1 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.

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.

Contents

1. Risks to Livelihood Dependent on Livestock ....................................................................................... 8

2. Livestock Insurance Market .................................................................................................................. 9

3. Current Supply of Livestock Insurance .............................................................................................. 10

3.1. Government Intervention .................................................................................................... 10

3.2. Product ................................................................................................................................ 11

3.3. 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 India‘s 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 supplier‘s 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.

8

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 India’s 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

3 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)

9

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 Priority 4

Tribal areas Health Life Non- identified Non- identified

Dry areas Drought Health Life Non- identified

Coastal areas Life Accident Business assets Health

Urbanized rural areas Life Accident Health Household assets

Rural economy areas Life Accident Health Livestock

Riot prone areas Business assets Life Non- identified Non- identified

Areas along with highways Accident Life 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.

7 1USD = INR 45

10

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.

8 Building Sustainable Microfinance Institutions in India by Mahajan Vijay, Nagarsi.

9 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.

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)

Box 1: Share of Public Insurers in Total Cattle Insurance in India

11

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 Community-based

Key

Features Insurer is the risk carrier

and sales are done

through MFIs/Co-

ops/Banks which gets

commission on sales.

Under IRDP scheme/other

government schemes

Insurers appoint their

own staff for marketing

as well as sales.

For non-scheme animals,

individual retail is done.

Community bears the risk by pooling

premiums

Done in one or two places in India.

Still in an experimental phase.

Current

outreach

Approximately 90% of

total insured animals

Approx 10% of total

insured animals

Not done on a very high (<0.01%) scale

due to inherent problems of risk bearing

capacity of community.

12

i. Partner-Agent Model (credit linked or standalone)

Insurers prefer to link insurance with credit to secure a good market share as approximately 40-

50% 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.

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

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 2.1: MFIs as Distribution Agencies

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 co-

operatives 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).

13

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 Provider-

Agent 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)

14

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

Banks)

Dairy Co-operative

Benefits To Insurers Increases outreach and helps in easy

origination, distribution and sales

Increases capacity for claims

management

Easy to educate insurers on client‘s

needs

Risk reduction strategies are well

implemented, and hence, chances are

that insurers can expect lesser claims

Reduce adversely selected portfolio

Easy marketing and awareness

generation of product

To Clients Rural clients get easy access to

insurance product to hedge their risks

Rural clients get easy access to

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 co-

operatives 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.

15

For

intermediary Negligence on the part of insurers:

Insurers delay in settling the claim

and this taints their image and spoils

business with their clients on the

ground. In turn, intermediaries get

bad publicity, which adversely

impacts their 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.

Negligence on the part of insurers:

Insurers delay in settling claims. This

taints their image and business with

their clients on the ground, and

intermediaries, in turn, get bad

publicity that adversely impacts their

business.

Possible Solution 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.

16

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.

Scheme‘s performance can be summed up as-

Table 4: Statistics of Vizianagaram Loan Protection Scheme

2006 - 07 2007-08 2008-09

Enrolments 3519 4756 48675

Claims Received 96 120 320

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.

11

DPIP is a state-sponsored programme and undertook community managed livestock insurance scheme with the

co-operation and support of the SHGs.

17

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 animal‘s 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).

18

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 animal‘s ear.

Figure 1: Metallic clip used for animal identification

19

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 Read

Distance

Ease of Reading Retention Ease of

Application

Cost

Metal Tag Inches Varies Low Easy Rs. 4-6

Brand Feet Good(till visible) Fades over time Difficult Cheap

Tattoo Few

metres

Low Fades over time Difficult Cheap

Ear Notch 1-3 Feet Difficult Long Difficult Cheap

Colour Pattern Metres Difficult Long N/A Price of colour

Bar-code Inches Varies Good to moderate Easy Cheap

RFID (Implant) Inches to

Feet

Easy Good to moderate Slightly

tough

Rs. 40-Rs. 200

(depends on

volume)

RFID (External)

(Figure 4)

Inches to

Feet

Easy Good to moderate Easy Rs. 40-Rs. 200

(depends upon

volume)

DNA Testing N/A Lab testing Lifetime Test takes time Expensive

Retinal Imaging Inches to

feet

Easy Lifetime Equipment set-

up

Not used

extensively

Muzzle

identification

Inches Require

expertise

Good Precautions to

take muzzle

imprint

Still in

experimental stage

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)

20

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 re-

insurer 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, de-

worming 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 co-

operative 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.

21

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 farmer‘s 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, de-

worming, 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)

22

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

farmer‘s 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

23

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.

24

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

25

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.

26

Annexure 1: A Brief on India’s 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

27

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 country‘s 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 %

Landless, <0.002ha 21.8 2.5 31.9 0.6

Marginal, 0.002-1.0 ha 48.3 43.8 47.1 51.3

Small (1-2 ha) 14.2 23.3 11.2 21.2

Medium (2-4 ha) 9.7 17.7 6.2 15

Large (>4 ha) 6 12.7 3.4 11.9

(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

Tribe

Scheduled

Caste Others All

No. per 1000

households

No. per 1000

households

No. per 1000

households

No. per 1000

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)

28

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 paper‘s 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

cross–bred (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

2004,Dec 27- The Financial Express, ―Centre Giving Final Touches to Livestock Policy‖ 22

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 (17th

Livestock Census, 2003)

29

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.

