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 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 ANNEX 79
80 CASE STUDY 2 PEPSICO CONTRACT FARMING IN INDIA maintain at half the cost (US$512 instead of US$1,023) in exchange for access to the station’s data. In Karnataka, Maharashtra and Punjab, each weather station is now 20 kilometres from a participating farmer; that is, the stations occupy the four corners of the grid with the farmer in the middle. Premium rate and subsidies The premium for index insurance in the PepsiCo programme is Rs 1,500/acre (US$30/acre), approximately 3-5 per cent of the sum insured (Rs 25,000-30,000 or US$500-600/acre). The product is structured to cover losses above 40 per cent of yield, with farmers covering losses up to this point through various risk coping mechanisms. The maximum payout is designed to be equal to the cost of production plus a bit more to include family farm wages and opportunity costs. Triggers Payouts for late blight disease are triggered if crops experience consecutive days of average relative humidity greater than 90 per cent and average temperature of 10-20°C. In subsequent years, a frost index was also added to the coverage, which triggers payout when the temperature falls below 1-2°C. Payouts The programme has been effective in timely settlement of claims, lowering the settlement time from an average of six to eight months to a maximum of two months from the end of the covered period. Efforts are still being made, however, to ensure settlement within 30 days of the end of the covered period. Table 7: Analysis of the programme through four seasons of implementation (2007-2008) Season/year Kharif Kharif Rabi 2007 Rabi 2008 2007 2008 (estimate) Number of farmers insured Number of farmers insured as a proportion of the total number of farmers in the 3 750 4 100 500 475 contract farming programme 80% 85% 50% 60% Average premium per farmer (US$/acre) 30/acre 30-37/acre 32/acre 25-30/acre Total premium (US$) 139 025 153 704 28 691 32 790 Average area insured per farmer (acres) 1.85 1.85 4.2 4.4 Total area insured (acres) 5 560 6 487 1 050 1 112 Average sum insured per farmer (US$) 922 922 2 049 2 049 Total sum insured (US$) 2 766 676 3 258 530 522 594 553 335 Total claims (US$) 130 208 71 728 43 037 n/a Incurred claim (%) 94% 45% 150% n/a
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Contacts IFAD Francesco Rispoli f.r
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