As we discussed in an earlier entry, a composite scheme that combines an NDVI and a Weather Index represents the latest development, and possibly the future, of Agricultural Insurance. The reason this new scheme is considered so promising is that it achieves greater yield accuracy alongside a similar ease of implementation. This can be seen in the comparative chart below.

Source: Patankar (2009)

From the insurer’s perspective, the composite scheme carries a greater correlation to the actual yield leading to fewer claims for payment. Moreover, the lower transaction costs of the scheme, when compared to a yield based scheme, also make it favorable to the insurer. Such reduced costs can potentially allow the insurer to reduce premiums, leading to an increase the consumption of Agricultural Insurance.

The policyholder also benefits greatly from the composite scheme. The greater transparency and speed of the claims settlement process make the scheme particularly attractive when compared to other options. Moreover, the potentially lower premiums are clearly in the interests of the policyholder. These lower premiums arise from lower transaction costs and greater precision in estimating the average crop yield.

However, the policyholder may not be entirely receptive to a composite scheme due to the sheer complexity behind the index. When presented with the NDVI and weather index values, the policyholder will not be able to understand how these numbers are used to estimate crop yields. As such, in the absence of extensive education regarding the product, policyholders are forced to simply trust that the insurer is calculating true and accurate yields for the farmer. This trust may not always be forthcoming and may be an impediment to the growth of Composite Insurance. However, despite this problem, NDVI composite schemes have already reached the implementation phase.

Though still in its development, many insurers have started to offer such a composite Insurance. Currently, ICICI Lombard, in partnership with Weather Risk Management Strategies (WIRMS), has already rolled out a Weather-NDVI Composite Insurance product in the Patiala district of Punjab, to cover wheat crops. Similarly, and possibly more significantly, AICI (Agricultural Insurance Company of India), the largest provider of Agricultural Insurance in the country, has started a Wheat Insurance Policy in Haryana and Punjab based on a Weather NDVI Composite as well. The performances of these schemes are yet to be assessed, but the expectations are that they may well outperform older models and provide a viable, sustainable, and efficient solution to the problem of Agricultural Insurance in India.

Tags: Agriculture, AICI, Composite, Hybrid, ILO, India, Insurance, NDVI, Weather Index, WRMS

This entry was posted on Wednesday, July 8th, 2009 at 3:06 pm and is filed under Livelihood. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.