of gratitude to IFFCO-TOKIO General Insurance Co Ltd., Gurgaon,
Oriental General Insurance Co Ltd., New Delhi, and ICICI Lombard General Insurance Co Ltd,
Mumbai, for sharing pertinent data sets for the study. I also acknowledge kind support from Mr.
Ravi Seshadri (Head- Internal Audit and Compliance at Bharti-AXA General Insurance Co Ltd)
for his guidance.

I am grateful to Mr. G. Vasudevan, Project Manager, District Poverty Initiatives Project;
Vizianagaram, for sharing valuable insights on community based livestock insurance in Andhra
Pradesh (India). I extend my heartfelt thanks to AMUL Research and Development Association
(ARDA) research scientists and BASIX Insurance business staff for providing key inputs.

Last but not the least; I convey my appreciation to my dear colleagues at the Centre; to Mangesh
Patankar, Anupama James, Priya Rampal, Altaf Virani and Alok Shukla for boosting my morale
and to Rupalee for improving the presentation of the study and her incessant encouragement. Her
unflinching support has always been inspiring.

Anupama
Center for Insurance and Risk Management

Study Design

Objective of Study
The study began with an objective to develop a deeper understanding of livestock insurance
sector challenges and to identify potential solutions to enable the growth and proliferation of
livestock insurance in developing countries. As India is one of the largest markets for livestock
insurance, and one where livestock insurance products have been in existence for the past many
years, it was worth understanding the Indian livestock insurance market and learn from it about
the various challenges faced, so that those challenges could be addressed efficiently in future in
India and other developing markets. The study includes multiple dimensions, such as:
understanding the Indian livestock insurance industry, challenges faced by insurers in
massification of livestock insurance and various delivery channels presently in vogue in India. It
also includes understanding the performance of livestock insurance products and the impact of
various policy efforts by the Indian insurance regulator. The idea is to suggest possible catalysts
necessary to ensure higher uptake of livestock insurance space. The study is targeted to benefit
national and international livestock insurers, brokers, academia and aggregators like cattle
cooperatives, MFIs, NGOs and dairies.

Note: Usually sheep, goat and fowls are reared for meat and other by-products and while it is important to de-risk
households dependent upon small animals, this paper concentrates on households dependent on incomes from large
animals i.e. bovines (cow and buffalo). The two reasons for limiting the paper’s focus are: Dairy animals are higher
value assets as compared to small animals (sheep and goat and poultry). Therefore cattle 2 business is considered to
be more risky and requires greater focus. Secondly, there has been little or no effort undertaken in valuation and
insuring small animals and their value chain is highly disaggregated.

Methodology
India has four public insurers and six private players providing livestock insurance in the
country. To attain the objectives mentioned above, the study concentrates mainly on gathering
qualitative data (feedback from stakeholders) and performance data based on past experience. In
combination with qualitative information, some secondary data was also collected. Semi-
structured and unstructured interviews were conducted with key people from: insurers- Rural
Insurance Department marketing departments and sales departments; distributors- Micro Finance
Institutions (MFIs) - NGOs and dairy-co-operatives; community based insurance programme
coordinators and Insurance Regulatory and Development Authority (IRDA). Interviews were
conducted with employees of different hierarchical levels of three public insurers and four
private insurers in India. A list of interviewees is given below:
United India Insurance Co. Ltd.
o Mr. K K Rao (Deputy General Manager)
o Dr. Purusothaman (Chief Manager and Veterinarian)
o Ms. Mamani (Manager- Microinsurance)
o Dr. Devshikhamani (Manager- Grievance Cell)
Oriental General Insurance Co. Ltd.
o Mr. Amaldas (General Manager)
o Dr. Mohanty (Manager-Cattle Insurance)
New India General Insurance Co. Ltd.

2
In the paper, ―cattle‖ means ―cow and buffalo‖.

o Mr. Segar Sampath (Deputy General Manager)
HDFC ERGO General Insurance Co. Ltd.
o Mr. Bhagwath Chandra (Head, National Sales)
o Mr. H. Parameshwaran, (Regional Sales Manager, Chennai)
o Dr. Ajay Rakhe (Underwriter)
Royal Sundaram General Insurance Co. Ltd.
o Dr. Mohan (General Manager)
o Mr. Srikanth (Head, Rural Marketing)
IFFCO-TOKIO General Insurance Co. Ltd.
o Mr. Gopinath (Head, Rural Marketing )
o Dr. Anugeta Jena (Executive, Livestock Insurance)
ICICI Lombard General Insurance Co. Ltd.
o Mr. Tarun Taneja (Head, National Products)
o Ms. Meghna Gupta (Manager)
o Ms. Ritu Kejriwal (Manager)
o Rajjan Khan and Alok Srivastava (Underwriters)
Project Sales staff of all above mentioned insurers
BASIX
o Mr. Gunaranjan (Head, Insurance Business)
o Mr. Satheesh Arjilli (Manager, Insurance Business)
o Dr. Sanjib Kumar Bora (Assistant Manager, Insurance)
o Mr. P. Venu (Assistant Manager, Insurance Business )
District Poverty Initiatives Project, Vizianagaram
o G. Vasudeva Rao, (Project Director, District Rural Development Agency
(DRDA), Vizianagaram, Andhra Pradesh)
AMUL (Dairy-cooperative)
o Dr. Amresh Patel (Head, AMUL Research and Development Association)
o Dr. G. G. Shukla (Associate Research Scientist, AMUL Research and
Development Association)
Insurance Regulatory and Development Agency
o Ms. Priya Bharath (Officer on Special Duty, IRDA)

Annual reports of public insurers were used to collect information on their livestock portfolio.
Efforts were made to collect quantitative information. However, the quantitative information
available was not sufficient to draw conclusions. Hence, the study is based on the qualitative
information collected.

Executive Summary

For developing countries (including India), livestock is an important source of household
income. Approximately, 100 million households are dependent upon livestock as either the
primary or secondary source of income in India only. Any disease, accident, or theft leads to a
substantial loss to the household. Apart from this, huge production risks associated with dairying
activities render animal husbandry business a risky proposition for the low-income households.
Production risks can be related either to scarcity of inputs e.g. dry and green fodder, water, etc
for animals, or, to high morbidity (in the case of individual animals or in case of an epidemic).
Factors that trigger off or aggravate these diseases are the tropical climate and poor hygienic
conditions present here. These factors lead to diseases like mastitis, Foot and Mouth Disease
(FMD) and hemorrhagic septicemia (HS). They could even lead to natural calamities like
tsunami or increasing temperature that induces heat stress on the animals. Above all, the loss of
assets is the biggest challenge for cattle owners as it leads to a precipitous fall in income.

Business risks in livestock rearing make it all the more important to regard insurance as an
efficient measure to provide safety to low income households. The first imperative is to
understand how customers and suppliers perceive the value of the potential product. This study
specifically concentrates on the supplier’s perspective to understand the challenges faced in
massification of livestock insurance. India is discussed as a special case as it has a 35 year long
history of livestock insurance.

The Government of India effectively launched the first livestock insurance scheme in the 1970s
for the purpose of asset building at the bottom of pyramid, and, thus pioneered the role of market
maker. Yet, its coverage is not more than 7% of the cattle population. Various schemes were
used to increase the spread of livestock insurance, with public insurers as risk carriers. Livestock
insurance was (and is, even today) offered as a compulsory product with bank credit for dairying
activities. More than 90% of livestock insurance are compulsory credit linked products (which
are sold using the partner-agent model), with less than 10% (sold through direct sales) being
voluntary products. Most of the schemes were subsidized at 50% in premium which had two
opposite effects. One, it helped to increase the uptake, but simultaneously, it posed challenges in
further product development as there were no good processes and systems that were put in place
to monitor subsidies. The result was poor processes for livestock delivery and more fraud.

