Chennai: A tea-shop owner in Tamil Nadu’s Karambayam village, B. Ramamurti is technology agnostic. But the owner of a cow that sports a radio frequency identification (RFID) tag—a microchip that stores information and can be tracked remotely—on its ear, understands the economics of insuring his cow.
After all, it delivers close to 9 litres of milk a day, fetching him Rs2,000 a month, or close to half his monthly earnings.
While the government has been promoting livestock insurance for over three decades, the risk of false claims kept premiums high.
As a result, less than 10% of the cattle in India, the country with the largest number of cows and bulls in the world, is insured.
IFMR Holdings, a Chennai-based rural financier, is using RFID technology to reduce fake claims for insurer HDFC Ergo, which in turn is charging a lower premium of 7% for a three-year policy, versus market rates of 12%, for cattle owners in this village in Tanjore district of Tamil Nadu.
HDFC Ergo General Insurance Co. Ltd is a 74:26 joint venture between Housing Development Finance Corp. Ltd, India’s largest mortgage lender, and Ergo International AG, a unit of Munich Re Group.
“I took a livestock insurance for my cow as a protective measure,” says 58-year-old Ramamurti, father of two unemployed sons, who recently bought a three-year policy for his cow valued at Rs20,000.
“The agency also provides medicine for my cow; that is also included as part of the package.”
While RFID is used on cattle in the US and Australia, where entire farms are insured, in India, low-cost plastic or metal ear tags for about Rs10 a piece are used to label an insured cow.
To claim insurance, the cattle owner has to produce the tag and a veterinarian has to do a post-mortem to issue a death certificate. However, false claims are often made by attaching the tag to the ear of another decayed carcass.
“This moral hazard gets built into the pricing and that is why premium on livestock insurance remained high and unaffordable for customers,” says M.R. Rao, chief operating officer of SKS Microfinance Pvt. Ltd.
SKS doesn’t offer livestock insurance due to the high premiums charged by insurers, huge operating costs and incidence of false claims.
In India, cheaper RFID technology is encouraging more insurers to offer policies on cattle. In Gujarat and Orissa, Iffco Tokio General Insurance Co. Ltd has launched pilots to test the effectiveness of RFID for cattle insurance.
Iffco Tokio officials could not be reached for comment immediately.
For IFMR Holdings, which launched its livestock insurance service about three weeks ago in Karambayam, this is part of its strategy to be a one-stop financial shop and spread operational costs over products such as life insurance and micro loans offered through 19 branches in Tamil Nadu, four in Uttarakhand and four in Orissa.
HDFC Ergo entered livestock insurance in 2008 and plans to increase focus now through its tie-up with IFMR. The company expects to insure about 100,000 cows and bulls this year, a majority of them through IFMR Holdings.
IFMR Holdings has partnered with the newly set up sister concern, Dairy Network Enterprise, or DNE, that has secured the Rs60 a piece RFID tags.
These tags would be rendered useless if plucked off the ear of a cow, mitigating the risk of false claims.
The price of the RFID tags is coming down since the last five-six years and hence the cost works out to be similar to conventional tags, which typically need to be replaced every year if they break or fall off.
“If the insurance providers are successful in spreading insurance awareness, designing customised products to cater to low-income people and reducing the premium at the same time, only then can we see more livestock owners taking insurance to protect themselves from loss of their livestock,” says Mandira Sarma, an associate professor at Delhi’s Jawaharlal Nehru University specializing in financial inclusion.
Still, it waits to be seen if IFMR Holdings, which earns interest by providing micro loans to customers who cannot make the full premium payment and also gets a commission from HDFC Ergo on every policy, successfully implements and replicates this model in other districts.