Lessons from India on Weather Insurance for Small Farmers

With 22 million farms covered by a yield based index, 3 million by a weather index insurance and 340,000 farms covered by an insurance combining the two indices, India is probably today the most innovative and experienced country in agricultural index insurance in the world. Given that the agricultural sector contributes 18 percent  of GDP and employs 60 percent  of the population, the Government of India closely monitors meteorological risks and plays a key role in the financing of agriculture in general and agricultural insurance in particular.

Family of farmers in India

Climate risks, including rainfall, have a significant impact on the yields of farmers whose farms have an average size of 1.2 hectares, are rarely irrigated, and poorly supplied with water and thus dependent on the monsoon rains. While the first yield indices were developed in 1979, the first meteorological agricultural insurance indices were sold in 2003, linked to agricultural credit.

In the last week of August this year, the Grameen Crédit Agricole Microfinance Foundation, in partnership with the Centre for Insurance and Risk Management (CIRM) organized a study tour on agricultural index microinsurance in India, with the starting point of the visit the city of Chennai, in the south of the country.

The main objective of this trip was to learn and analyze what has been done to date in India, specifically in the state of Tamil Nadu, to cover small holder farmers against the risk of crop loss with index insurance. In addition to having significant involvement from the government, India, has also experimented with various types of indices and has extensive experience with private and community programs as well.

The twenty three participants that were eager to learn from India’s long and varied experience came from four continents and 12 countries (Azerbaijan, Benin, France, Germany, Guatemala, Nigeria, Philippines, Senegal, South Africa, Kenya, and Togo). Participants also had diverse professional backgrounds and included regulators, insurers, managers of microfinance institutions, private foundations, donors, and academia.

During the week, participants learned about the benefits and issues associated with these types of risk management tools. At the end of the stay, everyone left with a clearer picture of the conditions for success in their respective countries for the implementation of these mechanisms. As expressed by Martine Dahoun, Head of Regulation at the Insurance Department of the Ministry of Finance in Benin, “As regulators, we can’t just wait for the products to appear. The insurance industry is constantly changing and we must adapt to this reality. We must be part of this movement and encourage the creation of new products.”

Another important lesson is that the value of products can be enhanced by adding services to the insurance. For example, insurers can offer weather-related forecast information to farmers via SMS as part of the insurance package.  With the increasing mobile access in Africa, this was proposed as an interesting solution to adopt for some participating countries.

The problem of reaching scale was partially solved in India by making insurance mandatory for agricultural loans. Although in reality this is only applied to 22 percent of loans, it has helped to significantly increase the volume of insurance policies. In addition, the federal government and the states subsidize between 50 and 70 of premiums and require private insurance companies to achieve a defined percentage of their turnover in rural areas. Whether all countries can afford to, or should, put in place such subsidies and mandate services from the private sector is a subject ripe for lively debate.

The design of an insurance product based on weather data is a complex exercise requiring close collaboration with the government and its agencies. The coupling with other interventions such as the provision of credit or farm inputs facilitates distribution at the village level.

Oscar Chamale, of the insurance company Aseguradora Rural from Guatemala was impressed by the close working relationship between the Farmers’ organizations and their insurer, «I was surprised by the involvement of the farmer organization in the management of the product and they were even responsible for the claims process. It’s very much integrated with their other activities and hence becomes a part of the value chain. In Guatemala, I have not yet seen any farmer organization take on this role.” In Tamil Nadu, Farmers’ organization helps its members to fill in the subscription forms and works with the insurance company to accelerate the payout process and to refine index.

The two-day field trip gave the participants the opportunity to hear first-hand from Indian farmers about their experience with index insurance. Momath Ndao, Controller of Insurance Commissioner in Senegal, summarizes the encounters: “The farmers are the key actors at every stage of delivering agricultural insurance and need to be involved at each step. We need to listen to the farmers as they are always smarter than us. They know what they want and what is good for them, just like the Senegalese farmers.”
You can find more about the study here.

-------- The author is the agricultural micro-insurance officer at Grameen Crédit Agricole Microfinance Foundation.