Institute for Financial Management and Research

Centre for Insurance and Risk Management Livestock Insurance: Lessons from the Indian Experience
Dr. Anupama Sharma1

This paper highlights the various challenges for massification of livestock insurance in India. The study incorporates the perspectives of insurers, delivery channels and the regulator on the issue. The author has expressed her opinion and recommendations to overcome these challenges in the concluding section.

Dr. Anupama Sharma, Consultant at CIRM can be reached at anupama.sharma@ifmr.ac.in. The views expressed in this note are entirely those of the author and should not be attributed to the Institution with which she is associated.

Contents
1.Risks to Livelihood Dependent on Livestock ....................................................................................... 8 2.Livestock Insurance Market .................................................................................................................. 9 3.Current Supply of Livestock Insurance .............................................................................................. 10 3.1. 3.2. 3.3. Government Intervention .................................................................................................... 10 Product ................................................................................................................................ 11 Prevalent Models for Livestock Insurance Delivery ........................................................... 11

4.Product Design and Distribution Challenges ...................................................................................... 16 5.Claims Settlement and Fraud Control ................................................................................................. 21 6.Conclusions and Recommendations ................................................................................................... 22 Annexure 1: A Brief on Indias Livestock Sector .................................................................................. 26 Annexure 2: Chronological Events in Livestock Insurance in India ..................................................... 33 Annexure 3: Important Points on IRDP ................................................................................................. 35 Annexure 4: Insurers in India................................................................................................................. 36 Annexure 5: Traditional Product of Indian Livestock Insurance Industry ............................................. 37 Annexure 6: Analysis of Standard Operating Procedure in Livestock Insurance .................................. 39 Annexure 7: Excerpts from Micro-Insurance Regulation of India, 2005............................................... 41 Annexure 8: Cash Management and Technology .................................................................................. 42

ACKNOWLEDGEMENTS I would like to convey my deep gratitude to the Microinsurance Innovation Facility at the International Labor Organization for providing the anchor to this study, with special thanks to Michal Matul for his persistent guidance. This study could not have been done without getting vital information from various general insurance companies in India. I am thankful to them for providing me relevant information and support. I acknowledge a debt of gratitude to IFFCO-TOKIO General Insurance Co. Ltd., Oriental General Insurance Co. Ltd., and ICICI Lombard General Insurance Co. Ltd. for sharing pertinent data sets for this study. I also acknowledge the kind support received from Mr. Ravi Seshadri (Head-Internal Audit and Compliance at Bharti-AXA General Insurance Co. Ltd.) for his guidance. I am grateful to Mr. G. Vasudev Rao, Project Manager, District Poverty Initiatives Project, Vizianagaram, for sharing valuable insights on community based livestock insurance in Andhra Pradesh, India. I extend my heartfelt thanks to AMUL Research and Development Association (ARDA) research scientists and BASIX Insurance business staff for providing key inputs. Last but not the least, I convey my appreciation to my dear colleagues at the Centre; to Mangesh Patankar, Anupama James, Priya Rampal, Altaf Virani and Alok Shukla for boosting my morale and to Rupalee for improving the presentation of this study and her encouragement. Her unflinching support has always been inspiring. Anupama Centre for Insurance and Risk Management

Study Design Objective of Study

To develop a deeper understanding of livestock insurance sector challenges. To identify challenges faced by insurers in massification of livestock insurance and to understand various delivery channels prevalent in market To analyse the performance of livestock insurance products in Indian market and the impact of various policy efforts by the insurance regulator on livestock insurance industry To judge possible catalysts necessary to ensure higher uptake of livestock insurance To identify potential solutions and formulate recommendations to enable the growth and proliferation of livestock insurance for rural markets in future

Note: Usually sheep, goat and fowls are reared for meat and other by-products and, while it is important to de-risk households dependent upon small animals, this paper focuses on households dependent on incomes from large animals i.e. bovines (cow and buffalo). The two reasons for limiting the focus of this paper are: Dairy animals are higher value assets as compared to small animals (sheep, goat and poultry). Therefore cattle2 business is considered to be more risky and requires greater focus. Secondly, there has been little or no effort undertaken in valuation and insuring small animals and their value chain is highly disaggregated.

Methodology Developing countries are trying and testing various livestock insurance programmes but no country other than India has a long history of 35 years in livestock insurance. In this paper India is studied as a special case and conclusions as well as recommendations are drafted for international community to take the learning from India. India has four public insurers and more than six private players who provide livestock insurance. To attain the objectives mentioned above, the study concentrates mainly on gathering qualitative data such as the feedback from stakeholders and insurers experience in the industry and the past performance data of insurers. Semi-structured and unstructured interviews were conducted with key people in the sector. They are Insurers Rural Insurance Department marketing departments and sales departments Distributors Micro Finance Institutions (MFIs), NGOs and dairy-co-operatives Community based insurance programme coordinators Insurance Regulatory and Development Authority (IRDA) Interviews were conducted with employees of different hierarchical levels of three public insurers and four private insurers in India. Data and Information sourcing Annual reports of public insurers have been used to collect information on their livestock portfolio. However, the quantitative information available was not sufficient to draw relevant conclusions. Therefore, the study is mostly based on the qualitative information collected.
2

In the paper, cattle means cow and buffalo..

EXECUTIVE SUMMARY Livestock is an important source of household income for developing countries (including India). Approximately, 100 million households are dependent upon livestock as either the primary or secondary source of income in India alone. Any disease, accident, or theft of livestock leads to a substantial loss to the household. Apart from this, huge production risks associated with dairying activities render animal husbandry business a risky proposition for the low-income households. Production risks can be related either to scarcity of input e.g. dry and green fodder, water, etc. for the animals, or, to high morbidity in the case of individual animals or in case of an epidemic. Thetropical climate and poor hygienic conditions present here are some of the factors that trigger or aggravate diseases such as Mastitis, Foot and Mouth Disease (FMD) and Hemorrhagic Septicaemia (HS). Above all, the loss of assets is the biggest challenge for cattle owners as it leads to a precipitous fall in their income. Business risks in livestock rearing make it all the more important to regard insurance as an efficient measure to provide safety to low income households. The first imperative is to understand how customers and suppliers perceive the value of the potential product. This study specifically concentrates on the suppliers perspective to understand the challenges faced in the massification of livestock insurance. India is discussed as a special case as it has a 35 year long history of livestock insurance. The Government of India effectively launched the first livestock insurance scheme in the 1970s for the purpose of asset building at the bottom of pyramid, and, thus pioneered the role of market maker. Yet, its coverage is not more than 7% of the cattle population. Various schemes were used to increase the spread of livestock insurance, with public insurers as risk carriers. Livestock insurance has been offered as a compulsory product with bank credit for dairying activities. This practice is continued presently too. More than 90% of livestock insurance has compulsory credit linked products, which are sold using the partner-agent model, with less than 10% sold through direct sales being voluntary products. Most of the schemes were subsidised at 50% in premium which had two opposite effects. One, it helped to increase the uptake, but at the same time posed challenges in further product development as there were no good processes and systems in place to monitor subsidies. The result was poor processes for livestock delivery and more fraud. This also led to a disincentive for setting up a proper database, and this as a result held up the process of constant upgradation of the premium amount based on actuarial data analysis of mortality tables. As a result, traditionally, insurers have used only one product in the livestock insurance market. The main finding is that offering sustainable livestock insurance is mostly hampered by unreliable data on livestock mortality and by low set premiums. It is seen that insurers go rural mainly because of social and rural obligations stipulated by regulation, and do not bother about competitive pricing. This, at times, leads to dumping of underpriced policies. The public and private insurers derive very low volumes (less than 1%) of business (total premium) from livestock insurance. On the other hand, the cost of entering the unorganised rural livestock markets is very high, which, when combined with underutilisation of the available

distribution channels, hinders the massification of livestock insurance. The cost-effectiveness and product delivery efficiency of different distribution channels is crucial to ensure the success of micro-insurance business. With new micro-insurance regulations in place, the insurers are hopeful about entering rural markets with lower transaction costs and about catering to a larger rural population. Challenges are also faced by insurers in the sense that the burden of all risks are passed on to the insurer as ex-ante risk mitigation strategies in the form of vaccination, de-worming, etc are not well in place. Lack of veterinarians and physical infrastructure for animal husbandry adds to the woes of insurers. To factor this in, insurers want to increase premium, but historically, a set premium of 4% cannot be changed or increased as it will impact the uptake. The environment of subsidisation that has pervaded for the past 30 years has already adversely impacted the product development cycle. It was interesting to find that many insurers who face a loss ratio of >150% were wary about the frauds during valuation and identification of cattle due to poor monitoring processes while there are others who recorded loss ratios of as low as 40-80% and regard it only as perception of frauds. Instances of high loss ratios are very difficult to control due to the remoteness of the villages. Insurers were highly aware of the lengthy process of claims settlement and showed keen interest to reduce the claim settlement process by use of technology. Insurers agreed that livestock insurance uptake would be a challenge unless a strong infrastructure is built and institutions are made more efficient. It is important to point out that in the presently distorted market scenario the demand also remains a big problem due to lack of awareness and unwillingness to pay the premium amount. The main challenges to livestock insurance can be summarised as: Unorganised market and poor veterinary infrastructure Absence of actuarial pricing due to lack of data and challenges due to moral hazard and adverse selection Incentive system for risk reduction and challenges in valuation and identification Absence of bundled comprehensive financial products Lack of proper incentive system for sales staff Lengthy claims settlement process Absence of concentrated marketing and product awareness Solutions can be sought to improve the livestock insurance markets throughout the world by creating databases that can help price the premium actuarially. Smart subsidies can be incorporated by the government or multi-lateral agencies later to help increase the uptake. Better marketing strategies and incentivising insurance sales agents to sell livestock insurance products will certainly help to boost demand. Technology is being incorporated at various levels from identification (like RFID, ZigBee) to cash management (biometric cards). Finally, the livestock insurance sector can aim to build strong livestock management systems. Risk reduction and risk transfer systems should be integrated so that the overall performance of the livestock sector can be improved. Insurers should ideally take the residual risk so that they have enough incentive to reach out to the market and sell the product. Although insurance markets are underdeveloped in developing countries, recent developments in the field of micro-insurance will hopefully increase demand in rural areas.

