Crop insurance in India


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Presentation by P Joseph, Agriculture Insurance Company, on crop insurance in India at the CCAFS Workshop on Institutions and Policies to Scale out Climate Smart Agriculture held between 2-5 December 2013, in Colombo, Sri Lanka.

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Crop insurance in India

  1. 1. Crop Insurance in India 1
  2. 2. The Agenda Indian Agriculture & Risks What’s Index Insurance? Why Index Insurance? Architecture of Indian Crop Insurance Coverage: The Numbers Index Insurance: Challenges Weather Index: Recent Developments & Innovations
  3. 3. Indian Agriculture at a Glance • Nearly 120 million farm holdings • About 145 million hectares of cultivated area (~ 190mha of gross cropped area) • Small farm holding size (average of 1.2 ha) • >80% small / marginal farmers, 62% own <1 ha • About 50% of area is under cereals and millets
  4. 4. Indian Agriculture at a Glance • 61% of Rural Households are Farming Households • Provides 50% of the Employment • Sustains 69% of Population • Varied agricultural practices • Predominantly Rain-fed Agriculture • Large number of farmers produce for self consumption
  5. 5. Rainfall Variability  Monsoons contribute 78% India’s annual rainfall undergoes wide annual variations  Large variations in distribution (10 to 1000cm)  Disparity in the rainfall distribution is huge – leads to simultaneous droughts and floods at different parts, same place at different periods  1/3rd of the country is under threat of drought  1/6th of the country is prone to floods
  6. 6. Index Insurance • Index insurance typically does not indemnify the pure loss, but ex-ante agrees to make a payment upon the occurrence of a triggering event • ‘Homogenous area' approach based insurance is adopted when reliable data of individual farmers is not available • Area approach assumes that within an unit area annual yield variability is similar for all farms thus forms a basic unit • Area approach helps mitigate moral hazard of 'individual approach' as all the insured in the unit area are treated at par
  7. 7. Index Insurance - Rationale • Large number of Small sized Farm-holdings ( 120 million / 1.2 hectare) • Non availability of individual farm level record of Yields, risk management capabilities etc • Low value of output per unit • Collection of small premiums from large number of farmers • Prohibitive cost of Manpower and Infrastructure • Asymmetric Information • Systemic nature of Agriculture risks
  8. 8. Crop Insurance System in India • Predominantly Index based • Credit linkage - presently compulsory, but need not be in future • Cost of insurance is additionally financed by the credit institutions • Insurance acts as collateral, lending agency has the first lien on claim • Sum Insured is based on production cost – works as a safety-net • Claims process is automated being ‘index’ • Multi-Agency Platform –convenient but insurer doesn’t have full control • Insurance with social dimension as Government provides for about 2/3rd cost of the program and has a larger say in dispute resolution • Private insurers enjoy same level of support as public insurer
  9. 9. Modified NAIS: How it Works? • Village-groups as Insurance unit for major crops for widespread losses • Farm level assessment for hailstorm and landslide damages • Farm level assessment for post harvest losses caused by cyclonic rains to crop left for drying in ‘cut & spread’ • On-account payment up to 25% of likely claims in case of severe losses • TY based on past seven years average yields excluding two years of declared natural calamities • Indemnity levels of 70%, 80% & 90% • Actuarial Premium , Up-front premium subsidy by Government • Uniform Seasonality discipline for Loanee & Non Loanee Farmers
  10. 10. Weather Index crop Insurance • Reference Unit Area covered under a AWS • Payout against deemed crop losses due to adverse weather incidence • Peril covered are deficit rainfall, excess rainfall, Consecutive Dry/ Wet Days, Heat / Frost & Mean Temp, Chilling Units, RH, Wind Speed, Disease proxy • Crops covered – all food crops, oilseeds, annual commercial & also perennial horticulture crops like mango, apple, cashew, grapes ,orange • Actuarial Premium rates with upfront premium subsidy from Govt. Payouts based on pre-defined triggers on specified weather parameters
  11. 11. Major Challenges • Product Basis Risk • Spatial Basis Risk • Financial Literacy • Delivery Channels for Non-Borrowing Farmers • Market Standards (vis-à-vis competition) • Plethora of Government Support programs
  12. 12. Yield Index Insurance Basis Risk • Challenges: – Insurance Units are administrative, non-homogeneity – Cost and Quality of Yield estimation surveys • Solution: – Lowering of the Insurance Unit – Separate irrigated and rain-fed crop – Satellite imagery (target sampling, yield modelling etc.)
  13. 13. Weather Index Insurance Basis Risk • Challenges: – Product Basis Risk – Spatial Basis Risk – Weather Station Infrastructure & maintenance • Solution:  Agronomic models  Low frequency & High Impact events (Catastrophe events)  Macro level Product  Increased weather station density  Technologies to generate weather data at micro level (TOPS etc.)
  14. 14. Yield vs. Weather Index: Advantage/Challenges Area Yield Index Weather Based Index All Risk Insurance – drought, Multiple perils cover viz. rainfall – flood, pest & diseases are (excess & deficit), temperature (heat & covered frost), relative humidity, wind speed Easy to design Challenges in index design (peril, crop, farming practices, agro-met zone etc.) Low start-up costs High start-up costs High loss assessment costs Low loss assessment costs (CCEs) Slow claims settlement Faster claims settlement 14
  15. 15. Recent Developments & Innovations • Index + (fruit crops) • Loyalty Bonus for Non-Borrowing farmers • Value added services (weather forecast etc.) • Traditional Insurance at community level (using GPS enabled HHDs) • Double Trigger (Weather and Yield) Product (conceptual stage) • Weather Secondary and Modelled outputs
  16. 16. Thanks!