1. 24th India Fellowship Seminar
MANDATORY CROP INSURANCE & CHALLENGES
Mentor - Mrs. Asha Joshi
Presented by
Prasunkumar Sarkar
Ananthanarayanan C
Anshul Bhushan
10 December 2015, Mumbai
Indian Actuarial Profession
Serving the Cause of Public Interest

2. Agenda Introduction Existing Mandatory Crop Insurance schemes
Challenges (Pricing/Regulatory/Operational)
Mandatory Crop Insurance for all - Pros/Cons
Way forward
Silver Lining
Questions
References

3. What is Crop Insurance?
Insurance for farmers against loss of their crop due to various insured perils
The group intends to discuss the existing mandatory crop insurance and its challenges.
Most of the challenges will remain even if the crop insurance is made mandatory for all the farmers including non-loanee.

4. Key Stakeholders in Crop Insurance
State
Govt and Agencies
Banks
Insurers
Farmers

5. Engagement Levels
State Governments – Not much unless there is pressure due to drought or farmer suicides
Banks – More interested in disbursing loans; would prefer to lend under other means
Insurers – Yes but severely constrained and heavily dependent on other stakeholders
Farmers – Very low unless impending disaster is very certain

6. History of Crop Insurance in India
In existence since the past three decades
Each successive scheme tried to improve on the previous schemes’ shortcomings
Major schemes introduced by the Government of India
CCIS (Comprehensive Crop Insurance Scheme)
NAIS (National Agricultural Insurance Scheme)
MNAIS (Modified NAIS)
WBCIS (Weather Based Crop Insurance Scheme)
NCIP (National Crop Insurance Programme)

7. CCIS - Introduction
Comprehensive Crop Insurance Scheme introduced in 1985
Operated for almost a decade and a half
Scheme covered cereals, pulses and oilseeds
States were free to choose whether to implement it or not
CCIS compulsory for farmers taking loans for crops production
Farmer insured for 100% of the loan
Premiums and claim amounts shared by Central and State govt. in the ratio of 2:1
Uniform premium rate for the whole country based on crop
50% subsidy for small and marginal farmers
CCIS points:-
Small and marginal farmers mean <2 ha. land area

8. CCIS Performance during 1985-1998* No. of farmers covered (Cr.)
CCIS – How did it work and why it failed?
Based on an area approach
Defined area could be a district, a block or any other contiguous area
CCIS Performance during *
No. of farmers covered (Cr.)
Area covered (Cr. Ha.)
Sum insured (Cr. Rs.)
Premiums (Cr. Rs.)
Claims (Cr. Rs.)
Claims Ratio
Claims/SI
7.6
12.8
24,975
404
2,319
575%
9.29%
Premium rates too low
No rationality in pricing….same rate charged uniformly charged across the country.
India is made up of heterogeneous weather conditions even in a small district….
CCIS discontinued due to its financial unviability
*Figures obtained from ‘Report of the Committee to Review the Implementation of Crop Insurance Schemes in India’, Ministry of Agriculture, Government of India, May 2014

9. NAIS – Improvements over CCIS
National Agricultural Insurance Scheme (NAIS) introduced in 1999
Scheme covered all crops where adequate yield data is available
Farmer loan up to 150% of the value of average yield
Improved pricing
Premium rates differs by crop and season for all crops other than annual commercial/horticultural crops
Annual commercial/horticultural crops – Premium based on experience
NAIS Points:
CCIS discontinued
States were free to choose whether to implement it or not
NAIS compulsory for farmers taking loans for crops production
50% subsidy for small and marginal farmers – initially was planned to be phased out gradually over 5 years but 10% remained till the end
Claims in excess of 100% of premiums (food crops & oilseeds) and 150% for commercial/horticultural crops shared equally by Central and State govt

10. NAIS Performance during 1999-2012* No. of farmers covered (Cr.)
Area covered (Cr. Ha.)
Sum insured (Cr. Rs.)
Premiums (Cr. Rs.)
Claims (Cr. Rs.)
Claims Ratio
Claims/SI
20.37
30.7
2,83,720
8,458
27,962
331%
9.9%
NAIS discontinued due to its financial unviability
Area unit size not small enough leading to heterogeneity in experience
MNAIS introduced to address shortcomings
Adverse selection problems
Inflated claims resulting from false coverage or tampered yield data or both
Lack of spread due to non-participation of important states.
*Figures obtained from ‘Report of the Committee to Review the Implementation of Crop Insurance Schemes in India’, Ministry of Agriculture, Government of India, May 2014