1. Risks to Livelihoods Dependent on Livestock

India ranks second in terms of its livestock wealth across the world. Out of the total livestock in the country, around 38.2% are cows, 20.2% are buffaloes, 25.6% are goats, 12.7% are sheep, and 2.8% are pigs. The steady increase in population and inefficient distribution of resources, is the reason a majority of poor households have very small or no agricultural land to be engaged in cropping activities. Therefore, a majority of the poorest among the Indian population depends on livestock as an important secondary source of livelihood3. It is estimated that approximately 100 million people derive their livelihood from livestock4 either as a primary or secondary source of income. Livestock related activities help to maintain a daily inflow of income for these households. Additionally, small landholders obtain nearly half of their income from livestock5. The livestock economy penetrates more equitably than agriculture in the Indian economy. Livestock rearing is central to the livelihoods and survival of millions of small and marginal farmers, and landless agricultural labourers across the country, particularly in the dry land regions of India, which amounts to approximately 85 million hectare, that is, 60% of total net cultivated area of India6. Large animals like cattle and horses are expensive, and therefore carry higher risk exposure. Any disease, accident or theft leads to a significant loss to the household. Many households are pushed into dire straits once they lose their livestock to disease, or other reasons such as scarcity of water and fodder, sheer poverty, which forces them to sell their animals, thereby making it impossible for them to rebuild their stock. Broadly we can classify risks into two categories: Production risk: o Non-availability of inputs (dry and green fodder) for animals. o Morbidity (to individual animal or in case of an epidemic): Cattle disease is considered to be one of the main factors contributing to the reduction or stoppage of milk production due to diseases like mastitis, Foot and Mouth Disease (FMD) and Hemorrhagic Septicaemia (HS). o Cattle mortality: The biggest challenge for cattle owners is loss of assets, as it leads to a dramatic fall in income. o Natural calamities like tsunami, earthquakes, drought etc. Price Risk: o Fluctuations in the costs of cattle and its products during disease outbreaks, and market losses happen due to reduced demand, which exposes farmers to income losses. Proper vaccination, de-worming and curative measures for the animal husbandry sector (Refer Annexure 1 for Indias livestock sector status) are inadequate and under developed in the case of developing countries. A key concern, therefore, is whether and how the poor in developing
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Two-third of livestock owners are the most small and marginal farmers and labourers with poor resources, owning only 30 percent of agricultural land. (Source: http://hipa.nic.in/KSDangiA.pdf , Department of Animal Husbandry and Dairying, Haryana) 4 Government of India, Report of the Working Group on Animal Husbandry and Dairying, Tenth Five Year Plan (2002-2007), Planning Commission, New Delhi, 2002 5 Shukla and Brahmankar 1999; Birthal et al. 2003 6 Enhancing Sustainability of Dry Land Rain fed Farming Systems by Department of Agriculture and Cooperation, Crops Division, Ministry of Agriculture, GoI Slide 2 (agricoop.nic.in/AgriMinConf/dryland.ppt)

countries can be shielded against risks faced by households dependent on livestock as a source of livelihood. The overall risk in the cattle owners portfolio can be dramatically reduced through common techniques like rearing a range of diversified animals and other informal risk hedging models like community ownership and management of cattle as observed in Self Help Groups (SHGs) and co-operatives. As formal risk-management services are under-developed (e.g. out of huge cattle population only 7% of cattle are covered under insurance in India), cattle owners resort to high-stress coping mechanisms (borrowing from moneylenders, selling assets, etc.) that push them deeper into poverty. Hence, there lies a very big challenge of de-risking the low-income population to protect their livelihoods.

2. Livestock Insurance Market

Due to the lack of availability of risk reduction strategies, it becomes all the more important to develop an insurance market as an option to protect the livelihoods of cattle owners. According to the Human Development Report (by UNDP Regional Centre at Colombo) assessment, insurance coverage can be extended to 50-70% of rural households (2006) in India. The study makes a market projection of approximately 44.68 million milch animals, at a premium of 4% of sum insured (sum insured - Rs. 10,000 per animal) and indicates a premium amount of at least Rs. 17,872 million (USD 397.15 million7). As surveyed in the states of Rajasthan, Tamil Nadu and Orissa in India (Table 1), present insurance penetration data indicates that rural households have livestock insurance also in their list of priorities, though life, accident and health insurance are given higher preference.

Table 1: Prioritizing of insurance demand by location based on risk assessment by poor Location(type) predominant Priority 1 Priority 2 Priority 3 Tribal areas Dry areas Coastal areas Urbanized rural areas Rural economy areas Riot prone areas Areas along with highways Health Drought Life Life Life Business assets Accident Life Health Accident Accident Accident Life Life Non- identified Life Business assets Health Health Non- identified Non- identified

Priority 4 Non- identified Non- identified Health Household assets Livestock Non- identified Non- identified

(Source: UNDP Regional Centre Unit, Colombo)

In addition to addressing insurance sector wide supply side challenges, interventions are required to create greater awareness and demand among cattle owners to encourage uptake and massification of insurance.

1USD = INR 45

3. Current Supply of Livestock Insurance

3.1. Government Intervention Livestock insurance is quite expensive and its reach to the poor is negligible, except when linked to government schemes8 (Refer Annexure 2 for Chronological Events in Indian Livestock Insurance Industry). Due to high losses in livestock business and less commission coming to insurance agents due to low ticket size of premium from livestock (as 15% of premium is taken as commission) other products are preferred to be sold in the rural areas. Nevertheless due to mandatory conditions of by Insurance Regulatory and Development Authority (IRDA) under Obligation of Insurers to the Rural and Social Sector, 2002 has created space and allowed more efforts in the livestock insurance space. In India initially cattle insurance was tied with rural credit delivery programs through banks as well as with credit delivered through development projects like the Integrated Rural Development Program9 (IRDP) so that large numbers could be reached (Refer Annexure 3 for details). That said, as has been demonstrated in the opening section, livestock insurance is more pro-poor. The increasing rural affluence has altered priorities and rural and social sector goals could be met by insurers cherry picking which could be obstacles to developing rural models of delivery. 3.2 Risk carriers India historically had only public insurers working in insurance industry. Four public insurance companies were the only insurers till 2001 (Refer Annexure 4 for details). Private players entered the general insurance business only after 2001. As of now, there are more than 14 private general insurers in India. Insurance schemes developed and offered had the potential to deeply impact the industry structure, and hence, even after eight years of liberalisation, public sector insurers have always dominated the Indian livestock industry.
Box 1: Share of Public Insurers in Total Cattle Insurance in India Public insurers have been the biggest players in the Indian livestock insurance market. Even in 2004-05, out of approximately 7.9 million animals insured, 6.29 million were covered by public insurers (i.e. 80%). United India Insurance Co. Ltd. (UIIL) has been the market leader throughout.

(Source: Data from Annual Report 2002-05 of all four public insurers)

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Building Sustainable Microfinance Institutions in India by Mahajan Vijay, Nagarsi. IRDP was the biggest poverty reduction programme initiated by the Government of India in 1983 and was extended till 2003. IRDP aimed to assist creation of assets of the asset-less target groups (such as small and marginal farmers, agricultural labourers and rural artisans) through income-generation activities that would enable them to break the posverty cycle. For comparatively high income groups, livestock insurance was extended through market agreement.

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However, even though public insurers have been in this field for past 35 years, there was little innovation offered by them, and cover remained restricted to Death and Permanent Total Disability (PTD). The possible reasons for limited attention towards product development are Low volume of business coming in from livestock. Usually, the total cattle insurance business brings less than 2 % of the total premium collected by any of these public players, hence, the lower importance accorded to livestock insurance. High losses made on livestock products year after year. The loss ratio at times exceeds 100%. This further dampens the willingness on the part of insurers to deliver livestock insurance products (the usual loss ratio faced by insurers is 40-80%).

3.2. Product Death is the major event covered under livestock insurance. Sometimes a rider of Permanent Total Disability (PTD), which covers for infertility and complete cessation of milk production, is available at an extra premium (Refer Annexure 5 for details) Various variants of death cover available which are designed by working around the premium amount or providing multi-year products. However, these long term products have very little market due to the following factors. High premium rates One year cycle of animal rearing: Cattle owners, who sell their animals after 1-2 years, usually see it as an additional burden and prefer not to take the product. 3.3. Prevalent Models for Livestock Insurance Delivery Cattle insurance can be distributed as a bundled product with credit or with non-financial services and as a standalone product. The Indian livestock insurance history is full of examples where livestock insurance was/is extended as a credit linked product. For credit linked products, market based financial institutions like corporate banks and community based financial institutions like MFI-NGOs and co-operative banks are used as delivery partners. As of now, bundling of livestock insurance with non-financial instruments such as the concentrated feed pellet bags or other inputs like vaccination and other risk services (as done in case of agriculture insurance where crop insurance is bundled with fertiliser and seeds) is not prevalent in India. In some places for standalone products, the direct sales method is being used by insurers. Broadly these methods can be classified in following categories:
Table 2: Comparing different models for insurance delivery Partner-agent model Direct sales Key Insurer is the risk carrier Insurers appoint their Features and sales are done own staff for marketing through MFIs/Coas well as sales. ops/Banks which gets For non-scheme animals, commission on sales. individual retail is done. Under IRDP scheme/other government schemes Approximately 90% of Approx 10% of total Current total insured animals insured animals outreach Community-based Community bears the risk by pooling premiums Done in one or two places in India. Still in an experimental phase.

Not done on a very high (<0.01%) scale due to inherent problems of risk bearing capacity of community.

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i. Partner-Agent Model (credit linked or standalone) Insurers prefer to link insurance with credit to secure a good market share as approximately 4050% of total credit in rural areas is taken towards dairying activities. Two major channels in this case are: MFIs, Co-operatives and NGOs who provide credit to poor households for dairying and are involved with asset building and growth exercise (Box 2.1). Dairy Cooperatives are important market players which provide the assured market to its members and also provide various services related to risk reduction (Box 2.2)Banks that provide loans for dairying activities as a part of priority sector lending provision of commercial banks, Regional Rural Banks and Co-operative Banks. These financial institutions provide livestock insurance as a compulsory bundled product along with the loan. Since it is mandatory, most cattle owners consider the premium as a cost to accessing credit. Also, such products are rarely able to capture the needs and feedback from clients.
Box 2.1: MFIs as Distribution Agencies As per Microfinance in India-A State of Sector Report 2006, Microfinance Institutions (MFIs) served 7.3 million households, of which 3.2 million were poor in the year 2006. SKS Micro-finance is one of the major players in the MFI sector, and of late, they are also looking for livestock insurance providers for their members. With its outreach of 3,906,007 clients (as on 28th February, 2009) and with 1354 branches, its scale of operations can have a deep impact on the livestock insurance industry. Other major livelihood promoting institution is BASIX that works in 15 states and over 10,000 villages. Livestock insurance is a part of financial inclusion strategy. 26,129 livestock are covered under BASIX livestock insurance till 31st March 2008.

Box 2.2: Dairy co-operatives as Distribution Agencies Community based Organisations India has demonstrated globally how co-operatives can be leveraged as distribution mechanism. Co-operatives act as the best mode of increasing the coverage of livestock insurance due to Large farmer base- Operation Flood, rural development programme of India initiated in 1970, is one of the largest of its kind, the programme objective was to create a nationwide milk grid. It resulted in making India one of the largest producers of milk and milk products, and hence is also called the White Revolution of India, 11.4 million cattle farmers had been organized into 1, 03,281 dairy cooperatives. It also helps to reduce transaction cost as co-operatives have their own field veterinarian staff. Dairy cooperatives like Gujarat Co-operative Milk Marketing Federation (Federation of dairy co-operative societies under the marketing brand AMUL) in Gujarat; NGOs like BAIF Research Foundation (which has a workforce of about 150 veterinarians) can have efficient immunization programs running throughout the year that helps health check ups and easy claims settlements for livestock insurance. It becomes very easy for insurers to extend livestock cover to members of these institutions.
(Source: Article, Co-operatives the Mainstay of Dairy Sector by Johnson Napier, October 22, 2005); Integration of SHGs with Dairy Cooperatives: A Model Concept by Dr.K.Swaroopa Rani and Dr.K.R.Rao; Report on gaps in Indian milk markets by Indian Society of Agri-business professional (ISAP).

