Tech-enabled insurance - with private sector participation - will help farmers more than delayed compensation
Agricultural insurance continues to be a divisive topic in India and a fresh debate is raging between proponents of establishing an agriculture risk fund to cover weather-related crop damage and those who believe the task should be tackled by a participatory insurance model, in which farmers pay part of the premium. As clients, they would ‘own’ the cover, and thus demand fast settlement of claims.
In many countries, there is a real possibility of a ‘political moral hazard’, where politicians are tempted to appease farmers, or other interest groups , by offering inflated compensation. This possibility cannot be dismissed when the government alone handles the risk fund. The case of groundnut claims submitted for area multiple times the size of the crop is a good example of moral hazard in a sub-optimal agricultural support system. Fortunately, there is a better solution: weather index-based insurance that uses technology to replace expensive loss adjustment in the field. This solution eliminates the moral hazard and adverse selection, transfers risk to the insurance market rather than exclusively to the tax-payers, and can pay claims within days of identifying an insured loss.
So far, the record of settling claims is unimpressive. I know of instances where it has taken more than a year. As well as causing farmers cash-flow problems, such delays make them lose faith in insurance. The blame rests with antiquated approaches; official loss estimations based on crop cutting experiments, for example, take months to complete due to the tedious manual processes. The government has also mandated that crop loans be bundled with insurance. But the sum insured in this case is, at the most, equal to the loan amount—only the banks realise the claims; the farmer doesn’t see any cash.
A third reason for the unfortunate position of Indian farm insurance is that premiums remain high. This is due to the lack of adequate coverage and ‘spread’. As soon as we start insuring 100 million hectares, with good indices, risk models and tamper-proof low-cost automated handling, premiums will come down. Most farmers would happily contribute a few hundred rupees and then get fast payouts, rather than have a free but unpredictable cover as an alternative and receive no damages for months, or even years.
The Union government currently spends more than R4,000 crore on premium subsidy and various drought and other relief packages. According to an estimation by Ashok Gulati, premiums could be brought down to as low as 3% by insuring 100 million hectares at R40,000 each, implying a sum of R12,000 crore as total premium money. Gulati proposes that farmers contribute 25% , i.e., R3,000 crore (or R300/ha), with the rest shared in a 2:1 ratio by the central and state governments. The Centre’s contribution would increase from the current liability of R4,000 crore to R6,000 crore, but a robust insurance strategy can be implemented.
What is also needed, both to keep premiums in check and allow for fast payouts, is the use of technology. Automatic weather stations, drones, remote sensing and mobile technology can drastically improve risk assessment and reduce loss estimate times. Further acceleration is possible through the combination of Jan Dhan Yojana, Aadhaar and mobile technology (JAM). An insurance initiative in Kenya shows clearly that smallholders readily embrace new technology and banking advances if these bring advantages.
In this age of technology, our imagination is the only limitation on introducing innovations. One such innovation is insurance scratch cards, similar to mobile prepaid cards. These would enable farmers to buy insurance in whatever crop and coverage denomination they wish. A farmer in Punjab can buy a wheat scratch card for one acre and immediately register via JAM. The government can pay its share of the premium for every registration. Crop damage will be assessed by the technologies mentioned above, and any payout will go through JAM. Farmers could receive compensation within a week, a period that could soon be reduced to just hours. These innovations will build farmers’ confidence and could lead to large-scale adoption of insurance, analogous to the Pradhan Mantri Suraksha Bima Yojana.
To get there, the right kind of cooperation between the public and the private sector is needed. The private sector is ahead of the government in the development, adoption and implementation of technology of all kinds in agriculture. In insurance, too, the private sector can be counted on for efficient, tech-based solutions. The private sector will play a major role in using technologies such as drones and remote sensing to assess crop damage and make faster payouts.
Getting 100 million hectares covered by crop insurance using JAM and scratch cards would also have the ancillary benefit of generating ‘Big Data’. India is currently pitifully short of useable data of any kind, and agriculture is a particularly poor case. Continuing land fragmentation among millions of farmers means that no one knows the precise area under each crop on any given date. The ‘agriculture data mystery’ would be solved once farmers register for crop-specific and area-specific insurance. Excellent weekly sowing and location data would then become available. The government could use this data to take proactive decisions on imports and exports, for example, and avoid supply crises and inflation.
There is a need for sizeable monetary support from the government to manage the risks associated with agriculture, especially climate risks leading to falls in crop production. But the answer does not in a static agriculture risk fund easily misdirected by political forces. Instead, we need each and every farmer to enjoy crop insurance and ‘own’ it, supported by the best of technology and with claims processed as quickly as possible. Since states would also pitch in along with central government, this approach would not only be participatory for farmers, but also provide an example of true cooperative federalism. These are goals worth working for, and which would allow the now divisive debate about agricultural support strategies to advance.
The author is executive director, Syngenta Foundation for Sustainable Agriculture. Views are personal