Date:26/12/2005 URL: http://www.thehindubusinessline.com/2005/12/26/stories/2005122602031200.htm

Back Designing and pricing crop insurance products — AIC to get expertise from IBRD-approved Canadian co

Radhika Menon

Mr Suparas Bhandari

Mumbai , Dec. 25

THE World Bank has approved a Technical Assistance Programme for the Agriculture Insurance Company of India (AIC) for designing and pricing of crop insurance products.

A Canadian actuarial firm has been appointed by the World Bank to carry out this programme over 14 weeks. The final report is expected to be submitted by March 31, 2006.

Mr Suparas Bhandari, Chairman and Managing Director, AIC, said the World Bank's assistance would help the company increase the penetration of crop insurance in the country.

"Currently, only 15 per cent of the 120 million farmers avail themselves of any form of crop insurance. This will be increased to 25 per cent by 2007 and 50 per cent by 2012," said Mr Bhandari.

The programme will help AIC move to an actuarial method (based on a risk profile) for the pricing of crop insurance cover rather than the current flat-rate system. The programme will be carried out in three phases. In the first phase, the Canadian firm will work on the designing and pricing of products for the National Agriculture Insurance Scheme (NAIS) which uses the parameter of `yield' to hand out claim payouts. The second phase will help AIC design and price weather insurance products while the last phase will aid the crop insurer in managing its portfolio and assessing the risk and capital required for accepting business.

NAIS, administered 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.

"The World Bank's assistance is a significant development in the context of the recent review of the crop insurance programme by the government and possible expansion from kharif 2006," said Mr Bhandari.

In the case of actuarial system, the premium, though supported by an upfront subsidy from the government, will be based on a risk profile and AIC will have to handle the claim payouts.

Premia based on these commercial rates could mean a low rate of 2 per cent for a safer crop such as wheat as opposed to higher rates for crops such as groundnut, bajra and red gram, which have a higher loss experience.

The Canadian firm would have to skim through 25 years of data regarding yield, underwriting experience, rainfall as well as the records of natural calamities in various States. The company will then develop a suitable rating methodology, which can be used by AIC to assess risk and arrive at the premium for crops.

Analysts say that the shift to an actuarial system would put in place a more efficient indemnity payment mechanism as well as better financial management for both AIC and the government.