This also led to a dis-incentive for setting up a proper database, which held up the process of
constant up-gradation of the premium amounts based on actuarial data analysis of mortality
tables. As a result, traditionally, insurers have used only one product in the livestock insurance
market. The main finding is that offering sustainable livestock insurance is mostly hampered by
unreliable data on livestock mortality and by low set premiums. It is seen that insurers go rural
mainly because of social and rural obligations stipulated by regulation, and do not bother about
good pricing. This, at times, leads to dumping of underpriced policies.
Both public as well as private insurers derive very low volumes (less than 1%) of business (total
premium) from livestock. On the other hand, the cost of entering unorganized rural livestock
markets is very high, which, when combined with underutilization of available distribution
channels, hinders the massification of livestock insurance. The cost-effectiveness and product
delivery efficiency of different distribution channels is crucial in ensuring the success of micro-

insurance business. With new micro-insurance regulation in place, insurers are hopeful about
entering rural markets with lower transaction costs and about catering to a larger rural
population. Challenges are also faced by insurers in the sense that the burden of all risks are
passed on to the insurer as ex-ante risk mitigation strategies are not well in place (in the form of
vaccination, de-worming, etc). Lack of veterinarians and lack of animal husbandry physical
infrastructure adds to the woes of insurers. To factor this in, insurers want to increase premium,
but historically, set premium of 4% can’t be changed or increased as it will impact the uptake.
The environment of subsidization that has pervaded for the past 30 years has already adversely
impacted the product development cycle.
It was interesting to find that many insurers facing a loss ratio of >150% were wary about the
frauds during valuation and identification of cattle due to poor monitoring processes while there
are others who recorded loss ratios of as low as 40-80%, but regard it only as ―perception of
frauds‖. Instances of high loss ratios are very difficult to control due to the remoteness of the
villages. Insurers were highly aware of the lengthy process of claims settlement and showed keen
interest to reduce the claim settlement process by use of technology.
Insurers agreed that livestock insurance uptake would not be a challenge if strong infrastructure
is built and institutions are made more efficient. It is important to make it a point that in the
presently distorted market scenario demand also remains a big problem due to lack of awareness
and willingness to pay the premium amount.

The main challenges to livestock insurance can be summarized as:
Unorganized market and poor veterinary infrastructure
Challenges in valuation and identification of animals
Absence of actuarial pricing due to lack of data and challenges due to moral
hazard and adverse selection
Incentive system for risk reduction
Absence of bundled comprehensive financial products
Lengthy claims settlement process
Lack of proper incentive system for sales staff
Absence of concentrated marketing and product awareness

Solutions can be sought to improve the livestock insurance markets throughout the world by
creating databases that can help price the premium actuarially. Smart subsidies can be
incorporated by the government or multi-lateral agencies later to help increase in uptake. Better
marketing strategies and incentivizing insurance sales agents to sell livestock insurance products
will certainly help to boost the demand. In a positive development, Indian insurance companies
are now embracing technology in a big way. Technology is being incorporated at various levels
from identification (like RFID) to cash management (biometric cards). Finally, the livestock
insurance sector can aim to build strong livestock management systems. Risk reduction and risk
transfer systems should be integrated so that the overall performance of the livestock sector can
be improved. Insurers should ideally take the residual risk so that they have enough incentive to
reach out to the market and sell the product. Although insurance markets are underdeveloped in
developing countries, recent developments in the field of micro-insurance will hopefully increase
demand in rural areas.

1. Risks to Livelihoods Dependent on Livestock
India ranks second in terms of its livestock wealth across the world. Out of the total livestock in
the country, around 38.2 percent are cows, 20.2 percent are buffaloes, 25.6 percent are goats,
12.7 percent are sheep, and 2.8 percent are pigs. Due to the steady increase in population and the
inefficient distribution of resources, a majority of poor households have very small or no
agricultural land to engage in cropping activities. Hence, a majority of the poorest among the
Indian population depends on livestock as an important secondary source of livelihood 3. It is
estimated that approximately 100 million people derive their livelihood from livestock 4 as a
primary or secondary source of income. Livestock related activities help to maintain a daily
inflow of income for these households. Additionally, small landholders obtain nearly half of their
income from livestock5.

The livestock economy penetrates more equitably than agriculture in the Indian economy.
Livestock rearing is central to the livelihoods and survival of millions of small and marginal
farmers, and landless agricultural labourers across the country, particularly in the dry land
regions of India (which is approximately 85 million hectare, that is, 60% of total net cultivated
area of India6).
Large animals like cattle and horses are expensive, and thus carry higher risk exposure. Any
disease, accident or theft leads to a significant loss to the household. Many households are
pushed into dire straits once they lose their livestock to disease, scarcity of water and fodder, or
sheer poverty, which forces them to sell their animals making it impossible for them to rebuild
their stock. Broadly we can classify these risks into two categories:
Production risk:
o Non-availability of inputs (dry and green fodder) for animals.
o Morbidity (to individual animal or in case of an epidemic): Cattle disease is considered to
be one of the main factors contributing to reduction or stoppage of milk production due to
disease like mastitis, Foot and Mouth Disease (FMD) and Hemorrhagic Septicemia (HS).
(See Table 1)
o Cattle mortality: Loss of asset is the biggest challenge for cattle owners as it leads to a
dramatic fall in income.
o Natural calamities like tsunami, earthquakes, etc.

3
Two-third of livestock owners are the most small and marginal farmers and laborers with poor resources, owning
only 30 percent of agricultural land. (Source: http://hipa.nic.in/KSDangiA.pdf , Department of Animal Husbandry
and Dairying, Haryana)
4
Government of India, Report of the Working Group on Animal Husbandry and Dairying, Tenth Five Year Plan
(2002-2007), Planning Commission, New Delhi, 2002
5
Shukla and Brahmankar 1999; Birthal et al. 2003
6
―Enhancing Sustainability of Dry Land Rain fed Farming Systems” by Department of Agriculture and
Cooperation, Crops Division, Ministry of Agriculture, GoI Slide 2 (agricoop.nic.in/AgriMinConf/dryland.ppt)

8

Table 1: Disease-wise Incidence of Livestock Diseases in India, 2003
Disease Name Species Name Outbreaks Attacks Deaths
Foot and Mouth Disease Bovine 1814 116420 1956
Buffalo 14 7140 110
Hemorrhagic Septicemia Cow 586 4128 1970
Buffalo 410 2399 894
Black Quarter Cow 797 4438 1370
Buffalo * 84 41
(Source: Ministry of Agriculture, Government of India) *-Lack of data

Price Risk:
o Fluctuations in the costs of cattle and its products during disease outbreaks, and market
losses happen due to reduced demand, which exposes farmers to income losses.

Proper vaccination, de-worming and curative measures for the animal husbandry sector (Refer
Annexure 1 for India’s livestock sector status) are inadequate and under developed in the case of
developing countries. A key concern, therefore, is whether and how the poor in developing
countries can be shielded against risks faced by households dependent on livestock as a source of
livelihood. The overall risk in the cattle owners’ portfolio can be dramatically reduced through
common techniques like rearing a range of diversified animals and other informal risk hedging
models like community ownership and management of cattle as observed in Self Help Groups
(SHGs) and co-operatives in India and other parts of the world.

As formal risk-management services are under-developed (e.g. out of huge cattle population only
7% of cattle are covered under insurance in India), cattle owners resort to high-stress coping
mechanisms (borrowing from moneylenders, selling assets, etc.) that push them deeper into
poverty. Hence, there lies a very big challenge of de-risking the low-income population to
protect their livelihoods.

2. Livestock Insurance Market
Due to the lack of availability of risk reduction strategies, it becomes all the more important to
develop an insurance market as an option to protect the livelihoods of cattle owners. A Working
Group of the Government of India’s 11th Five Year Plan (2007-2012) on ―Risk Management in
Agriculture‖ says livestock insurance penetration should increase to 30% by year 2012 (Table 2).
But India is far behind the stipulated coverage and insurers as well as government agencies need
to put in rigorous effort to achieve this goal.

Table 2: Probable expected livestock penetration of insurance in India under 11th Five Year Plan (2007-12)
Year Livestock Penetration
2006-07 6.58%
2007-08 11.50%
2008-09 16.50%
2009-10 21.50%
2010-11 26.50%
2011-12 31.50%
(Source: Report of Working Group on Risk Management for Agriculture for 11th Five Year Plan 2007-2012, GoI,
Planning Commission, India)

9

There lies a massive market potential for livestock insurance, especially in countries with a huge
cattle population. According to the Human Development Report (unit by UNDP Regional Center
at Colombo) assessment, insurance coverage can be extended to 50-70% of rural households
(2006) in India. The study makes a market projection of approximately 44.68 million milch
animals, at a premium of 4% of sum insured (sum insured- Rs. 10,000 per animal) and indicates
a premium amount of at least Rs. 17,872 million (USD 397.15 million7). As surveyed in the
states of Rajasthan, Tamil Nadu and Orissa in India (Table 3), present insurance penetration data
indicates that rural households have livestock insurance also in their list of priorities, though life,
accident and health insurance are given higher preference.

