Issue Focus

Reinsurance: The Backbone of Crop

Insurance
Ajay Singhal
Deputy General Manager
Agriculture Insurance Company of India
Ltd.

Background: the Government of India has Insurance Companies,

The importance of agriculture introduced market driven Reinsurance Companies and
in India needs no scheme, namely, Pradhan Farmers are the main
introduction. About 58 % of Mantri Fasal Bima Yojana stakeholders.
India’s population is engaged (PMFBY) which is purely on There are 5 main phases in
in agriculture. It contributes actuarial/ commercial basis the insurance cycle which
about 16% of Gross Domestic and 18 companies (including repeats every cropping
Product (GDP) of India. More 5 Government companies) season. All the stakeholders
than 80% farmers are small have been empanelled to are involved in the cycle. The
and marginal (having less implement the same. Banks and Government act as
than 2 ha of land). Most of the Crop Insurance Cycle: facilitators in the process. The
agriculture area is rain fed Unlike any other line of cyclical flow diagram of the
(60%) and only 40% land is insurance, Crop Insurance is seasonal insurance cycle
irrigated. Agriculture, in fact, a multi-stakeholder scheme which keeps repeating every
is the most risky enterprise in where Central Government, crop season is as under:
India as it is exposed to State Government, Bankers,
systematic/ catastrophic
risks which are high in both
frequency and volume.
Considering this, crop
insurance has always been an
important tool for risk
mitigation. Although various
crop insurance schemes have
been operating in India since
IRDAI Journal March 2019

1985, most of them were

implemented on
administered platform where
Government was
contributing if the claims
were exceeding the premium
amount. The sole agency for
implementing these schemes
have been GIC/ AIC. Fig 1: Insurance Cycle under PMFBY Scheme
However, from Kharif 2016,
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 PMFBY impact on Crop PMFBY (from Rs. 5500 in 2018-19. India is at
Insurance in India: crore in 2015-16 to Rs. number three in the world
The Gross Premium under 22000 crore in 2016-17). after USA and China in terms
Crop Insurance has multiplied The premium in 2017-18 is of Crop Insurance Direct
to four times in the very first around Rs. 25000 crore and Premium.
year of introduction of likely to be Rs. 28000 crore

Table 1: Premium (USD million)

Global Agriculture Premium (USD million) 26300
Premium (USD million) USA China India
Gross Premium 12000 7900 3600
exchange value taken as USD 1 = INR 70

Need of Reinsurance receipt of upfront subsidy insurance companies cede

under Crop Insurance from Government. There is about 75% of risk under
As mentioned earlier, the risk hardly any gap in receipt of Quota Share treaties and also
size under PMFBY has Funds (Premium Subsidies) buy Stop Loss treaties for
increased manifold and and Claims payments. Hence their net retention of about
therefore the need of no corpus and very low 25%. Apart from this, the
reinsurance is obvious for investment income is Facultative Reinsurance is
Insurance Companies to generated here unlike other also taken by some companies
accept this line of business lines of insurance. Therefore, for gaps in their normal
considering their to be able to underwrite more reinsurance treaties. This
underwriting capacity and business, to deal with the makes Crop Insurance as
solvency margin. The systemic risk and bring number one line of Insurance
selective nature of diversification and as far as reinsurance Cessions
participation from riskier area stabilization, reinsurance are concerned, not only in
leads to higher risk exposure. requirement is more in crop India but also in the world.
Crop Insurance being a insurance than any other line The comparison of crop
seasonal business, the of insurance. Insurance/ reinsurance
variation in ultimate loss ratio It is pertinent to mention that premium vis-a-vis Non-Life
is also very high on annual the extent of reinsurance is Insurance in India is as under:
basis and there is delay in highest under PMFBY where
Table 2: RI Cessions
S.No. 2017-18 All lines of Business Crop Percentage
(Non-Life)(A) Insurance(B) (%)C=B/A
1 Gross Direct Premium (India) Rs. 1.5 lakh Crore Rs. 25000 Crore 17%
2 Reinsurance Premium Rs. 38000 crore Rs. 21000 Crore 55%
IRDAI Journal March 2019