Approximately 90% of business in livestock insurance is through Bancassurance, the biggest source for insurance sales in all sectors. India is the fourth densest financial network in the world. Insurers prefer to link insurance with credit as banks are mandated to engage in due diligence activities stipulated by Reserve Bank of India (RBI), and hence chances of bad risk decreases. Additionally, banks/co-operatives needs to verify their assets and thus help to keep the

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process more transparent. Usually, MFIs and NGOs which provide credit for dairying activities educate farmers and build good risk reduction methods also. As more than 40-50% of MFIs portfolios go into dairying, lending, some of the MFIs constantly keep a watch on health and management of livestock so that there is lesser default for credit given by these organizations and they can get good repayment rates. BASIX is one such organisation (Box 3, highlights a brief analysis of the experiment and innovation in the ProviderAgent Model Section). Animal health care, artificial insemination and animal hygiene camps are organised on a regular basis so as to reduce mortality and morbidity. cases.
TRIAD Strategy at BASIX IDS (Institutional Development Services) LFS (Livelihood Financial Services- Credit, Insurance, Savings, Remittances) Ag/BDS (Agriculture and Business Development Services) Risk Management by BASIX for Poor Non Financial interventions: Risk Minimization e.g. Preventive Vet Care Financial interventions: Savings, insurance), Insurance for lives and livelihoods 26,129 livestock covered till 31st march 2008.

Box 3: BASIX Risk Management Services

Processes Innovation at BASIX in Royal Sundaram Livestock Insurance Product: Certification of animal value and health at the time of enrolment delegated to BASIX field staff (Reduces transaction cost: As BASIX staff is involved in valuation and risk analysis of cattle, cost of veterinarian is reduced and hence product can be offered at comparatively at a lower price. But LSAs are not technically qualified hence chances of poor risk analysis can not be ruled out. Replicability and operational feasibility: This model is only replicable in areas where MFI-NGO and insurer has enough trust in its non-technical workers and is ready to risk) 10 day waiting period from the date of tagging for risk cover commencement (to reduce adverse selection) Full benefit(i.e.100% of Sum Insured) payment in event of claim (Value proposition for farmer) Underwriting at the insurance company based on submission of electronic data as BASIX as Rural BPOs to help them in easy data entry (reduce time and documents) Rural BPO (reduction in turnaround time in claims processing and improvement in quality control for new business and claims) Discount on premium (5% for 2 animals and 10% for 3 or more) for customers (Minimize adverse selection and enhance outreach)
(Source: Experiences in Livestock Insurance at BASIX by Mr. Gunaranjan, Head Insurance Business, BASIX)

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Considering cooperatives and MFIs are the most prominent channels for delivery, following is a comparison between the two mentioning benefits and challenges faced by them.
Table 3: Comparison of Credit-linked and Dairy Co-operative as Channel for Livestock Insurance Distribution Credit institutions (MFI-NGOs and Dairy Co-operative Banks) Benefits To Insurers Increases outreach and helps in easy Risk reduction strategies are well origination, distribution and sales implemented, and hence, chances are that insurers can expect lesser claims Increases capacity for claims management Reduce adversely selected portfolio Easy to educate insurers on clients Easy marketing and awareness needs generation of product To Clients Rural clients get easy access to Rural clients get easy access to insurance product to hedge their risks insurance product to hedge their risks Limitations For Insurers Banks or MFIs tend to do adverse selection and become reluctant to undertake proper due diligence in case of claimants (as cattle insurance is not their regular business). Possibility of collusion between banks/MFIs and farmers due to incentive alignment (as bank wants repayment of its loan and the farmer is also keen to repay the loan and get new loans, which could be financed through insurance payment). If the farmer is not able to pay back, there is an incentive created to let the animal die. Additionally, banks/MFIs/agents are paid on the basis of sales and not on the basis of claims settled or rejected, claim processing efficiency and response time. Usually, banks collect the claims paper and inform insurance companies only at month end when there is a huge pile of cases and insurers cannot cross check. In this scenario, they have to pay the claim without satisfying their doubts regarding the genuineness of the claim. Possibility of collusion between cooperatives and farmers due to incentive alignment as co-operatives will be benefitted if farmer provides regular supply of milk and the farmer too is remunerated for the same. So, chances of frauds can not be ruled out.

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For intermediary

Possible Solution

Negligence on the part of insurers: Negligence on the part of insurers: Insurers delay in settling the claim Insurers delay in settling claims. This and this taints their image and spoils taints their image and business with business with their clients on the their clients on the ground, and ground. In turn, intermediaries get intermediaries, in turn, get bad bad publicity, which adversely publicity that adversely impacts their impacts their business. business. Intermediaries also expressed concern about the seriousness insurers actually attached to their social and rural obligations. They were wary about the fact that insurers take the premium and as soon as the target for their obligation to the rural and social sector is fulfilled, they resist offering cover to any other clients over and above this limit. Also, since the interest is not in generating a sustainable business- servicing and claims settlement is poor, it depicts a serious flaw in the law of Obligation to Rural and Social Sector, 2002 as this law only talks about collection of premium and neglects claims settlement and response time. It is important to have right processes when an intermediary is used for origination of reliable insurance portfolios.

Although there are concerns but the Partner-Agent Model is preferred as it becomes easy for insurers to expand their reach to remote areas where it was difficult to reach earlier. ii. Direct Sales Model Where the product is not credit linked (as a compulsory or voluntary product) it is difficult to sell the product due to tangible demand from the cattle owners and also, development officers and agents give more importance to other businesses through which they can get more commission and larger deals. There are no specific agents appointed by insurance companies to sell livestock insurance. Livestock insurance is sold along with other products and agents handling other products deal with livestock portfolios also.10 Hence, direct sales model is not as successful as the Partner-Agent Model. Limitations: Branch-wise non-profitability of the product makes direct sales model unsustainable. Insurers use their own branches which are set in towns or in cities away from rural areas to sell various rural insurance products. It leads to increased transaction cost per policy. This high transaction cost model leads to high levels of adverse selection (as the agents will tend to choose everyone who comes for policy without calculating the risk) and chances of moral hazard in case agents are not incentivized properly. During the process of claims management, factors such as cost of
10

In India direct sale is for non-IRDP programme and it is approximately 10% of total livestock business. Agents go to Kisan Melas (Animal Fares) and Pashu Mandis (Animal Markets), where people buy and sell livestock, to sell insurance product when it is easy to convince cattle owner for take up. Direct sales help insurers to use their work force (existing agents and development officers) time more prudently to extract more business out of them.

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travel, verification of claim and post-mortem of animals could all add to the overall expenditure incurred by insurers. All this makes the product non-profitable. iii. Community-based Insurance Model Community based insurance models are rare in India but it can help to reduce false claims, documentation, and cost of insurance including the transaction/time cost and potential risk, while, at the same time it increases insurance cover of loan-financed livestock assets. One such example is Loan Protection Scheme by Vizianagaram District Poverty Initiatives Project (DPIP)11 in Andhra Pradesh, India. It is a community-managed livestock insurance scheme which is done in co-operation and support from Self Help Groups (SHGs). It introduced community supervision and the monitoring of insurance, making the community a major stakeholder in the process. The major advantage of this scheme is that it reduced the opportunity to raise false claims and also resulted in minimizing the origination and claims procedures. Schemes performance can be summed up asTable 4: Statistics of Vizianagaram Loan Protection Scheme

Enrolments Claims Received

2006 - 07 3519 96

2007-08 4756 120

2008-09 48675 320

The scheme is performing well with approximately 85000 animals being insured under the scheme this year. The scheme has helped to increase the livestock insurance coverage to its members with >80% of its SHG members benefitting from it. Loss ratio is less than 40% which is rarely seen in the case of Partner-Agent Models in the country.

4. Product Design and Distribution Challenges

Unorganized market Livestock rearing in India is an unorganised market with cattle ownership and management largely pursued as an individual business. Deficiencies in the rural system in the ownership of cattle, vet care for health facilities and lack of training for farmers (ignorance about services) leads to: o Very low demand in the inputs for higher productivity and cattle based livelihoods are characterised by subsistence and low productivity business. This leads to lower demand for risk hedging products. o The small percentage of people who access insurance either through mandatory or voluntary schemes, their ignorance of insurance products leads to poor utilisation of services. This could include non-submission of claims due to unawareness about either risk coverage or the process in the submission of claims. It could also lead to repudiation of many claims due to non compliance of procedure. This leads to bad experience among the insured minority, and reduces the re-enrolment rates substantially. o An additional contextual challenge that is posed by the absence of infrastructure that highlights identification of cattle and establishes ownership. This leads to a substantial moral hazard and insurers have had the experience of insuring non-existent animals.
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DPIP is a state-sponsored programme and undertook community managed livestock insurance scheme with the co-operation and support of the SHGs.

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o Supply and demand of livestock depends upon the demand for a livestock product which tends to be volatile---similar to the commodities markets---and it complicates the process of assessing the true value of cattle. It is important to organise proper documentation, to have standardisation of animal values and to have a system that establishes a relationship between animal and owner. These measures help to improve the overall scenario. Absence of Actuarial Pricing due to Lack of Data It is very difficult to produce effective design in a data-poor environment to make credible probability assumptions and to price insurance products appropriately. In India presently, the regulator is collecting data for businesses that have >10% share in total premium and as livestock is less than 2%, no care has been taken to improve condition of data in the case of livestock insurance in the rural insurance segment. Insurance companies are also not very concerned about the validity and reliability of data. In some cases the data exists, but there is a limited effort to clean the data and to convert it to usable information that can be analysed. Other issues, objectives and the industry milieu related to the animals management make it more complicated. The situation is further aggravated when one is not able to predict losses and is therefore unable to project risk, especially in case of systemic risks, which should form the basis for economically feasible premiums for clients. Insurers require sufficient information to design actuarially sound products. Although there are a wide range of heavily-subsidised government insurance schemes currently available, yet the insurers find it difficult to get a true picture of livestock insurance business., Premium rates were not actuarially tested and the basis for the premium rate was unknown to suppliers when India offered various government schemes to the public. The price of the product was the same, irrespective of the age of cattle and other risks factors. No re-evaluation of cattle at the time of the renewal of policy was undertaken. This exposed insurers to higher risk with a possibility of the product being under-priced. It actually hindered the whole process of product development in terms of pricing as well as testing new products with better coverage and newer models. Challenges due to Moral Hazard and Adverse Selection Cattle insurance is usually infested with moral hazard problems. Insurers use various processes to curb adverse selection and moral hazard (Refer Annexure 6 for details). The documentation required and lengthy claims settlement lead to lower uptake of livestock insurance as farmers find it very difficult to collect all the relevant documents. Additionally, the farmer has to bear expenses for ear tagging and to obtain the health certificate. This increases the actual cost of insurance for the poor and therefore leads to low uptake or re-enrolment. To ensure low adverse selection and moral hazard, paper work is required, especially with regard to the issuance of health certificates, which is an additional cost to be borne by the policy holder. Without a health report it is difficult for an insurer to know about the type of risk he is undertaking. The insurer has to empanel a veterinary doctor which is very costly. Poor veterinary infrastructure in villages compounds the problem (Annexure 1 for details).