Table 3: Prioritizing of insurance demand by location based on risk assessment by poor
Location(type) predominant Priority 1 Priority 2 Priority 3 Priority 4

Tribal areas Health Life Non- identified Non- identified
Dry areas Drought Health Life Non- identified
Coastal areas Life Accident Business assets Health
Urbanized rural areas Life Accident Health Household assets
Rural economy areas Life Accident Health Livestock
Riot prone areas Business assets Life Non- identified Non- identified
Areas along with highways Accident Life Non- identified Non- identified
(Source: UNDP Regional Center Unit, Colombo)

In addition to addressing insurance sector wide supply side challenges, interventions are required
to create greater awareness and demand among cattle owners to encourage uptake and
massification of insurance.

3. Current Supply and Regulation in India
3.1. Government intervention and regulatory framework
Formal mortality insurance for livestock is an important risk hedging mechanism to reduce the
potential livelihood loss due to cattle death. Livestock insurance is, however, quite expensive and
its reach to the poor is negligible, except when linked to government schemes8. In India, the
government pioneered the effort to create a market for livestock insurance with the help of Small
Farmer’s Development Agency9 (SFDA) in 1971 and subsequently various schemes were
launched at the national level to provide safety nets for all livestock rearing farmers in the
country (Annexure 2).

7
1USD=INR 45
8
Building Sustainable Microfinance Institutions in India by Mahajan Vijay, Nagarsi
9
All India Rural Credit Committee (1969) recommended the establishment of an agency to assist small farmers who
had not benefitted from the gains of the Green Revolution. As a result, Small Farmer's Development Agency
(SFDA) came into existence, and started working in 1971-72. Programs based on agriculture and animal husbandry
were started. SFDA provided subsidy to the extent of 25% to support small farmers on capital investments and
inputs. Loans from commercial and co-operative banks were made available. (Source: Rural Development:
Principles, Policies, and Management, By Dr. Katar Singh, Edition: 2)

10

Insurance Regulatory and Development Authority (IRDA) of India came into existence in 1999-
2000, and subsequently the insurance market was liberalized. Before liberalization, (1970-2000)
the public sector general insurers had a monopoly in the livestock insurance sector.

IRDA takes a stipulated approach to ensure more equitable access. To strengthen the availability
of products in rural areas, as per IRDA’s regulation titled ―Obligation of Insurers to the Rural
and Social Sector, 2002‖, all non-life insurance companies have to collect 2% of their written
gross premium income (in the first year of inception) from rural areas. This would have to go up
to 7% by the ninth year. A point worth noting is that although it is not compulsory for them to
do so, many insurers use livestock insurance to fulfill their rural obligations. It depends entirely
on Development Officers (DOs) and agents appointed by a particular insurer. But due to high
losses in livestock business and less commission coming to DO/agents due to low ticket size of
premium from livestock (as 15% of premium is taken as commission) other products are
preferred to be sold. Nevertheless this mandatory requirement has created space and allowed
more efforts in the livestock insurance space.

Under Micro-insurance Regulations, 2005, (Annexure 7) Micro-Finance Institutions (MFIs),
Non-Government Organizations (NGOs) and Self-Help Groups (SHGs) can act as distribution
agents for insurance companies.

This allows increased penetration of insurance in the rural markets and hopes are high that
livestock insurance being a part of it will get a boost automatically.

That said, as has been demonstrated in the opening section, livestock insurance is more pro-poor.
The increasing rural affluence has altered priorities and rural and social sector goals could be met
by insurers’ cherry picking which could be obstacles to developing rural models of delivery.

Cattle insurance was tied with rural credit delivery programs through banks as well as with credit
delivered through development projects like the Integrated Rural Development Program10
(IRDP) so that large numbers could be reached. The IRDP programme had been financed partly
by government subsidies and partly through bank credit. Hence livestock, agriculture and asset
insurance remained scheme driven and mandatory in nature with little awareness among the
customers. Figure 1 depicts that the number of animals insured under IRDP scheme stood
reduced after 1999-2000 and more animals were insured under non-IRDP programs.

10
IRDP was the biggest poverty reduction program initiated by Government of India. It was started in 1983 and was
extended till 2003. IRDP aimed to assist creation of assets of the asset-less target groups (such as small and marginal
farmers, agricultural laborers and rural artisans) through income-generation activities that would enable them to
break the poverty cycle. For comparatively high income groups, livestock insurance was extended through market
agreement.

11

25
20
15
10
5
0

1988-89

1994-95

2000-01
1989-90
1990-91
1991-92
1992-93
1993-94

1995-96
1996-97
1997-98
1998-99
1999-00

2001-02
2002-03
No. of animals insured under Non-IRDP (in millions)
No. of animals insured under IRDP (in millions)

Figure 1: Number of animals insured under IRDP and non-IRDP

It is difficult to understand the actual reasons for this, but one possible reason could be the
lowered premium rates available even under non-IRDP schemes—a result of market forces
(Figure 2).

350
300
250
200
150
100
50
0

Average premium under non-IRDP
Average premium under IRDP
Figure 2: Comparison of premiums under IRDP scheme and non-IRDP in India

12

Box 1: IRDP Scheme
Banks like National Bank for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs)
were financing livestock purchase and there were compulsory insurance policies in the IRDP scheme. This acts as
risk covers for these banks and helps them to refinance the purchase of livestock in the event of any real shocks or
death of animals. Under the IRDP program, a total 70.369 million of animals were insured for the years 1988-2003.
Private insurers became associated with the program only after the year 2000, following liberalization. Today,
private insurers are encouraged to participate so as to ensure competitive premium pricing. However, pricing of
these products still is a challenge. As shown in the Figure below there is a high inverse correlation between the
premium amount and the number of animals insured. As the premium price increases, the number of animals insured
decrease.

Effect of premium on insurance

2000-01

1997-98

1994-95

1991-92

1988-89
0 50 100 150 200 250 300 350

198 198 199 199 199 199 199 199 199 199 199 199 200 200 200
8-89 9-90 0-91 1-92 2-93 3-94 4-95 5-96 6-97 7-98 8-99 9-00 0-01 1-02 2-03

Average IRDP Premium (in Rs) 90.2 75.8 101 95.8 86.6 96.5 71.2 75.8 101 303 251 88.2 107 85.5 73.5
Number of animals insured (in 31.1 48.4 34.4 42.5 48.3 49.4 65 69.6 52.3 21.9 29 49.2 49.8 52.9 59.9
lakhs)
Value

This graph clearly depicts that farmers are sensitive to the pricing of the product. But as rural areas are marked by
high transaction costs and farmers are typically charged for that transaction cost, it becomes difficult for farmer to
access viable livestock insurance products. (Source of data: www.indiastat.com )

3.2. Risk carriers
All four public insurance subsidiaries of General Insurance Corporation Ltd. (GIC) were formed
(Annexure 3 and as mentioned in Box 1) according to their respective regional reach to extend
livestock insurance to farmers against death of animals in all parts of the country. Insurance
schemes developed and offered had the potential to deeply impact the industry structure, and
hence, even after eight years of liberalization, public sector insurers have always dominated the
Indian livestock industry (Box 2).

13

Box 2: Share of Public Insurers in Total Cattle Insurance

Public insurers have been the biggest players in the Indian livestock insurance market. Even in 2004-05, out of
approximately 7.9 million animals insured, 6.29 million were covered by public insurers (i.e. 80%). United India
Insurance Co. Ltd. (UIIL) has been the market leader throughout.

(Source: Data from annual report 2002-05 of all four public insurers)

However, even though public insurers have been in this field for past 35 years, there was little
innovation offered by them, and cover remained restricted to Death and Permanent Total
Disability (PTD). One possible reason cited by various insurers is the low volume of business
coming in from livestock. Usually, the total cattle insurance business brings less than 2 % of total
premium collected by any of these public players, hence, the lower importance accorded to
livestock insurance. The other critical reason is high losses made on livestock products year after
year. The loss ratio at times exceeds 100%, thus further dampening the willingness on the part
of insurers to deliver livestock insurance products (the usual loss ratio faced by insurers is 40-
80%).

