De-Risking Agriculture: Tech-Enabled Transformation of Crop Insurance

The world has encountered a range of compounding shocks in the past few years: droughts, floods, wildfires, cyclones, and most recently, a worldwide pandemic that has taken over 6 million lives and geopolitical instability as demonstrated by the Russia-Ukraine conflict. The pandemic and the war will (eventually) pass, but their impact will take time to heal. However, the next global challenge is already upon us, Climate Change. Climatic shocks will increase in frequency and severity over the next few decades.?

Agriculture is one of the most powerful tools to end extreme poverty, boost prosperity and feed a projected 10.9 billion people by 2100. Growth in the agriculture sector is up to four times more effective in raising incomes among the poorest compared to other sectors. Analyses of data on employment in agriculture show that 65 percent of poor working adults made a living through agriculture.

Agriculture is also crucial to economic growth, between 2000 and 2020, it accounted for approximately 4 percent of global gross domestic product (GDP).

The dependence on agriculture is very high in developing countries, especially in Asia and Africa. In some countries, it can account for more than 30% of GDP. In India, the share of agriculture in GDP increased to 18.32 percent in 2020 from 15.97 percent in 2018 while it was 42.77 percent in 1967.

Today agriculture-induced growth and poverty reduction, as well as food security, are at risk due to various factors including but not limited to climate change, water stress due to abuse, changing food patterns, and consistently low productivity. Agriculture is getting directly affected by evolving global dynamics, threatening global food security and stability, these shocks can cripple livelihoods, disrupt value chains, and even undermine macroeconomic stability.

The weather anomalies, water availability for agriculture, and low investments in agriculture are already leading to a reduction in crop yields, especially in the developing world. Agriculture is not only the victim of climate change and water stress but is also one of the reasons behind the same. Agriculture utilizes close to 70% of global freshwater withdrawals, and agriculture and land-use change are responsible for about 24 percent of greenhouse gas emissions. It is critical for the world to make agriculture more environmentally sustainable, profitable for farmers, and ecologically diverse. This is possible only if technology adoption is scaled in agriculture.

Risk in Agriculture

Risk is an important aspect of any business, it is more pronounced in agriculture due to the inherent nature of agriculture. Agriculture has many uncertainties due to multiple factors including weather, yields, prices, government policies, value-chain dynamics, access to inputs, availability of manpower, and many other factors. Each of these uncertainties can impact agriculture extensively and can cause wide swings in farm income.

While a farmer endures various risks across the crop cycle, from choosing crop variety till they sell farm output, five general types of risk are: production risk, price or market risk, financial risk, institutional risk, and human or personal risk.

• Production risk is based on the uncertain natural growth processes of crops. All farmers aspire to have high productivity or yields in terms of quantity and quality but this is dependent on a large number of factors. Some of the major factors impacting yields include weather, natural disasters (flood, earth quack, volcanic eruption, tornado, hail storm) accidents (fire, dam/cannel burst) disease, pests, soil condition, access to inputs (seeds, pesticides, nutrients, labor, water), availability of credit, and agriculture practices. Production risk is directly affected by both the quantity and quality of commodities produced.
• Price or market risk refers to uncertainty about the prices farmers will receive for commodities or the prices they must pay for inputs. The nature of price risk varies significantly from commodity to commodity. The prices depend on various factors both regional as well global and include demand for a commodity, production projections of the commodity, prices of an alternative to the commodity, downstream value-chain dynamics of commodity, government intervention, and other market forces including storage and logistics to name a few.
• Financial risk in a farm business is relevant when farmers borrow money and creates an obligation to repay debt. As a majority of farmers in developing countries are dependent on unorganized credit they are at far more risk when compared to farmers in developed countries who do have access to institutional credit. The financial risk depends heavily on interest rates, terms and period of credit, and the type of lender. Restricted credit availability is also a key aspect of both production risk as well as a financial risk. The analysis shows doubling agricultural credits generates around a 4-5 percent increase in agricultural productivity.
• Institutional risk results from uncertainties surrounding Government actions. Agriculture policies unfortunately are not always about sound economics. Agriculture in most countries is a social, political, and cultural issue as well. Agriculture is directly connected with livelihood, food security, and tradition making it a complex subject for policymakers. Further, the international impact of food security and the environmental impact of agriculture make it a global policy landmine as well. Institutional risk is dependent on parameters including tax laws, international food trade policy (import/export), regulations for chemical use in agriculture, rules for agriculture waste disposal, food subsidies, essential commodity storage regime, public distribution of food policies, and the level of price or income support payments are examples of government decisions that can have a major impact on agriculture.
• Human or personal risk refers to factors such as problems with human health or personal distress that can affect the farm business. Accidents, illness, death, and family disputes are examples of personal crises that can threaten a farm business.

