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Agriculture Insurance Still a Far Cry in India

                                                                             by Shri Jagendra Kumar

Diversification of agriculture and development of the hi-tech processing industry capable of meeting strict international standards can have major multiple effects on employment and equitable income growth in the Indian rural sector. In fact, agri-businesses can play a significant role in the overall rural and economic development with agro-enterprises being a major source of non-farm employment in India. But much needs to be done in this area. The expert committee set up by the Ministry of Agriculture has estimated that an investment of about Rs. 11200 crore would be required in the next 10 years for establishing the desired infrastructure in agricultural marketing. As such, the focus needs to be shifted to develop market yards or auctioning centres that can handle perishable commodities like flowers, which offer tremendous scope for the vastly-networked Insurance and Banking systems of the country with big financing opportunities.

Worldwide, the agro-insurance industry is emerging as a strong economic activity, particularly in view of development of new technological capabilities in processing, storage, etc. India has great potential for agro-insurance mainly because of relative abundance of diversified crops and availability of skilled manpower. Another area of opportunity for lending in the Indian rural sector is ‘modernisation of existing facilities’. There is a need to design new insurance covers to suit the requirements and needs of the farmers in line with the international standards. The agro-insurance industry offers a business opportunity for the Insurance Companies.

International organisations are the all-time favourites among agricultural pass-outs. Agriculture is the oldest of all professions for most civilisations but it has undergone a sea change with the passage of time. It has only been because of sustained efforts of agricultural experts that we have been able to meet the food-grain demands of our ever-growing population over the decades. Agricultural specialists in India are continuously working to improve upon the basic channels of food products. At present, India can boast of 39 agricultural universities that include deemed universities. Besides this, some non-agricultural universities also offer degree programmes in agriculture through their affiliated colleges. India only has 156 agricultural scientists per million of its population, while China has 450, the US 4,300 and Japan a whooping 4,900 for the same population figure. India has one agricultural field expert for 833 farm holdings only. An agricultural degree coupled with an MBA-general or agro-business, is a deadly combination and the growing requirement of the market.

Factors like weather, pests and diseases continue to affect crop production in India year after year. At least 65% of Indian agriculture is heavily dependent on natural factors, particularly rainfall that is increasingly becoming unpredictable and uncertain. The rainfall variations account for more than 50% of variability in crop yields across the country. There is no way that we can control weather factors but the related adverse financial effects can certainly be mitigated by crop insurance. Such insurance can lead to stable growth of the agriculture industry. In India, an all-risk Comprehensive Crop Insurance Scheme (CCIS) for major crops was introduced in 1985, coinciding with the introduction of the Seventh-Five year plan. It was subsequently replaced by the National Agricultural Insurance Scheme (NAIS) w.e.f. 1999-2000. These schemes were announced after years of preparation, studies, experiments and trials on a pilot basis. The Agriculture Insurance Company of India Limited (AIC) was formed by the Government of India with a mission to provide financial security to persons engaged in Agriculture and allied activities through insurance products and other support services. AIC took over the implementation of NAIS which until 2003 was implemented by GIC of India. AIC launched Varsha Bima in 2005 which covers anticipated shortfall in crop yield on account of deficit rainfall. Varsha Bima is voluntary for all classes of cultivators who stand to lose financially upon adverse incidence of rainfall. Initially Varsha Bima was meant for cultivators for whom NAIS was voluntary. The insurance operates during June to September for short duration crops, June to October for medium duration crops, and June to November for longer duration crops. Further, these periods are state specific. In case of ‘Sowing Failure’, the insurance is for the period from 15th June to 15th August. The AIC has future plans to introduce covers for Sugarcane, Coconut, Rubber,Tea, Poppy, Basmati Rice, Aromatic & Medicinal Plants and Contract Farming Insurance.

After a prolonged public debate on the recommendations of the Second Labour Commission, the Labour Ministry proposed a draft ‘Unorganised Sector Workers, Welfare Bill-2005’. The proposed Draft provides for the setting up of an Unorganised Sector Workers Welfare Board at the Centre. According to NSSO estimates, the total employment in the country has risen from 374 million in 1993-94 to 397 million in 2000. Out of this, around 28 million are in the organised sector and the balance 369 million in the unorganised sector. About 60% of the labour in the unorganised sector is engaged in agriculture and allied activities. They constitute small and marginal farmers, landless agriculture labourers, share croppers, etc. Identification of unorganised workers and funding of welfare schemes has been one of the major stumbling blocks in setting up welfare funds for unorganised workers. The most important feature of the proposed Draft is in funding of the welfare schemes. It proposes to levy access or an appropriate tax by the Central Government to partly finance the schemes, programmes and projects for the welfare and social security of unorganised workers. The other sources of income would be the registration fee for the workers and the grants and loans by appropriate governments. The floor level schemes of social security propose to have at least some components of insurance, medical care, sickness benefits, employment injury benefit, maternity benefit, old age pension and survivor’s benefit.