From above, it can be seen How Crop Reinsurance of Indian Regulator (IRDAI)
that reinsurance is playing works in India are also to be followed for
the most vital role under As per Operational Guidelines reinsurance Placements. The
PMFBY and without it the of PMFBY, the insurance Insurance Companies keep
insurance Companies would companies are fully about 20-25% net Retention
not have been able to responsible for claims and to and cede about 75% to 80%
underwrite this volume of make appropriate into Quota share
business. reinsurance arrangements. (Proportional) treaties and
The Regulations/Instructions also buy Stop Loss Treaty

28 Reinsurance
(Non-Proportional) for their the Crop reinsurance Border reinsures worldwide.
Net Retention. The Indian premium and the balance is GIC Re is also protecting their
Crop reinsurance is led by placed with Foreign crop Inward business through
GIC Re (National Reinsurer) reinsurers who have set up Stop Loss Retrocession with
who receive around 50% of branches in India and Cross international reinsurers.

Agriculture Insurance/ Reinsurance Models Worldwide

1. United States of development to produce new participates in the
America (USA) and innovative insurance reinsurance of the Crop
Agriculture Insurance products. RMA also develops Insurance program through
product, namely Multi-Peril educational programming to Special Reinsurance
Crop Insurance (MPCI) in the help farmers learn about and Arrangement (SRA), which is
USA is administered by a implement market based risk also managed by RMA on
Government Body called the management techniques. The behalf of the government. The
Federal Crop Insurance RMA works with private insurance company bears the
Corporation (FCIC). The sector Approved Insurance portion of the risk of loss up
MPCI scheme is heavily Providers (AIPs) to provide to a certain point after which
subsidized by the government the public-private it is covered by its Standard
through FCIC. The FCIC is partnership (PPP) that make Reinsurance Agreement
also responsible for the crop insurance widely (SRA) with the government.
setting of the crop insurance available. There is some Quota Share
rates which are on an actuarial The Insurance companies are but most of the insurance
basis. The distribution of the reinsured, pretty much companies are well enough
MPCI product is done exclusively, on a Stop Loss capitalized so as not to require
through 18 ‘Agricultural basis. US Government also it from a capital management
Insurance Providers’ (AIPs) perspective.
who compete on service as the Federal Crop Insurance Program
prices are set by the FCIC.
About 96% of all crop
insurance in the USA is MPCI.
The remaining 4% of crop
insurance business in the USA
is Crop Hail (CH) which is not
subsidized and with no
government involvement in
it. Unlike MPCI, Hail product
IRDAI Journal March 2019

is competed for both price

and service by the crop
insurance companies (AIPs).
On behalf of FCIC, the Risk
Management Agency (RMA)
was created in 1996 to
oversee the crop insurance
program and to do the
necessary research and
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 2. Canada to set up the Chinese Agriculture Cooperative
As in the USA, Multi Peril Crop Agricultural Reinsurance Federation (NACF). The
Insurance (MPCI) in Canada is Pool (CARP) to write 50% of NACF is reinsured on a
administered by a single all agricultural reinsurance quota-share basis with 6 local
company in each province purchased. reinsurers. Only the liability
owned by the provincial 4. South Korea in excess of 110% local
government or by a sub In Korea, crop insurance market loss ratio and up to
department of the provincial program was introduced in 180% local market loss ratio
government. There is no 2001 with the enactment of (150% after 2013) is
competition from the private the Crop Disaster Insurance transferred to the
sector. MPCI is heavily Act. The crop insurance international reinsurance
subsidized by both levels of program is handled by a market. The government
government (Federal & public private partnership acts as the reinsurer of last
Provincial) and Rates are and is heavily supported by resort for all the liability in
actuarially set by the the government. excess of a 180% local market
respective provincial company loss ratio (150% after 2013).
The crop insurance scheme
/ government department. In is managed by the National Fig: Crop Insurance in South
most provinces crop insurance Korea.
was introduced in the 1960’s
so the level of information for
rating & administrative
purposes is supported by
quality database. Each
provincial company buys Stop
Loss reinsurance mainly to
protect their crop insurance
fund.
3. China
The People’s Insurance
Company (Group) of China
(PICC) has offered crop
insurance in China since the
1950s but it was only in 2007
that the central government
started a subsidized crop
insurance pilot for both crop Source: Agriculture Insurance in Asia. Challenges in developing markets.
and livestock. This has now Peter Book. Allianz Re Singapore. August 2017
grown into a USD 7 bn industry 5. Spain the pool. Thus ‘risk’ is
and now covers forestry in assumed in a ‘co-insurance’
addition to crop and livestock. One of the key characteristics
of the Spanish Agricultural regime. The commercially
Today PICC is responsible for
run but publicly owned
IRDAI Journal March 2019

