Institutional Reforms in Crop Insurance Sector

04/21/23 1Dr. Reshmy Nair

Dr. Reshmy NairAssociate Professor

ASCI, Hyderabadreshmy.asci@gmail.com/reshmy.nair@asci.org.in

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“In a country where agriculture is at the mercy of the

vagaries of the monsoon and other factors beyond the

control of the farmer, the importance of crop insurance is

not in doubt and needs no emphasis”

V. M. Dandekar, Review of Agriculture, EPW, June 1976

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GDP growth originating in agriculture is atleast twice as effective in reducing poverty as GDP growth originating outside agriculture (WDR, 2008).

Agriculture Insurance for Growth & Poverty Reduction•Cushions the shock of disastrous season•improves I and productivity•Increases access to credit•Can be claimed as a right.

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Spurt in volume of global agri-insurance premium: 2003-05: $ 7-8 billion 2012 : $ 23 billion

1.Increases in commodity prices and SI of crops2.Major expansion of agricultural insurance in emerging markets3.Increase in premium subsidy levels for agriculture insurance in key countries

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Public Sector Insurance Canada, Greece, Cyprus, India (till 2007-NAIS), Iran, Philippines

Private sector insurance with no government support

Argentina, South Africa, Australia, Netherlands, Germany, Hungary

National Scheme with Monopoly Insurer Private Coinsurance pools in Spain, Turkey

Commercial Competition with high level of control US

Commercial Competition with low control – premium subsidy support; perils, crops, regions at the discretion of insurers

Brazil, Chile, France, Italy, Mexico and Poland, India

Public and Private Insurers Control on Premiums and Area of operationVery Less Control on ProductNo Legislation/Regulatory Framework

India (2007 onwards)

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Region Countries % FI % AI

Countries without Premium Subsidies

High Y Australia, Germany,Hungary, New Zealand, Sweden, Switzerland

41.7 39.1

Upper Middle Y Argentina, Panama, Romania, South Africa 44.0 27.3

Lower Middle Y Ecuador, Mongolia, Nicaragua, Paraguay, Thailand 8.0 2.0

Lower Y Bangladesh, Ethiopia, Malawi & Nepal 0.5 4.7

Countries with Premium Subsidies

High Y Canada, France, Israel, Italy, Korea, Spain, US 88.0 47.6

Upper-Middle Y Brazil, Chile, Costa Rica, Kazakistan, Mauritius, Mexico, Poland, Russia, Turkey, Uruguay, Venezuela

26.7 26.8

Lower-Middle Y China, Colombia, Dominican Republic, India, Iran, Philippines, Sudan, Ukraine

15.4 9.7

India 25

Source: World Bank (2010) Government Support to Agriculture Insurance9

Global Experience Penetration of Agriculture

Viability A+I/P<1; A(Administration costs); I (Indemnity); P (Premium)i.e. Average Loss Ratio<70-75% (plus A/O expenses of 25-30%)

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Country Period (I+A)/P Period Loss Ratio

Brazil 1975-81 4.57 2004-7 o.81

Costa Rica 1970-89 2.80 2003-07 0.90

India 1985-89 5.11(I/P) 2000-08 314

Mexico 1980-89 3.65 2003-07(crop &

Livestock)

0.50

Philippines 1981-89 5.74 2003-07 0.73

United States 1980-89 2.42 2003-07 0.70

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• 30 million out of 120 million farmers (25%) are insured

• 90% are loanee farmers for whom insurance is compulsory

  Govt of India targets coverage to 50 million farmers under 12th plan.

During 2013-14, over three crore farmers were insured for an insurance value of Rs. 71,000 cr, generating a gross premium of Rs. 4600 crores and a claim disbursement of 5200 cr

  2013-14

Weather Index Insurance - 14 million farmers covered annually- Implemented in 16-18 implementing states

Yield Index Insurance - 16 million (NAIS-11 million and MNAIS 5 million) covered annually. Implemented in 27 states.