17

Moral hazard and adverse selection are seen to be a poor process characteristic and usually these problems occur when the insurer is not able to effectively monitor these changes in the behaviour of animal owners while imposing the relevant policy provisions. In environments which have high moral hazard problems, the indemnity will be greater than expected by the insurers, and in subsequent years, the premium will increase and uptake will be low. Valuation of Animal At times insurers underinsure so as to reduce frauds due to high valuation of cattle. Although this enables them to hedge their risks, it makes the insurance product less interesting for cattle owners. Underinsurance finally leads to higher transaction cost percentage and lower risk coverage. The value of cattle is closely correlated with its production capacity, apart from which age also plays an important role in deciding the worth of cattle. The value of a heifer is almost half the price of adult cattle from its second lactation and onwards. The age of an animal is a critical criterion along with health which decides the value of cattle. Due to the range of breeds in different geographies with different feeding patterns, insurers find it difficult to assess the correct value of cattle. Therefore, they have to depend upon the veterinarian to know the actual value of cattle. As observed in developed countries, different breeds of cattle used for beef and milk have a set price depending upon their weight and milk productivity, and this data is available to the public. Such kind of standardisation is absent in India which poses difficulties to insurers, as low value cattle can be overvalued if there is collusion between a veterinarian and farmer. In such a case, the insurer would have to face huge losses. Identification of Animal Poor identification techniques increase the moral hazard problem substantially and consequently impacts product pricing. Various identification methods have been tried and tested in the market (Table 5). None of them have yet provided a complete solution. Identification of animals is difficult in terms of operational issues involved with it. Indian markets have typically used the external ear tag for identification of the animal. The external ear tag is a plastic or a metallic clip (Figure 1) which is put on the animals ear.

Figure 1: Metallic clip used for animal identification

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Ear tagging is an unreliable method of identification as the tag can easily fall or removed oand submitted for claims by ear clipping which is a common practice12. o Identification of an animal is a problem as no national /state livestock identification system is in place. o It even creates problem in the tracing of diseases and also poses problems in data base creation for productivity projections.
Table 5: Comparison of different techniques for identification of cattle
Metal Tag Brand Tattoo Ear Notch Colour Pattern Bar-code RFID (Implant) Read Distance Inches Feet Few metres 1-3 Feet Metres Inches Inches to Feet Inches to Feet N/A Inches to feet Inches Ease of Reading Varies Good(till visible) Low Difficult Difficult Varies Easy Retention Low Fades over time Fades over time Long Long Good to moderate Good to moderate Ease Application Easy Difficult Difficult Difficult N/A Easy Slightly tough Easy of Cost Rs. 4-6 Cheap Cheap Cheap Price of colour Cheap Rs. 40-Rs. 200 (depends on volume) Rs. 40-Rs. 200 (depends upon volume) Expensive Not used extensively Still in experimental stage

RFID (External) (Figure 4) DNA Testing Retinal Imaging Muzzle identification

Easy

Good to moderate

Lab testing Easy Require expertise

Lifetime Lifetime Good

Test takes time Equipment setup Precautions to take muzzle imprint

2.1

2.2

Figure 2: External (2.1) and Internal (2.2) RFID tags

12

The estimated rate of ear-tag loss was 0.0024 ear-tags lost per day. The use of ear-tags alone might not be sufficient for long-term identification of extensively managed animal populations. (Source: Department of Veterinary Integrative Biosciences, College of Veterinary Medicine and Biomedical Sciences, Texas A&M University, College Station)

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 Underwriting Underwriting becomes tough when the policyholder is unable to or does not disclose the appropriate health status and history of animals. Also, at times, intermediaries involved in the process are unable to provide risk data to underwrite a group policy. Then underwriters consider only the tentative mortality data on which to price, as they do not have access to critical data on present animal health management systems, government machinery and its functioning, etc., which makes it very difficult to measure and rate. Risk Transfer Opportunities Reinsurers have till recently maintained that risks in developing countries are uninsurable primarily because of poor livestock farm management, absence of efficient and reliable loss control and loss assessment systems, slow moving administrative and statistical systems and non availability of authentic past loss experience. Secondly, livestock insurance business is too small in volume to attract a re-insurer. Insurance companies feel that the government should act as reinsurer for livestock insurance as some of them think that this business will grow in future. Incentive Systems for Risk Reduction Most of livestock support services like artificial insemination/natural service, vaccination, deworming etc. are time-sensitive, which government institutions, at times, are not able to deliver due to financial as well as bureaucratic constraints. Though the government understands that there is a compelling need to improve the dairying and animal husbandry sectors, efforts are so thinly spread that the positive effects are not revealed. Hence, many milestones remain untouched probably due to the public nature of animal health interventions. It is not going to bear fruit till there are extremely large collectives to justify such interventions. The government has to provide constant support for rigorous improvement in the animal husbandry sector. If risk reduction measures are available, product designing will take a new turn as insurers can plan for disease, epidemic and productivity fluctuation products which are currently absent. Absence of Bundled Comprehensive Financial Products Comprehensive risk covers help to ensure that the ratio of risk premium to transaction cost improves and premium has more percentage of pure risk and households can be saved from paying transaction cost for each different cover. Comprehensive products must be increased e.g. for livestock diseases, etc., and more products and process innovations are required. Channels used to deliver bundled products will be of great importance as presently India lacks usage of leveraging existing channels like its huge cooperative structure, banks, post offices, etc. When insurance is linked with loans, the uptake of insurance increases for compulsory as well as voluntary products as farmers as well as intermediaries prefer to secure their portfolios and hence in these cases, insurance operations are seen rather as a means to facilitate access to loans and to protect credit portfolios. In case of voluntary products, there are more chances of adverse selection than in compulsory products, but one cannot say that with confidence.

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 Sales Staff and Incentive Systems Because the number of rural representatives and development officers are inadequate, animal insurance coverage on the scales envisaged has not been achieved13. Also, insurance agents and development officers who go to villages prefer to fetch high ticket businesses like tractor or life insurance rather than cattle insurance due to incentive alignment14 (as a percentage of premiums collected). This implies that the agent will be entitled to get more commission if there is a high premium collection and hence livestock insurance takes a back seat. From the farmers perspective livestock insurance is already low priority. This goes even lower down the list of priorities when one has travel to the point of sale and hence the chances of product uptake decrease even further. Therefore, incentive systems for sales staff and potential for hidden behaviour by farmers can defeat a well designed model and efficiently priced product. Absence of Concentrated Marketing and Product Awareness Due to illiteracy, it becomes necessary to use audio-visual aids rather than any other cheaper printed material to facilitate insurance literacy. It is necessary that material be developed in languages familiar to the farmer. However, these have limited value outside the command area, a fact that increases the cost of marketing. Ignorance of the insured and his past negative experiences with insurers decreases insurance uptake. When livestock insurance is marketed, insurers try to educate farmers regarding risk reduction methods such as vaccination, deworming, hygiene, etc., so that mortality can be decreased, but its impact has still not been measured. One big challenge is to offer an efficient risk reduction programme due to the nature of animal health interventions, which is like a public good.

5. Claims Settlement and Fraud Control

The claim settlement process requires deciding the cause of cattle death and cattle identification. This requires substantial paper work, duly completed claim form for reporting claim, death certificate by way of documentary proof of death of the animal, post mortem report, First Information Report (FIR) in case of any accident, and most important, ear tag with portion of ear to file the claim. The policyholder has to cut the ear of the animal along with the tag and send this to the insurer at the time of claim settlement. This is a very weak process. All insurers strictly follow the rule of no tag no claim. Some insurers collect photographs in order to ascertain that the dead animal for which a claim has been made is the same one which was insured. The whole process becomes very transaction heavy as the veterinarian empanelled by
13

Report on http://www.cag.gov.in/reports/commercial/1995_book14/chapter8.htm by Comptroller and Auditor General of India, Government of India 14 There were 1.6 million "highest income" households in rural areas. National Council on Applied Economics and Research (NCAER) India projections indicated that the number of "middle income and above" households was expected to grow to 111 million in rural India by 2007. (Source: Shanti Kannan, "Rural market - A world of opportunity," www.hindu.com, 11th October 2001)

(Source: Francis Kanoi, 2002) (1 Crores= 10000000)

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the insurer has to reach the village and conduct a post-mortem and other verification before payment of claim. There are other difficulties, too. The post mortem is to be conducted within 24 hours of the death being reported and at times it is difficult to reach the village on time. Interestingly, insurers shared that the maximum number of claims are reported on Saturdays and Sundays. Veterinarians are unable to reach the village within 24 hrs as they are holidays. The animals are either burnt or sent to slaughter houses and the insurer has to pay the claim without verification. Hence, claims management remains the biggest challenge as paperwork and transportation increase the cost. The impact of these fraudulent claims becomes evident on the yearly premiums and massification of insurance. Cumbersome paperwork involved in the standard process of claim settlement reduces the farmers interest in buying the product and leads to heavy transaction costs for the insurer (transport and post mortem) that acts as a barrier in the massification of the product. There is an emerging need to make the claims processing procedure as seamless and easy as possible.

6. Conclusions and Recommendations

The present cattle insurance market with its limited penetration is considered insufficient in developing countries and requires substantial investment and innovation for it to become a wholly successful venture. The future of livestock insurance is still uncertain and the policy development needs to be coordinated. Interest in developing the insurance of animal husbandry is increasing presently due to the drastic environmental impact on low-income households. It is believed that livestock insurance will work best when the government and industry work together. There is a need to look for more comprehensive cover and move towards complete livestock management systems. As the health of the animal is affected by numerous externalities and possesses public good characteristics, it would require constant government support for prevention, control and the regulation of various risk management and risk transfer practices. On the basis of clues from the market some improvements are suggested below. These can help boost the performance of the livestock insurance industry in developing countries. 6.1. Create Database Risk carriers need adequate data including estimates of frequency and severity of loss to calculate accurate premiums. i. The challenge faced by insurers is finding sufficient data probability distributions. In many cases this data simply does not exist, but most often such data does exist within institutions or with other agencies but it requires cleaning and digitising to be converted into information that can be utilised. ii. The most significant constraint is the lack of base line data on potential claims that can help insurers to design or price products actuarially. Consumption and saving patterns are also critical aids to assess insurance needs. iii. Insurers need both data relating to the risk characteristic of individuals as well as data describing the effectiveness of government safeguarding programmes to effectively

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underwrite a policy. This type of data is difficult to obtain as there is a lack of research done on this theme. The government and the regulator can help to collate this data and help improve the availability of such data. 6.2. Marketing and Insurance Literacy The issue of moral hazard and adverse selection is a matter of concern for the insurer. Spreading awareness among the illiterate segments of the insurable population and capacity building of the delivery organisations are major challenges. Insurance products require ample efforts in marketing and spreading responsiveness. Due to the illiteracy pervading the insurable population, it is important to use non verbal communication in printed medium and audio visual aids periodically to reinforce the insurance concept with a degree of regularity. The government and the insurer needs to bear the cost for such efforts as it will have a positive impact on the national economy as well as on insurers business. 6.3. Risk Profiling Presently it seems that potential policy holders have better information about risk exposure than the insurer. Given this scenario, it becomes important for an insurer to be able to accurately classify potential policyholders according to their risk. Those faced with higher risk exposure should be charged higher premium rates. This is not a practice in India. If insurers do not have sufficient information it will become difficult for them to conduct risk exposure and hence chances of adverse selection will increase. Risk profiling will help insurers to reduce the risks to which they are exposed. Rather than individual risk profiling which incurs high recurrent cost, an indexed approach where a risk matrix is pre-defined (with defined value of cattle and risk based payout as in case of Mongolia) will be easier to apply and will result in grossly reduced transaction costs. Some insurers have structured risk profiling exercises but have not started using them. 6.4. Greater use of Technology for Process Improvement The limited governmental and private efforts have been undertaken for technology improvement and this will materialise with an increased use of technology in the distribution of product, identification of animal and cash management. Technology can be leveraged for fraud control, non-cash channels, and alternate mechanisms for animal identification and valuation. This will make non-profitable portfolios viable and profitable and consequently lead to a reduction in premiums and greater willingness and ability to pay on the part of cattle owners. i. Use of Technology in Transaction Processing Cash management in premium collection is a big challenge for insurers (Annexure 8). It is not only true for livestock business but for other rural businesses as well. Provisions for electronic cash transfer options need to be explored. Biometric cards and use of mobile technology will have the added advantage to help faster and easy premium collection and claims settlement.

