As Indian banks plan to march into rural India disbursing commercial loans and housing finance, they need insurance companies to keep in step in order to de-risk their borrowers and make their lending safer. The challenge and opportunity lies in moving to the bottom of the pyramid by providing flexible, affordable and easily available insurance to rural and semi-urban people, preferably through the involvement of state governments or through large companies (especially public sector undertakings), industry associations or NGOs and Self Help Groups (SHGs).
NGO sources say that there are two main causes of rural indebtedness—first, borrowing to fund marriages and second, losses caused by the vagaries of the temperamental Indian monsoon. There is no easy way to stop people from spending far beyond their means on weddings, but almost all insurers are working overtime to sell and design weather insurance products to make agri-business less risky.
In fact the World Bank and IFC Washington supported a pilot project with ICICI Lombard in 2003, which showed that weather insurance is far better suited to “small farmers in rainfall-dependent countries such as India”. They even found reinsurance for these weather policies.
BASIX, a large microfinance institution with nearly 10,000 borrowers in nine states, sold around 250 policies to groundnut and castor farmers in Andhra Pradesh through its Krishna Bhima Samruddi Local Area Bank as a part of this pilot. The first time the company settled these claims, it paid out cheques to the farmers and only then realised that most of them did not have a bank account. It than collected the cheques bank and settled claims through a bank, says Sandeep Bakshi, COO of ICICI Lombard. Weather insurance is different from traditional crop insurance because of quick payout possibility, low administrative costs and ease of determining the loss. Weather insurance is now being structured to reach a larger number of people, especially in lower-income groups, who badly need insurance but could not afford it.
In most cases, public and private insurers offering weather insurance are working through state governments to offer protection against reduced demand or lower production due to deficit rainfall. This works well for the state and the insurance companies. It allows state governments to offer a safety-net to vulnerable but politically-sensitive groups and save on the large compensation it forks out in times of distress.
Protecting farmers is especially important, because farmer suicides are the worst possible reflection on any society and are also politically disastrous. For insurance companies, it creates a business opportunity without the impossible job of selling insurance to low income and semi-literate groups.
The weather insurance, for instance, covers almost all unusual occurrences from the sowing stage to harvest and beyond. Last year, the Agricultural Insurance Company launched the Varsha Bima scheme for two lakh farmers and 13 crops in 10 states. The states that have signed up to provide insurance cover to their farmers through one company or the other include - Andhra Pradesh, Madhya Pradesh, Rajasthan, Tamil Nadu, Himachal Pradesh, Maharashtra (generic grapes), Punjab, Jharkhand, Gujarat and Karnataka.
Many of these policies are still in the experimental stage and will evolve, based on the needs of specific regions, but the market is growing rapidly. For instance, ICICI Lombard has already covered 1,22,000 farmers and an area of 1.3 lakh acres. It has already settled 7,000 claims with some interesting learning experiences. With the increase in airlines operating in India, a fog-cover or insurance against disruption due to heavy rains is another obvious weather insurance market to cover the cost of cancellation and rerouting flights.
There are also takers among brick makers (through their association) and companies such as Gujarat Heavy Chemicals. The government is also working on a massive health cover package for a 26 crore population in partnership with public and private sector insurers. When it evolves, this will probably introduce the semblance of a national healthcare system in India for at least poorer people.
Individual state governments in Punjab and Gujarat are also looking at medical or health insurance for target groups such as farmers or handloom weavers. The handloom weavers scheme in Gujarat allows each weaver and his family to get medical treatment worth Rs 15,000 every year by paying a premium of Rs 200, the balance premium of Rs 800 is borne by the government. This ICICI Lombard scheme is being implemented through the Commissioners of Handloom. Bajaj Allianz has similarly tied up with Kribco to insure farmers. It also has a tie up with seven regional rural banks to make flexible life insurance scheme available at over a 1,000 rural and non-urban branches.
Interestingly however, farmer leaders such as Sharad Joshi are not every impressed at Varsha Bima, which he says makes no sense whatsoever. Joshi calls it an insurance against an act of God. He is also against mathematical models of forecast which are not precise and localised. In a newspaper column, Joshi wrote that “success of the monsoons is to be assessed not by the total quantum of rainfall but by the effect it has on the overall agricultural produce. If the rains are abundant and cause water-logging and loss of crops, it will be a calamity”.
However, Sandeep Bakshi counters this saying, “The whole concept of weather insurance needs to be gone through and understood in detail. Weather insurance provides insurance against yield losses on account of deviation in weather patterns, rainfall being the major factor - the basis that the model is prepared is on the past 40 years rainfall data and its correlation with crop yields geography-wise”.
Past data over time will help develop a premium chart and ensure the viability of such insurance schemes in India. This is important for all of us. As for the person insured, the real proof of efficacy is in actual payout; most insurers realise this.