Weather Insurance provides covers against loss of production due to heavy or insufficient rainfall. Weather Insurance in India is synonymous with Agricultural Insurance that provides cover against excess rainfall or draught. There is a large potential for Weather Insurance in the non-agricultural sector, which some private non-life insurers are planning to enter in a big way. At present, weather insurance which is predominantly crop insurance  against rainfall, comprises a small percentage of non-life insurance business. Weather insurance is still unavailable in the non-agriculture sector.ICICI Lombard is planning to provide covers to wind power generators, hydel-power generators and the construction sectors soon. It is planning to market these products very aggressively for the next five years once these are launched. It has sold its first non-agricultural weather cover to Gujarat Heavy Chemicals Ltd. where it provided financial protection against an expected loss of salt production from unseasonable rainfall at their NSPF in Tamil Nadu. Estimated agricultural losses of nearly Rs. 2000 crore in Maharashtra and Andhra Pradesh and a complete absence of incomes in the flood-affected areas have re-emphasised the necessity of faster expansion of weather insurance in India. So far this year, more than 2.77 lakh farmers availed of weather insurance with the Agriculture Insurance Company of India and ICICI Lombard covering around 1.3 lakh farmers each. The potential of weather insurance in India can be gauged from the fact that rainfall on an average accounts for nearly 95% of the claims under the general crop insurance scheme that covers a broad gamut of crop related damages.

NABARD has launched a pilot project in Tamil Nadu to disburse funds through selfhelp groups using the existing post office network. The bank hopes to initiate the scheme in three districts of the state. Post offices will be used to offer credit to farmers and customers in rural areas. For post offices facing a dwindling share of activity in recent years, this offers a chance to re-invent themselves through productive use of a one lakh-plus countrywide network. The NABARD had to face a series of hiccups in launching the scheme. The stumbling block appeared in the Postal Act itself since the Act does not allow post offices to take credit risk. To circumvent this problem, NABARD has decided to take the credit risk while post offices would act as agents on a fee basis. This is one way of increasing the banking sector’s outreach currently restricted to only 43.4 million of the 148 million rural households.

So far, the insurance against excess rainfall has been a relatively untapped area, especially for field crops such as wheat, rice, and pulses that cover a majority of India’s arable land. With rapid changes in the climatic conditions, it has become very difficult to forecast the weather. At present it is at a very rudimentary stage in India as the actuarial element is still missing. Marketing the product, creating awareness and finding the right intermediaries to penetrate the rural masses are other problems being faced by the companies. A number of problems still need to be addressed before weather insurance actually takes off in a big way in India. One of the biggest impediments facing the insurance firms is the inaccessibility of quality historical weather data and lack of reliable weather stations in remote parts of the country. It is very tiresome to procure from IMD as the IMD stations are present only at the district level. Moreover, lack of the desired government support for this product has led to companies not coming forward to provide larger benefits at the same premium. This product has all the right ingredients to expand its coverage. Its flexibility is the main attraction as different levels of benefits are provided under different premiums. Moreover, it scores better over the conventional crop insurance schemes due to its transparency, simplicity, quick settlements and wide choice.

Agriculture insurance position is about to change with major players such as ICICI Lombard and the Agriculture Insurance Company of India gearing up to launch the product for excess rainfall in field-crops in the near future. Agri-business and agri-process have become the main drivers of the second round of the Green Revolution with crop diversification as one of the main strategies. The huge domestic market and large international market throw open great avenues for financing the agri-business sector. India has all the advantages viz. varied agro-climatic conditions to produce every product of demand, easily available labour, abundant natural resources and the largest agriculture ex- tension/research institutions.What is required is the initiative to make huge investments coupled with strong policy support.

Today, shopping malls are the pride of metros and large urban centres. Parts of rural India with improved income levels have also accepted similar exclusive agricultural malls that have a trade ambience suiting the local needs. Banks have tremendous opportunities to develop credit products to suit such initiatives. Food Park is also a concept where there are decentralised systems of production and centralised systems of processing and marketing. In many countries, the concept has been found viable. The concept could be another avenue for lending by the banks and protecting by the insurers. There are many success stories on contract farming. Contract farming provides good framework for loan of credit to marginal/small farmers, tenant cultivators/oral lease,etc. at a reduced transaction cost. They can also be organised into Self-Help-Groups.With commodity exchange in India now spreading far and wide, covering a large number of commodities. Commodity markets offer a big chance for the economic uplift of farmers in particular and the rural sector in general. Commercial Banks in India with a wide network of branches in the rural areas can act as an intermediary between the aggregators and farmers and thus make available the benefits of price risk insurance to large sections of the farmers through put option market. The transition from traditional agriculture to agro-business also throws up opportunities for insuring and financing the ancillary units like packaging material industries, service centres, etc. The transformation to a successful technology oriented ‘agrobusiness’ can really take off only when large corporates of the country tap the enormous business opportunities available and Insurance Companies design suitable covers to meet the requirements. Agrobusiness insurance needs to undergo a metamorphosis for bringing about the transition and package cover to come out with innovative insurance products.

