Coming Together to Build a Resilient India Agriculture Insurance Sector

India is an agricultural powerhouse, ranked second in the world in terms of its level of agricultural output. With 58 percent of the rural population of India reliant on agriculture for their livelihood (and a total figure of 2.2 billion across Asia) plus more than fifty percent of total working population of India employed in the food industry, ensuring that farmers are resilient and can rebuild after crop setbacks is a top priority for the country.

This challenge is being tackled. For India, agricultural insurance schemes such as Pradhan Mantri Fasal Bima Yojana (PMFBY) are ambitious, continually pressing to reduce the protection gap, with a target to cover 50 percent of gross cropped area over the next couple of years. But the challenge to further close this gap continues, and it was central to the theme for the Fifth Asia Agriculture Insurance Conference recently held in New Delhi — entitled “The Future of Agro Insurance: The Impact of Climate Change, Technology and Inclusive Insurance.”

I was very pleased to be the chairman for this conference. Highlighting the huge interest in this sector and a willingness to look for integrated solutions to the challenges ahead, there were representatives from the Indian government and the World Bank in attendance, together with speakers and delegates from across the industry, including brokers, public and private reinsurers, modelers, solution and technology providers.

India Agriculture: Advancements and Challenges

Looking at India, farmers are moving forward and achieving increases in crop production both in terms of the land area devoted to crop production and the ultimate crop yield. Increased crop yields have largely been achieved through adoption of better crop management practices and technological improvements such as fertilizer use, seed genetics and widespread irrigation systems. And thanks to its large range of agro-climatic regions, India can grow a variety of different crops throughout the year.

But such diversity in climatic regions also exposes crops to a wide range of different weather events, many of which can have devastating impacts for crops. Significant individual weather events or the accumulation of adverse weather events can jointly impact crop yields over a crop’s growing season, depending on the intensity and timing of adverse weather in relation to each crop’s development cycle. These fundamental risks to crops are combined with issues ranging from a growing population coupled with the related impacts of land use changes, water scarcity and climate change. This produces a mix of challenges which governments in India and around the world are increasingly looking to resolve by developing more resilient agroecosystems.

So, how can you protect over 100 million farmers in India who largely rely on rainfall to water their fields, from the vagaries of weather? The PMFBY scheme introduced by the Indian Government, a yield-based crop insurance, has been implemented by central and state governments with the (re)insurance industry providing insurance coverage against crop damage risk for the past two years or so. And, on one hand, the scheme is a great success as it has seen sums insured significantly increasing, with market-wide premiums up by nearly 300 percent from about US$850 million in 2015/16 to around US$3.3 billion in 2016/17.

But, with such a fast-growing scheme, there are growing pains, with issues arising around its effective implementation, the measurement and reporting of resulting yields, and claims processing. The government have studied the observed data in detail, working together with (re)insurance industry representatives and agriculture experts to come up with a concrete plan to address all these issues.

Dr. Ashish Kumar Bhutani, CEO of PMFBY, gave the opening address to the conference. He said that the new operational guidelines issued by the government for PMFBY gave it the potential to be a game changer. Asia Insurance Review published Dr. Bhutani’s comments from the conference: “We have been able to position the PMFBY as the single most powerful and effective risk mitigation mechanism in the country. Under the new guidelines, insurers will have to pay the correct claim amount to farmers in the shortest possible time, and advance the enrolment cut off dates and reduce the time taken by various stakeholders for data entry, reconciliation and approval of application and submission and approval of e-data.”

New initiatives will also include a performance ranking for insurers and the state government, placed in the public domain and shared with all stakeholders, in order to make all stakeholders accountable. Technology plays a big role in driving efficiency for the scheme, and the government is using smartphone applications for its crop-cutting experiments (CCE) with the CCE Agri App, and the use of innovative technology, especially to capture yield data, will see the PMFBY deploy remote sensing imagery from satellites, unmanned aerial vehicles and drones.

How to Achieve Fifty Percent Coverage

To reach their target of covering 50 percent of cropped area within the next couple of years, the Indian Government is committed to transfer and spread risk including agricultural risk, both nationally and internationally through insurance mechanisms. This will require the capacity and resources of the international (re)insurance market. The Government and insurance regulator have implemented changes to encourage growth and bring foreign expertise into the local market, such as product design, ratemaking, underwriting and loss adjustment, and to bring Indian (re)insurance practices in line with well-established insurance markets.

It is an exciting time for the insurance market which needs to innovate to address the challenge. To move forward, reinsurers need mechanisms and tools to better understand their risk associated with crop insurance cover. Over the past decades, probabilistic models to assess the risk from natural catastrophes affecting property have grown in sophistication and models are now an integral part of pricing risk and managing solvency across many sectors of the insurance market, including marine, cyber, and terrorism.

The concepts of probabilistic modeling have now been applied to the agricultural sector on weather derived indices and multi-peril crop insurance to develop innovative solutions and to deliver more comprehensive and scientific underwriting approaches. Crop models provide greater insight into next year’s possible outcomes by simulating realistic adverse weather events that have not occurred in the past based on the true frequency of recent historical events than a pure historical (burn) analysis could do.

As much as the farmers of India, and across Asia are moving forward with technology and are looking for greater financial resilience and certainty from events affecting their crops, the reinsurance industry also needs to ensure it is resilient and continually innovating in this exciting, developing sector, through the use of sophisticated tools such as modeling and associated technology.