Out of all the key risks, the most critical ones are productivity risk and price or market risk, various mitigation tools and initiatives have been tried consistently for decades to cater to these two risks of agriculture. Both the developing countries and developed countries have put in place policies to counter these two risks of agriculture. One such tool has been Crop Insurance, different countries have made different policies contextualized to local requirements and insurance companies have continuously launched products to serve this requirement of farmers.

Crop Insurance a vital Risk Mitigation Tool

Crop insurance is provided to agricultural producers by a provider for which the provider is paid a premium. This premium is paid to a provider based on three models, paid by the producer, paid/subsidized by the government, paid partially by the producer, and partially paid/subsidized by the government.

Crop Insurance is also structured in multiple ways, to protect against either the loss of crop productivity due to natural disasters, accidents, weather, and disease or pests or the loss of revenue due to declines in the prices of agricultural commodities. The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance.

The global crop insurance industry generated $34.05 billion in 2019 and is estimated to generate $53.02 billion by 2027, registering a CAGR of 6.1% from 2020 to 2027 with North America having a 51 percent share followed by Asia (27 percent), Europe (15 percent), Latin America (4 percent), Africa (2 percent) and ANZ (1 percent).

Some of the key players in the sector include Agriculture Insurance Co. of India Ltd., American Financial Group Inc., American International Group Inc., AmTrust Financial Services Inc., AXA Group, Chubb Ltd., Groupama Assurances Mutuelles, ICICI Bank Ltd., Indian Farmers Fertiliser Cooperative Ltd. (IFFCO), QBE Insurance Group Ltd., Santam Ltd., Sompo Holdings Inc., The New India Assurance Co. Ltd., Tokio Marine Holdings Inc., and Zurich Insurance Co. Ltd. among others.

Crop Insurance in Developed Country, Case of USA

In the USA federal crop insurance was established in the 1930s to cover yield losses from major natural causes in form of multiple-peril crop insurance or MPCI. The program operated on a limited basis up through the early 1980s, when insurance availability was greatly expanded and premium subsidies were increased, further key reforms were legislated in 1994 and 2000. In the mid-1990s, revenue insurance was introduced into the Federal crop insurance program.

Today the USA has a subsidized multi-peril federal crop insurance program, administered by the Risk Management Agency and authorized by the Federal Crop Insurance Act, available to most farmers and more than 100 different crops. The amendments made by the Federal Crop Insurance Reform Act of 1994 and the Agriculture Risk Protection Act of 2000 authorized USDA to offer free catastrophic (CAT) coverage to producers who grow an insurable crop. Farmers can buy additional coverage beyond the CAT level by paying an additional premium. Crops for which insurance is not available are protected under the Noninsured Crop Disaster Assistance Program (NAP).

Federal crop insurance is provided by private insurance companies responsible for sales and services to farmers. A portion of the premium as well as the administrative and operating expenses of the private companies is subsidized by the government. The Federal Crop Insurance Corporation reinsures the companies by absorbing some of the losses of the program when indemnities exceed total premiums. Several revenue insurance products are available on major crops as a form of additional coverage including but not limited to The Stacked Income Protection Plan (STAX) for cotton farmers, The Price Loss Coverage (PLC) program, and The Agricultural Risk Coverage (ARC) program for wheat, feed grains, rice, oilseeds, peanuts, and pulses.

The USA has more than 290 million acres insured under the federal crop insurance program, including more than 80 percent of the acres of major field crops planted.

Crop Insurance in Developing Country, Case of India

In 2016 with the nationwide introduction of two indemnity and parametric-based programs, Pradhan Mantri Fasal Bima Yojana (PMFBY), and the Restructured Weather-Based Crop Insurance Scheme (RWBCIS) crop insurance in India underwent significant changes. These programs replaced earlier programs National Agricultural Insurance Scheme (NAIS) and Modified National Agricultural Insurance Scheme (MNAIS) which were found to be ineffective in serving the farmers due to structural inefficiencies.

PMFBY is an area-based yield-index insurance program accounting for nearly 90% of the crop insurance portfolio in India. It is designed to provide comprehensive insurance cover against crop failure and provide income stability while covering all food crops, oilseeds, and annual commercial and horticultural crops grown. The program is implemented by federal and state government agencies and empaneled public and private insurance companies. Farmers pay a nominal premium between 1.5% to 5% and the rest is born by the federal and state governments equally.