State-owned companies are providing standard horticulture/ plantation policy of insurance for fruit/vegetable crops, which is an essential infrastructure of investments.With growing investments in the commercial horticulture/plantation ventures, it is of paramount importance to have a cushion for insurance for successful long-term sustenance of this activity. The policy covers the crops of grape, citrus (orange, lime, sweet lime), chickoo (sapota), pomegranate, apple, banana and strawberry. The policy undertakes to cover the extent of loss or damage to the insured item occasioned by operation of any one or more of the following perils, either in isolation or in concurrence:

1. Fire

2. Lightening

3. Storm, hailstorm, cyclone,

typhoons, tempest, hurricane, tornado whilst in direct and immediate operation over the insured area,

4. Flood and inundation

5. Riots and strike: The policy is normally designed to cover an insured weather owner or tenant engaged cultivation of one or more crops or the name of an association or an organised or registered body of farms engaged in cultivation of the specified crops where such association or body has been formed and is functioning for the purpose of procurement of inputs, processing, marketing of the produce, provided particulars of each member farmer is recorded in as schedule.

Insurance companies are expanding their micro-offices in rural and remote areas to exploit the so far untapped rural business opportunities. This phenomenal outreach of insurers in the country is a great strength and it could be leveraged well to transform the traditional agriculture into agro-business. With domestic savings growing at 28.1% of GDP, resources for lending and insurance do not pose a major constraint. There is a need to develop cold chains and establishment of large and sophisticated cold storages in strategic locations. Storage of fruits and vegetables also poses the need for a large number of refrigerated vehicles and containers to carry the perishable produce and similarly the insurance protection for farmers and financers.Milk value chain is extremely promising and the potential needs to be harnessed to produce high quality dairy products conforming to best global standards. Establishing innumerable numbers of privately-owned milk-chilling plants under contract with large players in every village is the key for a possible further leap. Insurance companies have so far not designed any exclusive cover for these chains and a vast area is lying untapped throughout the country.

Farmer-centric insurance could be the next driver of growth for finance companies. Since 70% of crop production in India is subject to the vagaries of the monsoon, the crop insurance has been in vogue through several public sector insurance companies for decades. However, farmers had not been able to make the best of these schemes. Moral hazard was the biggest bane. Insurance premiums were too low and policies too complex. There was not sufficient data to verify and settle claims efficiently. Public sector insurance companies looked at crop insurance as a liability and not as a business opportunity. Rainfall insurance was predominantly a feature in the power sectors of developed nations.

However, in the few years since its agricultural application, the index linked rainfall insurance has blossomed into a booming business with over 20 crops being covered. As many as three private companies are already into rainfall insurance business and it hints a bright future of this business. ICICI Lombard cover crops in all major agricultural segments including horticulture, spices and fibres, and sells weather products through intermediaries like BASIX in 100 districts in the states of Andhra Pradesh, Karnataka, Tamil Nadu, Maharashtra, Gujarat, Punjab, Madhya Pradesh and Uttar Pradesh. Index-linked rainfall insurance presents a win-win situation for all parties involved. ICICI Lombard has signed over 1,50,000 farmers in 2005 and BASIX had sold policies to more than 2.5 crore rural clients. Rainfall insurance is already making big waves and there is more to come.

 In just two years of its existence,the National Agriculture Insurance Company of India has achieved many a milestone. They have set up the R&D department at HO to design farmer-friendly and affordable insurance products. Their actuarial cell is evaluating actuarial aspects of various crop insurance products. The AIC product NAIS was implemented in 23 states and 2 Union Territories, insuring 30 crops during the Kharif season and 25 crops during the Rabi season. Almost 18 million farmers were insured during 2004-05. Some more products like Farm Income Insurance Scheme, Varsha Bima-2005, Coffee Insurance and Sookha Suraksha Kavach were also launched subsequently. A field feedback exercise on NAIS and other insurance products was undertaken during 2004-05 that involved interactions with more than 15000 farmers, 3000 state government officials and Rural Financial Institutions. An awareness campaign for NAIS “Krishi Bima Kissan Tal” was launched to cover 1 lakh villages in 400 districts across the country. In fact the AIC in its endeavour to cover 2.5 crore farmers in the year 2005-06 and 3 crore farmers by 2006-07 i.e. 25% of the total farmers, has chalked out a dynamic strategy. This strategy is going to benefit six crore farmers by the year 2011-12.

Despite significant headways being made, the agriculture insurance is more or less still a far cry in India. State Governments and the agencies who are participating in various agriculture insurance schemes have to educate the farmers on the Scheme features, to guide them in filling the proposal forms and collecting the required documents.

The marketing of agriculture insurance products of private insurers is more flexible and accessible to the farmers and gradually the farmers are reposing faith in these private players for protecting their yields. The time ahead warrants the private players to innovate more and more agriculture- related products to cover this most vital untapped area. Ventures like IFFCO-Tokio should come ahead to meet the basic needs of the Indian agro-industry.