Research Idea

Title

A study on Rainfall Insurance in India: Challenges and Opportunities with special reference to Maharashtra.

Introduction

Agriculture in India is a pressing issue both in economic and political arenas. Though Agriculture and allied
areas account for over 17% of the GDP and 56.6% total work force, by and large, it is monsoon dependent
and no reliable alternate for irrigation is available to most farmers especially in lower developed states. A
large number of farmers depend on rain and a draught spells havoc on agrarian economy which also casts
its shadow on national economy and output. Besides floods, hailstorm, diseases and other natural calamities
also have their impact on areas prone to them. So agricultural insurance has a very pivotal role to play in
order to sustain the growth of agricultural sector as a whole. In India crop insurance dominates agricultural
market while weather based insurance, especially monsoon insurance is catching up.

Crop insurance in India has been institutionalized by the Govt. of India. Existing agricultural insurance
schemes such as the modified NAIS (modified National Agricultural Insurance Scheme, introduced recently
formerly Comprehensive Crop Insurance Scheme), Experimental Crop Insurance, Farm Income Insurance
Scheme (FIIS) typically are burdened with heavy subsidies delayed payouts, high claims to premium ratio
and moral hazards and have met with limited participation and heavy losses to the exchequer.

Private players such as ICICI Lombard have not been able to do well either. ICICI has managed to integrate
the insurance along with the loan so that the nominal interest rate is increased by around 3 percentage points
but during low rainfall periods, the interest payment can come down by up to 6 percentage points. ICICI
policies also insure against extreme tail events only - up to 89th percentile of losses incurred, the payout is
zero thus providing practically no indemnity against losses.

Monsoon Insurance is a type of rainfall index insurance, which can be used to solve the issue of farmers
facing erratic rainfall. It is a product which gives a payout when rainfall exceeds or falls below pre-
determined levels as calculated by historical rainfall data. It is a mainstream product in the developed world
and is being adopted in developing countries such as India, Mexico and South Africa albeit with several
inefficiencies. The main advantage of rainfall index based insurance is that farmers cannot alter their
production to get false claims. In addition to this, insuring the rainfall means that there is little due diligence
required on the part of the insurer with regard to claims. So it reduces the cost of insurance significantly.
Apart from giving a farmer his desired risk-return characteristics for farming, it greatly lowers the risk on
the loans that farmers have taken and improves his creditworthiness. Given a properly priced index
insurance, the risk on a farmer loan (the biggest component of it is rainfall risk according to a study by the
World Bank) significantly reduces with insurance and possibly enough to allow a much lower interest rate
for his loans and availability of loans in cases where they were previously unavailable. A World Bank study
shows that about 60 percent of rural loans are in the unorganized sector and the interest rates vary from
around 40 percent to over 100 percent. Reduction in farmers’ loan risk will go a long way in ensuring
financial inclusion.

The main disadvantage arises from the complexity in calculation of premium due to which the premiums
collected may be too high or too low. There would an effort to keep it on a slightly higher side given the
low market size at present which results in high operating costs due to lack of scale, as well as reinsurance
costs which could be high. Another operational issue is that the value of rainfall upon which a payout is
given may not be related to what the farmer experiences and there is the fact that losses may not be
proportional to differences in rainfall alone. But these are minor flaws compared to the several advantage
mentioned above.

Literature review

Townsend identifies 5 factors which aid farmers in case of income fluctuations due to erratic rainfalls and
other calamities & diseases – diversification of land holdings, storage of grains from previous year,
livestock, lenders and gifts.

William Dick and Andrea Stoppa point out various advantages and disadvantages in WII ranging from
transparency, low cost, rapid payout and no moral hazard on one end to Basis risk, high technical expertise
and lack of weather data on other end

Dr. Md. Mushfiqur Rahman, Bikash Chandra Ghosh, Dr. Mir Khaled Iqbal Chowdhury point out that for
lower developed/small economies like Bangladesh which face digh deviation of weather a problem of high
initial capital requirement makes it difficult to administer WII

J.D. Daron , D.A. Stainforth mention that how tacking changes and their direction helps build more robust
WII products and the potential dangers of relying on past data for weather pattern connected with WII.

The report of World Bank 2011 describes how weather indexed insurance works best for large farmers and
also for banks who could insure their loans to farmers. The state could also have a sovereign stake here.

Xavier Giné, Robert Townsend, and James Vickery found Insurance take-up to be decreasing in basis risk
between insurance payouts and income fluctuations, higher among wealthy households, and lower among
households that are credit constrained

Sarkar concludes that Weather insurance can make farmers more confident to purchase raw materials like
fertilizers, seeds etc. and to protect their crops as investment. To protect from all sorts of external risks as
well as climate change, weather index insurance could play a significant role.

NAIS report by Niraj Verma and Olivier Mahul envisages that The Indian Government moved from a
social crop insurance scheme to a market-based crop insurance program with actuarially sound premium
rates, up-front subsidies, and participation of private insurers.

USAID report on Index Insurance For Weather Risk In Lower-Income Countires states that Rainfall index
insurance has been sold by private companies since 2003 to compensate farmers for agricultural losses
due to drought and excess rain. In 2005, the Indian government insurance company also began selling this
form of insurance. Thus far, these insurance products are being sold with no subsidies. In 2005, about
250,000 small Indian farm households purchased some form of index insurance for weather risk. The
interest has been significant enough that private investments are being made to increase the number of
weather stations to reduce basis risk

Collier Skees and Barnett point out that in absence of appropriate data the need of WII against other loss
based insurance increases to curb the moral hazards.
Collier Skees and Barnett conclude that reaping the benefits of economies of scale and reaching out to the
problems of local take holders was pivotal to the success of WII

Daniel J Clarke of World bank states that that WII India was not completely free from moral hazard and
adverse selection.

Shivtar singh asserts that the criterion for working out premiums should not only be based on technical
considerations but also economic and social such as paying capacity of the farmers ,the resources that the
government is willing to allocate and the desirability and feasibility of income transfer from non-
agriculture sector to agriculture sector.

Alan Fuchs and Hendrik Wolff state that WII creates disincentives to invest in other noninsured
crops leading to potential overspecialization and monoculture. WII further generates disincentives to
invest in irrigation systems because farmers are insured only when producing on non-irrigated land.

Barry J Barnett concludes that WII should not only target crop yield shortfall but also other consequential
and catastrophic losses.

Raghvendra singh asserts that with introduction of NAIS and WBCIS India has arrived at crossroads from
crops insurance schemes to weather based with former losing out to latter in phased manner.

Scope

As weather based index find its foot in India (especially rainfall insurance), it would be important to
understand as to what extent farmers are aware of it and how do they perceive it especially vis-à-vis crop
insurance. It would help to estimate the success and spread of rainfall insurance going forward and enable
the authorities to imbibe the same in their future agricultural insurance plan.

Research Questions

To study the impact of rainfall on agriculture produce in India & Maharashtra?

What are the major factors affecting the selection of agricultural insurance amongst farmers?

Objective

To Identify the Opportunities and Challenges for Rainfall Insurance in India.

Research Framework

Type – Descriptive

Sampling method – Stratified Quota

Sample size – yet to be decided

Data collection – primary & secondary

Analysis – tools to be used factor analysis and regression and other techniques as needed

Bibliography
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Benjamin Collier, J. S. (2009). Weather Index Insurance and Climate Change: Opportunities and
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Clarke, D. J. ( 12 April 2012). Weather based crop insurance in India. World Bank.

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http://censusindia.gov.in/Census_And_You/economic_activity.aspx

http://statisticstimes.com/economy/sectorwise-gdp-contribution-of-india.php