•Agriculture is the largest private sector employer in the country, contributing 24% of the GDP.

•Up to 80% of variability in crop yields is attributable to weather.

•Only 40% of net sown area is irrigated.

•60% of net sown area is dependent on rains.

•Drought and low rainfall account for 70% agricultural loss.

•Floods and excess rainfall account for 20% agricultural loss.

If numbers can tell a story, this is a telling one. ?The level of overall GDP growth is greatly influenced by weather-induced fluctuations in farm output.? This unassuming mention in the 2008 Review of the Economy issued by the Economic Advisory Council to the Prime Minister makes the story setting even more gripping.

Size matters

Reducing weather vulnerability is a critical challenge and weather insurance may soon develop into a dynamic market product with agriculture offering a significant growth potential. As Anuj Kumbhat, Director, Weather Risk Management Services confirms, ?For 2007-08 the total premium written or insured by weather insurance companies was around Rs 170 crores.?

Experts opine that though it is difficult to estimate the precise market size and potential for weather insurance products, growth rate of weather insurance market in agriculture is more than 100%. Samir Bali, Partner, Advisory Services, Ernst & Young avers, ?Some indication of the potential within the agriculture space is that the current market estimates indicate that only around 0.5-0.6 million farmers are covered under the scheme. On the other hand, there are an approximate 20 million farmers under the National Agricultural Insurance Scheme (NAIS) crop insurance scheme and that at a penetration level of only around 15% of the total number of farmers. The BASIX data indicates an average premium per year of around 1,500 per farmer, and this can give an estimate of the potential for the product.?

Weather based crop insurance scheme that was piloted in the country in 2003 is now involving private insurance companies to increase coverage under the scheme along with the public sector Agriculture Insurance Company of India (AIC). Private players like ICICI Lombard covered more than 150,000 farmers in the last season whereas Iffco-Tokio has insured 2.14 lakh farmers under different weather insurance schemes.

Mixed yield

According to latest estimates, in kharif 2007, 43,790 farmers over 50,075 area hectare with sum insured of Rs 53 crore were covered. In rabi 2007-08, more than 6 lakh farmers, over an area of about 9 lakh hectare have been covered. While the scheme started out as a deficient rainfall cover, it now encompass excess rainfall, high and low temperatures, relative humidity and a combination of the above, depending upon the weather related risks being faced. Pranav Prashad, Head, Rural and Agricultural Business Group, ICICI Lombard shares, ?Farmers understand the losses that could result due to unforeseen weather conditions like the early arrival or delay of the monsoon, extreme heat or extreme cold and weather insurance can help them mitigate risks.?

He adds that as weather insurance is mainly offered for farmers, it is impacted by all the factors of conducting business in rural areas. In order to reach out to the farmers, insurers partner with NGOs, micro-finance institutions, self-help groups and distributors of seeds and fertilisers. However experts opine that the response to the scheme has been a mixed one.

As Kumbhat explains, ?Weather insurance is basically a proxy to actual crop loss. The product has done well in the areas where correlation between payout and actual crop loss has been good. Also, banks have yet to accept it as potent tool for risk management in agriculture. If bankers accept it, the market and utility of the programme would increase immensely.?

Cover up

World Bank and other international funding and donor agencies are also evincing keen interest in promoting such schemes for poverty alleviation. And technological and policy frameworks would determine the future course here. NK Kedia, Director Marketing, Iffco-Tokio General Insurance, shares, ?The new generation products envisage shifting from point based weather stations to grid based satellite observations. We can expect to see growth of satellite based Rainfall Estimation (RFE) and Normalised Difference Vegetative Index (NDVI) insurance model in India in the next decade.?

A sentiment echoed by Alok Shukla, Vice-President, Weather Risk Management Services, ?With better weather station infrastructure ? IMD is planning to double its weather station in a couple of years, third party data providers like Ingen Tech, NCMSL are also expanding their Auxiliary Warning System (AWS) network in all key regions coupled with government subsidy support, we will witness an immense scope in this market.?

Analysts confirm that in the weather insurance market there are opportunities for innovation that have not been exploited yet. As Bali reasons, ?Growth in the weather insurance product is expected both through increased penetration in the agricultural sector as well as, over a period of time through the extension of the product to the other sectors like energy, construction, transportation, media and entertainment, that form an important part of the target market in the international markets.? And here will lie the potential and challenge for companies to cash in by offering products that will provide the right cover for the rainy day!