50% of all crop insurance with Insurance System was the

setting up of a Pool in which Insurance Compensation
the other 50% offered by
all the insurance companies Consortium (CCS) is a
Twelve local and national
offering agricultural member of the pool with a
insurance companies. All these
companies buy Quota share protection would operate. 10% of participation.
and stop Loss reinsurance The Pool is managed by a Agroseguro acts as reinsurer
protection in the international service company, for the Pool. There is no price
reinsurance market. However, Agroseguro (SA). There are / indemnity competition
in 2016 the Chinese now Twenty Nine national & between members.
government took the decision foreign private companies in Competition between
30 Reinsurance
members is purely on service. each member has in the Pool. ensure the transparency and
As a Pool manager, Agro There are two further control judicial safety of the system.
mechanisms to ensure In reinsuring AgroSeguro,
Seguro has the responsibility
CCS offers (Stop Loss)
of pricing the products, premium rates are set
protection at two different
drafting all insurance correctly by Agroseguro and rates dependent upon the
contracts and distribution of member company needs of the member
all contracts through the management expenses are company. Those requiring a
network of member controlled appropriately. One ‘special’ financial protection,
insurance companies. On is through oversight from the (for whatever reason), pay a
behalf of the Pool members, Economy Ministry, who higher rate than those who do
they oversee all loss regulate the whole insurance not. Pool members are
adjustment and handle claims sector, and the other is required to approach CCS first
settlements. Agroseguro is through oversight from the for reinsurance coverage. Pool
also assigned for assumption Farmers Union and ENESA. members also buy Stop Loss
of all agricultural risk from CCS acts as reinsurer of the reinsurance for the coverage
Pool members and Pool through an annually they need beyond that
negotiated contract. CCS also provided by CCS at a standard
distribution of all assumed adjustable rate.
risk back to Pool members in has oversight of all loss
adjustments, in order to The Agroseguro framework is
accordance with the share
as under:

The following is the system’s general operating pattern:

IRDAI Journal March 2019

Reinsurance 31
 Turkey Turkey’s agricultural for transferring risk are
As per the “Agricultural insurance sector was devised. policed and it ensures
Insurance Act” passed in By law, all agricultural risks centralized payment system
2005, an Agricultural insured are to be transferred for loss indemnification.
Insurance System was to the pool (TARSIM) so as to Insurance companies can
established wherein the allow for a standardized optionally take a
Agricultural Insurance Pool agricultural insurance retrocessional share from it.
(TARSIM) with public- product across the country, Broad framework of
private partnerships in which means the conditions TARSIM is depicted as
under:

Entire premium is collected participation). Where cover provided by domestic

by the individual insurance retrocession does not take and international reinsurance
companies, and the total risk place, reinsurance cover markets is insufficient, the
is transferred to the Pool. through domestic and Government will provide
The Pool is authorized to international reinsurance Catastrophe Stop Loss
retrocede risks to insurance companies is required. As a protection.
companies (voluntarily last resort, if the reinsurance
IRDAI Journal March 2019

Other than the traditional Alternative Risk Transfer certain risks the transactions
insurance and Reinsurance, (ART): aim to cover. ART solutions
there are alternative risks Alternative risk transfer, also are tailor-made risk financing
transfer techniques which are known as ART, enables solutions and a key response
being explored. The two companies to transfer risks to to some of the limitations of
solutions used are Alternative another party or to capital the traditional insurance
risk transfer and Catastrophe markets investors and thus market and can help in three
Bonds receive protection against significant ways:

