Weather Risks Insurance for Agriculture

Transcription

1 Weather Risks Insurance for Agriculture International Workshop on Agrometeorological Risk Management, Delhi Oct 26, 2006 Presented by: Pranav Prashad ICICI Lombard General Insurance Co. Mumbai, India

2 Weather and Indian Agriculture Causal analysis of agricultural losses as compiled by General Insurance Corporation of India s crop insurance cell ** Cause Proportion of Loss Drought / Low Rainfall 70% Floods / Excess Rainfall 20% Others* 10% *(Storms,Pest, Negligence,Earthquake) Majority of the agricultural losses can be attributed to weather vagaries **Source: Varsha Bonds and Options Rajas Parchure

3 What is Weather Insurance An insurance product based on a weather index Financial protection based on the performance of specified index in relation to a specified trigger Detailed correlation analysis is carried out to ascertain the way weather impacts yields of the crops to arrive at compensation levels Weather indices could be deficit/excess rainfall, extreme fluctuations of temperature, relative humidity and/or a combination of above

4 Process of making index based product Peril identification Weighted index setting for each phase of the crop Back testing for payouts Pricing Monitoring Claims settlement

5 Advantages of Index based insurance A long term sustainable solution A market-based alternative to traditional crop insurance, which overcomes challenges of High monitoring and administrative cost Moral hazard and adverse selection Transparency replaces human subjective assessment with objective weather parameters Scientific way of designing product Simple terms of insurance delivery Speedy claims settlement process

6 An example Coriander Peril identification and index setting Time Period Mid Dec - Feb Mid Feb - Mid March Stage Vegetative Growth Maturity Risk Weather Index Low temperature leading to frost injury Minimum temperature noted during the crop growth phase Unseasonal rainfall having qualitative impact on crop Maximum rainfall on any single day during the crop growth phase

7 Simple terms for Insurance Delivery

8 Initiatives in Weather Insurance Launched in 2003 with support from the World Bank Pilot was launched for Castor and Groundnut crop in Mehbubnagar in Andhra Pradesh against deficit rainfall with the help of a microfinance institution called BASIX farmers bought the cover Over the last one year, covered 150,000 farmers in 120 different locations and an acreage of over 180,000 Crops covered Field Crops: Soybean, Paddy, Cumin, Coriander, Fenugreek, Wheat Horticulture crops: Oranges, Grapes, Apples, Peach Weather perils -Deficit, excess and unseasonal rainfall -High relative humidity (RH) -Excessively high and low temperatures -Prolonged dry spell -And combination of above

9 Reducing Basis risk - Automated weather stations at Block level Basis risk Inability to measure weather data at precisely the customer location Tie up with National Collateral Management Services Limited for installing Automated Weather Station (AWS) at block level Supplements India Meteorological Department s district level weather stations AWS provides real time daily data through automated calling process Covering 91 locations to reduce basis risk (up from 64 locations last year)

10 Making crop specific structure - Wheat Wheat cultivation in India is a gamble of temperature. Howard, British Scientist at PUSA Early 20 th Century Time Period Jan - Mar Mar - Apr Stage Grain Filling Stage Harvesting phase Risk Extreme temperature fluctuations Unseasonal rainfall Weather Index Deviation in fortnightly average Tmin and Tmax on higher side from benchmark Max. rainfall on any single day

11 Making crop specific structure - Apples Time Period Dec to Mar Mar to May April to Aug Stage Dormancy (Rest) Flowering Risk Non availability of sufficient chilling and moisture Extreme temperature fluctuations Fruit set and development Non availability of sufficient water Weather Index Chilling units as per Utah model Aggregate precipitation GDD, a Tmin and Tmax based index that captures deviations on higher and lower side. Aggregate rainfall during subphase of the crop phase.

12 Making crop specific structure - Oranges Time Period Mid Jun - July July - September Stage Flowering initiation Fruit set and development Risk Weather Index Concentrated amount of rainfall within short period Rainfall events - 3 day consecutive rainfall. Prolonged absence of rainfall leading to dry spell. Aggregate rainfall in sub periods of crop stage - 10 day periods in July, 15 day periods in August and 30 days in September.