11. MNAIS Performance during 2010-2013* No. of farmers insured (Cr.)
MNAIS – Improvements/Performance
Modified NAIS introduced (MNAIS) as a pilot scheme in 2010
Improvements over NAIS
Actual premium charged – subsidy up to 75%
Premiums subsidy shared equally by Centre and State
Claim liability on the insurance company
Smaller unit of area (Village/Village panchayat)
MNAIS Performance during *
MNAIS financials significantly better than CCIS and NAIS
No. of farmers insured (Cr.)
Area insured (Cr. Ha.)
Sum insured (Cr. Rs.)
Premiums (Cr. Rs.)
Claims (Cr. Rs.)
Claims Ratio
Claims/SI
0.46
0.47
11,024
1,088
864
79.4%
7.8%
Points for MNAIS:-
NAIS withdrawn from areas where MNAIS implemented
25% of likely claims given to farmers as immediate relief
Indemnity for prevented sowing and Post harvest loss cover upto 14 days for the crops in “ cut and lying “ conditions.
Cat relief fund at national level
Threhold based on last 7 years average (and not 3-5) excluding 2 cat years
*Figures obtained from ‘Report of the Committee to Review the Implementation of Crop Insurance Schemes in India’, Ministry of Agriculture, Government of India, May 2014

12. WBCIS Performance during 2007-2013* No. of farmers insured (Cr.)
WBCIS – Introduction/Performance
Weather Based Crop Insurance Scheme (WBCIS) introduced in 2007
Alternative to yield based insurance
Protection against crop losses resulting from adverse weather conditions (rain/temperature/humidity, etc.)
Based on an area approach
Actuarial rates – capped at different levels for difference crops
WBCIS Performance during *
No. of farmers insured (Cr.)
Area insured (Cr. Ha.)
Sum insured (Cr. Rs.)
Premiums (Cr. Rs.)
Claims (Cr. Rs.)
Claims Ratio
Claims/SI
4.69
6.32
80,951
7,519
5,286
70.3%
6.5%
WBCIS notes:
Covers all crops
Mandatory for loanees (Do loanees have a choice which insurance to take?)
Up to 50% subsidy shared by Centre and state for the premiums (depending on the P/SI slab)
Index acts as proxy for yield
Share of farmers insured under WBCIS (78% AIC, 20% ICICI LOMBARD, 2% IFFCO-TOKIO)
Private insurers claims ratio all under 45%, AIC around 65%
WBCIS – musch fasters claims settlement
*Figures obtained from ‘Report of the Committee to Review the Implementation of Crop Insurance Schemes in India’, Ministry of Agriculture, Government of India, May 2014

13. NCIP National Crop Insurance Programme (NCIP) introduced in 2013
Essentially merged the two major schemes - MNAIS and WBCIS
Encouragement from Govt. to implement MNAIS at village/panchayat level
Larger area for initial few years subject to approval
States implementing village/panchayat level to be reimbursed CCE expenses up to a limit
Aims to improve weather data for WBCIS
5000 AWS (Automatic Weather Stations) to be set up through PPP model
NCIP notes:
NAIS completely discontined
States have to implement MNAIS instead
Two indemnity levels (80 and 90%) instead of three before under MNAIS
Merged CPIS as well
Actuarial rates – capped at varying threshold's (MNAIS)
If rates>threshold , reducing SI in proportion to cap level

14. Pricing Challenges- Weather Based Crop Insurance Scheme (WBCIS)
Absence of rigorous statistical analysis to choose the best index in a
specific environment i.e. establishing correlation between the index
parameters and the actual yields.
Pricing established through iterations so far in India.
Perils not captured by the weather station data, such as localized weather, pestilence or disease, or weather events not adequately captured by the index used in the WBCIS product. Ideally WBCIS suited to cover CAT risks.
A typical Weather Station in RUA
Remote sensing technology ( Satellite based Optical sensing to supplement WS data)
Insured’s choice of WS.
Reference of more than a single WS
More WS across the country.
WBCIS claim payments are expected to correlate more closely with area average yields than individual farmer yields.
Standalone Pricing against Portfolio pricing
Oversensitive to statistically insignificant features of historical data
Data uncertainty more in historical data for a particular product
Cost of capital does not account diversification.
Moral Hazard and Adverse Selection

15. Pricing Challenges- Weather Based Index Insurance
Example: Weather Based Crop Insurance Scheme (WBCIS) in India
(Clarke et al,2012)