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ii. Use of Technology for Identification of Animals To address the requirements of the huge market potential, appropriate systems should be evolved to track livestock information, by using Radio Frequency Identification (RFID), muzzle identification, technologies. RFID not only helps in identification but creates more data storage options also. Having generated and recorded sufficient data through RFID technology it will become easier to implement risk reduction measures and to track diseases than it has been in the past. Even technologies like ZigBee which can help to track physiological characteristics of animals along with identification need to be further explored for their cost-benefit analysis. 6.5. Expansion of Product Risk Cover There is need for comprehensive cattle care covers. The product should be able to address more than death risk and try to graduate towards the productivity cover. Customised product development to suit the varying requirements of the local populace should be the aim of the expansion in risk cover. Increase in product cover will help create an increased demand and relevance of the product to the client. This implies that products that cover livestock diseases are to be designed to increase product value to the client. No product is available that can take care of disease outbreak/epidemics of Foot and Mouth Disease (FMD), Hemorrhagic Septicemia (HS), Black Quarter (BQ), Thielariosis, etc. There is also a disincentive for the cattle owner to report a disease outbreak at the earliest as there are no indemnity payments. If indemnity payments are available, they fall far short of the actual value of animal. India faces a lot of this kind of problems when there is the outbreak of an epidemic. It leads to huge losses and more so when disease is zoonotic (zoonotic diseases can be passed from animals to human beings) as in the case of brucellosis. Once the disease spreads, there will be high mortality in the particular area and the insurer will incur loss. This is one of the major reasons that restrain insurers from providing livestock insurance. Products can be designed better when risk transfer is bundled with risk reduction strategies to contain overall risk and help households benefit from the arrangement. Additionally, risk reduction methods will help to reduce mortality and morbidity and therefore have a better impact on the insurer as well as insured. The livestock sector needs research and development of packages for risk reduction through interventions that can be delivered by the private sector in a good manner. This would have a high demonstrated impact on risk reduction. In arrangements where intermediaries have shared stakes by provision of risk layering between insurer, intermediary and cattle owner, the chances of frauds can be reduced to a great degree. Risk layering will coerce intermediaries into having the right processes so that moral hazard and adverse selection problems can be curtailed. This will result because their portfolios will get a hit every time a claim is reported and settled. It will help to reduce process level complications and can help to make livestock a profitable venture. Other arrangements like deductibles and co-payments will be interesting to incorporate in livestock insurance as these can aid the reduction in incentives for moral hazards. Private insurers will not be able to take more bundled and comprehensive products due to the covariate risks involved, and the government, National Bank for Agriculture and Rural
24

Development (NABARD) and other multi lateral agencies like International Labour Organization (ILO) need to be involved. The government and other agencies can provide smart subsidies to catalyse growth in the sector and should invest more in the infrastructure in order to ensure an overall sector growth. In some cases, reinsurance arrangements can be entered into with the government as other re-insurers have shown no inclination or readiness to take re-insurance for risky businesses. This is primarily because it is very difficult for them to gauge the risk exposure due to the lack of available data. 6.6. Livestock Management Systems In conclusion, the livestock insurance sector should aim to build livestock management systems. Risk reduction and risk transfer systems should be integrated so that the overall performance of the livestock sector can be improved. Insurers should ideally take the residual risk. Residual risks result when it is indicated how adequately the individual producer practises and the government carry out its responsibilities. This will be assessed by the insurance industry and the government as policies are developed for livestock producers. These policies have to be priced adequately in order to produce profit for insurance companies, yet it has to be competitively priced to ensure that the policy is affordable to the producer. Procedures for premium payment, claim and other services should be formalised along with increased customisation of products to suit the needs of low-income households.

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Annexure 1: A Brief on Indias Livestock Sector

Importance of Livestock in the Rural Indian Economy India lists second in terms of its livestock wealth across the world. Out of the total livestock in the country, around 38.2 percent are cows, 20.2 percent are buffaloes, 25.6 percent are goats, 12.7 percent are sheep, and 2.8 percent are pigs. According to the 17th Livestock Census, crossbred cattle constitutes 13.3 percent of the total cattle and 86.7 percent are indigenous cattle. The share of livestock contribution to agriculture Gross Domestic Product (GDP) of the country has increased despite the fact that share of agriculture in overall GDP has decreased over years (Figure 3), indicating greater returns from the livestock sector.

Figure 3: Share of livestock in agriculture GDP in India (Source: Share of Agriculture and Livestock Sector (GDP) in India{(At Current Prices) (1980-1981, 1985-1986 to 2004-2005)}, Ministry of Agriculture, Govt. of India)

Due to the steady increase in population and an inefficient distribution of resources, a majority of poor households have very little or no agricultural land to engage in cropping activities.15 A majority of the poorest of the Indian population depends on livestock as an important secondary source of livelihood.16 It is estimated that approximately 100 million people derive their livelihood from livestock17 as a primary or secondary source of income. Livestock related activities help to maintain a daily inflow of income for these households. Additionally, land smallholders obtain nearly half of their income from livestock.18 The livestock sector penetrates more equitably than agriculture into the Indian economy. Livestock rearing is central to the livelihoods and survival of millions of small and marginal farmers, and landless agricultural labourers across the country, particularly in the dry land
15

In India, 58 percent of rural households have land holding of less than 2 hectares and another 32 percent have no land as an asset. Number of households with little or no ownership to land is likely to increase due to further subdivision of land holdings. (Source: International Livestock Research Institute (ILRI) report on Livestock in the Livelihoods of the Underprivileged Communities in India: A Review) 16 Two-third of livestock owners are the small and marginal farmers and labourers who are the most resource-poor, owning only 30percent of agricultural land. (Source: http://hipa.nic.in/KSDangiA.pdf , Department of Animal Husbandry and Dairying, Haryana) 17 Government of India, Report of the Working Group on Animal Husbandry and Dairying, Tenth Five Year Plan (2002-2007), Planning Commission, New Delhi, 2002 18 Shukla and Brahmankar 1999; Birthal et al. 2003

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regions of India (which is approximately 85 million hectare i.e. 60% of total net cultivated area of India19). Table 6 highlights the predomination of bovine ownership among small landholders and marginal rural farmers at 71.5% of the countrys bovine population.
Table 6: Comparison of Livestock Distribution across Various Rural Groups in India in 1991-92 and 2002-03 1991-92 2002-03 Population % Bovine % Population% Bovine % 21.8 2.5 31.9 0.6 Landless, <0.002ha 48.3 43.8 Marginal, 0.002-1.0 ha 47.1 51.3 14.2 23.3 Small (1-2 ha) 11.2 21.2 9.7 17.7 6.2 15 Medium (2-4 ha) 6 12.7 3.4 11.9 Large (>4 ha) (Source: NSS Report No. 408 and 493, Livestock Ownership across Operational Land Holding Classes in India, Ministry of Statistics and Program Implementation, GOI)

The possible reason for this could be limited access to agricultural land, high disguised unemployment and availability of cheap labour within rural households for production of animal products at a comparatively lower cost. As per the National Sample Survey Organisation (NSSO) data for 1993-94, Scheduled Tribes20 have more number of cows per 1000 households and draught animals when compared to other social classes in India (Table 7), so the livestock economy plays a vital role in securing livelihoods for vulnerable economic and social groups.
Table 7: Number per 1000 Households Reporting Possession of Milch and Draught Animals by Household Social Groups in Rural Areas of India (July 1993-June 1994) Household Category Scheduled Scheduled Tribe Caste Others All No. per 1000 No. per 1000 No. per 1000 No. per 1000 households households households households Possession of Milch Animals Cows Only 258 188 219 216 Buffaloes Only 69 122 186 158 Both Cows & Buffaloes 39 27 70 57 Possession of Draught Animals A Pair or More 346 130 220 214 Single 95 67 84 81 (Source: Ownership of Livestock, Cultivation of Selected Crops and Consumption Levels, NSS Report No. 424, 50th Round (July 1993-June 1994)

Why does this paper focus only on the bovine economy? India also has a huge population of small animals such as sheep, goat and chicken which help low-income households to earn substantial income. The dairy sector alone engages nearly 70
19

Enhancing Sustainability of Dry Land Rain fed Farming Systems by Department of Agriculture and Cooperation, Crops Division, Ministry of Agriculture, GoI Slide 2 (agricoop.nic.in/AgriMinConf/dryland.ppt) 20 Scheduled Castes ("SC"s) and Scheduled Tribes ("ST"s) are Indian population groupings that are explicitly recognised by the Constitution of India, previously called the "depressed classes" by the British, and otherwise known as untouchables. SCs/STs together comprise over 24% of India's population, with SC at over 16% and ST at over 8% as per the 2001 Census. (Source: http://en.wikipedia.org/wiki/Scheduled_Castes_and_Tribes)

27

million people, whereas nearly 5 million people21 are engaged in sheep and goat-rearing activities.22 The poultry sector, one of the important components of the livestock sector, provides gainful employment to approximately three million households. Usually sheep, goat and fowls are reared for meat and other by-products and while it is important to de-risk households dependent upon small animals, this paper concentrates on households dependent on incomes from large animals i.e. bovines (cow and buffalo). The two reasons for limiting the papers focus are: i. Dairy animals are higher value assets as compared to small animals (sheep, goat and poultry). Therefore, cattle23 business is considered to be more risky and requires greater focus. ii. There has been little or no efforts undertaken in valuation and insuring small animals and their value chain is highly disaggregated.
Characteristics of Cattle owned by Socially Disadvantaged Groups

Cattle owners in India are marked by small herd strength, averaging 1-2 large animals (cow/buffalo) per household. India has a higher number of indigenous animals as compared to crossbred (or high yielding breeds). Indigenous breeds are sturdier and better adapted to the tropical climate of the country but are marked by low productivity. Hence, even though the numbers are high, the country does not produce a proportionately high value animal output (Figure 4). Livestock in India are raised as part of mixed farming systems. Mixed farming systems are considered sustainable because of the complementarity between crop and livestock production. Usually, the livestock economy is a source of self-insurance for farmers as it provides a diversified source of income and mitigates the uncertainties of seasonal income from agriculture.

