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Risk-based premium for crop insurance on the cards

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Mr Suparas Bhandari
Mr Suparas Bhandari

Radhika Menon

Mumbai, Oct. 12

THE premium for crop insurance in India could soon be customised to the risk profile of the crop, region and the affordability of the farmer.

The Agriculture Insurance Company of India, (AIC) is preparing for a gradual shift to the actuarial assessment of premium for crop insurance from the current flat rate system. This is in line with the Government's plans to fix up a suitable crop insurance financing model for the country.

This would imply that the cultivator of a sturdier crop would pay less premium while those engaged in the production of `riskier' crops would have to pay a higher rate.

From the insurer's point of view, it would mean that while premium will be subsidised, claim - pay outs will not be subsidised by the Government; AIC will not only have to take on the responsibility of settling claims but also look for international reinsurance to spread the risk portfolio.

The process of shifting to an actuarial system has been under way for some time, with AIC exploring sound rating methodology. The company is also in talks with a few international re-insurers.

According to Mr Suparas Bhandari, Chairman cum Managing Director, AIC, in major crop insurance markets such as US, Canada and Spain, the support of the Government is in terms of upfront subsidy in premium, while the claims are left to the insurer. The insurance company is additionally supported by Government on reinsurance and payment of administrative expenses.

The National Agricultural Insurance Scheme (NAIS), currently implemented in the country by AIC, is based on a flat rate for food crops and oilseeds with the Government financing both premia subsidy and claims. The scheme insured 1.80 crore farmers for a sum assured of almost Rs 18,000 crore in 2004-05.

Under the NAIS, the farmers pay administered rates ranging from 2.5-3.5 per cent during the kharif season and 1.5-2 per cent for rabi. In the case of an actuarial system, the premium - though supported by an upfront subsidy from the Government - will be based on a risk profile. Premium based on these commercial rates could mean a low rate of two percentage points for a stronger crop such as wheat as opposed to higher rates for crop such as groundnut, bajra and red gram, which have a higher loss experience.

Mr Bhandari said a flat rate system had also meant that crop insurance was financially unviable in India. But he added that the actuarial premium rates would have to be supported by adequate level of upfront subsidy in premium, keeping in mind the affordability of the farmers.

The Indian crop insurance market for 2004 raked in premium of about Rs 550 crore at administered rates, which on actuarial rates could be approximately Rs 2,200 crore.

AIC, with a capital base of just Rs 200 crore, will need further capital infusion and reinsurance to be able to handle the claims.

Mr Bhandari said in designing products based on actuarial assessment, the data provided from multiple agencies would have to be authentic and there should be a sense of participation from the stakeholders.

"The support of the Government and private-public partnerships are essential in the way forward," he said.

(This article was published in the Business Line print edition dated October 13, 2005)
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