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Existing Situation Future Concerns

Index insurance products has moved

from pilot to planned phase

Is the present legal & regulatory

environment conducive for the

growth of the crop insurance sector?.

Entry of plethora of Insurance companies

in the crop insurance sector

Has objectives of introducing

competition in the crop insurance

sector achieved?.

Index-based Crop Insurance in India - Understanding Futuristic Needs

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Principle of Indemnity: Insurance is a contract of indemnity. Under such contracts, the insurer promises to indemnify the insured against any loss caused by the occurrence of the insured event. In other words, the insurer has to compensate the insured only for the actual loss that was sustained.

(1) Index based claim payment: Under index insurance, payment is based on an index, not on actual loss. The index is only a proxy for the loss and may not ideally reflect the exact loss suffered by the farmer.

(ii) Excess/Low Claims in relation to losses: The indemnity concept can also be construed as requiring that the insurance contracts cannot exceed Loss. Given the potential for basis risk, the payment may exceed or may be lesser than the loss sustained by the insured.

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Principle of Insurable Interest: Insured should have an interest in the subject matter insured.

Would this mean: existence of a physical, financial or larger economic interest? need to have ownership to establish his insurable interest? need to demonstrate possessing the insurable interest- at the time of inception

of the policy, both at the time of taking the policy and at the time of the loss occurring etc or only at the time of loss occurring?.

What are the legal mechanisms in place for the insurers to verify insurable interest and what could be the consequences for the insured?

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Insurance Act, 1938

No risk to be assumed unless premium is received in advance:

Refund of Premium: Section 64VB. (3) of the Act states that “Any refund of premium which may become due to an insured on account of the cancellation of a policy or

alteration in its terms and conditions or otherwise shall be paid by the insurer directly to the insured by a crossed or order cheque or by postal money order and a proper receipt shall be obtained by the insurer from the insured, and such refund shall in no case be credited to the account of the agent”.

Register of policies and register of claims: Section 14 (a) and (b) of the Act mentions that every insurer shall maintain a register or record of policies, in which shall be entered, in respect of every policy issued by the insurer, the name and address of the policy -holder….

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IRDA Regulations

(i) Loss Intimation: According to the IRDA, Protection of Policyholders’ Interests Regulations, 2002, an insured or the claimant shall give notice to the insurer of any loss arising under contract of insurance at the earliest.

(ii) Interest Payment on Delay in Claims Settlement: Section 6 of the above regulations state that upon acceptance of an offer of settlement as stated in sub-regulation (5) by the insured, the payment of the amount due shall be made within 7 days from the date of acceptance of the offer by the insured.

(iii) Elaborate Training Requirements for licensing of individual/corporate insurance agents: According to IRDA, Licensing of Insurance Agents Regulations 2000/Licensing of Corporate Agents) Regulations 2002, an insurance agent applicant shall have completed from an approved institution, at least, one hundred hours’ practical training in general insurance business (spread over three to four weeks).

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USA Federal Crop Insurance Act -1938; Federal Crop Insurance Corporation, 1938, The ARPA,

2000 Federal Crop Insurance Program (Multi-peril yield and Revenue Insurance products)-

Administered by RMA – PPP b/w Federal Government and private sector insurance companies.

RMA- Policy, planning, developing insurance programmes, setting terms and conditions for premium, coverage etc, premium subsidy and CAT coverage etc.

Constantly evolving Legislation and partnership between RMA and other agents/insurers (e.g. auditing agents with high claim ratios/R & D with private sector).

CANADA

Crop Insurance Act, 1959 and subsequent amendments

Flexibility of designing customized programmes for provinces and agreements with the federal government on financing/reinsurance

Farm Income Protection Act, 1991- All federal/provincial farm safety nets within the general framework – Crop insurance program, revenue insurance program, net income stabilization account, special measures for unforeseen emergencies.

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