The Potential for Scale and Sustainability in Weather Index Insurance

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CASE STUDY 5
PRIVATE AND PUBLIC INDEX INSURANCE IN INDIA
Weather Based Crop Insurance Scheme (WBCIS)
In 2007 the federal Government requested that AIC design the Weather Based Crop
Insurance Scheme (WBCIS) as a pilot to be implemented with government financial and
policy support. The pilot was the first of its kind and was developed in collaboration with
high-level scientific and technical experts in India.
WBCIS has two different types of coverage, one for kharif (June-October) and one for
rabi (December-March). Kharif coverage is based on rainfall outputs, while in rabi it uses
composite index insurance as a substitute for area-yield insurance. Triggers vary depending
on the day of the month and crop development stage. What is more, it is also locationspecific
(based on subdistricts) and crop-specific.
The insurance product was designed using an innovative ‘tripod’ for capturing data:
• Cleaning of historical weather data, and extending them to 100 years through simulation;
• A crop-growth simulation model to capture the yield/weather relationship and establish
triggers and payout rates; and
• A dense network of automatic stations to measure current weather.
The price of the premium was established with the capacity-building support of the
Technical Assistance Project (TAP), made available to AIC by the World Bank. The
components of pricing included the expected loss; loadings for data uncertainty; return on
risk (RoR), calculated using 1-in-100 years probable maximum loss (PML); and administrative
and business expenses.
During kharif, WBCIS covers rice, sorghum, pearl millet, groundnut, soy, sunflower, cotton
and other crops against both deficit and excess rainfall. During rabi, it covers wheat, mustard,
chickpea, potato, cumin, coriander and other crops against frost, high temperatures,
humidity, excess rainfall and other risks.
The average premium was 8 per cent, depending on the type of crop and region
insured – of which an average of 2.8 per cent was paid by farmers after subsidy
adjustments. The premium was subsidized equally by federal and state governments,
ranging from 25 to 80 per cent depending on the crop, and averaging 63 per cent. As an
example, commercial premium rates for soy and groundnut are 8 per cent of the sum
insured; farmers pay a premium of 3.5 per cent, and the remaining balance is equally
shared by federal and state governments. The 2007/08 pilot was offered to approximately
200 subdistricts (out of about 5,000 subdistricts in the country) for more than 20 crops. In
recognition of its work on this pilot, AIC was awarded the Innovation of the Year 2008 award
at the Asian Insurance Industry competition.
Assessment
Performance
A summary of the performance of AIC’s weather insurance products can be seen in Table
13. Varsha Bima is the longest-running index insurance product in AIC’s portfolio, but
despite a promising pilot and 2005/06 uptake, the number of farmers insured has been
decreasing since the 2006/07 season. However, the launch of the two WBCIS products in
2007/08 has seen a massive increase in the number of farmers insured.