Suparas Bhandari

IN THE article `Weather insurance: Taking on the rain Gods' (June 15, Business Line), the author Sharad Joshi questioned why farmers alone were covered under Varsha Bima, when in fact rain impacted a whole lot of communities? Agriculture Insurance Company of India Limited (AIC) is aware of the impact rainfall has, particularly on rural communities, and therefore proposes to expand the scope of the scheme. Varsha Bima is still in its early stage of evolution.

It is expected to mature as a product in the next 5-10 years. The next category that will be covered will be agricultural labourers, a development AIC will consider next year.

Mr Sharad Joshi has expressed concern over the basis on which premiums have been calculated. In calculations of life insurance premiums, it is customary to use mortality tables. In the case of rainfall, the relevant concept is something similar. Known as `rainfall distribution', and it relates the probabilities of occurrence to the quantum of rainfall. AIC has based the premium calculations on rainfall distribution over 90-105 year; the data for which was obtained from the India Meteorological department.

In his article, Mr Joshi has stated that insurance policies do not cover acts of God. That is not true. Many standard fire insurance policies cover risks due to floods, earthquakes and the like. It is true that insurance companies sometimes do not cover catastrophic acts of God because their limited capital may not permit them to do so. But in other circumstances, acts of God are routinely covered by many insurance companies.

It may be pointed out that the existing National Agricultural Insurance Scheme (NAIS) is practically an `all-risk" insurance. Similarly, the crop insurance programmes of many countries cover `acts of God Perils'.

Mr Joshi's apprehension that the distribution of rainfall during the season is as important as the quantum of that rainfall, is well founded. AIC has, therefore, brought out different options in Varsha Bima, which includes the `rainfall distribution index' insurance in which rainfall in different pheno-phases of the crops are given different weightages based on agronomic considerations.

Finally, Mr Joshi has questioned why Varsha Bima covers the value of output and not the physical production. The reasoning is thus: Insurance being a financial service must collect premium in terms of money and pay claims in terms of money.

Second, AIC believes that welfare of farmers depends on the entire value of output (limiting the cover to cost of cultivation, for instance, will not do justice to the farmer).

One of Mr Joshi's points relates to rainfall predictions in relation to the premium rates charged. He points out that institutions are predicting rainfall deficit of plus/minus 12-34 per cent this year and he compares it with the 4-8 per cent premium that AIC proposes to charge.

In fact, these parameters are not comparable because rainfall predictions are based on deviation from normal rainfall, whereas the premium rates are based on such parameters as historical rainfall distribution, payout triggers fixed (deductibles) and the value of output.

Further, there is very little connection between rainfall predictions that are made on an all-India basis, whereas premium rates vary with local rainfall distributions and also with crop sensitivity to rainfall.

Also, rainfall predictions keep changing, and ultimately go wrong. This, in fact, is the foundation of Varsha Bima.

On the issue of the Finance Minister, Mr P. Chidambaram's support to the scheme, it must be pointed out that the scheme is presently running without any support from the government.

(The author is Chairman and Managing Director, Agriculture Insurance Company of India Limited)

© Copyright 2000 - 2009 The Hindu Business Line