16. Pricing Challenges- Weather Based Index Insurance (Contd.)
Example: Weather Based Crop Insurance Scheme (WBCIS) in India 9 years of data (1999 – 2007)
(Clarke et al,2012)

17. Pricing Challenges - Yield Index Based ( NAIS and MNAIS)
In the present system district averages through crop cutting experiments do not capture the systemic risks at a smaller unit.
High Basis Risk- Geographic Risk, Risk Coverage, Product Design
De-trending of historical yields.
Identification of pure random improvements against technological improvements in yields.
A typical crop cutting experiment
A national Procedure Manuals for CCE’s- clarifying the reasons for the yield losses so as to exclude yield losses attributable to non insured perils .
CCE’s to be conducted by trained loss adjustors.
Video recording of the official CCE’s.
IU size could be reduced in areas with heterogeneous yields and increased in those areas with homogeneous yields.
Real time reporting of CCEs by requiring primary workers to send yield data by mobile phone
Independent, random CCE audit.
Weather data, satellite images/ remote sensing technology to target CCEs in areas where claim payouts are high.
Reliability of Historical Data
Tendency to report lower yields especially in low yield scenarios .
Yield reporting is more reliable in good days i.e. high actual yields
Moral Hazard and Adverse Selection
Delay in loss intimation, Delay in Final Settlement.
Challenges from a reserving perspective also.

18. Market Structure Challenges
Any mandatory nature of insurance will reduce the incentives to design simple and transparent products . And this is complemented by the role of states in selecting the insurers.
Market Structure
Multiple-year contract with a firm to design weather products across the state; and second, insurers could compete on price or other specified dimensions to offer the stated products.
States could tender for multi-year contracts with an insurance provider to design and offer products.
Regulation may impose a mandatory ten year history of claims that would have been paid , using data from the contractual weather station. ( If WS not available, then nearest government approved WS can be used). This would give indication to loanee as well as non-loanee farmers for understanding the effectiveness of the product. ( especially claims payments in bad years) ( F & U guidelines)
Less innovation in product design following the introduction of WBCIS, despite the large amount of data available. This may be caused by an increase in competition having reduced the private benefits from designing improved indices.
Decisions about weather indexed insurance products are complex and there is a strong rationale for creating a technical support unit to support central and state governments in making informed decisions about insurance product design, and in choosing between insurance providers.
Contracts are therefore typically complex and a farmer is unlikely to even have a good idea
about what the claim payments from the product would have been in the recent past. Poor
understanding is particularly detrimental to farmers who are eligible but not compelled to
purchase WBCIS insurance.

19. Market Structure Challenges (Cont.)
Institutional Mechanism – Absence of a Crop Insurance Legislation/Regulation to an Institutional Model promoting growth of the sector…
e.g.
Number of weather stations and CCE’s to accurately represent risk.
How to make rates in absence of data.
More transparency in past claims settlements.
Checking the authenticity and validation of WS data.
Allowing the insured’ choice of WS as per the location of his/her field.
National System for ongoing training of specialized personnel tasked with conducting Overseeing the process of CCEs for insurance purposes.
CCEs to be conducted by trained loss adjustors in areas where large claims are expected due to observable adverse agricultural conditions.
Supervisory role for loss adjustors in other areas.
Independent, random CCE audit.
Video recording of the official CCEs.
Widen the scope of the existing regulations in the short run
An all encompassing legislation on agriculture risk protection in the long run

20. Legislative Framework - Challenges
No risk to be assumed unless premium is received in advance
Refund of Premium: Section 64VB. (3) of the Act states that “Any refund of premium which may become due to an insured on account of the cancellation of a policy or alteration in its terms and conditions or otherwise shall be paid by the insurer directly to the insured.
Section 64VB in the The Insurance Act 1938;
Section 14(a) and (b) of the Act;
Policyholders Protection Act, 2002;
Licensing of Corporate Agents, 2002
Register of policies and register of claims: Section 14 (a) and (b) of the Act mentions that every insurer shall maintain a register or record of policies, in which shall be entered, in respect of every policy issued by the insurer, the name and address of the policy-holder.
Loss Intimation
Interest Payment on Delay in Claims Settlement
Elaborate Training Requirements for licensing of individual/corporate insurance agents

21. Basic Principles of Insurance – Conflicts
Applied to index insurance primarily..
Principle of Indemnity: Insurance is a contract of indemnity. Under such contracts, the insurer promises to indemnify the insured against any loss caused by the occurrence of the insured event. In other words, the insurer has to compensate the insured only for the actual loss that was sustained.
(i) Index based claim payment: Under index insurance, payment is based on an index, not
on actual loss. The index is only a proxy for the loss and may not ideally reflect the exact loss suffered by the farmer.
(ii) Excess/Low Claims in relation to losses: The indemnity concept can also be construed as requiring that the insurance contracts cannot exceed Loss. Given the potential for basis risk, payment may exceed or may be lesser than the loss sustained by the insured.