The program is compulsory for those farmers who have availed of institutional crop loans or have Kisan credit card accounts while is voluntary for all other farmers. This program is predominantly a crop yield loss insurance covering non-preventable risks. The insurance coverage is determined based on federal government-declared minimum support prices and local calculation of benchmark yields based on crop cutting experiments (CCEs).

RWBCIS constitutes the remaining 10% of the crop insurance portfolio. The structure of farmers’ premiums, administration, etc. are similar to PMFBY. The claim settlement will be based on predefined terms drawn from weather parameters. Horticulture crops or other crops where ascertaining crop yield through the conduct of CCEs is not possible are commonly insured under this policy.

The sum insured under crop insurance increased six times in INR terms and four times in US$ terms from US$ 8.5 billion in 2010-11 to US$ 33.6 billion in 2018-19. In 208-19 close to 52.65 million farmers were covered by crop insurance programs.

Viability & Scalability, the Key Obstacles of Crop Insurance

In any insurance product scalability is key to viability and vice versa. The majority of crop insurance programs, especially in developing countries, suffer from inadequate government financial support, unviable subsidy models, delayed claim settlement, skewed benefit patterns, inefficiency in operations, lack of transparency, non profitability for ecosystem participants, and high cost of delivery.

In most cases, the programs are perceived to work better for the private providers than the farmers, are difficult for farmers to adopt and providers to administer and governments to monitor and regulate. These factors make these programs economically unviable for providers to participate in and lead to low adoption hence making the programs financially unsustainable due to the high cost to the agriculture ecosystem.

A technology-enabled demand-driven approach is key to the success of these programs as it can provide velocity, variety, and verifiability. Hence making crop insurance programs work better for farmers, insurers, administrators, and governments.

Tech-Enabled Future of Crop Insurance

Digital technologies can play an important role to overcome the challenges of crop insurance by efficient and economical crop monitoring using remote sensing (satellite and drones), improved yield prediction using artificial intelligence and machine learning (crop models and weather models), reducing frauds and fair claim processing using blockchain, and reducing service delivery costs by implementing big data analytics for workflow digitization (mobile, GPS, robotic process automation).

Some of the notable digital technology solutions for crop insurance are

• Skymatics's SkyClaim is a crop damage mapping tool that uses computer vision and AI to improve the way insurers look at crop loss. Developed to bring value to farmers by highlighting crop loss across a whole field, SkyClain uses machine learning to identify and quantify crop loss areas.?SkyClaim's personalized dashboard provides users with multiple tools to visualize and understand the extent of crop damage. Downloadable reports identify, classify and quantify specific damage types to support insurance claims. Industry-leading insurance companies are already integrating these reports into their adjustment.
• CropIn’s SmartRisk, is a predictive and prescriptive solution for risk monitoring, mitigation, and forecasting intelligence. The AI and Machine-learning based platform detects cropping patterns and predicts the future of the crop, thus highlighting the associated risk and opportunity for agri-stakeholders. The businesses can achieve farm-level crop detection and yield prediction through the SmartRisk capabilities that can also establish the historical performance of every pixel at the farm/postcode/state/country level by utilizing easy-to-use Connector APIs.
• SatSure’s satellite-based intelligent platform empowers insurance providers and administrators by reducing their losses with smarter risk estimates and real-time monitoring. Satsure gives insights based on detailed geographical and climate records of any place in the world, from the 1990s to today.
• PlanetWatchers' bundle of services provides crop insurance agencies a powerful solution for staying ahead of the needs of their customers by providing reliable and predictable monitoring services. These services are global, fully scalable, orders of magnitude faster, and work day and night and under all weather conditions, enabling them to provide valuable insights even through clouds and fog. The benefits include improved safety, cost savings, increased speed of payout, more robust loss prevention, and the potential for new insurance products.
• AgriWatch's scientific market forecast and price estimation and technology-enabled yield estimation solution are positioned to make agriculture insurance fair, efficient and transparent to ecosystem players. It ensures a lower cost of delivery using phygital model.

Digital technologies can facilitate a shift from index-based insurance to indemnity-based insurance by reducing basis risk and strengthening trust and understanding, this can improve demand for crop insurance leading to better adoption which will further make crop insurance more economical for the farmers.

About Author

DEEPAK PAREEK, CEO, AgriWatch, Technology Pioneer & Expert – Digital Transformation, World Economic Forum??

Deepak is CEO of AgriWatch a consulting firm that provides market intelligence, research, and advisory services across the agribusiness value chain. AgriWatch is bridging the information and insight gap that exists in various sub-sectors of the agricultural economy in general and agricultural commodities trade in particular through access to lakhs of farmers and thousands of traders. Deepak has 22 years of diverse experience working across 34 countries on various projects.