Building a case for meso-level insurance: Perspectives from Sector Experts
In our last blog, we highlighted the need for a Multi-stakeholder perspective in understanding and addressing the myriad challenges of effective risk management in agriculture, in India. In this piece, we highlight some insights from ongoing interviews with key insurance sector experts on the evolution of agricultural insurance in India, the adequacy of current products for mitigating risk effectively, and their outlook on introducing a meso-level insurance product in India.
The experts acknowledge that access to crop insurance has come a long way in terms of acreage covered as well as the numbers of farmers insured, especially over the last five years with the Pradhan Mantri Fasal Bima Yojana (PMFBY). However, there are inherent issues in the current design of the underlying insurance product.
First, there is a lack of a comprehensive understanding of all the risks associated with agriculture, which vary significantly across geographies This has prompted several states to introduce their own mechanisms to mitigate these risks. Second, there are several lacunae in the process of loss assessment and the actual value of the losses incurred is often measured incorrectly. Relying solely on yields as a measure of crop loss is incomplete and results in significant arbitrariness in addressing damages and losses at an individual farm level. Third, the declining interest of private insurance companies arising from operational difficulties has caused these insurers to withdraw from the scheme. Without sustained interest from the private sector, agricultural insurance will remain heavily dependent on state intervention. That being said, the experts acknowledged that administering insurance at the scale required for India requires policy support from the state. This is especially true in the event of large losses arising out of any natural or man-made unforeseen events where the government may have to provide a bailout.
Experts point out that while aggregating risk is conceptually appealing, the success of this approach rests on the choice of aggregators. Additionally, the unit of aggregation needs to be adequately defined in order to avoid the pitfalls of the current design in terms of high basis risk that meso-level insurance intends to address. A key element for a meso-level product would be identifying institutional arrangements through which this product can be distributed. Farmer Producer Organizations and Cooperative Societies are potential channels for distributing a meso-level product — given their close understanding of local contexts and ground level risks. The benefits of a meso-level product for an aggregator is identified as being able to create niche products that account for locally relevant and specific risks. Meso-level insurance can potentially reduce the cost of administering insurance products from an insurer’s point of view. While the scope for selling meso-level products is high for insurers in India given the large number of cooperatives and FPOs, marketing a demonstrable working model of a meso-level product will be crucial for boosting their initial take up.
As for the role of the government bodies, the experts that we have interviewed also suggest that there is scope to test meso-level innovations through a regulatory sandbox approach which has been promoted by IRDA in the past year to enable innovations in the insurance sector. This allows for live testing new products or services in a controlled regulatory environment by interested stakeholders. Insurers should be provided an option to implement this with the ease of operation and flexibility. The product testing can be facilitated through a pilot in 100–150 small Villages/Gram Panchayats in different geographies across the country. The experiences from these locations can be reviewed before introducing a set of proper regulations.
The industry experts suggest that the government can play a significant role in supporting the program by partly sharing the premium and allowing the rest to be paid by the aggregator on a depreciating basis. If the products prove to be beneficial, the aggregators will be interested to continue purchasing the product and make it a viable business proposition.