New farm insurance products in the offing

Farmers across the country may soon have insurance covers matching their needs. The Agriculture Insurance Company of India (AICI) is in the process of designing eight weather insurance products covering fruits, vegetables and a wide range of farm produces.

The second and the third phases of the World Bank-assisted agriculture insurance project have begun last week. These phases aim at helping the government-owned AICI to move to a market-based approach in designing and pricing of weather and rainfall insurance products.

They also assist the agriculture insurer in developing cost-effective risk transfer strategies, such as reinsurance or alternative risk transfer mechanisms. The AICI was formed in 2002 to offer agriculture-related insurance.

The World Bank has sought the assistance of the Pune-based National Insurance Academy (NIA), independent American and Indian consultants, World Bank and AICI experts interacting with farmer groups, NGOs, MFIs and local experts to develop eight weather insurance policies on a pilot basis.

The eight weather insurance pilots "" including field crops (rice, cotton, groundnut, soybean, wheat), plantation crops (tea, rubber), fruits (apples, oranges, mangoes, grapes) and vegetables (tomatoes, potatoes) "" will be developed in the districts of Andhra Pradesh, Maharashtra, Kerala, Jharkhand, Haryana and Uttar Pradesh.

The methodology for the design and the pricing of weather insurance products developed under this assignment will be flexible enough to be replicated by the AICI in other areas with same agro-climatic characteristics after the completion of the project. The weather insurance pilots will be implemented in 2007.

The AICI will provide access to existing crop yield, weather database and technical documentation on the domestic crop insurance, besides identifying the agro-climatic zones, seasons and crops where pilots can be developed.

The NIA team will identify weather insurance delivery channels, such as rural banks, micro-finance institutions, input providers, besides developing a strategy for the AICI to market the new products.

The third phase of the project is to assess the risk exposure of the AICI's insurance business and develop cost-effective risk transfer strategies based on reinsurance and/or alternative risk transfer mechanisms, such as weather derivatives and contingent debt.

The government has given the World Bank a period of five months to complete the remaining phases.

The agriculture insurance project was mooted two years ago. In the first phase, the government had asked the World Bank to assist the AICI in making the present National Agricultural Insurance Scheme (NAIS) more attractive to farmers to increase the crop insurance penetration levels to 25 per cent by 2006-07 and to 50 per cent by 2011-12 from 17 per cent in 2004-05.

The government also wanted to place the scheme on an actuarial regime supported by up-front premium subsidies.

"The idea is to do away with NAIS in the long run and have eight agriculture insurance policies that match the needs of every state," said Dr K C Mishra, director of NIA.

The World Bank has recommended the government to change the basis of indemnity of NAIS from the input stage, including fertilisers and seeds, to the output stage, that is the production stage, to subisdise the insurance scheme only at the premium stage and to make loss assessment area-wise rather than on individual basis.

"The NAIS scheme was subsidised by the government at the premium and claim stages, burning a hole in the government's pocket. Also, farmers of Punjab and Haryana chose not be part of NAIS, as they preferred indemnification of output at the production stage," added Mishra.

India has 116 million farm holdings, operating an area of 163 million hectare. Small marginal farmers account for 65 per cent of all farmers covered under the NAIS. NAIS currently covers food crops (cereals, millets and pulses), oilseeds and select annual commercial crops.