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, India‘s 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

Livestock Farmer

Village Market

Private players/ Dairy Unions at

District level

Town/City Market

Consumers

Exports Processing

Industry/Milk Plants

Village dairy co-operative society

Neighbours (Consumption)

Local Vendor

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

30

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 ICAR–ILRI international workshop held at National Agricultural Science Complex,

New Delhi, India (31 January–1 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 ICAR–ILRI international workshop held at National Agricultural Science Complex,

New Delhi, India (31 January–1 February 2006).

31

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 animals28

, 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).

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

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 No. of animals (Census 2003)

States/UTs Veterinary Hospitals/Polyclinics

Veterinary Dispensary

Veterinary Aid Centre (Stockmen Centres/mobile dispensaries)

Total vet infrastructure units available

Cattle (in ‘000)

Buffalo (in ‘000)

Total Number of animals

No. of animals/vet institution

Assam 29 428 1213 1670 8440 678 9118000 5460

Bihar 39 785 1435 2259 10729 5743 16472000 7292

Chhattisgarh 208 708 290 1206 8882 1598 10480000 8690

Gujarat 14 487 587 1088 7424 7140 14564000 13386

Jharkhand 405 3 - 408 7659 1343 9002000 22064

MP 565 1742 72 2379 18913 7575 26488000 11134

Maharashtra 43 1382 2056 3481 16303 6145 22448000 6449

Rajasthan 1439 285 1733 3457 10854 10414 21268000 6152

Uttar Pradesh 1763 268 2313 4344 18551 22914 41465000 9545

West Bengal 111 612 3248 3971 18913 1086 19999000 5036

(Source: Data collected from 17th Livestock Census, 2003; State-wise area, GoI)

Box 5: Veterinary Infrastructure Problems

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)

Box 4: Status of State Veterinary Machinery

32

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) Demand (in Million MT) Deficit as % Demand

Green Dry Green Dry Green Dry

1995 379.3 421 947 526 59.95 19.95

2000 384.5 428 988 549 61.1 21.93

2005 389.9 443 1025 569 61.96 22.08

2010 395.2 451 1061 589 62.76 23.46

2015 400.6 466 1097 609 63.5 23.56

2020 405.9 473 1134 630 64.21 24.81

2025 411.3 488 1170 650 64.87 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 India‘s 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.

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.

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 non-

availability of proximate chilling centres. Therefore, milk chillers should be installed at collection centres in villages.

(Source: Agriwatch 2003)

Box 6: Milk Distribution Chains in India

33

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 Farmer‘s 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

India-

Table 9: Chronological events in insurance history of India

Year Implementing agency/program Note

1971 ―Cattle Insurance Scheme‖ by

Small Farmer‘s Development

Agency

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.

1983 ―Cattle Insurance Policy‖ under

Integrated Rural Development

Programme (IRDP)

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.

1983 Livestock Insurance under Market

Agreement31

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)

34

1999 Insurance Regulatory and

Development Authority (IRDA)

Inception of IRDA, liberalization of the Indian insurance

industry

2001

onwards

Private players registered ICICI Lombard, IFFCO-TOKYO, HDFC ERGO, Royal

Sundaram initiated

2003 Cattle insurance freed from

Market Agreement

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.

2005 Micro-Insurance Regulation32

,

2005

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 Micro-

Insurance Regulation will help to address the distribution

related issues.

2006 ―Livestock Insurance Scheme‖

implemented by State Livestock

Development Boards (SLDB) and

State Animal Husbandry

Departments (SAHD)

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

government’s will to emphasize on farmers rearing HYVs.

32

India is the only country to have micro-insurance regulation. 33

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)

35

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 schemes—a 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.

36

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 Head Office Covers

New India Assurance Company Limited(NIACL)34

Mumbai Western India

National Insurance Company Ltd(NICL)35

Calcutta Eastern India

United India Insurance Company Limited (UIIL)36

Chennai South India

Oriental Insurance Company Limited (OICL)37

New Delhi 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 Bharti-

AXA 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

37

Annexure 5: Traditional Products of Indian Livestock Insurance Industry

Sum insured: Sum insured would be the market value of the insured cattle (NDDB and co-

operatives or authorised veterinary or insurance company‘s 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

and age. Examining Veterinarian‘s

recommendation shall be considered proper

guide for acceptance of Insurance/settlement of

claims. Sum Insured will not exceed 100% of

the Market Value

Price fixed for purchase committee shall be

treated as sum insured/market value (Loan plus

subsidy). This will be the basis for insurance

and settlement of claim. This is an agreed

value policy. Sum insured will not exceed

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 company’s internal policy)

Non-scheme Animals Scheme Animals

a. Milch cows 2 years (or age at 1st calving) to

10 years.

2 years (or age at 1st calving) to 10

years.

b. Milch Buffaloes 3 years (or age at 1st calving) to

12 years.

3 years (or age at 1st calving) to 12

years.

e. Indigenous/ 1st exotic

cross breed female

calves/ heifers

4 months up to date of 1st

calving or minimum age limit

for adult female animals as

above.

4 months to 32 months or calving

whichever is earlier

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 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

Death: On agreed value basis

Permanent Total Disablement:

75% of Sum Insured

38

Premium Rates

Non-scheme animals Scheme animals

Cooperative Dairies- 4%, Private

Farmers/Bank Finance- 5%.

2.25%

(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 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%

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)

39

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 insurer‘s 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 insurer‘s 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.

40

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 company‘s prescribed

form.

Death certificate obtained from Veterinary doctor or a certificate jointly issued by any

two officials mentioned in the claim form in company‘s 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 company‘s 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)

41

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 Micro-

Finance 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)

42

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,

banker‘s 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 non-

cultivator 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

43

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/I-

Cube2008SummaryReport_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)