How we can insure our farmers from extreme weather risks

Tech-enabled assessment of crop damage and govt subsidy for insurance premiums will help expand coverage.

By: Ashok Gulati and Prerna Terway

Policy-makers and farmers have heaved a sigh of relief with June rains exceeding normal levels by 16%. But the India Meteorological Department is still cautioning that July and August rainfall could be deficient, and India could still face a drought. Whichever way it unfolds, the real challenge is how we can insure our farmers from extreme weather risks.

Although in the long run, India has to invest more in irrigation and better water management, in the short run, the crop insurance system needs a total overhaul, with the deployment of the latest technology. Two key issues have to be sorted out in this context: (1) What should be the level of coverage in terms of area, sum insured per ha, and how much subsidy can the government give on premiums based on actuarial; and (2) how can we use the latest technologies, viz. drones, doves, and LEOs, to monitor crops and assess damage quickly? Let us discuss these in the Indian context and the best international practices, if they have anything to offer.

At the moment, there are three schemes operating in the country: National Agriculture Insurance Scheme (NAIS), Weather-Based Crop Insurance Scheme (WBCIS) and Modified National Agriculture Insurance Scheme (MNAIS). These schemes have low penetration in terms of area insured. Based on a three year average, 2011-12 to 2013-14, the area insured under all the three schemes is 14 million hectares in Rabi season and 28 million hectares in Kharif season. The premium rates are administered in NAIS, varying between 1.5 to 3.5%, devoid of actuarial. However, MNAIS and WBCIS are based on actuarial premium rates, varying between 8% and 10%. But the sum insured in these schemes covers only cost of cultivation, not the farmers’ prospective incomes and settlement of claims takes as long as 6 to 12 months. Thus, the challenge is how to increase the area insured, say to 100 million ha, raise the sum insured, reduce premiums based on actuarial, and quicken the process of damage assessment and settlement of claims. The basic principles of insurance state that premiums reduce drastically with increase in acreage and geographical spread, hence it is a myth that the government’s subsidy burden will increase 15-20 fold if the sum insured and coverage is increased.

The US and China are the biggest crop insurers in the world, with US insuring about 120 million ha and China 73 million hectare in 2013. Both subsidise crop insurance, the US by 70% (including administrative charges) and China by 80% (50-65% till 2013). With this increase in subsidy in China, area covered increased from 10 million ha in 2007 to 73 million ha in 2013. Kenya is an interesting case, where Kilimo Salama, a weather-based insurance product, is being sold by input companies sharing the premium with farmers and claims settled within 4 days.

Lessons for India are clear: without significant subsidy from the government, crop insurance is a non-starter. India already bears more than R4,000 crore per year as premium subsidy and various compensation packages (average of the triennium ending 2013-14). With some additional resources, India can enlarge the area covered to 100 million ha, build an insurance system that is science-based, transparent, devoid of the patwari system and
ad-hoc political interference.

Drone technology is experiencing explosive growth. These robots are low-cost, can fly at low heights and capture images in all resolutions needed for assessing crop damage. They are even better than satellite-imagery and remote-sensing when it comes to avoiding cloud covers and having higher frequency of images. The projections are that 80% of the commercial market for drones will eventually be for agricultural uses. The law will have to be tweaked to let them fly.

Planet Labs, a private venture engaged in space and information technology in the US, has designed low-cost satellites called “doves”. They have a resolution of about 3-5 metre, fly in near-earth orbits and can collect data from any place on earth. China has launched 100 LEO (low-earth orbit) satellites in 2014. With these drones, doves and LEOs, it has become much easier and faster and highly cost-effective to monitor and assess crop damage. If India can be proud of its Mars Orbiter Mission(MOM) that cost R450 crore, it can certainly feel far prouder of insuring its farmers through drones and doves, supplemented by all weather stations (AWS, 5 in each block), all of which will cost less than R500 crore.

Handheld devices, costing just R8,000, could be used to verify GPS coordinates of the field for digitising land records. Thus, a three-layered system for assessing crop damages including AWS, satellite/drone images and mobile-based technology on top of crop-cutting experiments can put the whole system on sound scientific ground and control corruption.

The digitised land records of the farmers need to be linked to their bank accounts and Aadhaar numbers for the direct transfer of claims, within two-three weeks—if not within 4 days, as Kenya is already doing.

The absence of rural agents to distribute agriculture insurance, unlike in the US, has been a major hindrance for the penetration of agriculture insurance in India. This has resulted in only loanee farmers being forced to take insurance.

This method is bound to fail. Agriculture insurance has to be undertaken on a mission-mode by unleashing thousands of entrepreneurs (rural agents to digitise land records and sell insurance, crop loss surveyors, weather station providers) to cover every farmer in the country.

The real cost to the government depends on the subsidy that it is ready to bear in premiums. A 75% subsidy (50% borne by the Centre and 25% by the state government) can revolutionise the crop insurance, making it demand-based like the grand success of various social security schemes announced by the PM recently. Our back of the envelop calculation reveals that insuring a sum of R40,000/ha is feasible. With 100 million ha coverage, premiums can reduce to about 3%, or R1,200/ha, implying a cost of around R300/ha for the farmer, of R600/ha for the Centre, and R300/ha for the state government, with the total government expenditure being R6,000 crore for the Centre (an additional R2,000 crore only). With this, India can leapfrog in covering farm risk. Public and private sector insurance companies, along with banks, can be roped in to put this entire infrastructure in place quickly (within 6-12 months). Competition amongst companies can keep the premiums low. If the Modi government can rise to this challenge, it will give a bigger gift to millions of Indian farmers than the MOM.

Gulati is Infosys chair professor for agriculture and Terway a research assistant, Icrier

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