National Agricultural 97470 Insurance Scheme in India Making Insurance Markets Work for Farmers Background Highlights With two-thirds of the population dependent on  With 25 million farmers insured, the National agriculture for a livelihood, crop insurance is an Agricultural Insurance Scheme (NAIS) in India is the important element of agricultural risk management in largest crop insurance scheme in the world. India. The Government of India (GoI) has historically focused on crop insurance as a planned mechanism to  The Indian Government moved from a social crop mitigate the risks of natural perils on farm production. In insurance scheme to a market-based crop insurance 1999, GoI established the National Agricultural Insurance program with actuarially sound premium rates, up- Scheme (NAIS) to reduce farmers' vulnerability to natural front subsidies, and participation of private insurers. disasters. The NAIS offers insurance for food crops,  The World Bank provided technical assistance to oilseeds, and selected commercial crops through state- support modification of NAIS based on international owned insurer, Agriculture Insurance Company of India best practice and in-country experience. (AICI). With about 25 million farmers insured, it is the largest crop insurance program in the world. Objectives NAIS is based on an indexed approach known as the area yield-based approach, where the index used is the crop The objectives of the NLTA were to: yield of a defined area called an insurance unit (IU, e.g.,  Review current underwriting methodology; an administrative block). The actual yield of the insured  Develop an actuarially sound pricing methodology crop, measured by crop-cutting experiments in the IU, is based on international best practice; compared to historical yields. If the former is lower than  Develop product design and pricing methodology for the latter, all insured farmers in the IU are eligible for the new weather index insurance products; same rate of indemnity payout. Individual crop insurance  Suggest cost-effective catastrophe risk financing would have been virtually impossible given the large solutions for the public crop insurance company AICI. number of very small landholdings. Using the area yield- based approach also has other merits. Most importantly, Outcomes it mitigates moral hazard and adverse selection. Key outputs of the NLTA include: NAIS is funded by post-disaster government contributions, entailing an open-ended and highly  Development of a best practice, standard, actuarially- variable fiscal exposure for GoI. Farmers’ premiums are sound pricing procedure using an experience-based subsidized; the annual claim/farmers’ premium ratio is approach for area-yield insurance; higher than 100 percent. At the end of the crop season,  Detailed inputs into the design of the modified NAIS aggregate claims exceeding the farmers’ premium are (mNAIS), which was launched for the 2010-11 funded 50-50 by the state and central governments. growing season in 12 districts, covering 332,628 India’s post-disaster funding arrangement was farmers, with an expected claims ratio within 50 necessitated by the lack of an actuarially sound premium percent; AICI is targeting 400,000 farmers for the next rating methodology, which means that estimating growing season; payouts is not feasible. This system is not optimal for  Development of commercial weather-based crop GoI’s budget management and delays claims settlement, insurance products; leading to distress of farmers and exposing farmers to a  Building of AICI’s capacity to transition NAIS to a vicious debt cycle. market-based approach;  Policy dialogue with various line ministries about the To address these challenges, in 2005 the Government fiscal impact of the modified NAIS as well as the formed a joint task-force with AICI and requested the welfare implications of the modified scheme; World Bank to provide non-lending technical assistance  Designing prototype actuarial software; pricing over (NLTA) in modifying the crop insurance program and in 200 insurance products; advising on use of mobile improving insurance coverage. technology for improving crop cutting data quality and timeliness. Main Features of the mNAIS  Actuarial regime. The mNAIS scheme operates on an “actuarial regime” in which the government’s financial liability is predominantly in the form of premium subsidies given to AICI and funded ex-ante, thereby reducing the contingent and uncertain ex-post fiscal exposure currently faced by the government under NAIS and reducing delays in claims settlement.  Up-front premium subsidies. AICI receives premiums (farmer collections plus premium subsidies from the government) and is responsible for managing the liability of the mNAIS through risk transfer to private reinsurance markets and risk retention through its reserves. It is financially able to operate on a sustainable basis.  On-account partial payment. The mNAIS product continues to be based on an area yield-based approach, with a provision for an early part payment to farmers (in season) based on weather indices.  Small Insurance Units. Crop-cutting experiments to assess crop yield estimates are lowered from Block level to Village level to reduce basis risk (i.e., the mismatch between the actual, individual crop yield losses and the insurance indemnity).  Cutoff dates. Adverse selection is reduced through the enforcement of early purchase deadlines ahead of the crop season.  Additional benefits. Additional benefits are offered for prevention of sowing, replanting, post harvest losses, and localized risk, such as hail losses or landslides. Lessons Learned 4. Combine traditional and innovative crop insurance. Although much development literature and debate on 1. State-of-the-art tools should be developed in close traditional versus new generation (weather-based) collaboration with the client, and second-best technical insurance, technical grounds were used to demonstrate solutions should be deployed when necessary to reflect the benefits of combining the two approaches, based on on-the-ground realities and political and economic their respective comparative advantages. Weather- considerations. Drawing on international best practice based indices are used for on-account partial payment of and in-country experience, the actuarially sound pricing claims in case of adverse mid-season conditions, while methodology helps attract international reinsurance area yield indices are used for final payment of claims. capacity. Such pricing methodology ensures the financial sustainability of the program and its relevance to the Glossary country context. An open approach helped close Area-yield based insurance: Insurance scheme under collaboration with the client, leading to drawing on their which insurance payments are based on an area-yield country and domain knowledge to a significant extent, a estimate determined by harvest production process which also enabled the Bank team to learn from measurements taken at a series of randomly chosen the client’s experience and knowledge. Crop Cutting Experiments locations. 2. Technical tools can pave the way for policy dialogue. Crop cutting experiment: Sampling process by which The actuarial tools by themselves were the defined crop yields are statistically estimated in each insurance output sought by the client. These actuarial tools were unit. used as the basis for a shift from ex-post to ex-ante funding. They were also used to demonstrate efficiency Further Reading and the political and economic gains possible through faster claims settlements. The tools therefore helped World Bank (2007). India – National Agriculture translate technical work into a policy dialogue. Insurance Scheme: Market-based solutions for better risk sharing. Washington, DC. 3. Extensive institutional capacity building and technical inputs for both the implementing agency and Word Bank (2010). Enhancing Crop Insurance in India. policymakers is critical. Agricultural insurance is a highly Washington, DC. specialized line of business that requires intensive Contact institutional capacity building. Major efforts were undertaken to ensure that the proposed technical Niraj Verma, Senior Financial Sector Specialist, The recommendations would be fully understood and World Bank, nverma@worldbank.org, +1(91) 5785- implemented. Intensive training was provided to AICI 151 technical staff through technical documents, monthly teleconferences, and quarterly on-site visits. Olivier Mahul, Program Coordinator, Disaster Risk Financing and Insurance, Capital Markets Practice (NBFI), and GFDRR, The World Bank, omahul@worldbank.org, +1(202) 458-8955 Updated March 2012 www.worldbank.org/fpd/drfip www.gfdrr.org