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Kolli Rao Index Insurance in India
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Dr. Kolli Rao of Aon Benfield/IRICS presented on index-based crop insurance in India at the workshop on Mobilizing a CGIAR Agricultural Insurance Community in Washington, DC, 20-22 January 2014, …

Dr. Kolli Rao of Aon Benfield/IRICS presented on index-based crop insurance in India at the workshop on Mobilizing a CGIAR Agricultural Insurance Community in Washington, DC, 20-22 January 2014, hosted by the International Food Policy Research Institute and the CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS). Read more about CCAFS work on index-based weather insurance:

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  • 1. Keynote 3 Climate Risk and Agriculture - Case of Indian Crop Insurance KOLLI N RAO, PhD Indian Crop Insurance Industry Expert (IRICS / Aon Benfield)
  • 2. OVERVIEW §  India: The Setting §  Insurance Penetration §  Crop Insurance: Challenges §  Research & Way Forward 2
  • 3. The Setting 3
  • 4. Indian Agriculture: The Setting §  1.2 billion population §  Agriculture sustains ~ 70% population §  120 million farm holdings §  62% farmers own less than ONE hectare §  145 million hectares of cultivated land §  1.16 Hectare Average Farm-holding size §  50% of area under cereals and millets §  Agrl. GDP estimated at US $ 285 billions (FAO, 2010) §  Nearly 3/4th Rainfall received over FOUR months §  Disparity in the rainfall distribution is so great – droughts and floods occur at different parts of the country at the same period and in the same place at different periods §  1/3rd country is mostly under threat of drought §  1/6th country prone to floods 4
  • 5. India: Architecture of Crop Insurance Implementation •  Almost 100% INDEX insurance •  YIELD index and WEATHER index dominate •  Credit linkage, and mandatory for borrowing farmers •  Risk covered is based on production cost (safety-net) •  Insurance acts as collateral, and lending agencies have the first lien on claim •  Minimal distribution costs •  Claims process is automated •  Yield estimation is done by the provincial government agencies , and based on ‘single series’ •  Weather data comes from both public as well as private data providers •  Private insurance providers (9) are allowed, and enjoy same level of government support as Public Insurance Company (AICI) 5
  • 6. Insurance Penetration 6
  • 7. Index Insurance: Numbers 2012-13 Program Farmers   Hectares   Sum  Insured   Premium                        Program   (Millions) (Millions) (US  $  Millions) (US  $  Millions) Nature   NAIS 15.45 29.92 5892.35 195.67 Adminstered WBCIS 13.23 18.39 4038.47 379.45 Actuarial 2.97 1149.20 125.10 Actuarial 51.28 11080.02 700.22   MNAIS 2.98   TOTAL 31.66   Source:  Government  of  India   Note: NAIS  Figures  are  Provisional  (AIC) 1.The sum Insured and premium size for 2013-14 is expected at US $ 12.5 billion and US $ 800 million, respectively 1.The sum Insured and premium size for 2014-15 is expected at US $ 15 billion and US $ 1.30 billion, respectively  
  • 8. Research Findings 8
  • 9. Research Findings
 §  Weather Index products analyzed across the competing insurance providers show significant differences in product design, pricing approach, and benefits offered §  The correlation appears better for Kharif products where rainfall is the key component, and the Weather Index product is underpaying. In comparison, Rabi products, particularly the heat (temperature) parameter show a poor correlation between weather and yield, and Weather Index product often overpaying §  42% probability of Weather Index products giving payout with NO visible Yield loss; Only 73% probability of Weather Index products giving payouts when Yield loss is 100% §  Spatial basis risk arising out of lack of adequate density of weather stations appears significant for rainfall §  The present Weather Index product is complex and fares poorly as an insurance mechanism. The payouts ate too frequent and too small §  Farmers practicing crop production under irrigated conditions have shown higher interest in crop insurance §  The awareness about crop insurance is primarily driven by the level of education, size of landholding and type of farming 9
  • 10. Challenges 10
  • 11. Key Gaps and Challenges of Index Insurance General §  §  §  §  Lack of Insurance culture Parallel government programs Full Value not insured (under insurance) Localized losses Yield Index §  §  §  §  Larger Insurance Unit size and Basis Risk Lack of historical yield data at a ‘smaller unit’level Yield estimations prone to manipulation and local politics Large number of Yield estimation surveys & Quality issues §  Delayed claim settlement Weather Index §  §  §  §  Too small and too frequent payouts Lack of Structured approach to Product design Basis risk: Spatial and Product Product targeting Micro level §  Pricing and Weather Cycles 11
  • 12. Some Technical / Research Solutions …   Yield Index §  Yield Audit systems (GPS enabled equipment to record key processes, near real-time reporting of results) §  Use of Satellite Imagery to estimate yields (either to corroborate / peer monitoring / replace manual yield estimations) §  Use of Technology to down-scale historical yields (sub-district to cluster of villages for major crops for past 10 years) §  Savings linked insurance products (for promoting loyalty of farmers) Weather Index §  Crop Growth Models §  Agro-Climatic zone level Crop-wise Product Templates §  Standardization of Weather Equipment and Maintenance §  Virtual Weather station network at micro level §  Double Trigger Products §  Index Plus Products