Private players entered the general insurance business only after 2001. As of now, there are
more than 14 private general insurers in India (Refer Annexure 4 for details of few).

3.3. Product
There is only one product available in Indian livestock insurance industry that covers death. It
has Permanent Total Disability (PTD) cover for infertility and complete cessation of milk
production as a rider, which comes at an extra premium (Box 3). Changes seen are superficial;
such as tweaking around the premium amount (from 2%- 6% for a one year product). Long term
products like those with three to five years tenure are also available, but the premium remains
very high causing poor uptake as there is no subsidy. Evidently, farmers who sell their animals
after 1-2 years, usually see it as an additional burden.

14

Box 3: Traditional Livestock Insurance Product (Continued)
Basic product in Indian livestock insurance market:
Sum insured: Sum insured would be the market value of the insured cattle (NDDB and co-operatives or
authorized veterinary or insurance company’s authorized person helps to judge the value of animal)
Non-scheme Animals Scheme (IRDP or any other scheme) Animals
Market value varies from breed to breed, area and age. Price fixed for purchase committee shall be treated as
Examining Veterinarian’s recommendation shall be sum insured/market value (Loan plus subsidy). This
considered proper guide for acceptance of will be the basis for insurance and settlement of claim.
Insurance/settlement of claims. Sum Insured will not This is an agreed value policy. Sum insured will not
exceed 100% of the Market Value exceed 100% of the Market Value.
Note: Veterinarian is technically qualified to decide the value of cattle. But in cases where product is credit
linked loan amount is taken as proxy.
Age Group: Animals of ages between 2-12 years depending on health certificate issued by veterinarian. (Some
insurers have their own veterinarian staff to do it especially public players; private players empanel one
veterinarian per unit area (different for different regions depending upon company’s internal policy)
Non-scheme Animals Scheme Animals
a. Milch cows 2 years (or age at 1st Calving) to 10 2 years (or age at 1st Calving) to 10 years.
years.
b. Milch Buffaloes 3 years (or age at 1st Calving) to 12 3 years (or age at 1st Calving) to 12 years.
years.
e. Indigenous/ 1st exotic 4 months up to date of 1st calving or 4 months to 32 months or calving
cross breed female calves/ minimum age limit for adult female whichever is earlier
heifers animals as above.
Whole productive age of animal is covered. Different product at a slightly different rate is available for heifers
but there is underdeveloped market for it.
Coverage:
Non-scheme animals Scheme Animals
Death: Sum Insured or market value prior to illness, Death: On agreed value basis
whichever is less and if the insured animal is pregnant
for less than 4 months, the indemnity will be restricted
to 50%. (It is restricted to 50% taking into
consideration the high chances of mortality during Permanent Total Disablement:
pregnancy) 75% of Sum Insured
Milch Cattle: Limited to 50% if death occurred during
dry period Permanent Total Disablement: Draught
Animals: Limited to 70% of Sum Insured
Premium Rates
Non-scheme animals Scheme animals
Cooperative Dairies- 4%, Private Farmers/Bank 2.25%
Finance- 5%.
(Premium is lower for co-operative dairies due to low transaction cost and higher business opportunity. Also co-
operatives have “skin in the game” and implement risk reduction programs using their own field vet staff that
leads to reduced mortality rates. In case of private farms and banks assumption is that risk reduction strategies
are not well practiced and chances of frauds are also high which is reflected in premiums)
Extra Premium
Non-scheme animals Scheme Animals
a) For PTD 1% c) For PTD 0.85%
b) For Transit Cover when transit is greater than 80 km d) For transit up to 80 km Nil
within the state, by rail or road 1% e) Beyond 80 km 1.00%

(Source: IFFCO-TOKIO General Insurance Company Limited, ICICI Lombard, United India Insurance, New India
Insurance)

15

Box 3: Traditional Livestock Insurance Product (Continued)
Exclusions are incorporated so as to reduce the high risky animals and to avoid some fraudulent cases.
Common Exclusions:
i. Malicious or willful injury or neglect, overloading, unskillful treatment or use of animal for purpose
other than stated in the policy without the consent of the Company in writing.
ii. Accidents occurring and /or Disease contracted prior to commencement of risk.
iii. Intentional slaughter of the animal except in cases where destruction is necessary to terminate
incurable suffering on humane consideration on the basis of certificate issued by qualified Veterinarian
or in cases where destruction is resorted to by the order of lawfully constituted authority.
iv. Theft and clandestine sale of the insured animal.
v. War, invasion, act of foreign enemy, hostilities (whether war be declared or not), civil war, rebellion,
revolution, insurrection, mutiny, tumult, military or usurped power or any consequences thereof or
attempt threat.
vi. Any accident, loss, destruction, damage or legal liability directly or indirectly caused by or contributed
to by or arising from nuclear weapons.
vii. Consequential loss of whatsoever nature.
viii. Transport by air and sea.
ix. Any non-scheme claim arising due to diseases contracted within 15 days from the date of risk are not
covered.
x. Disease contracted before commencement of policy
xi. All the claims received without ear tag.

Some companies list specific exclusions for certain areas depending upon endemic status of diseases like:
Pleuropneumonia in respect of Cattle in Lakhimpur and Sibasagar Districts and newly carved out
districts out of these two districts of Assam. (Source: New India General Insurance Co. Ltd.)

(Source: United India Insurance, ICICI Lombard, IFFCO-TOKIO, New India General Insurance)

3.4. Prevalent models for livestock insurance delivery
Cattle insurance can be distributed as a bundled product with credit or with non-financial
services and as a standalone product. The Indian livestock insurance history is full of examples
where livestock insurance was/is extended as a credit linked product. For credit linked products,
market based financial institutions like corporate banks and community based financial
institutions like MFI-NGOs and co-operative banks are used as delivery partners. As of now,
bundling of livestock insurance with non-financial instruments like concentrate feed pellet bags
or other inputs like vaccination and other risk services (as done in case of agriculture insurance
where crop insurance is bundled with fertilizer and seeds) is not prevalent in India. For
standalone products, the direct sales method is being used by insurers.

Broadly these methods can be classified in following categories:
Partner-agent model Direct sales Community-based
Key Insurer is the risk carrier Insurers appoint their Community bears the risk by pooling
Features and sales are done own staff for marketing premiums
through MFIs/Co- as well as sales. Done in one or two places in India.
ops/Banks which gets For non-scheme animals, Still in an experimental phase.
commission on sales. individual retail is done.
Under IRDP scheme/other
government schemes
Current Approximately 90% of Approx 10% of total Not done on a very high (<0.01%) scale
outreach total insured animals insured animals due to inherent problems of risk bearing
capacity of community.

16

i. Partner- agent model (credit linked or standalone)
Insurers prefer to link insurance with credit to secure a good market share as approximately 40-
50% of total credit in rural areas is taken towards dairying activities. Two major channels in this
case are:
Through banks providing loans for dairying activities as a part of priority sector lending
provision of commercial banks, Regional Rural Banks and Co-operative Banks. These
financial institutions provide livestock insurance as a compulsory bundled product along with
the loan. Since it is mandatory, most cattle owners consider the premium as a cost to
accessing credit. Also, such products are rarely able to capture clients’ needs and feedback.
MFIs, Co-operatives and NGOs providing credit to poor households for dairying and
involved with asset building and growth exercise

Approximately 90% of business in livestock insurance is through bancassurance.
Bancassurance is the biggest source for insurance sales in all sectors with India being the fourth
densest financial network in the world. Insurers prefer to link insurance with credit as banks are
mandated to engage in due diligence activities stipulated by Reserve Bank of India (RBI), and
hence chances of bad risk decreases. Additionally, banks/co-operatives needs to verify their
assets and thus help to keep the process more transparent. Usually, MFIs and NGOs which
provide credit for dairying activities educate farmers and build good risk reduction methods also.

As more than 40-50% of MFIs’ portfolios go into dairying, lending, some of the MFIs constantly
keep a watch on health and management of livestock so that there is lesser default for credit
given by these organizations and they can get good repayment rates. BASIX is one such
organization (A brief analysis of the experiment and innovation is highlighted in Box 5 in the
Provider- Agent Model Section). Animal health care, artificial insemination and animal hygiene
camps are organized on a regular basis so as to reduce mortality and morbidity cases.

Box 4 (1): MFIs as Distributive Agencies

As per ―Microfinance in India- A State of Sector Report 2006‖, Microfinance Institutions (MFIs) served 7.3
million households, of which 3.2 million were poor in the year 2006.

