Need for Major Innovations in Agriculture Insurance Agriculture is the backbone of Pakistan’s economy Most crops are highly vulnerable to the vagaries of weather This vulnerability is likely to increase due to weather variability and Climate Change Despite this no worthwhile effort has been made in Pakistan to launch innovative Crop insurance schemes

Need for Major Innovations in Agriculture Insurance The CLIS in the country protects the loan portfolio of the banks to a certain extent and has many shortcomings The Insurance Industry has a low risk appetite and does not want to venture into new areas Most countries have moved on from conventional crop insurance to innovative crop insurance schemes There is no need for us to re-invent the wheel All that we need to do is review the success stories of other countries and customize them as per our local requirements

Why not conventional crop insurance? Half hearted attempts have been made in Pakistan to experiment with Conventional crop insurance which were bound to fail Conventional Crop insurance has been declared a global failure by international experts like Skees, Murdoch etc It can not be successful in developing countries due to bulging populations, budgetary constraints, huge farmlands and political pressures It is a bottomless pit because the claims subsidy is open-ended. It cannot be budgeted by the governments

Why not conventional crop insurance? There is a high level of moral hazard The claims settlement is delayed for months hence defeating the very purpose of insurance It is difficult to remove the political pressure

Major Advantages of weather Insurance Negligible moral hazard Outside political pressure Low administration cost Transparent structure It is faster It can be budgeted It has proved to be more sustainable and scalable than conventional crop insurance

The Indian Experience

Indian Experience Three crop insurance schemes are running side by side in India. All of them are compulsory and are bundled with loans: Conventional Crop Insurance (NAIS) Weather Insurance (WBCIS) Modified Crop Insurance (MNAIS)

Indian Experience Total premium underwritten in 2014: Weather insurance- Rs 27 billion Modified Insurance- Rs 12 billion Conventional Insurance- Rs 7.8 billion

Indian Experience The Year on year growth rate of last 5 years: Weather Insurance : 24% Modified Insurance :14% Conventional Insurance :--5%(Negative Growth)

Indian Experience The cumulative 5 years loss ratio of: Weather Insurance: 73% Modified Insurance : 81% Conventional Insurance : 330%

Indian Experience The average claim settlement time in these three schemes: Weather Insurance : 30 to 45 days Modified Insurance : 6 to 12 months Conventional Insurance : 6 to 12 months

Future of Crop Insurance In India Conventional Insurance is expected to be gradually phased out Weather Insurance is likely to replace other schemes especially for Horticulture crops because they are highly vulnerable to extreme weather conditions For Agriculture crops, Weather insurance will continue to be implemented side by side with Modified Insurance

Future of Crop Insurance In India Modified Insurance schemes are being successfully implemented in many other countries like US, China and Brazil. Such innovative models have been able to overcome the major shortcoming of the other two schemes by combining the advantages of Conventional and Weather Insurance schemes

Future of Crop Insurance In India All crop insurance products will continue to be highly dependent on subsidies as the actuarial premium rates are much higher and cannot be afforded by farmers Premium subsidies up to 75% are being offered under Weather & Modified schemes. For Conventional Insurance premium rates are capped at 1.5%-3.5% & claim subsidy is provided if the claim is more than 100%

Way Forward for Pakistan Food Security will become a bigger challenge due to the bulging population and negative Impact of Climate Change Agriculture Insurance cannot survive without government subsidies The State Bank should make weather insurance & Modified Insurance also compulsory with the agriculture loans

Way Forward for Pakistan Weather & conventional products complement each other and can run side by side because they target different segments of the risk. Its time for the Insurance Industry to venture into new areas where the numbers are huge and the profitability is good. The insurance sector needs to change their mind set and view weather insurance as a viable commercial proposition

The Future The future lies with those companies who see the poor as their customers C.K.Prahalad