22. Key Challenges or Hurdles
Insurance knowledge of farmers
Poor awareness of farmers about crop insurance
Not aware of various schemes
how premium is deducted from loan amounts
Not certain about sum insured
But some farmers who are aware do
Anti select based by delaying the insurance purchase
Cultivate a crop different from that being insured

23. Key Challenges or Hurdles
Crop Area Insured
Insured area is greater than sown area
Sometimes, there is no cultivation at all !!
Farmers insure the same area multiple times with different banks
Genuine cases do exist due to non germination of seeds
This leads to area correction factor (actual to insured)
But this is applied to the entire state
Impacts honest farmers too

24. Key Challenges or Hurdles
Crop loan practices
Banks do not confirm to principles and guidelines of crop insurance schemes
Kharif season – more loans disbursed; Rabi season – less loans disbursed
Disburse loans after cut off date to evade premium
Unusual high loans disbursed towards the cut off dates when there is more certainty about weather conditions

25. Key Challenges or Hurdles
Weather Data
Lack of confidence in AWS which forms the basis for determination of claims in WBCIS
AWS density is not sufficient to gather credible data
Delay in sending weather data by private agencies
Inherent variation in weather data between two places 20 kms adds to the issue
Relation of weather parameters to claims is not understood by the farmer

26. Key Challenges or Hurdles
Crop Cutting Experiments (CCE)
Inherently a difficult task – number of CCE, spread of area over which to perform and short time span
Reliability of data collected – procedure not properly followed, local pressure to underestimate the yield
Delay in consolidation of data
Lack of trained people to conduct the CCE

27. Key Challenges or Hurdles
Settlement of Claims
If claims are not settled in a timely manner, then the credibility of the crop insurance scheme is damaged
Impacted by the multiple stakeholder set up
CCE data sometimes takes months to be collated and sent to the nodal agencies
Premium or part of it is not received by the insurer for months (for example the subsidy component from state government)

28. Other Challenges or Hurdles
Allocation of Districts to Insurers
Insurance Premium
Technical Skill building
Product Design

29. Crop Insurance compulsory for all?
Pros
Everyone covered following a calamity
Govt. may invest in flood defences, irrigation, etc so that areas are insurable
There is a wider pool from which risks can be pooled
Mitigates adverse selection which is an area of concern
Would help in understanding risks better and better pricing & risk management
Cons
Farmers may not be able to afford
Administratively difficult to implement given the existing challenges
May not be a popular move for the govt. (to force everyone purchasing insurance)
Need a robust regulatory structure which is currently missing

30. Way forward Use of Technology at various stages
Technology can be helpful to reduce the time taken to collect, collate data, reconcile data
Loan Disbursal Stage – Use of land records from digital database
Crop Cutting Experiments – Using remote sensing methods
Weather data information in real time

31. Way forward Allocation of district for a longer tenure
Districts may be allocated to insurer(s) for a longer tenure – say five years
It would reduce the uncertainty that the insurers currently face between two successive years
It would help develop better pricing basis in premiums
It would reduce the volatility in results year on year – since experience rating can be incorporated in pricing
Goodwill generated when claims are settled is not lost when the insurer is no longer associated with the area

32. Silver Lining
Though we have addressed issues in crop insurance, it does not imply all is wrong with it
Some positives from crop insurance
It has indemnified farmers in times of adversity
Awareness of crop insurance is gradually increasing
It has given insurance companies scope to diversify their product portfolio
More focus on crop and its associated risks has also brought multi stakeholders together & sharing knowledge

33. Questions?

34. References
‘Report of the Committee to Review the Implementation of Crop Insurance Schemes in India’, Ministry of Agriculture, Government of India, May 2014
‘Policy Research Working Paper on WBCIS’ by World Bank, 2012
‘Crop Insurance Seminar’ by IAI in 2013
‘Crop Insurance Seminar’ by IAI in 2014
‘Policy Research Working Paper on MNAIS’ by World Bank, 2012