Agri insurance

A weather-based agricultural insurance scheme, where premiums will be evenly subsidized by the
Union government and states, is to be rolled out across select districts in 12 states for the forthcoming rabi
season as part of a new initiative to offset risks underlying Indian farming.

This would be the first occasion that the government will use private insurers for a subsidized agricultural
insurance package, said a senior finance ministry official, who did not wish to be identified.

The weather-based insurance policies will be sold by the government-owned Agriculture Insurance Co. of
India Ltd (AIC) and two private insurers, ICICI Lombard General Insurance Co. Ltd and Iffco-Tokio General
Insurance Co. Ltd.

The government’s broad objectives are to bring about a timely and objective claims settlement process and
streamline subsidies in agricultural packages, said people associated with the project.

The total national subsidy for the new scheme couldn’t be ascertained as some states are yet to finalize the
districts where the insurance package can be rolled out. Marketing of the package would begin by next
month to give farmers time to understand and buy the product before work on sowing wheat begins, said
executives at the insurance companies.

Insuring Weather (Graphic)

The weather-based insurance package would be priced according to the risk borne by insurers, said Pranav
Prashad, head, rural and agricultural business, at ICICI Lombard. The government, however, has fixed a
price ceiling: the premium on a food crop, such as wheat, should not exceed 8% of the sum insured and
that on commercial crops, such as corriander, should not exceed 12% of the sum insured.

The farmer would pay between 1.5% and 3% of the sum insured towards premium, the same amount as
that of an existing government scheme. The residual amount of the premium would be split evenly between
the Union government and the states.

The National Agricultural Insurance Scheme (Nais), the Union government’s existing subsidized agricultural
insurance package, is dogged by a slow claims-settlement process and open-ended subsidies, said officials
closely associated with the developments, who didn’t want to be identified.

The existing scheme subsidizes the claims paid by AIC, which has exceeded the gross premium by almost
threefold in the last few years. In 2006-07, 17 million farmers took a Nais policy and paid gross premiums of
Rs565 crore. The claims for the year were Rs1,624 crore, according to provisional data released by AIC.

The weather-based package works by identifying insurable parameters, such as average rainfall,
temperature and frost for each district where the package is to be sold. In the event that any one of the
insured parameters falls outside a band fixed in the policy, claims for the entire district are automatically
triggered. Insured farmers are spared the hassle of paperwork to get the claim money and there is no
subjectivity in deciding claims, officials said.

For the insured, the weather-based package differs from the government’s existing subsidized agricultural
insurance package in critical ways.

Claims now can take up to a year to be processed, said an executive at AIC. Also, as these claims are
triggered if average farm yields—estimated by respective state governments—fall below a threshold, they
can be contentious as individual farmers may fall below the threshold for reasons not covered by an
insurance policy. In contrast, weather-based packages would have quicker settlements.
“It is 45 days from the end of the risk period, which normally coincides with harvesting of crop. In some
cases, the risk period may end a few days earlier than harvesting,” said M. Parshad, chairman and
managing director of AIC, which would take the lead in implementing the new package.

Weather data covering the last 25 years would be obtained from the meteorological department. Over and
above that, AIC is using risk modelling firm RMSI Inc., a US-based company with Indian operations, to run
simulations going back 100 years based on meteorological department data to improve the robustness of
insurable parameters.

Vijay Sardana, an agri-business specialist who is the managing director of Anand Rathi Commodity
International Pvt. Ltd, says he is sceptical about the weather insurance package as it could be hurt by
ticklish operational issues.

“As a concept, I have no dispute” with it, said Sardana. However, he added, claims settlement can be
hijacked by vested political interests.

Officials argue that the shift to a scientific mode of assessing risk and getting all stakeholders to share the
insurance premium may reduce or at least peg the financial burden on the government at current levels.

