Great Potential Exists for Crop Insurance in India & World

Dr. Olena Sosenko, International Consultant on Crop Insurance (Zurich, Switzerland), was present during 2-Days Extensive International Training Programme on Crop Insurance and shared valuable knowledge on Crop Insurance from around the world. 

This is an executive summary/ conclusions as noted by her during this extensive programme. Insurance Foundation of India appreciates her contribution in making this training programme a great success. 

The Insurance Foundation of India hosted the international training seminar on crop insurance for a wide range of participants: government representatives, insurers, brokers, media, agricultural analysts, technology companies’ and others. The seminar took place in New Delhi and attracted the guests not only from different regions of India but also from various countries such as Jordan, Kenya, Sri Lanka and Nepal. The program of the seminar through presentations of 13 speakers and panel discussions covered various dimensions of the agricultural insurance equally from Indian and international perspective. The presenters and the audience actively discussed the achievements and challenges of PMFBY –Indian national agricultural insurance program, which over last 2 years lead the country to achievement of the second global largest agricultural insurance premium after USA. 

Despite such high premium volume the crop insurance market penetration in India stays at the level of 35% leaving 65% of farmers being uninsured. Non loanee farmers take higher stake in uninsured category in comparison with loanee farmers. The audience also had chance to get acquainted with the international practices in agricultural insurance that includes beside the crop also livestock, aquaculture, greenhouse, forest and pet insurance. The examples of various insurance products (index and traditional), principles of underwriting and loss adjustment, risk pricing and system management were given within the training presentations. It became clear that despite using the commonly known elements of the risk pricing, system management and innovative technology India outstands from other countries around the world due to its unique farming structure and volume. Thus India requires the individually tailored solutions for products, system administration and especially for loss adjustment. In the global perspective the agri insurance is implemented in the form of the private business as we as a private public partnership (PPP). Especially where the multi peril crop insurance is need the state subsidy for the insurance premium is necessary due to high price of the risk. Thus the government takes part in the entire agricultural insurance system regulation through providing subsidies and creating the state underwriting agencies. The known best examples of such agencies are RMA in US, Agroseguro in Spain, Tarsim in Turkey etc.

India has multi agency scheme for agricultural insurance that involves multiple stakeholders – federal and regional governments, banks, insurers, brokers, scientists, technology companies. It is important to mention the role of international reinsurers with their capital and technical knowhow as well as the “primary” stakeholder of the entire scheme – the farmers. Does the Indian agricultural insurance scheme achieve the efficient result for its N1 stakeholder – farmers? This question was highlighted at the seminar. It seems all participating market players’ focus on the better outcome for the farmers – the government subsidy makes the insurance coverage more affordable for farmers, marketing efforts of insurers and banks lead to higher market penetration, the use of the remote sensing technology helps to increase the efficiency of loss adjustment and reduce the basis risk etc. 

There is still a substantial room for improvement in every aspect of the scheme. This is reflected in the critical media publications that take rather a side of farmers and give a fair portion of critics to the insurers. Certain Indian states – like Punjab - still don't see the benefits in participating at PMFBY. In other states the insurers experience challenges in reaching farmers due to the lack of rural infrastructure and engaging them to insurance due to lack of farmers trust. Insurers also need to cope with variability of data standards in different states, delay of yield data arrival and late subsidy payment. Despite the substantial administrative burden of increased amount of crop cutting experiments (CCE) their results sometimes are considered to be not reliable. In India the variability between yield levels at 2 neighboring farms can reach 50% due to the difference in farming practices. This problem could be mitigated by the usage of the innovative technologies offered by such companies like RMSI, Climacell and others – remote sensing, crop growth modeling and ultimately – artificial yield simulation.

The scientists and technology companies need to continue the historical calibration of NDVI in combination with weather data against the ground yield measurements in order to be able to simulate the individual farm yield. This will optimize the process of crop cutting experiments and make the yield measurement as well as loss estimation more precise and individualized. Indian government takes its own measurements for the improvement of the PMFBY efficiency. One of very useful recent creations is the National Crop Insurance Portal, which will help to centralize the data base and system management through online declaration forms and online claims calculation. While insurers might have own view on such initiative, the centralized view of the entire agricultural insurance scheme would be important not only for Indian government but also for international reinsurers who provide their financial capacities simultaneously to multiple Indian insurers.

Unlike in other countries the Indian crop reinsurance cession is too high. It reaches 80% as the risks are mostly reinsured within the quota share treaties. For the reinsurance optimization many components need to be taken into account: the internal capital availability for higher insurers retention, the transparency and predictability of the portfolios underwriting result, higher confidence of re-insurers on the business profitability. As it was especially highlighted in the international presentations the agricultural insurance requires a balance of interests of all country stakeholders. It is possible to reach such balance only when all stakeholders have the common point of view on the farm production risk caused by weather calamities. The government, Indian insurers and international reinsurers need to inline their approaches to risk pricing, loss expectation and portfolio PML calculation through the unified database and algorithm. The farmers should be better educated on their risk awareness and financial instruments for the risk coping, which is, probably a task of the join forces between insurers and the government. 

It is universally common that farmers receive some state support during natural disasters such as severe drought or floods. Disaster assistance is costly and it may encourage production in high risk areas if payments are made frequently. In the USA, disaster assistance was phased out in 1982 and the official view is that farmers must insure their crops (US Congress). Hail insurance is provided adequately by the private sector in many countries as the occurrence of hail is more random than droughts. Crop insurance, however, only enjoys sufficient acceptance by farmers in countries where it is highly subsidised such as in Canada or where it is compulsory as in Sweden. In the USA, only 16 per cent of potential cropland is insured in spite of a 25 per cent subsidy on premiums.

In South Africa, crippling droughts during the past years (1983, 1984) again focused attention on crop insurance, while the Australian Bureau of Agricultural Economics is at present considering providing incentives to farmers to insure their crops. International interest is shown in crop insurance by the conference on agricultural risk, insurance and credit held in San Jose, Costa Rica, in February 1982 (Binswanger, Hogan Gardner and Kramer). The demand for crop insurance, even at a subsidized level, appears low. The purpose of this paper is to measure empirically factors explaining farmer participation in a crop insurance programme with a view to assist policy-makers. Welfare re-distributional impacts of insurance as simulated within a simultaneous equations model are also presented.