Figure 4: Annual production per milch animals (in kilograms) [Adapted from Indian Society for Agribusiness Professionals (ISAP) Report on Milk Production, Data Source: Basic Animal Husbandry Statistics, Ministry of Agriculture]

Considering the fact that 90% of the total female bovine population is milch animals24, it is important to insure them against mortality, diseases and other risks that impact their productivity.
21 22

2004,Dec 27- The Financial Express, Centre Giving Final Touches to Livestock Policy Suchitra Mohanty, Section I - Introduction Indian Livestock-An Overview (ICFAI Books) 23 Further in paper cattle means cow and buffalo. 24 Source: Ministry of Agriculture, Government of India (17 th Livestock Census, 2003)

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Milk Supply Chain Milk markets in India are largely informal (Figure 5). Vendors and milk dealers dominate the informal market, but they operate on a small scale. Only 4 % of the milk produced in the country is marketed, and the remaining is consumed by the producer households (Kurup, 2002). Almost 98% of the milk marketed is produced in rural areas and 77% is marketed through traditional channels25. The organised sector markets (comprising of the co-operatives and private sector) produce 23% of the total milk marketed which is approximately 13% of the total milk produced in the country. 11.4 million cattle farmers have been organised into 1, 03,281 dairy cooperatives.

Village Market Village dairy cooperative society Livestock Farmer Local Vendor Neighbours (Consumption)

Private players/ Dairy Unions at District level

Processing Industry/Milk Plants

Exports

Town/City Market

Consumers

Figure 5: Marketing Channels for Milk in India [Source- Observations]

Due to a large informal market for the final produce (milk and milk products), the price

Due to a large informal market for the final produce (milk and milk products), milk price of milk price is determined arbitrarily, and under-pricing is common. Since cattle and cattle- produce valuation is linked closely, undervalued price of milk leads to lower valuation of cattle. The informal nature of the market leads to poor identification, and finally, incorrect valuation of animals. Internationally, livestock products account for 18% of the world trade in agricultural products (FAOSTAT 2005). However, Indias share is negligible at 0.3% in exports and 0.4% in imports.

25

Traditional/Informal: Producer Consumer Producer Vendor Consumer Producer Creamery / Halwai Consumer Producer Vendor Creamery / Halwai Consumer Producer Vendor Retailer Consumer Formal/Organized: Producer Vendor Milk Plants Consumer Producer Milk Collection Centre Milk plant Distributor Retailer Consumer

29

Nearly 2 % of the milk purchased by organised players is processed into value added products; the rest is sold as liquid after pasteuriation and packaging26 (Figure 6).

Figure 6: Share of Different Value Added Products (Source: Birthal PS, Taneja VK and Thorpe W. 2006)

Therefore, with limited value addition in the dairy chain, the route to poverty reduction through livestock is not free from threats. Poor livestock producers face numerous constraints in production and marketing. They are constrained by a lack of access to capital, quality inputs, improved technology and support services for marketing. Cattle owners have small marketable surpluses, while local rural markets are thin. Further, sales to distant urban markets result in very high transaction costs.27 Existing Infrastructure for Supply of Inputs for Livestock Development Infrastructure for livestock inputs The government runs various schemes for improvement in the animal husbandry and dairy sector. These programmes can be categorized under the following focus areas: i. Livestock health interventions: a. Assistance to States for Control of Animal Diseases, b. National Project on Rinderpest Eradication, c. Foot & Mouth Disease Control Programme, d. Animal Quarantine and Certification Services, ii. Cattle and Buffalo Breeding Programs iii. Assistance to States for Feed and Fodder Development.

26

Birthal PS, Taneja VK and Thorpe W. 2006- Smallholder Livestock Production in India: Opportunities and Challenges. Proceedings of an ICARILRI international workshop held at National Agricultural Science Complex, New Delhi, India (31 January1 February 2006). NCAP (National Centre for Agricultural Economics and Policy Research)ICAR (Indian Council of Agricultural Research), New Delhi, India, and ILRI (International Livestock Research Institute), Nairobi, Kenya. 27 Birthal PS, Taneja VK and Thorpe W. 2006- Smallholder Livestock Production in India: Opportunities and Challenges. Proceedings of an ICARILRI international workshop held at National Agricultural Science Complex, New Delhi, India (31 January1 February 2006).

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Box 4: Status of State Veterinary Machinery

The State veterinary departments mostly engage in diagnosis and treatment. They have qualified technical person power but lack financial resources. While, most of the important vaccines and medicines are manufactured in the country there is a shortage of diagnostic agents. Almost every state has a State Agricultural University and a veterinary faculty. Improved networking amongst the Veterinary Laboratories and Teaching Institutions is necessary. Interventions are required in: Availability of both preventive (vaccination, de-worming, availability of quality fodder, sanitation, scientific practices in milching) and therapeutic services (surgery, drugs) to improve overall health of the livestock Development of vaccines and diagnostics for different diseases in the area of animal biotechnology, vaccination programmes, and vaccination schedules Health-cover against gastro-intestinal parasites and other parasitic control measures. Programmes aimed at improvement in Reproductive Management Cycle to reduce reproductive problems, improve fertility rates and increase reproductive efficiency.
(Source: Agriwatch 2003)

Despite vaccination schemes and breeding efforts by the government, livestock remains a risky business due to non availability of timely inputs for breeding and health care of animals 28, lack of suitable education/training for veterinary skill development; inadequate finances and poor rural infrastructure for veterinary care. The command area per government veterinary institution is very high leading to operational inefficiencies. Ideally one veterinary institution can cover a cattle population of approximately 5000, whereas in some states the ratio stands at 1: 10,000 animals (Box 5).
Box 5: Veterinary Infrastructure Problems The command area per government veterinary institutions is very high, leading to operational inefficiencies. Ideally, one veterinary institution can cover a cattle population of approximately 5000, whereas in some states the ratio stands at 1: 10,000 animals (excluding small animals!) as shown in the table below:.
2006 States/UTs Veterinary Hospitals/Polyclinics Veterinary Dispensary Veterinary Aid Centre (Stockmen Centres/mobile dispensaries) Total vet infrastructure units available No. of animals (Census 2003) Cattle (in 000) Buffalo (in 000) Total Number animals of No. of animals/vet institution

Assam Bihar Chhattisgarh Gujarat Jharkhand MP Maharashtra Rajasthan Uttar Pradesh West Bengal

29 39 208 14 405 565 43 1439 1763 111

428 785 708 487 3 1742 1382 285 268 612

1213 1435 290 587 72 2056 1733 2313 3248

1670 2259 1206 1088 408 2379 3481 3457 4344 3971

8440 10729 8882 7424 7659 18913 16303 10854 18551 18913

678 5743 1598 7140 1343 7575 6145 10414 22914 1086

9118000 16472000 10480000 14564000 9002000 26488000 22448000 21268000 41465000 19999000

5460 7292 8690 13386 22064 11134 6449 6152 9545 5036

(Source: Data collected from

17th

Livestock Census, 2003; State-wise area, GoI)

Lack of infrastructural facilities in rural geographies like shortage of fodder facilities (Table 8), water and milk collection points (i.e. cold chains, value processing units; quality inputs in the

28

Livestock services (Chapter 5, Section 5.2.17)- Report on 10th Five year plan by Planning commission of India

31

form of good semen to good nourishment, animal health care and professionals i.e. veterinarians29) remain big challenges.
Table 8: Supply and Demand of Green and Dry Fodder in India (1995-2025 Estimated)
Year Supply (in Million MT) Green 1995 2000 2005 2010 2015 2020 2025 379.3 384.5 389.9 395.2 400.6 405.9 411.3 Dry 421 428 443 451 466 473 488 Demand (in Million MT) Green 947 988 1025 1061 1097 1134 1170 Dry 526 549 569 589 609 630 650 Deficit as % Demand Green 59.95 61.1 61.96 62.76 63.5 64.21 64.87 Dry 19.95 21.93 22.08 23.46 23.56 24.81 24.92

(Source: State Planning Board, Govt. of Kerala)

The infrastructural challenges listed above are further compounded by lack of information on formal risk transfer methods (insurance) and unavailability of customised livestock insurance products. Infrastructure for Output Supplies It is necessary for dairies to maintain transportation standards (proper temperature of 4 degree Celsius for liquid milk) to ensure high quality products. The Government of Indias Tenth Five Year Plan (2002-07) made a budgetary outlay to establish 3, 00,000 bulk milk coolers in rural areas. In addition, National Dairy Development Board (NDDB) supports dairy co operatives in establishing and maintaining cold chains from villages to retail points, in order to ensure availability of quality milk and milk products. The Milk Co-operative infrastructure does cover all aspects related to milk collection (bulking, chilling and pre-plant transport) and facilitates infrastructure for cold chain/storage (cold stores, deep freezers, refrigeration trucks, warehouses and automatic milk vending units). But in the case of informal markets it becomes very difficult to control the quality of milk (Box 6). Hence, strategies need to be developed to store raw milk in bulk coolers in rural areas.
Box 6: Milk Distribution Chains in India
Efforts are being made to organize Dairy Farmers Co operatives, which, as of now, is an unorganied sector. Most of the farms operate at a small level, unable to make use of machines and modern management practices. While the State Animal Husbandry Department mainly provides health services, extension services to educate farmers are almost non-existent. Another challenge which leads to low business productivity is the poor quality of milk in rural areas. This is due to the nonavailability of proximate chilling centres. Therefore, milk chillers should be installed at collection centres in villages. (Source: Agriwatch 2003)

29

Pro-poor Livestock Policy Initiative: A Living from Livestock- Research Report on Livestock Service Delivery in Andhra Pradesh: Veterinarians Perspective by M. Punjabi, P.Kumar, P. Sreeramulu, and V. Ahuja.

32

Annexure 2: Chronological Events in Livestock Insurance in India

In India, the government pioneered the effort to create a market for livestock insurance with the help of Small Farmers Development Agency30 (SFDA) in 1971 and subsequently various schemes were launched at the national level to provide safety nets for all livestock rearing farmers in the country. Following table describes the various programs started by Government of IndiaTable 9: Chronological events in insurance history of India Year Implementing agency/program 1971 Cattle Insurance Scheme by Small Farmers Development Agency Note

1983

Cattle Insurance Policy under Integrated Rural Development Programme (IRDP)

1983

Livestock Insurance under Market Agreement31

Nationalized banks began to finance the purchase of cattle and agreed to collect premium from beneficiaries. Cover was for one year and premium was collected annually. It was a compulsory product. Note: As insurance companies had limited infrastructure and generally low income households were not able to take insurance as a major risk transfer tool, it was important to link it with credit to increase the outreach. Livestock and asset insurance was extended to the poor along with IRDP subsidized loans (50% subsidy). It was a compulsory product. It was devised by General Insurance Company (GIC) and implemented through its four subsidiary agencies from 1983 onwards. Premium 2.25% (death) + 0.85% for Permanent Total Disability with no age limit. Note: The IRDP scheme helped to extend livestock insurance to the masses. Due to the element of subsidy many low income households were attracted into buying insurance. But what was lacking was ant equal emphasis on educating masses about the same, and hence, though many households had livestock insurance, they could not benefit from it as they did not even know that they had it. All this led to low claims ratios initially, which increased during the latter period. Cattle insurance governed by the Market Agreement as devised by GIC, as well as the rates, terms, conditions etc. were applicable to all the four insurance companies. No subsidy was given and it was a voluntary product for non-scheme animals. Defined premium ranging from 2.85% to 4%. Age specified: milch cow- 2-8 years, buffalo- 3-12 yrs. Note: As mentioned earlier, fewer people were willing to take insurance under the Market Agreement as no subsidy was available. But later when the premium amount got to be almost the same for both, and in fact, the premium even decreased for non-IRDPs, there was an increasing trend towards non-IRDP buying.

