India: Making Insurance Markets Work for Farmers

Challenge

Access to risk mitigation is critical for India’s 120 million farmer households (80 percent of whom are small and marginal farmers), who are highly dependent on rain-fed cultivation. Crop failures lead to distress and the inability to service debts, creating a potential debt trap. Crop insurance also helps enhance the viability of crop lending and hence is vital for banks. India’s crop insurance program is the world’s largest (25 million farmers) yet, 85 million farmer households are not covered.

The relatively low coverage is explained by issues in product design and a post-disaster government funding mechanism (latter was partly necessitated by the lack of an actuarially sound premium rating methodology without which estimating payouts is not feasible). A post-disaster funding mechanism is sub-optimal for budget management for government, and, for farmers, it delays claims settlement and leads to high exposure to risk. 

Approach

Through Non-Lending Technical Assistance (NLTA), the Bank helped design an actuarial premium determination methodology and a cost-effective risk financing solution for crop insurance. Actuarial tools were used to demonstrate, amongst other things, the efficiency and political economy gains possible through faster claims settlements. The approach helped the client gain technical knowledge and use technical tools to influence policymaking. The joint regional and anchor staff team worked collaboratively with the client and national and international experts in this highly specialized area. Capacity building included regular visits of a certified actuary.

The team also collaborated with a sub-national agriculture sector lending project to pilot ideas on the ground (use of cell phones to report crop yields). The approach has also involved adapting state-of-the-art tools to second-best technical solutions when necessary to reflect ground realities and political economyconsiderations. The work combined both traditional and new generation (weather) insurance as opposed to promoting one over the other.

Results

The NLTA produced the following key outputs and milestones:

• Formulation of a best-practice, country-specific, actuarially sound premium determination methodology (2007-10) and product design to address farmer risk mitigation helped improve the main existing crop insurance program.
• Policy formulation and piloting of an improved crop insurance program in 50 districts (an estimated 400,000 farmers have participated in the first crop season)
• Review of India’s crop insurance program (including underwriting and ratemaking (2007)
• Development of commercial weather-based crop insurance products, which led to an increase of the public insurer's weather-based crop insurance portfolio to almost 1 million farmers and a total annual premium volume in excess of US$50 million (2009-10)
• Development of the public insurer’s capacity to transition to a market-based approach (2007-11) and increased involvement of private insurance and reinsurance market in crop insurance
• Policy dialogue on the fiscal and welfare implications of the improved program (2007-11)
• Prototype actuarial software and pricing of more than 200 insurance products, and advice on mobile and remote sensing technology to improve data quality and timeliness (2009-11).

Bank Contribution

The main contribution of the World Bank has been through highly specialized technical and operational advice to the client, including through drawing on national and bringing in international best practices and other country experiences. The NLTA has been supported through the Bank budget supplemented by trust funds (total cost around US$1 million).

Beneficiaries

While the direct client of the NLTA is AICI, the ultimate beneficiaries are India’s farmers. The benefits to farmers come from a better insurance product, greater product options, faster claims settlements and more equitable pricing. Better understanding of risks – through the actuarial premium rates – can facilitate more appropriate agriculture policy and agriculture extension services, thereby improving farmer cropping patterns and productivity.
 

Partners

The NLTA involved collaboration with government, the Agriculture Insurance Company of India (AICI) and various technical institutions. Funding from the Swiss Agency for Development and Cooperation Agency, the Financial Sector Reform and Strengthening Initiative (FIRST) and the Global Facility for Disaster Reduction and Recovery (GFDRR) sustained activities.

Toward the Future

With the launch of the improved pilot program in 50 districts, the immediate challenge is to address technical and implementation issues that confront any such new product roll-out. For the client, a key next step is to evaluate how well the pilot program has performed. This will be done at the end of three crop seasons (2012). Based on this, a decision will be taken on the scaling up of the program. Technical support to improve market infrastructure and address the complexities of implementing the scaling up of such a large program will remain a challenge going forward.