Module 11 - India: Innovative Rainfall-Indexed Insurance

The 2005 scaled-up program. In the 2005 scaling-up phase, BASIX and ICICI Lombard further improved the product by adding new features recommended by farmers: the dynamic starting date and the exclusion of daily rainfall below 2 millimeters and above 60 millimeters from the cumulative level which determines payout.¹⁷  Another important change is the crop parameter. Instead of crop-specific policies, BASIX sells area-specific generic weather insurance products which suit all principal rainfed crops within the same agroclimatic region. The products were sold to farmers in 36 locations in 6 states. In total, BASIX sold 7,685 policies to 6,703 customers in 2005. In addition to ICICI Lombard, the government’s Agriculture Insurance Company (AIC) also underwrote the policies for BASIX in one of the states.

Benefits and Impacts

Farmer uptake was immediate, with around 100 farmers signing up the first day. Informal interviews with about 15 farmers who bought the policies revealed that they are very well aware that contracts are based on a rainfall index and are aware of the associated basis risk. The farmers value the quick payout of the weather policy, which distinguishes it from the federal crop insurance policy in India. Interviewed farmers also understand and appreciate the weighted and capped structure of the contract, as it directly reflects their experience that the distribution of rainfall throughout the season significantly affects yield.

Overall, a win-win outcome of the scheme can be expected: not only do farmers benefit (from insurance against catastrophic events, improved income stability, and greater access to credit and lower interest rates), but banks also stand to benefit from secured lending and reduced default rates, improved collateral, and increased lending amounts and savings in rural areas. Further, the public sector can benefit from reduced need to provide emergency assistance.

Lessons Learned and Issues for Wider Applicability

Now that weather insurance has been initiated, the immediate challenge is to scale up the distribution and ensure fast claims settlement. It is important to manage expectations of the farming community for the insurance product. Other important lessons emerging from this pilot and past index-based insurance initiatives include:

• The index must be based on long-term statistical information and credible actuarial models. To this end, the public sector can develop information sources such as risk maps.
  
  
• Triggers must be verified independently (this will reduce vulnerability to political interference and manipulated farm losses).
  
  
• The payment schedule (what will and will not be covered and the extent of coverage) must be clear, quantifiable, and measured by an independent and credible third party.
  
  
• Education programs and technical assistance for stakeholders (both farmers and service providers) should be provided.
  
  
• Private sector involvement must be encouraged from the outset, and any government subsidies must be kept to a minimum with a clear directive for complete phasing out.
  
  
• Combining index-based programs with other types of insurance and financial services can improve the effectiveness of the trigger.