SKS Micro-finance is one of the major players in the MFI sector, and of late, they are also looking for livestock
insurance providers for their members. With its outreach of 3,906,007 clients (as on 28th February, 2009) and
with 1354 branches, its scale of operations can have a deep impact on the livestock insurance industry.

Other major livelihood promoting institution is BASIX that works in 15 states and over 10,000 villages.
Livestock insurance is a part of financial inclusion strategy. 26,129 livestock are covered under BASIX livestock
insurance till 31st March 2008.

17

Box 4(2): Dairy co-operatives as distribution agencies

Community based Organizations
In some states (like Andhra Pradesh, Gujarat and Rajasthan) in India, where the co-operative structure is well in
place and is capable of working efficiently, these institutions act as the best mode of increasing the coverage of
livestock insurance due to their large farmer base. It also helps to reduce transaction cost as co-operatives have their
own field veterinarian staff. Dairy co-operatives like Gujarat Co-operative Milk Marketing Federation (Federation
of dairy co-operative societies under the marketing brand AMUL) in Gujarat; NGOs like BAIF Research
Foundation (which has a workforce of about 150 veterinarians) can have efficient immunization programs running
throughout the year that helps health check ups and easy claims settlements for livestock insurance. It becomes
very easy for insurers to extend livestock cover to members of these institutions. Master policy arrangements are
also done with co-operatives to make a bulk deal.

Dairy co-operatives are community based organisations which aggregate large volumes of livestock-produce. By
2002-03, under the National Dairy Development Board (NDDB), and Operation Flood (Operation Flood was a
rural development programme initiated in 1970) was started. One of the largest of its kind, the programme
objective was to create a nationwide milk grid. It resulted in making India one of the largest producers of milk and
milk products, and hence is also called the White Revolution of India, 11.4 million cattle farmers had been
organized into 1, 03,281 dairy cooperatives. Their milk collection was estimated at 84.6 million liters and their
earnings were in the region of Rs. 50 billion (USD 1.1 Billion). States like Andhra Pradesh, Gujarat and Rajasthan
have very strong co-operative structures in place. There are 22 state level dairy cooperative federations federated
into 170 milk unions.

(Source: Article, “Co-operatives the Mainstay of Dairy Sector” by Johnson Napier, October 22, 2005); “Integration of SHGs
with Dairy Cooperatives: A Model Concept” by Dr.K.Swaroopa Rani and Dr.K.R.Rao; Report on gaps in Indian milk markets
by Indian Society of Agri-business professional (ISAP).

18

Box 5: BASIX Risk Management Services

TRIAD Strategy at BASIX
IDS (Institutional Development Services)
LFS (Livelihood Financial Services- Credit, Insurance, Savings, Remittances)
Ag/BDS (Agriculture and Business Development Services)
Risk Management by BASIX for Poor
Non Financial interventions: Risk Minimization e.g. Preventive Vet Care
Financial interventions: Savings, insurance), Insurance for lives and livelihoods

26,129 livestock covered till 31st march 2008.

Processes Innovation at BASIX in Royal Sundaram
Livestock Insurance Product:
Certification of animal value and health at the time
of enrolment delegated to BASIX field staff
(Reduces transaction cost: As BASIX staff is involved
in valuation and risk analysis of cattle, cost of
veterinarian is reduced and hence product can be
offered at comparatively at a lower price. But LSAs
are not technically qualified hence chances of poor
risk analysis can not be ruled out.
Replicability and operational feasibility: This model
is only replicable in areas where MFI-NGO and
insurer has enough trust in its non-technical workers
and is ready to risk)
10 day waiting period from the date of tagging for
risk cover commencement (to reduce adverse
selection)
Full benefit(i.e.100% of Sum Insured) payment in
event of claim (Value proposition for farmer)
Underwriting at the insurance company based on
submission of electronic data as BASIX as Rural
BPOs to help them in easy data entry (reduce time
and documents)
Rural BPO (reduction in turnaround time in
claims processing and improvement in quality
control for new business and claims)
Discount on premium (5% for 2 animals and 10%
for 3 or more) for customers (Minimize adverse
selection and enhance outreach)

(Source: Experiences in Livestock Insurance at BASIX by
Mr. Gunaranjan, Head Insurance Business, BASIX)

(Source: BASIX)

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Table 5: Comparison of Credit-linked and Dairy Co-operative as Channel for Livestock Insurance
Distribution
Credit institutions (MFI-NGOs and Dairy Co-operative
Banks)
Benefits To Insurers Increases outreach and helps in easy Risk reduction strategies are well
origination, distribution and sales implemented, and hence, chances are
Increases capacity for claims that insurers can expect lesser claims
management Reduce adversely selected portfolio
Easy to educate insurers on client’s Easy marketing and awareness
needs generation of product
To Clients Rural clients get easy access to Rural clients get easy access to
insurance product to hedge their risks insurance product to hedge their risks

Limitations For Insurers Banks or MFIs tend to do adverse Possibility of collusion between co-
selection and become reluctant to operatives and farmers due to
undertake proper due diligence in incentive alignment as co-operatives
case of claimants (as cattle insurance will be benefitted if farmer provides
is not their regular business). regular supply of milk and the farmer
Possibility of collusion between too is remunerated for the same. So,
banks/MFIs and farmers due to chances of frauds can not be ruled
incentive alignment (as bank wants out.
repayment of its loan and the farmer
is also keen to repay the loan and get
new loans, which could be financed
through insurance payment). If the
farmer is not able to pay back, there is
an incentive created to let the animal
die.
Additionally, banks/MFIs/agents are
paid on the basis of sales and not on
the basis of claims settled or rejected,
claim processing efficiency and
response time. Usually, banks collect
the claims paper and inform insurance
companies only at month end when
there is a huge pile of cases and
insurers cannot cross check. In this
scenario, they have to pay the claim
without satisfying their doubts
regarding the genuineness of the
claim.
For Negligence on the part of insurers: Negligence on the part of insurers:
intermediary Insurers delay in settling the claim Insurers delay in settling claims. This
and this taints their image and spoils taints their image and business with
business with their clients on the their clients on the ground, and
ground. In turn, intermediaries get intermediaries, in turn, get bad
bad publicity, which adversely publicity that adversely impacts their
impacts their business. business.
Intermediaries also expressed concern
about the seriousness insurers
actually attached to their social and

20

rural obligations. They were wary
about the fact that insurers take the
premium and as soon as the target for
their obligation to the rural and social
sector is fulfilled, they resist offering
cover to any other clients over and
above this limit. Also, since the
interest is not in generating a
sustainable business- servicing and
claims settlement is poor, it depicts a
serious flaw in the law of ―Obligation
to Rural and Social Sector, 2002” as
this law only talks about collection of
premium and neglects claims
settlement and response time.
Possible Solution It is important to have right processes when an intermediary is used for origination
of reliable insurance portfolios.

Despite the concerns, the Partner- Agent Model is preferred as it becomes easy for insurers to
expand their reach to remote areas where it was difficult to reach earlier.

Box 6: Servicing challenges

Servicing gets complicated as a very small number of clients need servicing. Therefore a continuous contact with
all channels reaching to all cannot be justified. The need is to leverage targeted channels (which operate with
cattle owners like dairy co-operatives for procurement of milk or banks which provide credit for dairying) or
large generic outreach channels (like post office, Panchayati Raj Institutions).

Very few channels have capacity to service the cumbersome paper work while they may be able to very well
originate insurance like banks. So, outreach theoretically can leverage existing channels is actually limited to
intermediaries with monitoring capacity (due to field staff) and substantial cash and data management capacities.

Though as compared to direct model now with help of Micro-Insurance Regulation, 2005 it has become easy to
reduce the transaction cost for at least those areas where MFIs, NGOs are working.

ii. Direct Sales Model
Where the product is not credit linked (as a compulsory or voluntary product) it is difficult to sell
the product due to tangible demand from the cattle owners. There are no specific agents
appointed by insurance companies to sell livestock insurance. Livestock insurance is sold along
with other products and agents handling other products handle livestock portfolios also11. But
this model is not as successful as the Partner-Agent Model, as development officers and agents
give more importance to other businesses through which they can get more commission and
larger deals. Usually, direct sale is for non-IRDP programs and it is approximately 10% of total
livestock business.

