Impact Story

This project is potentially replicable to other regions and or countries where weather-based crops failures are regular occurrences. There are a number of important pre-conditions for implementation which include availability and or ease of collection of data and, in the case of weather-indexing, sufficient investment in appropriately located automated weather stations. Shortcomings in these areas do not rule out development of good systems but would impact on cost and timing thereof.

This was a substantial project introduced to FIRST by the World Bank and the Agricultural Insurance Company of India in June 2006. It is a good example of FIRST being used to follow on from technical assistance achieved by other programs. In this case, the World Bank and the Swiss Government had funded development of a premium setting methodology for crop insurance that was actuarially and commercially based but had insufficient funds to continue to improve crop insurance techniques in India. They had identified however the potential for weather based crop insurance and wanted to find technical assistance to support this development and run some pilots on certain crops and certain States in India.

The National Agricultural Insurance Scheme (NAIS) operating in India was already reaching about 18 million farmers out of a total of about 125 million but most small area farms (which dominate the sector in India) were not covered. The NAIS cover operated on an “area yield” basis and so a drop in a crop yield caused by external factors such as drought triggered a payment to all insured farmers in the specified area.  There were possible ways to improve this cover to allow it to drill down to smaller land areas, speed up indemnity payments, be more crop specific and more applicable to small farm holdings. The NAIS scheme had tended to benefit larger farms (which can in any event be more efficient) and even then claims paid out were over 350% of premiums, thereby requiring substantial Government subsidy.

The weather based index scheme aimed to overcome some of the problems summarised above and even allow for extensions of cover for seeds and land preparation in advance of harvesting. In addition it would use sound actuarial rate setting so that government subsidies could be up front as a premium subsidy rather than making up losses after the event (which means compensation to farmers is delayed).

This technical assistance had various challenges: it required highly specialist expertise; had a short time frame so that the scheme could start to be tested through pilots in the pre-crops season; required a substantial amount of data collection and data cleansing and, a review of existing automatic and manual weather stations in India to determine value of input for the proposed pilots.

The focus for the pilots was on certain crops in certain rain-affected States (i.e. those States that experienced a periodic but damaging drought risk for crops). Crops involved in the pilots were: rice, cotton, groundnuts, wheat and sorghum.

Lessons learned:

• Poverty alleviation can be substantial where such schemes are workable because the cover can benefit smaller farms and by getting the premiums “right” up front (even where some Government subsidy may still be involved) claims for loss can be substantially expedited.
• The expertise required is highly specialised and this drives up cost for such technical assistance.
• Funding is likely to be necessary for certain infrastructure investment such as automated weather stations.
• Substantial on-going expertise in the host country in data gathering, actuarially-based premium setting and adjustment to changing weather patterns is also needed. This existed in India but in some other developing countries building this local capacity may be more of a challenge and could take 5 years or so depending on various factors.
• Index-based insurance techniques can be applied other area or incidences of weather-based events e.g. floods (Mekong Delta); extreme winters (Mongolian live-stock).

Reports:

• The terms of reference which are a useful guide for the technical assistance needed for other candidates in this area of work
• An Executive Summary of the results of this project. There are many more detailed reports as outcomes but these are highly technical and more specific to certain crops and regions of India: the Executive Summary (19 pages) is sufficient as an introduction to the potential for this type of project.