30

All India Rural Credit Committee (1969) recommended the establishment of an agency to assist small farmers who had not benefitted from the gains of the Green Revolution. As a result, Small Farmer's Development Agency (SFDA) came into existence, and started working in 1971-72. Programmes based on agriculture and animal husbandry were started. SFDA provided subsidy to the extent of 25% to support small farmers on capital investments and inputs. Loans from commercial and co-operative banks were made available. (Source: Rural Development: Principles, Policies, and Management, By Dr. Katar Singh, Edition: 2) 31 Market agreements were formulated by public sector companies and it was considered more appropriate when dealing with a class of risk about which limited knowledge and experience is available. (Source: Practice of General Insurance, Insurance Institute of India, Page no.157)

33

1999 2001 onwards 2003

Insurance Regulatory and Development Authority (IRDA) Private players registered Cattle insurance Market Agreement Micro-Insurance 2005 freed from

2005

Regulation32,

2006

Livestock Insurance Scheme implemented by State Livestock Development Boards (SLDB) and State Animal Husbandry Departments (SAHD)

Inception of IRDA, liberalization of the Indian insurance industry ICICI Lombard, IFFCO-TOKYO, HDFC ERGO, Royal Sundaram initiated After 2003, all insurers were given a free hand to decide premium and policy conditions by themselves. It paved the way for product and process innovations. Micro-Finance Institutions33 (MFIs), Non-Government Organizations (NGOs) and Self-Help Groups (SHGs) can act as agents for insurance companies to increase the penetration of insurance in the rural markets. It is envisaged that MicroInsurance Regulation will help to address the distribution related issues. Under the scheme, the crossbred and high yielding cattle and buffaloes are being insured at a maximum of their current market price. The premium of the insurance is subsidized to the tune of 50%. The entire cost of the subsidy is being borne by the Central Government. The benefit of subsidy is provided to a maximum of 2 animals per beneficiary for a policy of a maximum of three years. The traditional method of ear tagging or the recent technology of fixing microchips could be used at the time of taking the policy. The cost of fixing the identification mark will be borne by the Insurance companies and responsibility of its maintenance will lie on the concerned beneficiaries. In the event of the claim becoming due, the payment of the insured amount should be made positively within 15 days after submission of requisite documents. Insurance companies, whose products are to be provided during the scheme, will be identified by the CEO/ District Level Officer on the condition that the rate of premium should not exceed 4.5% for annual policies and 12% for three year policies. Veterinarians are to be associated with the work of identification and examination of the animals to be covered under the scheme, determination of their market price, tagging of the insured animals, and finally, issuing veterinary certificates as and when a claim is made. Note: This scheme shows marked improvement in giving upper hand to states for program implementation and to insurance companies to take cues from the market and deciding the premium amount with final authority to choose insurance by state government officials. Insurance also indicates the governments will to emphasize on farmers rearing HYVs.

32

India is the only country to have micro-insurance regulation. MFI as an organisation or association of individuals including the following if it is established for the purpose of carrying on the business of extending microfinance services : (i) a society registered under the Societies Registration Act, 1860,( ii) a trust created under the Indian Trust Act,1880 or public trust registered under any State enactment governing trust or public, religious or charitable purposes, (iii) a cooperative society / mutual benefit society / mutually aided society registered under any State enactment relating to such societies or any multistate cooperative society registered under the Multi State Cooperative Societies Act, 2002 but not including: a cooperative bank as defined in clause (cci) of section 5 of the Banking Regulation Act, 1949 or a cooperative society engaged in agricultural operations or industrial activity or purchase or sale of any goods and services. (Source: Chapter VIII, National Bank for agriculture and Rural Development, Government of India)
33

34

Annexure 3: Important Points on IRDP

The IRDP programme had been financed partly by government subsidies and partly through bank credit. Hence livestock, agriculture and asset insurance remained scheme driven and mandatory in nature with little awareness among the customers. Figure 7 depicts that the number of animals insured under IRDP scheme stood reduced after 1999-2000 and more animals were insured under non-IRDP programs.

Figure 7: Number of animals insured under IRDP and non-IRDP

It is difficult to understand the actual reasons for this, but one possible reason could be the lowered premium rates available even under non-IRDP schemesa result of market forces (Figure 2).

Figure 8: Comparison of premiums under IRDP scheme and non-IRDP in India [Source of data: www.indiastat.com]

Under the IRDP programme, a total 70.369 million of animals were insured for the years 1988-2003. Private insurers became associated with the program only after the year 2000, following liberalization. Today, private insurers are encouraged to participate so as to ensure competitive premium pricing. However, pricing of these products still is a challenge. Farmers are sensitive to the pricing of the product. But as rural areas are marked by high transaction costs and farmers are typically charged for that transaction cost, it becomes difficult for farmer to access viable livestock insurance products.
35

Annexure 4: Insurers in India

Public insurers cover more than 80% of livestock insurance in India. Four subsidiaries of General Insurance Corporation Ltd. (GIC) were formed according to their respective regional reach to extend livestock insurance to farmers against death of animals in all parts of the country.
Name of Public Insurer New India Assurance Company Limited(NIACL) 34 National Insurance Company Ltd(NICL) 35 United India Insurance Company Limited (UIIL)36 Oriental Insurance Company Limited (OICL)37 Head Office Mumbai Calcutta Chennai New Delhi Covers Western India Eastern India South India North India

Out of the private general insurers, it is mainly three private insurers, namely ICICI Lombard General Insurance Co. Ltd38, IFFCO-TOKIO General Insurance Co. Ltd39 and Royal Sundaram Alliance Co. Ltd40 that are providing scaled death insurance covers. Many other players like HDFC ERGO General Insurance Co. Ltd, TATA-AIG General Insurance Co. Ltd and BhartiAXA General Insurance Co. Ltd have recently entered into the livestock market. ICICI Lombard is the biggest private player and estimates its livestock insurance portfolio to be as big as its health insurance portfolio41. Most private players were registered in 2001 but started their livestock business only in 2005. Their overall share is very low, i.e., 20% in the overall Indian livestock insurance markets.

34

NIACL was started in 1919 but became exclusively a general insurance company in 1956. After 2002 it was delinked from GIC and now it is completely a Government of India undertaking (Source: http://newindia.co.in/) 35 NICL was started in1906 but during nationalization of general insurance business in 1972, 21 foreign and 11 Indian companies were amalgamated with it and NICL became a subsidiary of General Insurance Corporation of India (GIC). After 2002, it was delinked from GIC and now it is completely a Government of India undertaking. (Source: http://www.nationalinsuranceindia.com/) 36 UIIL was incorporated in 1938 and in 1972, 12 Indian Insurance Companies, 4 Co operative Insurance Societies and Indian operations of 5 foreign insurers, besides General Insurance operations of southern region of Life Insurance Corporation of India were merged with United India Insurance Company Limited. After 2002 it was delinked from GIC and now it is completely a Government of India undertaking. (Source: http://www.uiic.co.in/ ) 37 Oriental Insurance India was started in 1947, at Bombay, and is a public sector company. It was one of the four subsidiaries of the General Insurance Corporation of India till 2002. After 2002 it was delinked from GIC and now it is completely a Government of India undertaking. (Source: http://orientalinsurance.nic.in) 38 ICICI Lombard Private Co. Ltd started its operations in 2001, while it launched its livestock insurance business in 2006. 39 IFFCO-TOKIO General Insurance Co. Ltd began operations in Gujarat in September 2001 and started its livestock portfolio in 2006. 40 Royal Sundaram Alliance General Insurance Co. Ltd started its operations in March 2001 and its livestock business in 2005. 41 Livestock insurance makes farmers go in for cross-breeding- this is the ICICI Lombard experience, Business Line, The Hindu Group of publications, Thursday, Mar 13, 2008

36

Annexure 5: Traditional Products of Indian Livestock Insurance Industry

Sum insured: Sum insured would be the market value of the insured cattle (NDDB and cooperatives or authorised veterinary or insurance companys authorized person helps to judge the value of animal) Non-scheme Animals Scheme (IRDP or any other scheme) Animals Market value varies from breed to breed, area Price fixed for purchase committee shall be and age. Examining Veterinarians treated as sum insured/market value (Loan plus recommendation shall be considered proper subsidy). This will be the basis for insurance guide for acceptance of Insurance/settlement of and settlement of claim. This is an agreed claims. Sum Insured will not exceed 100% of value policy. Sum insured will not exceed the Market Value 100% of the Market Value. Note: Veterinarian is technically qualified to decide the value of cattle. But in cases where product is credit linked loan amount is taken as proxy. Age Group: Animals of ages between 2-12 years depending on health certificate issued by veterinarian. (Some insurers have their own veterinarian staff to do it especially public players; private players empanel one veterinarian per unit area (different for different regions depending upon companys internal policy) Non-scheme Animals Scheme Animals st a. Milch cows 2 years (or age at 1 calving) to 2 years (or age at 1st calving) to 10 10 years. years. st b. Milch Buffaloes 3 years (or age at 1 calving) to 3 years (or age at 1st calving) to 12 12 years. years. st st e. Indigenous/ 1 exotic 4 months up to date of 1 4 months to 32 months or calving cross breed female calving or minimum age limit whichever is earlier calves/ heifers for adult female animals as above. Whole productive age of animal is covered. Different product at a slightly different rate is available for heifers but there is underdeveloped market for it. Coverage: Non-scheme animals Death: Sum Insured or market value prior to illness, whichever is less and if the insured animal is pregnant for less than 4 months, the indemnity will be restricted to 50%. (It is restricted to 50% taking into consideration the high chances of mortality during pregnancy) Milch Cattle: Limited to 50% if death occurred during dry period Permanent Total Disablement: Draught Animals: Limited to 70% of Sum Insured Scheme Animals Death: On agreed value basis

Permanent Total Disablement: 75% of Sum Insured

37

Premium Rates Non-scheme animals Scheme animals Cooperative Dairies- 4%, Private 2.25% Farmers/Bank Finance- 5%. (Premium is lower for co-operative dairies due to low transaction cost and higher business opportunity. Also co-operatives have skin in the game and implement risk reduction programs using their own field vet staff that leads to reduced mortality rates. In case of private farms and banks assumption is that risk reduction strategies are not well practiced and chances of frauds are also high which is reflected in premiums) Extra Premium Non-scheme animals a) For PTD 1% b) For Transit Cover when transit is greater than 80 km within the state, by rail or road 1% Scheme animals c) For PTD 0.85% d) For transit up to 80 km Nil e) Beyond 80 km 1.00%

