Rain Check

This is how it will works: it provides cover to farmers against anticipated shortfall in yield if the rains go missing. The farmer can then claim settlement immediately without anyone having to estimate his crop loss first.

Unfortunately, this is a neglected area. There is insurance linked to crop loss but rain insurance has just been tried on a pilot basis. Lack of insurance means that a farmer is unable to pay back his credit and is labelled a ‘‘defaulter’’ making him ineligible to borrow from banks. It is this link that is leading to some innovations in the insurance sector: Micro-financiers are teaming up with private insurance companies for insuring groups of farmers. Or companies are setting up their own network of weather stations rather than waiting for the Indian Met Department to modernise.

At present, the insurance cover for farmers is a dismal 17 per cent for the entire country. For some of the states with the highest tally of suicides, it is as low as 2 per cent.

Worse, the government is sitting on a draft of reforms prepared by a a joint group set up in 2004 and recommended changes in the present system of National Agriculture Insurance Scheme (NAIS).

The case for insurance

Experts have consistently been stressing the need for insurance—every postmortem of farmer suicides, including the last one done by Sharad Pawar, have devoted much space to it.

‘‘This is the only option in the absence of cost effective risk hedging options…’’ says their report.

The Agriculture Insurance Company of India is currently implementing the NAIS throughout the country. So far, the insurance package is on crop losses only.

An analysis of rainfall figures in the 31 suicide-prone districts shows that truant rainfall has been a major cause of farmer suicides. In Vidarbha, the actual rainfall has been just 75 per cent of the average in Amravati and Yavatmal districts. In Andhra Pradesh where two-third of the state falls under arid zones, during 2002-03, and 2004-05, several districts went without rain.

In Karnataka, two districts have continuously not had rain — Chitradurga and Chikmaglur. Even in the high rain zone Kerala, there has been a shortfall which is bad especially for plantation crops like coconut, banana, pepper, cashew and rubber.

Additional irrigation is expensive and will take years before the pending projects are finished and new ones are commissioned — it is estimated that Rs 12,582 crore would be required to bring in 21 lakh hectares under irrigation.

Till then it is insurance that has to be made to work.

Credible weather data

For weather insurance to be successful, a timely and accurate feed from the weather station is required. At present, IMD has rain stations in district headquarters. Even they do not function 24×7. Tamper-proof automatic weather stations at the mandal and block level are essential to succeed.

It is estimated that about a thousand stations are required to cover 30 districts. The minimum requirement is 200 costing Rs 3 crore to cover districts which predominantly grow horticulture or plantation crops.

Better data means more options in insurance package — sowing failure risk, seasonal rainfall insurance, rainfall distribution index

Micro-insurance & finance

There is something new that is being tried — micro-insurance — an insurance product for low-income groups. It has modest premiums and benefit packages. The premium is derived on a community risk rating with active involvement of intermediate agency like NGOs. These schemes have gathered momentum thanks to micro-finance. It exploits the mandatory requirement of all formal insurance companies to extend their activity to rural and other social sectors in the country. Increasingly, micro-finance institutions and NGOs are negotiating with profit insurers and purchasing insurance for a group of people. Micro-finance institutions already have extensive networks.

In another initiative, NCDEX is setting up high accuracy weather stations through National Collateral Management Services Limited (NCMSL). They have set up 88 weather stations in 10 states costing Rs 1 to 1.5 lakh each. NCMSL charges Rs 4,800 per month from ICICI Lombard towards supply of weather data. These are in areas where IMD is yet to reach.

Ethiopia’s extra cover

This project has some lessons for India. The World Food Program, a United Nations agency, has taken out an insurance policy that will pay the agency should Ethiopia’s rains fail in 2006.

It is the first natural disaster insurance coverage for an international aid agency. Though it is humanitarian aid in form of an insurance, in the Indian context, it would be equivalent to the centre or the state government coughing up aid after a cyclone or drought or even farmers committing suicide.

The policy, which costs $930,000, covers 17 million farmers of Ethiopia. Instead of waiting for drought to hit and for people to suffer and then pursuing money from donors, the World Food Program has taken out insurance on the income losses that Ethiopian farmers would face should the rains fail.

If the rainfall measured at 26 weather stations around Ethiopia falls below a certain level between March and October 2006, AXA Re, a large French insurer, will pay up to $7.1 million.

It is based on the premise that such a big payout would follow a drought which Ethiopia faced in 1994.

There was fear whether an insurance company would actually write a policy based on Ethiopian weather data. That has worked, partly because an American company, MDA Federal, based in Maryland, will ensure the accuracy of the rainfall numbers.

The United Nations received five proposals from major international insurance companies. It accepted the offer from AXA Re, which already issues weather-related policies in other parts of the world.

This is taking weather insurance to an extreme but only goes on to show it is possible to insure farmers of an entire nation against vagaries of nature.