11
In India direct sale is for non-IRDP program and it is approximately 10% of total livestock business. Agents go to
―Kisan Melas (Animal Fares)‖ and ―Pashu Mandis (Animal Markets)‖, where people buy and sell livestock, to sell
insurance product when it is easy to convince cattle owner for take up. Direct sales help insurers to use their work
force (existing agents and development officers) time more prudently to extract more business out of them.

21

Limitations:
In the Direct Sale Model, insurers use their own branches to sell various rural insurance
products. But usually these branches are set in towns or in cities and their number in rural areas
are almost negligible. But most of the livestock insurance business is generated from rural areas,
and hence, transaction costs for villagers are inevitably high. This high transaction cost model
could lead to high levels of adverse selection and chances of moral hazard in case agents are not
incentivized properly. During the process of claims management, factors such as cost of travel,
verification of claim and post-mortem of animals could all add to the overall expenditure
incurred by insurers. This makes the product non-profitable.

iii. Community-based Insurance Model
Vizianagaram District Poverty Initiatives Project (DPIP)12 in Andhra Pradesh undertook a
community-managed livestock insurance scheme (Box 6) with the co-operation and support of
Self Help Groups (SHGs).
Box 6: Vizianagaram Community Based Loan Protection Scheme for Livestock
Rationale for Community based insurance:
The economy of Vizianagaram (Andhra Pradesh, India) primarily depends on agriculture and animal husbandry including
dairying. Animal husbandry/dairying is most preferred activity for investment by the poor. The proceeds of SHG bank
linkage are largely invested in animal husbandry and household dairy by households. Villagers had livestock insurance from
a public insurer but there were high loan defaults and the beneficiaries often get vexed with the claim settlement officers and
veterinary doctors of insurers. The beneficiaries have also been losing about 30% of the value in the settlement process.
Further, on account of the lack of community involvement, some, false claims are also made. Therefore, the Vizianagaram
District Programme Management Unit (DPMU) and the Zilla Samakhaya (ZS, a District Unit) designed a scheme ―LOAN
PROTECTION SCHEME (LPS)‖. The main objective of the scheme is to protect the loan financed assets by assuring
compensation to the dead animal. Thus, the scheme is intended to provide insurance cover to livestock assets purchased.

Process of delivery:

Every household has to submit a written application to the ZS through
Village Officer (VO). The VO and Mahila Samiti (MS) need to
recommend the application and issue letters. The applications should be
accompanied by an amount equivalent to 4% of the estimated value of
the animal in the form of Demand Draft. In addition, an admission fee
of Rs.10/- per person is to be paid. The doctor authorised by the ZS has
to certify the value of the animal and the same needs to be approved by
the VO / MS. The ZS approves the insurance and issues a bond. Along
with the bond, a health card is also issued to the household and the
household is provided some training in animal management practices by
the paraprofessional. Once the policy bond is provided to the member
household, it is presumed that the animal is insured.

Upon the death of an insured animal cattle owner informs VO at call
centre. A member of the LPS sub-committee verifies the claim by
visiting the village. After discussing the issue with the LPS sub-
committee, the claim is either settled or rejected.

12
DPIP is a state-sponsored program and undertook community managed livestock insurance scheme with the co-
operation and support of the SHGs.

22

The settled claim is given to the VO by cheque. The VO adjusts the claim against the Community Investment Fund (CIF) dues
and pays the balance amount to the beneficiary.
The amount to be paid is as follows:
3 months from date of insurance - 90% of cost.
3-6 months - 85%
6-9 months - 82%
9 months to 1 year - 80% of the cost of the animal would be paid.
The insurance for the animal would be renewed during the next year after deducting a depreciation of 20% in the cost of the
animal.
2006 - 07 2007- 2008-
08 09
Enrollment 3519 4756 48675
Claims Received 96 120 320
The scheme is performing well with approximately 85000 animals being insured under the scheme this year. The scheme has
helped to increase the livestock insurance coverage to its members with >80% of its SHG members benefitting from it. Loss
ratio is less than 40% which is rarely seen in the case of Partner-Agent Models in the country.

(Source: Mr. G. Vasudeva Rao, Project Director, District Rural Development Agency, Vizianagaram, Andhra Pradesh)

The major advantage with the scheme is that it reduces possibility of bogus claims. There is a lot
to learn from community-based schemes as they are helping to reduce bogus claims,
documentation, and cost of insurance including the transaction / time cost and potential risk,
while, at the same time increasing insurance cover of loan- financed livestock assets. These
schemes have also resulted in minimizing other procedures. More importantly, they have
introduced community supervision and the monitoring of insurance, making the community a
major stakeholder in the process.

4. Product Design and Distribution Challenges
Unorganized market
Livestock rearing in India is an unorganized market with cattle ownership and management
largely pursued as an individual business. Deficiencies in the rural system in ownership of cattle,
vet care for health facilities and lack of training for farmers (ignorance about services) leads to:
o Very low demand for inputs for higher productivity and cattle based livelihoods are
characterized by subsistence and low productivity business. This leads to lower demand for
risk hedging products.
o For a small percentage of people who access insurance either through mandatory or
voluntary schemes, ignorance of insurance products leads to poor utilization of services. This
could include non-submission of claims due to unawareness about either risk coverage or
process of claim submission. It could also lead to repudiation of many claims due to non
compliance of claims procedure. This leads to bad experience among the insured minority,
pulling re-enrolment rates down substantially.
o An additional contextual challenge that is posed by the absence of infrastructure that
highlights identification of cattle and establish ownership. This leads to substantial moral
hazard and insurers have had experience of insuring non-existent animals also.
o Supply and demand of livestock depends upon demand for livestock products which is very
volatile--- just as in other commodities markets--- and it complicates the process of assessing
the true value of cattle. It is important to get proper documents in place, to have
standardization of animal values and to have a system that establishes a relationship between
animal and owner. These measures help to improve the scenario, overall.

23

Absence of Actuarial Pricing due to Lack of Data
In data- poor environments it is very difficult to produce effective design, make credible
probability assumptions and price insurance products appropriately. In India presently, the
regulator is collecting data for businesses that have >10% share in total premium and as livestock
is less than 2%, no care has been taken to improve condition of data in the case of livestock
insurance under the rural insurance segment. Insurance companies are also no too concerned
about the validity and reliability of data. In some cases data does exist, but there is a limited
effort to clean the data and to convert it to usable information that can be analyzed.

Other issues, objectives and the industry milieu related to animal’s management make it more
complicated. The situation is further aggravated when one is not able to predict losses and is
unable to project risk, especially in case of systemic risks, which should form the basis for
economically feasible premiums for clients. Insurers require sufficient information to design
actuarially sound products.

In India, where a wide range of heavily-subsidized government insurance schemes are currently
available, insurers find it difficult to get a true picture of livestock insurance business. During
IRDP and other schemes, premium rates were not actuarially tested and the basis for the
premium rate was unknown to suppliers. The price of the product was the same, irrespective of
the age of cattle and other risks factors. No re-valuation of cattle at the renewal of policy was
undertaken. This exposed insurers to higher risk with a possibility of the product being under-
priced. It actually hindered the whole process of product development in terms of pricing as well
as testing new products with better coverage and newer models.

Challenges due to Moral Hazard and Adverse Selection
Cattle insurance is usually infested with moral hazard problems. Insurers use various processes
to curb adverse selection and moral hazard (Refer Box 7 for details).

