Table 2: Premium subsidies for commercial crops covered under WBCIS

|**Commercial Premium**|**Subsidy for commercial crops **|
|---|---|
|**<2%**|No subsidy|
|**2%-5%**|25% of commercialpremium,with minimum of 2%|
|**5%-8%**|40% of commercialpremium,with minimum of 3.75%|
|**8%+**|50% of commercialpremium,with minimum of 4.8% and maximum of 6%|

WBCIS enjoys substantial government subsidy, with farmer premium rates capped at 1.5% for wheat and 2.0% for other _food_ crops (cereals, millets, pulses and oilseeds) and defined subsidy rates for other, _commercial,_ crops (Table 2), although subsidy rates for commercial crops are typically lower than the subsidy rates enjoyed by the NAIS. With WBCIS offering lower, more predictable costs to state government and quicker claim payments to farmers, some large states have experimented with WBCIS as an alternative to NAIS.

As might be expected, the introduction of a largely compulsory, heavily subsidized program led to a substantial increase in premium volume and number of farmers insured from 2007-8 onwards, with between-year volatility mostly caused by large states changing their decision about whether to opt in to WBCIS or not (Table 1). A significant majority of farmers covered under WBCIS are compulsory, borrowing farmers rather than voluntary, non-borrowing farmers.

One key difference between WBCIS and NAIS is that under WBCIS private sector insurance companies are allowed to compete with the public insurer to offer the subsidized products.<sup>4</sup> Competition is at the district level, with state governments choosing a single provider for each district. Private insurance companies have been allowed to offer voluntary cover since 2007 and cover to borrowing farmers, for whom insurance purchase was compulsory, from Rabi 2009-10. For the 2009-10 agricultural year, private insurance companies sold policies amounting to over 20% of the entire WBCIS portfolio by premium volume, with the remainder sold by the public insurer AICI.

With only four years of matched premium and claim payment data it is not possible to make strong statements about the loss ratio, the ratio of claim payments to commercial premium since it is challenging to differentiate between favorable weather experience and expensive products. Over the 2007-2010 agricultural years, the unweighted average loss ratio was 65% and the unweighted producer loss ratio, the ratio of claim payments to farmer premiums, was approximately 130%; that is to say that for every ₹1 of farmer premium paid in each of the four years, ₹1.3 of claims were paid in each of the four years. This is lower than the producer loss ratio of 300% for borrowing farmers purchasing NAIS cover between 2000 and 2008 (Mahul et al. 2008).<sup>5</sup> However, with only four years of claims data, the most recent of which happened to be among the best of the past decade, this may not be representative of the future average producer loss ratio.

# **3. Weather insurance product design**

The primary aim of designing an index for agricultural insurance should be to minimize basis risk, the risk that the index does not accurately capture farm-level losses. In particular, it is important to ensure that the product makes appropriate claim payments in years that are unusually bad for

> 4 Under the modified NAIS private sector insurance companies also compete with the public insurer.

> 5 The producer loss ratio for nonborrowing farmers purchasing NAIS cover between 2000 and 2008 was 640%. This disparity illustrates the impact of adverse selection in an insurance program without risk-based pricing: non-borrowing farmers chose to purchase cover when it was actuarially more valuable.

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