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 1

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) 3

Agriculture Risks

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  

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% India’s annual rainfall - undergoes wide inter annual variations



Large variations in rainfall distribution (<10cm in western desert to >1000cm 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

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 7

         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

National Agricultural Insurance Scheme [NAIS]

(Government’s 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 9

Crop: Sorghum

NAIS: How it Works?

Sum Insured (INR): 10000 Year Yield (Kg/Ha.)

2004 2005 2006 350 950 1200 2007 2008 2009 2010 875 250 950 1200 Current Yield - 2011 (Kg/Ha.): Average Yield of latest 5 years: (Kg/Ha.): 650 895.00

Risk category

high risk medium risk low risk

Indemnity level TY (Kg/Ha.)

60% 537 80% 90% 716 805.5

Shortfall (Kg/Ha.) shortfall %

0 0.00% 66 155.5

10.15% 23.92%

claim (INR)

0.00

1015.38

2392.31

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 11

Pilot WBCIS

1 A. 1 B.

Rainfall of less than 2.5

Rainfall Volume Rainfall Distribution (Consecutive Dry Days) Crop: Groundnut PERIOD TRIGGER I (<) TRIGGER II (<) EXIT RATE I (Rs./ mm) RATE II (Rs./ mm) Max. Payout (Rs.) TOTAL PAYOUT (Rs.) PERIOD TRIGGER DAYS (>=) Season: Kharif PHASE-I 21st June to 15th July 80 mm 40 mm 20 25 75 2500 10000 20 PHASE - II 16th July to 15th Aug 160 mm 80 mm 30 25 60 5000 25 1st July to 31st August PHASE – III 16th Aug to 30th Sept 80 mm 40 mm 20 25 75 2500 30 PAYOUT (Rs.) 1500 3000 5000 TOTAL PAYOUT (Rs.) 5000

mm in a day shall not be considered as a rainy day; and multiple payouts considered

Max. Payout (Rs.) 15000

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Modified Yield Index Insurance

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Modified NAIS: How it Works?

Crop: Sorghum Year

2004 2005 2006 2007 2008 2009 2010

Yield

Current Yield - 2011 (Kg/Ha.): Average Yield of latest 7 years: (Kg/Ha.): Average Yield of latest 7 years less 2 calamity years (Kg/Ha.): 950 1200 875 950 1200 650 825.00

1035

Sum Insured (INR):

350 calamity year1 250 calamity year2

Risk category

high risk medium risk low risk

10000 Indemnity level TY (Kg/Ha.)

70% 80% 90% 724.5

828 931.5

Shortfall (Kg/Ha.) shortfall %

74.5

178 281.5

11.46% 27.38% 43.31%

claim (INR)

1146.15

2738.46

4330.77

Index Based Crop Insurance Progress: 2011-12

Program NAIS WBCIS MNAIS TOTAL Farmers (Millions) 16.731

Hectares (Millions) Sum Insured (US $ Millions) 22.947

7415.29

Premium Program (US $ Millions) Nature 219.22

Adminstered 11.607

15.629

4179.99

370.28

Actuarial 1.084

1.182

730.56

66.67

Actuarial 29.422

39.758

Source: Agriculture Insurance Company of India

12325.84

656.17

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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 2/3 rd cot of the program 17

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 19

India

Crop Insurance: New Initiatives

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Weather index: 1.

2.

3.

4.

Index + Double-Trigger product Savings linked (Loyalty Discount) based product TOPS based weather data generation Yield index: 1.

2.

3.

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)

नमस्कारम

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