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
Coverage
In India, farmers who take an agricultural loan from a state bank (‘loanee farmers’) are
required to purchase insurance. Most loans are provided by government banks, which are
required to provide the traditional yield insurance for a given list of crops. When the list in a
state does not include potatoes, farmers are free to choose index insurance. When the list
of crops in a particular state does include potatoes, then the bank mandates the purchase
of the National Agricultural Insurance Scheme (NAIS), which is the government agricultural
insurance programme. In some cases, farmers may refuse to pay for the traditional
insurance or bankers may not want to bother with it, and they can demand an exception
to choose index insurance instead. Farmers seemed quite displeased with NAIS, saying
that it is not transparent and that there are ‘never’ payouts.
Among PepsiCo contract farmers, roughly 95 per cent elect to purchase index
insurance, a high proportion that is driven at least in part by price incentives and the
requirement that loanee farmers buy insurance. PepsiCo also encourages the purchase of
index insurance through client education, as it finds index insurance simpler, more
transparent and faster to settle than conventional insurance.
Approximately 50 per cent of those insured by the index insurance programme were
smallholders, owning less than 5 acres (2.025 ha) of land. In Punjab, where relatively few
farmers need to take out loans for production costs and have no requirement to purchase
insurance, about 75 per cent of farmers still choose to buy it. In Maharashtra, where index
insurance is compulsory for loanee farmers, 1,500 farmers have purchased it. Of the 1,500
PepsiCo farmers in Karnataka, about 75 per cent chose to purchase the insurance in 2008.
The payout in Karnataka in 2007 was up to 90 per cent of the sum insured, equivalent to
Rs 22,500/acre, which may have led to the increased number of subscriptions in 2008.
Target issue
WRMS designed this product to cover severe potato crop losses caused by late blight
disease, as minor losses could be avoided through better farming practices. Late blight
disease can spread easily under certain conditions, especially those involving high
moisture caused by rain, dew, irrigation or high humidity (greater than 85 per cent) and
moderate temperatures (night temperatures of 10-15°C and day temperatures of
15-21°C). Consequently, the insurance programme is based on a disease index,
incorporating both humidity and temperature levels.
Product information
Weather data and infrastructure
Index insurance was first offered through the contract farming programme in Karnataka and
Maharashtra in the kharif season (June through October) in 2007, West Bengal and Punjab
in the rabi season (December through March) in 2007, and then in Uttar Pradesh in rabi in
2008. During implementation of the product, weather stations were installed, with their
locations carefully chosen to minimize basis risk. WRMS bore the costs of installing the new
infrastructure, recovering this investment through the revenue generated by the insurance
programme and the sale of services to other companies and commercial farmers. For
example, it offered private clients subsidized weather stations that it would install and
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