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.

1. Crop Insurance in India
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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. 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. 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. 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. 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. Index Insurance - Rationale
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Large number of Small sized Farm-holdings ( 120 million / 1.2 hectare)
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Non availability of individual farm level record of Yields, risk
management capabilities etc
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Low value of output per unit
•
Collection of small premiums from large number of farmers
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Prohibitive cost of Manpower and Infrastructure
•
Asymmetric Information
•
Systemic nature of Agriculture risks

8. Crop Insurance System in India
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Predominantly Index based
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Credit linkage - presently compulsory, but need not be in future
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Cost of insurance is additionally financed by the credit institutions
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Insurance acts as collateral, lending agency has the first lien on claim
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Sum Insured is based on production cost – works as a safety-net
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Claims process is automated being ‘index’
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Multi-Agency Platform –convenient but insurer doesn’t have full control
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Insurance with social dimension as Government provides for about 2/3rd
cost of the program and has a larger say in dispute resolution
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Private insurers enjoy same level of support as public insurer

9. Modified NAIS: How it Works?
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Village-groups as Insurance unit for major crops for widespread losses
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Farm level assessment for hailstorm and landslide damages
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Farm level assessment for post harvest losses caused by cyclonic rains to
crop left for drying in ‘cut & spread’
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On-account payment up to 25% of likely claims in case of severe losses
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TY based on past seven years average yields excluding two years of
declared natural calamities
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Indemnity levels of 70%, 80% & 90%
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Actuarial Premium , Up-front premium subsidy by Government
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Uniform Seasonality discipline for Loanee & Non Loanee Farmers

10. Weather Index crop Insurance
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Reference Unit Area covered under a AWS
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Payout against deemed crop losses due to adverse weather incidence
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Peril covered are deficit rainfall, excess rainfall, Consecutive Dry/ Wet
Days, Heat / Frost & Mean Temp, Chilling Units, RH, Wind Speed,
Disease proxy
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Crops covered – all food crops, oilseeds, annual commercial & also
perennial horticulture crops like mango, apple, cashew, grapes ,orange
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Actuarial Premium rates with upfront premium subsidy from Govt.
Payouts based on pre-defined triggers on specified weather parameters

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. 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. 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. 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
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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. Thanks!