Crop Insurance As Risk Mitigation Tool in Agriculture

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Crop Insurance As Risk Mitigation Tool in
Agriculture
Small Sized Holdings and Low Value Crop the
Case of Index Insurance 27th September 2012,
Brussels

Kolli N Rao Agriculture Insurance Company of
India (AIC)
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OVERVIEW

• Indian Agriculture
• Agriculture Risks
• Crop Insurance Evolution
• Crop Insurance Why Index insurance?
• Crop Insurance Key Products
• Crop Insurance How Products work?
• Crop Insurance Key Characteristics
• Crop Insurance Key Challenges
• Crop Insurance New Initiatives

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• Indian Agriculture

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Indian Agriculture Salient Features

• 1.2 billion population
• 120 million farm holdings
• 80 farmers own less than two hectares
• 61 of rural households are farming households
• 145 million hectares of cultivated land
• 190 million hectares of gross cropped area
• 1.2 Hectare Average Farm-holding size
• 50 of area under cereals and millets
• 52 of the employment provided
• 69 of population is sustained
• Subsistence agriculture dominates
• Agrl. GDP estimated at US 285 billions (FAO,
  2010)

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• Agriculture Risks

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Rainfall Variability

• Rainfall variability is dominant due to the
  presence of the Monsoon (seasonal winds blowing
  from the Indian Ocean and Arabian Sea in the
  southwest bringing heavy rainfall)
• Monsoons contribute 78 Indias annual rainfall -
  undergoes wide inter annual variations
• Large variations in rainfall distribution (lt10cm
  in western desert to gt1000cm in northeast)
• 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
• One - third of the country is mostly under threat
  of drought
• One - sixth of the country prone to floods

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India

• Crop Insurance History

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Evolution of Crop Insurance

• J S Chakravarthi proposed Drought Insurance
  based on rainfall index in 1920
• First ever crop insurance started in 1972 for H-4
  cotton based on individual farm
• In 1979 a pilot insurance was introduced based on
  homogenous area based yield index (Pilot Crop
  Insurance Scheme PCIS)
• In 1985 the PCIS was converted into a
  country-wide yield index based crop insurance
  covering cereals, millets, pulses and oilseeds
  (Comprehensive Crop Insurance Scheme CCIS)
• Scope of CCIS expanded in 1999 as National
  Agricultural Insurance Scheme NAIS
• Pilot Farm Income Insurance Scheme(FIIS)
• Weather Based Crop Insurance Scheme WBCIS was
  introduced from 2007
• Modified NAIS as pilot in 50 Districts from Rabi
  2010-11 season

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Why India Needed Index Based Crop Insurance?

• Non availability of past record of Yields, Land
  surveys, Ownership and Tenancy
• Large number of Farm-holdings (nearly 120
  million)
• Small size of farm-holdings (Average size of 1.2
  hectare)
• Remoteness inaccessibility of Farm-holdings
• Low value per unit
• Large variety of crops, varied agro-climatic
  conditions and package of practices
• Difficulty in collection of small amount of
  premium from large number of farmers
• Simultaneous harvesting of crops all over the
  country
• Prohibitive cost of Manpower and Infrastructure

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National Agricultural Insurance Scheme
NAIS(Governments flagship Yield index Crop
Insurance Program)

• Introduced in 1999 and presently in operation
  countrywide
• Homogenous Area approach and Area-Yield Guarantee
  
• Available to all Farmers - compulsory for
  borrowing optional for non-borrowing
• Covers Food crops, Oilseeds Annual Commercial /
  Horticultural Crops
• Indemnity levels vary from 60 to 90 of past
  average yield
• Sum Insured - Loan amount to 150 of value of
  Yield
• Premium rates
• Food crops Oilseeds ranges from 1.5 to 3.5
• Annual Commercial / Horticultural Crops
  Actuarial
• Indemnities exceeding Premium for food crops
  oilseeds are borne by the Government
• Being Implemented in 25 States 2 Union
  Territories
• Covers more than 35 different crops each during
  Kharif and Rabi

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NAIS How it Works?
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Weather Index Crop Insurance

• Government providing support since 2007
• Indemnifies farmers against deemed crop losses
  due to adverse weather incidence
• Crops covered include perennial horticulture
  crops like mango, apple, cashew, grapes orange
• Risk based Premium rates with upfront premium
  subsidy from government
• Payouts based on pre-defined triggers on
  specified weather parameters
• Weather Parameters
• Rainfall Deficit rainfall, Excess rainfall,
  Consecutive Dry/ Wet Days , Number of rainy days
• Temperature Maximum Temperature (heat), Minimum
  Temperature (frost), Mean temperature, daily
  chilling units
• Relative Humidity
• Wind Speed
• Disease proxy Combination of rainfall,
  temperature humidity

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Pilot WBCIS
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• Modified Yield Index Insurance

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Modified NAIS How it Works?
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Index Based Crop InsuranceProgress 2011-12
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India

• Crop Insurance Key Characteristics

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Key Features of Implementation

• Credit linkage, and mandatory for borrowing
  farmers
• Risk covered is based n production cost
  (safety-net)
• Credit institutions also finance the premium (in
  addition to crop loan)
• 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 product uses crop modeling inputs
• Weather data comes from both public as well as
  private data providers
• Extension activities and awareness programs are
  also organized by the government
• Private insurance providers are allowed for
  actuarially priced programs, and enjoy same
  level of support as AIC
• Government provides for about 2/3rd cot of the
  program

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Key Challenges

• Basis risk
• Issues of financial literacy
• Un-realistic expectation high frequency payouts
  to sustain interest
• Crop Insurance Vs Other Subsidy programs
• Technically Complex Products (weather index)
• Climate Change Seasonal Forecasts
• Yield estimates prone to manipulation risk

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Some Solutions

• Yield audit system
• Weather data standardization and integration
• Technical Support Unit (TSU) product
  bench-marking
• Financial literacy and consumer education
• Micro-insurance agents
• On-line portal
• Information interface for stakeholders

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India

• Crop Insurance New Initiatives

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New Initiatives

• Weather index
• Index
• Double-Trigger product
• Savings linked (Loyalty Discount) based product
• TOPS based weather data generation
• Yield index
• GPS enabled cell phones to audit yield estimation
• Satellite imagery based area estimation and crop
  health reporting
• Remote Sensing based Information and Insurance
  for Crops in Emerging Economies (RIICE)

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