Exclusions are incorporated so as to reduce the high risky animals and to avoid some fraudulent cases. Common Exclusions: Malicious or wilful injury or neglect, overloading, unskilful treatment or use of animal for purpose other than stated in the policy without the consent of the Company in writing. Accidents occurring and /or Disease contracted prior to commencement of risk. Intentional slaughter of the animal except in cases where destruction is necessary to terminate incurable suffering on humane consideration on the basis of certificate issued by qualified Veterinarian or in cases where destruction is resorted to by the order of lawfully constituted authority. Theft and clandestine sale of the insured animal. War, invasion, act of foreign enemy, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, mutiny, tumult, military or usurped power or any consequences thereof or attempt threat. Any accident, loss, destruction, damage or legal liability directly or indirectly caused by or contributed to by or arising from nuclear weapons. Consequential loss of whatsoever nature. Transport by air and sea. Any non-scheme claim arising due to diseases contracted within 15 days from the date of risk are not covered. Disease contracted before commencement of policy All the claims received without ear tag.
(Source: IFFCO-TOKIO General Insurance Company Limited, ICICI Lombard, United India Insurance, New India Insurance)

38

Annexure 6: Analysis of Standard Operating Procedure in Livestock Insurance

Identification: 1. All Insured animals are to be properly identified with the following ways along with Polyurethane/metal tags in the proposal form: Any Natural Identification or mark. Horn Length. Shoulder height i.e. height from hoof to scapula joint. Two Photographs of the tagged animal, one with clearly visible tag number & other with full body photograph of tagged animal. In case of Re-tagging it has to be ensured that the re-tagged animal is the same insured animal, not a new one by cross checking with other identification data and photograph. This is a lengthy procedure meant to reduce frauds. Above mentioned parameters can change as animal grows so these prove to be very fragile methods for identification. Fraud control Mechanism: 2. Adverse selection or anti-selection of the animal must be avoided i.e. insuring old, diseased, debilitated animals, along with this, over valuation of the animal must be avoided. This step is basically to ensure that the insured does not make profit out of a claim. It shows intention of insurer not to entertain fraud cases but it as there are no proper valuation techniques available it is hard to avoid such cases. For ensuring that animal is healthy insurers prefer to take health certificate by a third party who is a veterinarian. 3. Effort should be put and it must be confirmed that insurers agent or employee has verified the animal & should be present at the time of tagging. For this the financing agency should inform insurers about the purchase and tagging date. 4. Company officer can make a visit on random basis, to ascertain the degree of proper identification and with this a good message will percolate down to the insured as well. 5. These types of visits, even without claim will help in developing trust & confidence of insured on us as well as we can able ascertain about the proper identification of animals and reduce fraudulent claims. Random checks will again ensure that the farmer is stabling the animals in a proper & hygienic manner. He should be given inputs and support in this, and claims will certainly come down in this aspect. Claim Procedure: 6. In the event of death of animal, the insured must inform the concerned insurers branch office within 12 hours of death of animal. (It helps to reduce the turn-over time for processing claim) 7. Insurers prefer to verify the carcass physically along with the tag in order to avoid any fraudulent claim, usually they make sure that their own staff must visit the place within 24 hours of intimation and cross check other identification data mentioned in the proposal form or in the health certificate with the dead animal and also to check any manipulation of tag and submit a report of the same.
39

8. Some insurers prefer to take two colour photographs (one with visible tag number and other with full body having tag) with other documents to cross check properly.

Documents for Claim: In the event of death of an animal, immediate intimation should be sent to the insurers and the following documents should be furnished at the earliest. Duly completed claim form. Death certificate from empanelled qualified veterinary doctor in companys prescribed form. Death certificate obtained from Veterinary doctor or a certificate jointly issued by any two officials mentioned in the claim form in companys prescribed form. (For Scheme animals) Two colour photographs (one with visible tag number and other with full body having tag) In the death of a pregnant animal Post-mortem report is a must requirement along with photograph showing the dead animal with foetus. Post-mortem report by qualified veterinary doctor in companys prescribed form. FIR Report, in case the death is due to any accidental cause. Most important, recovery of the Ear Tag with a portion of ear.

Note: Principle of NO-TAG NO-CLAIM is strictly enforced for both scheme & non-scheme animals. Lengthy list of claim settlement documents discourages insured to take up the insurance as he is almost sure that it will be difficult to gather so many documents and hence adversely impacts uptake of livestock insurance.
(Source: IFFCO-TOKIO General Insurance Co. Ltd., ICICI Lombard General Insurance Co. Ltd, United India Insurance Co. Ltd)

40

Annexure 7: Excerpts from Micro-Insurance Regulation of India, 2005

Micro-Insurance Regulation, 2005 provide for the appointment of micro insurance agents for distribution of micro insurance products. For this purpose, the term micro-insurance agent means: A Non-Government Organization (NGO); or a Self Help Group (SHG); or a MicroFinance Institution (MFI), who is appointed by an insurer to act as a micro-insurance agent for distribution of micro-insurance products. A code of conduct has also been laid down for micro insurance agents. A micro-insurance agent shall not work for more than one insurer carrying life insurance business and one insurer carrying general insurance business. A deed of agreement clearly specifying the terms and conditions of appointment, including the duties and responsibilities of both the micro-insurance agent and the insurer, should be executed. Every insurer shall impart at least twenty-five hours of training at its expense and through its designated officer(s) in the local vernacular language to all micro-insurance agents and their specified persons in the areas of insurance selling, policy holder servicing and claims administration. A micro insurance agent may be paid, remuneration for all the functions rendered including commission, by an insurer, and that the same shall not exceed the limits as stated: For Life Insurance Business: Single Premium policies 10% of the single premium, Non-single premium policies 20% of the premium for all the years of the premium paying term, Non-Life Insurance Business: 15% of the premium.

(Source: Insurance Regulatory and Development Authority, India)

41

Annexure 8: Cash Management and Technology

As per Indian Insurance Act, 1938, 64VB42 rule risk will be undertaken by insurers once the premium is fully paid to either an insurer or an agent appointed by an insurer. Premiums are to be paid as mentioned under the Insurance Regulatory and Development Authority (Manner of Receipt of Premium) Regulations, 2002.43 Though there are provisions for electronic cash transfer options under the Act mentioned above, the absence of electronic cash collection infrastructure for premiums through cheque, drafts and cash make this a cumbersome and costly process as farmers in rural areas do not have access to formal financial services44-45. The poor rural infrastructure status further exacerbates the situation. Poor roads46 and bad/no tele-density47 and internet connectivity48 retract the process development.

42

Rule 64VB states that No risk to be assumed unless premium is received in advance. (Source: Indian Insurance Act, 1938) 43 The premium to be paid by any person proposing to take an insurance policy (hereinafter referred to as the proposer) or by the policyholder to an insurer may be made in any one or more of the following manner(s), namely:a) Cash; b)Any recognised banking negotiable instrument such as cheques, including demand drafts, pay orders, bankers cheques drawn on any scheduled bank in India; c)Postal money orders; d) Credit or Debit Cards held in his name; e) Bank Guarantee or Cash Deposit; f) Internet; g) E-transfer; h) Direct credits via standing instructions of proposer or the policyholder or the life insured through bank transfers; and any other method of payment as may be approved by the Authority from time to time (Source: Insurance Regulatory and Development Authority (Manner of Receipt of Premium) Regulations, 2002) 44 A World Bank-National Council of Applied Economic Research survey found rural banks primarily served the needs of richer borrowers. Whereas two-thirds of large farmers had a deposit account and nearly half had access to credit, 87 per cent of marginal farmers lacked access to formal finance, with 44 per cent borrowing from moneylenders at rates near 50 per cent per annum. (2008, July 25: Rural Finance: Making Poverty a History, http://www.nextbillion.net/news/rural-finance-making-poverty-history) 45 Derived data from the NSSO Study shows that 64.95 million cultivator households and 46.6 million noncultivator households respectively do not have access to formal financial services (Source: Chapter 3, National Rural Financial Inclusion Plan by National Bank for Agriculture and Rural Development, India http://www.nabard.org/pdf/report_financial/Chap_III.pdf ) 46 According to the information provided by the State Governments, there were about 2.62 lakhs unconnected villages/habitations in the country on 1st January 2000. Despite all efforts made during the Tenth Five Year Plan (2002-07) about 35% of all habitations are yet to be connected by all-weather roads under Pradhan Mantri Gram Sadak Yojana. (Source: 10th and 11th Five Year Plan, Planning Commission, Government of India)

(Source: 11th Five Year Plan,, Planning Commission, GoI)

47

There is a wide gap between urban tele-density (55.94%) and rural tele-density (2.83%) in India. In fact, even in urban areas in India it is still much lower than developed countries like US where teledensity is as high as 122.71%. 48 The computer literate populace in the rural areas is nearly 15.1 million-strong (As per Internet and Mobile Association of India (IAMAI). Of this, 5.5 million have used the Internet in the past. With only 0.6% of penetration in the total population, there are 3.3 million active Internet users (which is very low as compared to other developed countries). So, there is an incessant need to improve these Internet services. (Source: I Cube-2008, Report by

42

Technology has an important role to ensure that easy premium collection can be done and there can be reduction in losses borne by the insurer and insured when there is delay during premium payment and claim settlement, respectively (due to value loss of money). Mobile technology is the attracting rural populace49 and the use of mobile phones as a very easy source of premium payment cannot be ignored. For group policies for intermediary insurers, the Cash Deposit Insurance (CDI) account must be prepared where some percentage of the total expected premium amount is already deposited by the intermediary as premium so as to have uninterrupted coverage for its members as and when they take cover. Due to income variability, poor farmers cannot afford lump sum payments of premium and insurers cannot take equal monthly instalments (EMIs). Therefore, there is less insurance uptake than could have otherwise been possible. But the Section Manner of Receipt of Premium Regulation also50 provides a leeway for it by mentioning the clause any other method of payment as may be approved by the Authority from time to time. Henceforth, many insurers are planning to move towards EMIs for rural business. As the monthly EMI will be less it will be an affordable option for poor people. Even more needs to be done for cash management systems in rural areas and there is need to drastically improve rural infrastructure like internet connectivity. Poor rural infrastructure necessitates efficient and effective decentralised services in tune with demands emanating from users. Availability of credit in time and technology support is two important services needed for livestock development in the rural areas. Advanced technology such as mobile phones can be used to improve the origination status of rural/livestock insurance products and the increase of plastic money or biometric cards will help to reduce cash related problems during premium payments and claims settlement. Technology can help to make livestock insurance an easy product to operate and can be sold Over the Counter (OTC).

Internet and Mobile Association of India (IAMAI) http://www.iamai.in/Upload/Research/ICube2008SummaryReport_30.pdf ) 49 It is believed that of the next 250 million people expected to go mobile; at least 100 million will come from rural areas. Most companies are now sweating it out by hard selling their products and services in the rural areas. As a result, the geographical coverage of mobile telephony in India has gone up from 13 percent, a couple of years ago, to 39 percent now. (Source-2008 August, Mobile Value Added Services in India- Report by IAMAI & e-Technology Group at IMRB, http://www.iamai.in/Upload/Research/mobilevasinindia_25.pdf) 50 In all types of risks covered by the policies issued by an insurer, the attachment of risk to an insurer will be in consonance with the terms of Section 64VB of the Act (Insurance Regulation Act on India) and except in cases where the premium has been paid in cash, in all other cases the insurer shall be on risk only after the receipt of the premium by the insurer. Provided that in the case of a policy of general insurance where the remittance made by the proposer or the policyholder is not realized by the insurer, the policy shall be treated as void ab-initio. (Source: Insurance Regulatory and Development Authority (Manner of Receipt of Premium) Regulations, 2002)

43