Intro.........
Agriculture in developing nations is characterized by small holdings, ill-structured
institutional credit, unpredictable market fluctuations and feeble extension systems in
addition to natural disasters like cyclones, floods, drought, hailstorms etc. besides
frequent pest out-breaks. However, majority of developing economies in the world are
invariably depended on agricultural production where India is not an exception.
Timely agro-advisory service and efficient risk mitigation mechanisms can
provide stable income to the farmers. To provide timely agro-advisory, efforts are going
on to develop a IT-based cost-effective personalized agro-advisory system, called eSagu,
to reduce the lab to land gap and improve the profitability of the farmer (Krishna Reddy
P, et al, 2005, Krishna Reddy, P, et al 2006, Ratnam BV et al 2006). The e-Sagu system
has been developed by IIIT-Hyderabad and Media Lab Asia. It is an IT-based
personalized agricultural advice delivery system which is being developed to provide
* eSagu is a trademark of IIIT, Hyderabad and Media Lab Asia. It is an IT-based Personalized Agroadvisory
System.
† Presented at Third National Workshop on "ICT and Agriculture: From Potential to Prosperity in a Global
Perspective", IAITA and DA-IICT, Ahmedabad, India, 15-16, June 2006.
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high-quality personalized (farm-specific) agricultural expert advice to each and every
farm in a timely manner at the farmer’s door-step without farmer asking a question. The
advice is provided once in a week from sowing to harvesting. During 2005-06, eSagu
has been implemented in 30 villages in Andhra Pradesh for six crops. The results show
that significant benefits have flown to the farmers in terms of reduced inputs and
enhanced yield.
In addition to agro-advisory service, crop insurance is recognized as the basic
instrument for sustainable agriculture development. However, the agri-insurance schemes
around the world whether an advanced or a developing nation are suffering due to
catastrophic losses, covariate risks, asymmetric information and lack of quality data.
These problems may pose a serious threat to the survival of the implementing agencies
unless the there is an effective monitoring system in place, with enough man power and
robust infrastructure. Like many other nations, the financial experience of the Indian
government also has been disastrous as the indemnities paid were always exceeded more
than 300%, invariably making it a huge burden on the government’s exchequer.
In this paper we explain how agri-insurance schemes can be effectively
implemented by piggybacking eSagu system which is being developed to provide agroadvisory
service. The agri-insurance scheme can be very cost-effective as it is
piggybacking eSagu system; the information collected by the eSagu system can
effectively hedge the problem of asymmetric information besides providing quality and
reliable data at farm-level. Most important, eSagu also improves the performance of
other formal risk mitigation mechanisms through farm-specific monitoring system.
The rest of the paper is organized as follows. In the next section, we explain the
problems associated with implementing the crop insurance scheme. In section 3, we
review the implementation of crop insurance schemes in USA and Japan. In section 4, we
discuss the evolution of crop insurance scheme in India, current schemes and
experience. In section 5, we briefly explain eSagu and its benefits. In section 6, we
explain how crop insurance scheme can be effectively implemented by piggybacking
eSagu system. The last section contains summary and conclusions.
2. The problems of crop insurance implementation
The prosperity of any nation would obviously depend upon its secured food bases and the
sustained producing power of its farmers even after catastrophic loses. But, prevalence of
risk in agriculture has become a rule rather than exception. In this regard farmers, rural
institutions and money lenders have, over generations, developed several informal risk
mitigation mechanisms such as crop diversification, intercropping, diversification of
income source, buffer stock accumulation of crops or liquid assets, crop and labour
sharing etc (World Bank, 2001 and Townsend, 2005). Some of these instruments (eg.
crop diversification and intercropping are less profitable than crop specialization) can be
very costly in terms of the income opportunities that farmers forego as they can
discourage investments and technological changes that can enhance long term
productivity growth. At the same time, formal risk mitigation mechanisms such as
agricultural extension systems, pest prediction & management systems, formal credit
lending systems, future contracts and crop insurance were evolved with support from
both public and private sectors. Among the formal mechanisms, crop insurance is
recognized to be the basic instrument for maintaining stability in farm income through
promoting technology, encouraging investment and increasing credit flow in the
agricultural sector. It contributes to self-reliance and self-respect among the farmers, since
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in cases of crop loss they can claim compensation as a matter of right (Chandrakanth,
1980). Thus, crop insurance cushions the shock of crop loss by assuring farmers
protection against natural hazards that are beyond their control. However, the financial
experiences of majority of the governments around the world were more or less similar
with respect to crop insurance where the ratio of indemnities paid to premiums collected
was more than three baring Japan as an exception (indemnities to premium ratio less than
one).
The basic principle underlying crop insurance is that the loss incurred by a few farmers is
shared by many in an area. Also, losses incurred in bad years are compensated from
resources accumulated in good years (Dandekar, 1976). We now discuss the basic
problems associated with crop insurance.
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