Index Insurance in India
Kolli N Rao, PhD
Aon Benfield, India
The Outline
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
Indian Agriculture
&
Monsoon
Indian Agriculture
Nearly 120 million farm holdings
About 145 million hectares of cultivated area (~ 190 million hectares
of gross cropped area)
Small farm holding size (Average of 1.2 hectares)
80% are small / marginal farmers (with 62% owning less than one
hectare)
About 50% of area is under cereals and millets
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
Rainfall Variability
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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
Index Insurance
Index Insurance
Index (Parametric) insurance is a type of insurance that 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 envisages that in
the absence of reliable data of individual farmers and in view of the
moral hazard involved in the 'individual approach', a homogenous
area comprising villages that are homogenous from the point of
view of crop production and whose annual variability of crop
production is similar, would form the basic unit, instead of an
individual farmer
Index Insurance - Rationale
Large number of Small sized Farm-holdings (nearly 120 million /
1.2 hectare)
Non availability of past record of Yields, Land surveys,
Ownership and Tenancy
Low value output per unit
Difficulty in collection of small amount of premium from large
number of farmers
Prohibitive cost of Manpower and Infrastructure
Asymmetric Information
Systemic nature of Agriculture risks
Crop Insurance Architecture
Indian Crop Insurance – The
Architecture
Predominantly Index based
Credit linkage (presently compulsory, but need not be in future)
Credit institutions also finance the premium (in addition to crop loan)
Insurance acts as collateral, and lending agencies have the first lien on
claim
Risk covered is based on production cost (safety-net)
Being ‘index’, claims process is automated
Multi-Agency Platform (administratively convenient, but insurer doesn’t
have full control)
Government provides for about 2/3rd cost of the program
Being a instrument with social dimension, the government has a larger say
Private insurance providers are allowed for actuarially priced programs, and
enjoy same level of support as public insurer
How Products Work?
NAIS: How it Works?
Modified NAIS: How it Works?
Weather Index crop Insurance
Weather Index crop
Insurance
Crop Insurance: Market Volume
Index Insurance: Numbers
Farmers Hectares Sum Insured
Premium
Program (Millions) (Millions) (US $ Millions) (US $ Millions)
Program
Nature
NAIS
15.45
29.92
6322
185
Adminstered
WBCIS
13.16
18.4
4247
415
Actuarial
MNAIS
2.98
2.97
1245
136
Actuarial
TOTAL
31.59
51.29
11814
736
Source: Agriculture Insurance Company of India
Index Insurance: Challenges
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
Index Insurance
S.No
1
Nature of
Basis Risk
Spatial Basis
Risk
2
Product Basis
Risk
3
Product
Design Basis
Risk
Basis Risk
Yield Index
Weather Index
Arises when the Insurance
Unit size is too large and is
not homogenous in terms of
agricultural production level
Arises when a weather station is
referenced for a larger
geographical area, covering areas
far off from weather station
Yield index insurance covers
risk from sowing till
harvesting. As Yields are
estimated at harvest stage,
losses if any suffered after
harvest are not reflected in
the yield index.
Trigger yield used in yield
index insurance is a function
of moving average of past 5
years’ yield and coverage
level, which may range from
60 to 90 percent. In other
words, the shortfall between
‘normal yield’ and ‘trigger
yield’ is not protected
Weather index covers risk arising
out of deviations in parametric
weather exigencies only. Risks
outside these parametric weather
(like pests, diseases, hailstorm,
flooding etc.) are not covered
Arises because of imperfect
correlation between weather
index and the production process
(yield)
19
Yield Index Insurance
Basis Risk
Challenges:
Insurance Units are administrative (rather than homogenous)
Cost and Quality of Yield estimation surveys
Solution:
Lowering the Insurance Unit
Separate irrigated and rain-fed crop
Satellite imagery (target sampling, yield modeling etc.)
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.)
Index Insurance: Developments
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 Modeled outputs
Thanks!
Index Insurance in India
Kolli N Rao, PhD
Aon Benfield, India