To address this and other problems, the Government of India is piloting a modified National Agricultural Insurance Scheme, a market-based scheme with involvement from the private sector. Compared with the existing scheme, the new program has a design that can offer more timely, claim settlement, less distortion in the allocation of government subsidies and cross-subsidies between farmer groups, and reduced basis risk.
The paper argues that the shift from a social crop insurance program with ad-hoc funding from the Government of India to a market-based crop insurance program with actuarially sound premium rates and product design is a major step forward. The improved product and active involvement of private sector insurance markets is expected to lead to significant benefits for farmers, including faster claims settlement, a more equitable allocation of subsidies and lower basis risk, and political economy gains for government, including better fiscal management, improved agricultural policy signaling and lower adverse selection.
However, key challenges remain for policy makers, insurers and academics. The mNAIS product, although being substantially better than the NAIS product, could still benefit from further fine-tuning, for example to reduce basis risk or increase the value to farmers of the early ‘on account’ payments.
The paper ends by arguing that the lessons learnt from this project can be specific to agriculture insurance in India as well as can be applicable more generally and indicate that:
- Provision of a cost effective agricultural insurance program requires long term investments in data and capacity beyond the horizon of the private sector
- Technical tools are necessary to help guide policy dialogue, and these tools should reflect on-the-ground realities and political and economic considerations even if this means that the solutions are technically second best
- Although much recent work has focused on either weather or area yield indexed insurance, it is possible to design products which combine the strengths of both, such as the pilot mNAIS product
- Political economy dimensions cannot be underestimated when it comes to implementation. Reforms of the scale of the mNAIS require significant political momentum from different ministries, most notably the Ministries of Agriculture and Finance, and an enabling policy climate
A copy of the paper can be accessed at this link