24

Box 7: Analysis of Standard Operating Procedure of Livestock Insurance General Insurance Companies
Identification:
1. All Insured animals are to be properly identified with the following ways along with Polyurethane/metal tags in the
proposal form (Annexure 5) :
 Any Natural Identification or mark.
 Horn Length.
 Shoulder height i.e. height from hoof to scapula joint.
 Two Photographs of the tagged animal, one with clearly visible tag number & other with full body photograph
of tagged animal.
 In case of Re-tagging it has to be ensured that the re-tagged animal is the same insured animal, not a new one by
cross checking with other identification data and photograph.
 This is a lengthy procedure meant to reduce frauds. Above mentioned parameters can change as animal grows so
these prove to be very fragile methods for identification.
Fraud control Mechanism:
2. Adverse selection or anti-selection of the animal must be avoided i.e. insuring old, diseased, debilitated animals,
along with this, over valuation of the animal must be avoided. This step is basically to ensure that the insured does
not make profit out of a claim.
 It shows intention of insurer not to entertain fraud cases but it as there are no proper valuation techniques
available it is hard to avoid such cases. For ensuring that animal is healthy insurers prefer to take health certificate by a
third party who is a veterinarian.
3. Effort should be put and it must be confirmed that insurer’s agent or employee has verified the animal & should be
present at the time of tagging. For this the financing agency should inform insurers about the purchase and tagging
date.
4. Company officer can make a visit on random basis, to ascertain the degree of proper identification and with this a
good message will percolate down to the insured as well.
5. These types of visits, even without claim will help in developing trust & confidence of insured on us as well as we
can able ascertain about the proper identification of animals and reduce fraudulent claims.
 Random checks will again ensure that the farmer is stabling the animals in a proper & hygienic manner. He should
be given inputs & support in this, and claims will certainly come down in this aspect.
Claim Procedure:
6. In the event of death of animal, the insured must inform concerned insurer’s branch office within 12hrs of death of
animal. (It helps to reduce the turn-over time for processing claim)
7. Insurers prefer to verify the carcass physically along with the tag in order to avoid any fraudulent claim, usually
they make sure that their own staff must visit the place within 24 hours of intimation and cross check other
identification data mentioned in the proposal form or in the health certificate (Annexure 6) with the dead animal &
also to check any manipulation of tag and submit a report of the same.
8. Some insurers prefer to take two color photographs (one with visible tag number and other with full body
having tag) with other documents to cross check properly.
Documents for Claim:
In the event of death of an animal, immediate intimation should be sent to the insurers and the following documents
should be furnished at the earliest.
 Duly completed claim form.
 Death certificate from empanelled qualified veterinary doctor in company’s prescribed form.
 Death certificate obtained from Veterinary doctor or a certificate jointly issued by any two officials mentioned
in the claim form in company’s prescribed form. (For Scheme animals)
 Two color photographs (one with visible tag number and other with full body having tag)
 In the death of a pregnant animal Post-mortem report is a must requirement along with photograph showing
the dead animal with fetus.
 Post-mortem report by qualified veterinary doctor in company’s prescribed form.
 FIR Report, in case the death is due to any accidental cause.
 Most important, recovery of the Ear Tag with a portion of ear.
Note: Principle of NO-TAG NO-CLAIM is strictly enforced for both scheme & Non-scheme animals.
 Lengthy list of claim settlement documents discourages insured to take up the insurance as he is almost sure that it
will be difficult to gather so many documents and hence adversely impacts uptake of livestock insurance.

(Source: IFFCO-TOKIO General Insurance Co. Ltd., ICICI Lombard General Insurance Co. Ltd, United India Insurance Co. Ltd)

25

The documentation required and lengthy claims settlement leads to lower uptake of livestock
insurance as farmers find it very difficult to collect all the documents. Additionally, the farmer
has to bear expenses for ear tagging and obtaining the health certificate. This increases the actual
cost of insurance for the poor and hence leads to low uptake or re-enrolment.

To ensure low adverse selection and moral hazard, a large amount of paper work is required,
especially the issuance of health certificates, which is an additional cost to be borne by the policy
holder. Without a health report it is difficult for an insurer to know about the type of risk he is
undertaking. Te insurer has to empanel its own veterinary doctor which is a very costly affair.
Poor veterinary infrastructure in villages compounds the problem.

Box 8: Veterinary Infrastructure Problems
The command area per government veterinary institutions is very high, leading to operational inefficiencies. Ideally, one
veterinary institution can cover a cattle population of approximately 5000, whereas in some states the ratio stands at 1: 10,000
animals (excluding small animals!) as shown in the table below:.
2006 No. of animals (Census 2003)
States/UTs Veterinary Veterinary Veterinary Aid Total vet Cattle Buffalo Total No. of
Hospitals/Polyclinics Dispensary Centre infrastructure (in (in Number of animals/vet
(Stockmen units ‘000) ‘000) animals institution
Centers/mobile available
dispensaries)
Assam 29 428 1213 1670 8440 678 9118000 5460
Bihar 39 785 1435 2259 10729 5743 16472000 7292
Chhattisgarh 208 708 290 1206 8882 1598 10480000 8690
Gujarat 14 487 587 1088 7424 7140 14564000 13386
Jharkhand 405 3 - 408 7659 1343 9002000 22064
MP 565 1742 72 2379 18913 7575 26488000 11134
Maharashtra 43 1382 2056 3481 16303 6145 22448000 6449
Rajasthan 1439 285 1733 3457 10854 10414 21268000 6152
Uttar Pradesh 1763 268 2313 4344 18551 22914 41465000 9545
West Bengal 111 612 3248 3971 18913 1086 19999000 5036
(Source: Data collected from 17th Livestock Census, 2003; State-wise area, GoI)

At the insured’s end, if the value of the cattle drops below the insured amount then an incentive
is created to leave the insured animal unattended most often. Hence, the chances of frauds are
high. Usually, farmers with more than one animal will insure only one or two which are high risk
and this creates an adverse selection problem. Moral hazard and adverse selection are seen to be
a poor process characteristic and usually these problems occur when the insurer is not able to
effectively monitor these changes in the behavior of animal owners while imposing the relevant
policy provisions.

In environments which have high moral hazard problems, indemnities will be greater than
expected by the insurers, and in subsequent years, the premium will increase only by bad risks.
This will further lead to an apparently spiraling premium regime, propelling a reduced demand
and uptake. Therefore, due to poor understanding and mismanagement of the portfolio, higher

26

claims are incurred due to frauds (moral hazard and adverse selection). This will lead to
recalibration of premiums upwards and a skewed uptake only by an adversely selected pool
which has a high perceived risk and need for insurance with higher probability of claims. Hence,
a vicious circle is formed, reducing the product’s outreach and viability.

Valuation of Animal
The value of cattle is closely correlated with its production capacity, apart from which age also
plays an important role in deciding the worth of cattle. The value of a heifer is almost half the
price of adult cattle when it is in second lactation and onwards. The age of an animal is a critical
criterion along with health which decides the value of cattle.

Due to the range of breeds in different geographies with different feeding patterns, insurers find
it difficult to assess the correct value of cattle. Therefore, they have to depend upon the
veterinarian to know the actual value of cattle. As observed in developed countries, different
breeds of cattle used for beef and milk have a set price depending upon their weight and milk
productivity, and this data is available to the public. Such kind of standardization is absent in
India which poses difficulties to insurers, as low value cattle can be overvalued if there is
collusion between a veterinarian and farmer. In such a case, the insurer would have to face huge
losses.

At times insurers underinsure so as to reduce frauds due to high valuation of cattle. Although this
enables them to hedge their risks, it makes the insurance product less interesting for cattle
owners. Underinsurance finally leads to higher transaction cost percentage and lower risk
coverage.

Identification of Animal
Identification of animals is difficult in terms of operational issues involved with it. Indian
markets have typically used the external ear tag for identification of the animal. The external ear
tag is a plastic or a metallic clip (Figure 3) which is put on the animal’s ear.

Figure 3: Metallic clip used for animal identification

Ear tagging is an unreliable method of identification as the tag can easily fall off or it can be
removed or submitted for claims by ear clipping (a common practice)13.

13
The estimated rate of ear-tag loss was 0.0024 ear-tags lost per day. The use of ear-tags alone might not be
sufficient for long-term identification of extensively managed animal populations. (Source: Department of
Veterinary Integrative Biosciences, College of Veterinary Medicine and Biomedical Sciences, Texas A&M
University, College Station)

27

o Identification of an animal is a problem as no national /state livestock identification system is
in place.
o It even creates problem in the tracing of diseases and also poses problems in data base
creation for productivity projections.

Poor identification techniques increase the moral hazard problem substantially and hence
impacts product pricing. Various identification methods are being tried and tested in the market.
But none of them have yet provided a complete solution.

