need for major innovations in agriculture insurance agriculture is the backbone of pakistan’s...
TRANSCRIPT
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Need for Major Innovations in Agriculture Insurance
• Agriculture is the backbone of Pakistan’s economy
• Most crops are highly vulnerable to the vagaries of weather
• This vulnerability is likely to increase due to weather variability and Climate Change
• Despite this no worthwhile effort has been made in Pakistan to launch innovative Crop insurance schemes
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Need for Major Innovations in Agriculture Insurance
• The CLIS in the country protects the loan portfolio of the banks to a certain extent and has many shortcomings
• The Insurance Industry has a low risk appetite and does not want to venture into new areas
• Most countries have moved on from conventional crop insurance to innovative crop insurance schemes
• There is no need for us to re-invent the wheel• All that we need to do is review the success stories of
other countries and customize them as per our local requirements
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Why not conventional crop insurance?
• Half hearted attempts have been made in Pakistan to experiment with Conventional crop insurance which were bound to fail
• Conventional Crop insurance has been declared a global failure by international experts like Skees, Murdoch etc
• It can not be successful in developing countries due to bulging populations, budgetary constraints, huge farmlands and political pressures
• It is a bottomless pit because the claims subsidy is open-ended. It cannot be budgeted by the governments
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Why not conventional crop insurance?
• There is a high level of moral hazard• The claims settlement is delayed for months
hence defeating the very purpose of insurance• It is difficult to remove the political pressure
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Major Advantages of weather Insurance
• Negligible moral hazard • Outside political pressure • Low administration cost• Transparent structure• It is faster • It can be budgeted • It has proved to be more sustainable and
scalable than conventional crop insurance
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The Indian Experience
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Indian Experience
• Three crop insurance schemes are running side by side in India. All of them are compulsory and are bundled with loans:
Conventional Crop Insurance (NAIS)Weather Insurance (WBCIS)Modified Crop Insurance (MNAIS)
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Indian Experience
• Total premium underwritten in 2014: Weather insurance- Rs 27 billion Modified Insurance- Rs 12 billionConventional Insurance- Rs 7.8 billion
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Indian Experience
• The Year on year growth rate of last 5 years:Weather Insurance : 24%Modified Insurance :14%Conventional Insurance :--5%(Negative
Growth)
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Indian Experience
• The cumulative 5 years loss ratio of:
Weather Insurance: 73%Modified Insurance : 81%Conventional Insurance : 330%
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Indian Experience
• The average claim settlement time in these three schemes:
Weather Insurance : 30 to 45 daysModified Insurance : 6 to 12 monthsConventional Insurance : 6 to 12 months
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Future of Crop Insurance In India
• Conventional Insurance is expected to be gradually phased out
• Weather Insurance is likely to replace other schemes especially for Horticulture crops because they are highly vulnerable to extreme weather conditions
• For Agriculture crops, Weather insurance will continue to be implemented side by side with Modified Insurance
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Future of Crop Insurance In India
• Modified Insurance schemes are being successfully implemented in many other countries like US, China and Brazil.
• Such innovative models have been able to overcome the major shortcoming of the other two schemes by combining the advantages of Conventional and Weather Insurance schemes
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Future of Crop Insurance In India
• All crop insurance products will continue to be highly dependent on subsidies as the actuarial premium rates are much higher and cannot be afforded by farmers
• Premium subsidies up to 75% are being offered under Weather & Modified schemes.
• For Conventional Insurance premium rates are capped at 1.5%-3.5% & claim subsidy is provided if the claim is more than 100%
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Way Forward for Pakistan
• Food Security will become a bigger challenge due to the bulging population and negative Impact of Climate Change
• Agriculture Insurance cannot survive without government subsidies
• The State Bank should make weather insurance & Modified Insurance also compulsory with the agriculture loans
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Way Forward for Pakistan
• Weather & conventional products complement each other and can run side by side because they target different segments of the risk.
• Its time for the Insurance Industry to venture into new areas where the numbers are huge and the profitability is good.
• The insurance sector needs to change their mind set and view weather insurance as a viable commercial proposition
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The Future
The future lies with those companies who see the poor as their customers
C.K.Prahalad