The Potential for Scale and Sustainability in Weather Index Insurance

THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE
FOR AGRICULTURE AND RURAL LIVELIHOODS
a very small portion of the risk on their books and depending on reinsurance companies to
validate pricing, the ability to insure small deals is severely restricted. This instigates a
vicious circle in which the programmes cannot be expanded without reinsurance support
and, in turn, there is no reinsurance support because the programmes are not sizable.
Weather insurance programmes in the country are small to begin with, and they expand
gradually, with farmers testing the concept and gradually endorsing it over time. In addition,
most reinsurers require the sales process to end 10 days prior to the risk inception date.
However, index insurance cannot work with policies older than 30 days.
The lack of pricing and underwriting skills further deters development of the local
reinsurance market and limits the retention capacity of the insurer. Since coverage is
voluntary, the number of enrolled farmers may vary significantly from one season to the next
and may represent a small value of total premium in the insurance market. As a
consequence, those reinsurance companies that enter the market load the premium, owing
to lack of reliable data on a real-time basis.
In answer to these current restrictions, better designed products and a larger number of
index insurance participants would encourage more reinsurance companies to join the
market, promoting lower rates. Public and private insurers in the country could join a
common platform in which they pool spare underwriting capacity, as has happened in
some other countries. However, a neutral and credible institution is needed to bring all the
insurers together in agreement. The Ministry of Agriculture could play this role with technical
support from a multilateral institution. In the meantime, there is a proposal that a
contingency fund be created by pooling resources from the Government and other
agencies. This contingency fund could support programmes for marginal farmers in a
community mutual insurance format. WRMS, which is a stakeholder in the ICICI-PepsiCo
programme, estimates that one million more small farmers could be served with a
contingency fund of US$3-4 million (expected to last 8-10 years before reserves allow the
programme to reach self-sufficiency). This fund could be used to target farmers in areas
with inadequate historical data availability.
Adaptability of index insurance
Once the proposed improvements to NAIS are introduced and prove to be effective, it is
possible that it could seem a more comprehensive and farmer-friendly product. Thus index
insurance may have to consider ways to become more competitive with NAIS.
Insurance Programmes – Public
History
The Agriculture Insurance Company of India (AIC) is a government-founded, public insurance
company set up in 2003 with the responsibility of designing appropriate crop insurance
products to meet the diverse needs of the farming sector. 38 Its first role was to take over
implementation of NAIS. Although a new body in name, it had almost 30 years of experience
in crop insurance, as it was created out of the Crop Insurance Department of General
Insurance Corporation of India (GIC), the sole entity administering crop insurance since 1973.
38 www.aicofindia.org.
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