13 Expanding the market to get benefit of diversification for agricultural risks Time Period Stage Risk Mar - Sep Production period, when normally rainfall is not expected Unseasonal rainfall Weather Index A Non Production Day (NPD) has been defined as a day with rainfall during the production period. NPDs have further been categorised as type A (1-9 mm), type B (10-24 mm) and type C (> = 25 mm) Compensation paid if NPDs observed is higher than a pre-determined level. Compensation is highest for type C NPDs and lowest for type A NPDs.

14 Where are we today Snapshot last one year Crop Risk Details States Number of farmers covered Area covered (in acres) Sum Insured (Rs mn) Soybean Deficit rainfall RJ, MP 4,112 16, Oranges - Deficit rainfall - Prolonged dry spell RJ 453 1,223 6 Generic product for all field crops - Deficit & Excess rainfall Ap, MP, MH, Jharkhand, KK, Orissa, RJ and TN 19,100 22, Grapes - Deficit & Excess rainfall, Temp MH, AP Paddy - Prolonged dry spell - Excessive rainfall Punjab 1,625 7, Cumin - High relative humidity RJ Coriander - Frost like temperature - Unseasonal rainfall RJ 2,075 2,200 6 Fenugreek - Excessively high temperature during days with high RH RJ Kinnu - Excessively high temperature - Deficit rainfall RJ Wheat - High temperature - Unseasonal rainfall Punjab, Haryana Cotton - Deficit rainfall MH 100, , Total 150, ,000

15 Key Challenge - Distribution Sheer spread and diversity of target customers makes cost effective distribution a big challenge 37% of the urban population lives in 23 cities 37% of the rural population lives in 100,000 villages Three pronged strategy Government Aggregators ICICI ICICI Lombard Lombard Direct Retailing

16 Cost effective distribution - Channels Bank Branches, Agents Semi-Urban locations MFIs, NGOs, Franchisee, Agents Villages Admin System, Kiosks,MFIs, NGOS, SHGs Villages Admin System, Self help Groups, E-Choupal, MFIs, NGOS Tehsil // Blocks Villages >5000 population Villages <5000 population Locally available channels are effective Trust is the cornerstone of relationships

17 Cost effective distribution Technology enabled delivery Multi-channel delivery model Smart Cards /Biometrics Simputers Deposit Machine Mobile Phones Core Banking Software Technology Innovations Smart Cards Handhelds, Mobile phones Mini Deposit Machines Low ticket premium collection Card accessed by service providers Technology Innovations

18 Smartcard-Objectives Stores Data Family Demographics Health Insurance Net worth Land Cattle Smartcard Capture customer info on a microchip Allows for biometric fingerprint based identification & unique customer code Capability to store information and process transactions Shared platform for multiproduct delivery Offers services Bank account Cash transactions Insurance Loans Investments Utility bills

19 Validation of correlation with on-ground experience Case study Crop : Coriander Area : Hadoti region, Rajasthan Season : Rabi 2006 Perils Covered : a) Frost injury due to drop in minimum temperature b) Unseasonal rainfall Cover Period : a) 15 Dec 28 Feb 2006 : b) 10 Feb 19 Mar 2006 Channel Partner : ITC e-choupal No. of farmers : 2,075

20 Case study contd Actual rainfall as per IMD was 40 mm, payout = Rs. 2,000 Actual field loss 100% crop damage

21 Way forward Competing against a subsidized Multi-peril Crop Insurance (MPCI) Scaling up through individual retail selling model is not sustainable. Distribution should be linked with bank funding through MFI, Agri input companies, NGOs etc Needs extensive government support to popularize the concept amongst farming community Product promotion Subsidy Service tax

22 Improving the lives of the billions of people at the bottom of the pyramid is a noble endeavor. It can also be a lucrative one C.K. Prahalad Thank You

23 In Conclusion. Rural demand for products and services is no different from urban requirements provided Fairly priced and a relevant product is made available Cost effective distribution systems are established Effective administration is ensured Easy accessibility and quality service is ensured Focused approach along with appropriate regulation will help build a model which is viable, sustainable and scalable Availability of financial services and insurance would change the rural landscape in future