The Potential for Scale and Sustainability in Weather Index Insurance

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THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE FOR AGRICULTURE AND RURAL LIVELIHOODS Table 12: Total outcomes for index insurance offered by ICICI and ITGI (2003-2008) Year 2003/04 2004/05 2005/06 2006/07 2007/08 Subsidies and government financial support Since rabi 2007, the Government has allowed public and private index insurance programmes to take advantage of subsidies, pending the approval of respective state governments. As a temporary measure, expected to last for five years, it is hoped the subsidy will promote adoption of index insurance and create a long-lasting insurance culture among farmers. Currently, as with all other commercial insurance products, the Government is charging service tax on weather insurance. 37 An additional step to make the premiums more affordable to farmers could be that the Government would exempt index insurance from service tax, due to the nature of the product. ANNEX ICICI: Total outcomes for all index insurance programmesa (Currency in US$; area in ha) Number of farmers insured 1 000 8 000 87 000 108 000 43 278 Gross premium 410 96 579 329 724 533 136 1 332 841 Sum insured 6 151 1 448 695 4 945 866 7 997 047 19 992 618 Area insured 1 700 7 850 26 800 45 000 108 500 Claims 615 65 821 60 490 349 819 1 271 325 Incurred claim (%) 0.000006 0.15 0.47 4.43 40.3 Loss ratio (claims/gross premium earned) 150% 68% 18% 66% 95% Agency costs 15% 15% 15% 15% 15% Reinsurance premiums paid 411 95 786 327 285 529 085 1 322 713 Total proportional reinsurance – sum insured 99% 99% 99% 99% 99% ITGI: Outcomes for the index insurance programme linked to the fertilizer programme Number of farmers insured NA NA 18 595 73 950 71 400 Gross premium NA NA 505 652 535 187 1 189 304 Sum insured NA NA 9 188 078 9 739 993 21 633 038 Area insured NA NA 51250 54 375 120 850 Claims NA NA 41 110 265 543 2 132 546 Incurred claim (%) NA NA 0.05 3.37 60.32 Loss ratio (claims/ gross premium earned) NA NA 8% 50% 179% Agency costs NA NA 12-15% 12-15% 12-15% Reinsurance premiums paid NA NA 355 601 376 156 834 532 Total proportional reinsurance – sum insured NA NA 70% 70% 70% ICICI Lombard and ITGI combined outputs Total number of farmers insured 1 000 8 000 105 600 181 600 114 678 Total gross premium 410 96 579 835 376 1 068 323 2 522 145 Total sum insured 6 151 1 448 695 14 133 944 17 737 040 41 625 656 Total area insured 1 700 7 850 78 050 99 375 301 350 a These totals include the BASIX and PepsiCo index insurance programmes. 37 In the 2008/09 season, the tax was 12.36% of the premium. 109
110 CASE STUDY 5 PRIVATE AND PUBLIC INDEX INSURANCE IN INDIA Strong institutional network and delivery channels A strong institutional network of insurers, reinsurers and data service providers, along with effective delivery channels, can be crucial to the scalability and sustainability of a programme. However, the Insurance Regulatory and Development Authority (IRDA) stipulates that a maximum commission of 17.5 per cent of the gross premium amount can be paid to an agent or channel partner, which appears to be a constraint on the profitable, sustainable growth of the sector. Diversify the portfolio Marginal farmers have traditionally been neglected by the insurance market in India. Private insurance companies and microfinance institutions have been found to target their insurance programmes at large-scale farmers, owing to the potential for higher returns. However, the ICICI Lombard and BASIX initiatives have been able to sustain operations targeting lower-income farmers over the last five years, largely due to the diversity of their portfolio: their operations are spread throughout the country and integrated with other extension services provided by BASIX. Their healthy portfolio has also attracted insurers and reinsurers to the programme. That said, the size of the programme is still not large enough for BASIX to recover its marketing and operational costs. Plans for scaling up Index insurance programmes are expected to expand in the next few years. Companies plan to expand coverage to other regions and to serve a higher number of marginal farmers. Restrictive regulations on distribution of insurance products Private insurance companies in India are at a disadvantage when it comes to scaling up index insurance programmes in rural areas. Government-run rural banking and cooperative institutions already reach some 50 per cent of the rural population, while private institutions will require a number of years before reaching close to the same level. Moreover, banks are obligated to offer the publicly-subsidized NAIS, thus it is difficult for them to collaborate with insurers for any other kind of crop insurance product, be it public or private insurers. As a way forward, to aid the scalability and sustainability of index insurance, the Government should allow banks to collaborate with any public or private insurance company. For this to be feasible, however, the Government would have to amend its notification on agricultural insurance schemes. Reinsurance capacity Only two major reinsurers operate in the Indian market. With limited participation by reinsurance companies, the reinsurance rates at times have been found to be high. Reinsurance companies cite lack of data, complexity of product structures and the relatively low economic value of coverage as reasons for the high rates. They mainly concentrate on substantial Indian programmes (with a total premium value of more than US$1 million); only one reinsurer has accepted a US$100,000 deal. With Indian insurance companies keeping
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22 CHAPTER 2 WEATHER INDEX-BASED IN
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The Potential for Scale and Sustainability in Weather Index Insurance

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