32 Reinsurance
1) to self-finance risks which investors. These bonds are moral hazard issues( both
are not typically covered inherently risky, generally BB from Insured and Insurer
by a traditional insurance and usually have maturities side) in the data
policy, less than three years. If no recorded.
2) to transfer non- catastrophe occurred, the • Anti-Selection and Moral
traditional risks and insurance company would pay Hazards: As the business
finally a coupon to the investors. comes from riskier
3) to access alternative However, if a catastrophe did locations.
forms of capital which occur, then the principal • Data/Statistics: Insurers
introduces competition would be forgiven and the share the provisional
and helps drive insurance company would use business statistics with
competitive pricing this money to pay their claim- the Reinsurers from time
holders. Investors include to time. However, the
The main areas of alternative hedge funds, catastrophe-
risk transfer include risk actual business statistics
oriented funds, and asset reaches the Reinsurers
securitization through managers. They are often
catastrophe bonds, insurance- only after the claims are
structured as floating-rate finalized.
linked securities and bonds whose principal is lost
reinsurance sidecars, trading if specified trigger conditions • Cash Flow: The premium
of risk through industry loss are met. If triggered the subsidy share receipt is
warranties and weather principal is paid to the usually delayed by the
derivative contracts and sponsor. The triggers are governments which
transforming capital market linked to major natural further affect the release
risks into reinsurance catastrophes. Catastrophe of Reinsurance premium
through transformer vehicles. bonds are typically used by to the reinsurers. This
Other techniques sometimes insurers as an alternative to delay has an impact in the
considered part of alternative traditional catastrophe cash-flow of the
risk transfer include Captive reinsurance. Reinsures.
insurance companies, life Need of the Hour: Crop
insurance linked Major Challenges faced
by Crop Reinsurers in Insurance Pool in India
securitization, longevity risk • Individual companies
transfer and other alternative India
• Pricing: The premium have limited ability to
risk financing techniques. retain. Risk -Pooling
Catastrophe Bonds (Cat rates are to be charged on
actuarial calculations/ enables greater local
Bonds) retention. It enhances the
methodology. However
Catastrophe bonds (also fierce competition among underwriting capacity.
known as cat bonds) are risk- insurers result in • A Pool could avoid
linked securities that transfer premium rates that are inefficiencies in bidding
a specified set of risks from a not satisfactory to the Process in each State.
sponsor to investors. Cat Reinsurers in many cases. • Reduced cost of
bonds emerged from a need reinsurance due to risk
by insurance companies to • Claim Management: The
IRDAI Journal March 2019

claims are calculated on diversification and risk

alleviate some of the risks consolidation
they would face if a major the basis of yield derived
catastrophe occurred, which from the Crop Cutting • Same underwriting
would incur damages that Experiments (CCEs). As standards and premium
they could not cover by the the CCEs conducted by the rates for all insurance
invested premiums. An State Government companies
insurance company issues machineries involve • Government support and
bonds through an investment human intervention, it coordination is much
bank, which are then sold to leads to delay apart from easier when dealing with

Reinsurance 33
 single entity Welfare (MoAFW), many of greater demand for
• Pooling will make the the challenges faced by the reinsurance capacity. It is
portfolio less volatile and Reinsurers mentioned above going to be win-win situation
more predictable. have been corrected. Now, for all the stakeholders. Crop
• It helps to create a PPP the Insurance companies are Insurance with Reinsurance
(Public Private also focusing more on both as backbone is a vehicle which
Partnership) model in Pricing and Claim is not only mitigating crop
Crop Insurance. Management at a larger scale. risks for farmers, but also
The premium under PMFBY helping in food security,
Conclusion protecting credit, alleviating
is growing as the Government
With the issuance of the poverty, enhancing farmer
intends/ targets to insure
revised Operational income, stabilizing
50% of the farmers in 2019-
Guidelines by the Ministry of Government fiscal volatility
20 as against 30% of present
Agriculture and Farmers’ etc.
level. There is going to be

References:
1. Goodwin, Barry K. 2013. Agricultural Reinsurance Issues. North Carolina State
University October 7, 2013 AAEA Crop Insurance and The Farm Bill Symposium
Louisville, Kentucky. https://www.aaea.org/UserFiles/file/Plenary-
AgriculturalReinsurance.pdf
2. Huang, Yutsai. 2013. Crop Insurance Program in Korea. http://ap.fftc.agnet.org/
ap_db.php?id=144
3. http://www.artemis.bm/library/what_is_alternative_risk_transfer.html
4. https://www.willistowerswatson.com/en/insights/2017/08/what-is-alternative-risk-
transfer
5. https://en.wikipedia.org/wiki/Catastrophe_bond
6. http://fenaber.org.br/uploads/assets/files/Apresenta%C3%A7%C3%A3o%20-
%20Eduardo%20Porcel%20-%20English%20version.pdf
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34 Reinsurance