A weather-based agricultural insurance scheme, where premiums will be evenly subsidized by the Union government and states, is to be rolled out across select districts in 12 states for the forthcoming rabi season as part of a new initiative to offset risks underlying Indian farming.
This would be the first occasion that the government will use private insurers for a subsidized agricultural insurance package, said a senior finance ministry official, who did not wish to be identified.
The weather-based insurance policies will be sold by the government-owned Agriculture Insurance Co. of India Ltd (AIC) and two private insurers, ICICI Lombard General Insurance Co. Ltd and Iffco-Tokio General Insurance Co. Ltd.
The government’s broad objectives are to bring about a timely and objective claims settlement process and streamline subsidies in agricultural packages, said people associated with the project.
The total national subsidy for the new scheme couldn’t be ascertained as some states are yet to finalize the districts where the insurance package can be rolled out. Marketing of the package would begin by next month to give farmers time to understand and buy the product before work on sowing wheat begins, said executives at the insurance companies.
Insuring Weather (Graphic)
The weather-based insurance package would be priced according to the risk borne by insurers, said Pranav Prashad, head, rural and agricultural business, at ICICI Lombard. The government, however, has fixed a price ceiling: the premium on a food crop, such as wheat, should not exceed 8% of the sum insured and that on commercial crops, such as corriander, should not exceed 12% of the sum insured.
The farmer would pay between 1.5% and 3% of the sum insured towards premium, the same amount as that of an existing government scheme. The residual amount of the premium would be split evenly between the Union government and the states.
The National Agricultural Insurance Scheme (Nais), the Union government’s existing subsidized agricultural insurance package, is dogged by a slow claims-settlement process and open-ended subsidies, said officials closely associated with the developments, who didn’t want to be identified.
The existing scheme subsidizes the claims paid by AIC, which has exceeded the gross premium by almost threefold in the last few years. In 2006-07, 17 million farmers took a Nais policy and paid gross premiums of Rs565 crore. The claims for the year were Rs1,624 crore, according to provisional data released by AIC.
The weather-based package works by identifying insurable parameters, such as average rainfall, temperature and frost for each district where the package is to be sold. In the event that any one of the insured parameters falls outside a band fixed in the policy, claims for the entire district are automatically triggered. Insured farmers are spared the hassle of paperwork to get the claim money and there is no subjectivity in deciding claims, officials said.
For the insured, the weather-based package differs from the government’s existing subsidized agricultural insurance package in critical ways.
Claims now can take up to a year to be processed, said an executive at AIC. Also, as these claims are triggered if average farm yields—estimated by respective state governments—fall below a threshold, they can be contentious as individual farmers may fall below the threshold for reasons not covered by an insurance policy. In contrast, weather-based packages would have quicker settlements.
“It is 45 days from the end of the risk period, which normally coincides with harvesting of crop. In some cases, the risk period may end a few days earlier than harvesting,” said M. Parshad, chairman and managing director of AIC, which would take the lead in implementing the new package.
Weather data covering the last 25 years would be obtained from the meteorological department. Over and above that, AIC is using risk modelling firm RMSI Inc., a US-based company with Indian operations, to run simulations going back 100 years based on meteorological department data to improve the robustness of insurable parameters.
Vijay Sardana, an agri-business specialist who is the managing director of Anand Rathi Commodity International Pvt. Ltd, says he is sceptical about the weather insurance package as it could be hurt by ticklish operational issues.
“As a concept, I have no dispute” with it, said Sardana. However, he added, claims settlement can be hijacked by vested political interests.
Officials argue that the shift to a scientific mode of assessing risk and getting all stakeholders to share the insurance premium may reduce or at least peg the financial burden on the government at current levels.