Weather risk is the predominant source of income fluctuations in rural areas and weather-induced crop failures, primarily from rainfall deficit, lead to significant losses for farmers and the rural economy. Traditional agricultural insurance schemes to protect farmers from such risk had several drawbacks including complex methodologies to assess loss, a long claim settlement process, and high administrative costs, which increased the price of insurance and thus prevented small and marginal farmers from investing in risk mitigation mechanisms.
The Social Initiatives Group of ICICI Bank jointly with ICICI Lombard General Insurance Company and the World Bank developed India’s first index-based insurance product. This insurance serves to protect Indian farmers from inadequate rainfall as determined by a rainfall index. The product was rolled out through a pilot project in the Mehboobnagar district of Andhra Pradesh through the Krishna BhimaSamruddhi (KBS) Local Area Bank, promoted by BASIX. The pilot was launched in June 2003 for the district’s 2003-2004 kharif season.
The insurance policy makes payments if the cumulative rainfall during the season falls below the historical average for a given geographical location. The product has facilitated immediate and transparent claim settlements for insured farmers. And it is grounded in the requirements and experiences of farmers.
The initiative resulted in:
- Reduced exposure to weather risk for farmers.
- Led to a completely new category of weather insurance products being offered by ICICI Lombard and eventually by other Indian insurance companies.
- Over one million weather insurance policies have thus far been sold.