Table 6: Comparison of different techniques for identification of cattle
Read Ease of Reading Retention Ease of Cost
Distance Application
Metal Tag Inches Varies Low Easy Rs. 4-6
Brand Feet Good (till Visible) Fades Overtime Difficult Cheap
Tattoo Few Low Fades Overtime Difficult Cheap
Meters
Ear Notch 1-3 Feet Difficult Long Difficult Cheap
Color Pattern Meters Difficult Long N/A Price of color
Bar-code Inches Varies Good to Moderate Easy Cheap
RFID (Implant) Inches to Easy Good to Moderate Slightly Tough Rs. 40-Rs. 200
Feet (depend on
volume)
RFID (External) Inches to Easy Good to Moderate Easy Rs. 40-Rs. 200
(Figure 4) Feet (depends upon
volume)
DNA Testing N/A Lab Testing Lifetime Test takes time Expensive
Retinal Imaging Inches to Easy Lifetime Equipment Set- Not used
Feet up extensively
Muzzle Inches Require Expertise Good Precautions to Still in
identification take muzzle experimental
imprint stage

4.1 4.2
Figure 4: External (4.1) and Internal (4.2) RFID tags

Underwriting
Insurance underwriting and premium rates depend upon the insurer’s ability to create a
heterogeneous pool by taking care of types of cattle owners (large or small), income groups in
specific regions and geographical variation, age, breed and type of cattle to be underwritten and

28

the capacity to understand irregularity in year to year outcomes. Underwriting becomes tough
when the policyholder is unable to or does not disclose the appropriate health status and history
of animals. Also, at times, intermediaries involved in the process are unable to provide risk data
to underwrite a group policy. Then underwriters consider only the tentative mortality data on
which to price since they do not have access to critical data on present animal health
management systems, government machinery and its functioning, etc., which makes it very
difficult to measure and rate.

Risk Transfer Opportunities
Reinsurers have till recently maintained that risks in developing countries are uninsurable
primarily because of poor livestock farm management, absence of efficient and reliable loss
control and loss assessment systems, slow moving administrative and statistical systems and non
availability of authentic past loss experience. Secondly, livestock insurance business is too small
in volume to attract a re-insurer. Insurance companies feel that the government should act as re-
insurer for livestock insurance as some of them think that this business will grow in future.

Incentive Systems for Risk Reduction
Most of livestock support services like artificial insemination/natural service, vaccination, de-
worming etc. are time-sensitive, which government institutions, at times, are not able to deliver
due to financial as well as bureaucratic constraints14. Though the government understands that
there is a compelling need to improve the dairying and animal husbandry sectors, efforts are so
thinly spread that it is not possible for the good effects to show immediately. Even there are dairy
co-operatives and cold chain owners for milk procurement who have incentives aligned to invest
in animal husbandry practices; many milestones remain untouched probably due to the public
nature of animal health interventions. It is not going to bear fruit till there are extremely large
collectives to justify such interventions, and hence, the government has to provide constant
support to improve the animal husbandry sector more rigorously. If risk reduction measures are
available, product designing will take a new turn as insurers can plan for disease, epidemic and
productivity fluctuation products which are currently absent.

Absence of Bundled Comprehensive Financial Products
Comprehensive risk covers help to ensure that the ratio of risk premium to transaction cost
improves and premium has more percentage of pure risk and thus households can be saved from
giving transaction cost for each different cover.
More comprehensive products are to be made e.g. for livestock diseases, etc., and more products
and process innovations are required. But private insurers will not be able to take more bundled
and comprehensive products due to covariate risks involved like in cases when agriculture and
livestock both are affected due to multi year drought or heavy rainfall.
Channels used to deliver bundled products will be of utmost importance as presently India lacks
usage of leveraging existing channels like its huge co-operative structure, banks, post offices,
etc.

14
Source: 10th Five Year Plan (2002-07) by Planning Commission, Govt. of India

29

When insurance is linked with loans, the uptake of insurance increases for compulsory as well as
voluntary products as farmers as well as intermediaries prefer to secure their portfolios and hence
in these cases, insurance operations are seen rather as a means to facilitate access to loans and to
protect credit portfolios. In case of voluntary products, there are more chances of adverse
selection than in compulsory products, but one cannot say that with confidence.

Sales Staff and Incentive Systems
Because the number of rural representatives and development officers are inadequate, animal
insurance coverage on the scales envisaged has not been achieved15. Also, insurance agents and
development officers who go to villages prefer to fetch high ticket businesses like tractor or life
insurance rather than cattle insurance due to incentive alignment16 (as percentage of premium
collected). This implies that the agent will be entitled to get more commission if he is collecting
high premium and hence livestock insurance takes a back seat.

From the farmer’s perspective livestock insurance is already low priority. This goes even lower
down the list of priorities when one has travel to the point of sale and hence the chances of
product uptake decrease even further. Therefore, incentive systems for sales staff and potential
for hidden behavior by farmers can defeat a well designed model and efficiently priced product
also.

Absence of Concentrated Marketing and Product Awareness
Due to general illiteracy, it becomes necessary to use audio-visual aids rather than any other
cheaper printed material to facilitate insurance literacy. But as different states use different
languages, material developed in vernacular languages are also necessary. The flip side to this is
that these have limited value outside the command area, a fact that increases the cost of
marketing.

Ignorance of the insured and his past negative experiences with insurers decreases insurance
uptake. During marketing of livestock insurance, insurers try to educate farmers regarding risk
reduction methods like vaccination, de-worming, hygiene, etc., so that mortality can be
decreased, but its impact is still not measured. One big challenge is offering an efficient risk
reduction program due to the nature of animal health interventions, which is like a public good.

5. Claims Settlement and Fraud Control
The claim settlement process requires a) deciding the cause of cattle death and b) cattle
identification. This requires substantial paper work, duly completed claim form for reporting
claim, death certificate by way of documentary proof for the death of animal, post mortem
15
Report on http://www.cag.gov.in/reports/commercial/1995_book14/chapter8.htm by Comptroller and Auditor
General of India, Government of India
16
There were 1.6 million "highest income" households in rural areas. National Council on Applied Economics and
Research (NCAER) India projections indicated that the number of "middle income and above" households was
expected to grow to 111 million in rural India by 2007. (Source: Shanti Kannan, "Rural market - A world of
opportunity," www.hindu.com, 11th October 2001)

(Source: Francis Kanoi, 2002) (1 Crores= 10000000)

30

report, First Information Report (FIR) in case of any accident, and most important, ear tag with
portion of ear to file the claim. The policyholder has to cut the ear of the animal along with the
tag and send this to the insurer at the time of claim settlement which is a very weak process. All
insurers strictly follow the rule of ―no tag no claim‖. Some insurers collect photographs also so
as to ascertain that dead animal for which a claim has been made is the same one which was
insured. But the whole process becomes very transaction heavy as the veterinarian empanelled
by the insurer has to reach the village and conduct a post- mortem and other verification before
paying the claim.

There are other difficulties, too. The post mortem is to be conducted within 24 hours of death
reporting and at times it is difficult to reach the village on time. Interestingly, insurers shared that
the maximum number of claims are reported on Saturdays as Sunday. Since these are holidays,
veterinarians are unable to reach the village within 24 hrs. After this time, animals are either
burnt or sent to slaughter houses and the insurer has to pay the claim without verification. Hence,
claims management remains the biggest challenge as paperwork and transportation increases the
cost. All these fraudulent claims show their impact on yearly premiums and massification of
insurance.

Cumbersome paperwork involved in the standard process of claim settlement reduces the
farmer’s interest in buying the product and leads to heavy transaction costs for the insurer
(transport and post mortem) that acts as a barrier in the massification of the product. So, there is
an emerging need to make claims processing as seamless and easy as possible.

6. Conclusions and Recommendations
With limited penetration, the present cattle insurance markets are considered underdeveloped in
developing countries and require substantial investment and innovation. The future of livestock
insurance is still uncertain and policy development needs to be coordinated. Interest in
developing animal industry insurance is increasing nowadays due to the drastic environmental
impact on low-income households. There are hopes that livestock insurance will work best when
the government and the industry work together. There is a need to look for more comprehensive
covers and move towards complete livestock management systems. But as animal health is
affected by numerous externalities and possesses public good characteristics, it would require
constant government support for prevention, control and the regulation of various risk
management and risk transfer practices.

On the basis of clues from the market some improvements are suggested below. These can help
boost the performance of livestock insurance industry in developing countries.

6.1. Create Database
Risk carriers need adequate data including estimates of frequency and severity of loss to
calculate accurate premiums.
i. The challenge faced by insurers is finding sufficient data probability distributions. While in
many cases this data simply does not exist, in most cases such data does exist within
institutions or with other agencies but it requires cleaning and digitizing to be converted into
information that can be utilized.

31

Livestock insurance lessons from the indian experience

Livestock insurance lessons from the indian experience

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