INDIA: Making Financial Products Work for Farmers and Poor Households

Rural family in their field harvesting crop. India. Photo: © John Isaac / World Bank
Rural family in their field harvesting crop. India. Photo: © John Isaac / World Bank


Improving livelihoods for the poor was a big challenge for the government of India during 2004–2009, when the poverty ratio was between 30 and 40 percent. With two-thirds of the population dependent on agriculture for a livelihood, crop insurance is an important element of agricultural risk management. The government has historically focused on crop insurance to mitigate the natural risks of farming. In 1999, the government established the National Agricultural Insurance Scheme (NAIS) to reduce farmers’ vulnerability to natural disasters. After four years of operations, the NAIS program covered only 15 percent of farmers, equivalent to 18 million farmers out of 120 million. During the period, the NAIS experienced loss ratios in excess of 350 percent of premiums charged on a flat rate basis, meaning that the program was not financially viable without heavy government subsidies. This system was not optimal for the government’s budget management, and it delayed claims settlement, leading to distress among farmers and exposing farmers to a vicious debt cycle. The government has recently decided to reform the NAIS and to place it on an actuarial footing. Premiums will be set on a commercial basis and the government’s support will provide up-front premium subsidies.


The Agriculture Insurance Company of India (AICI) sought FIRST's technical assistance (TA) in developing microinsurance products that would be both more affordable for small farmers and viable for the company. The project, India Development of Crop Insurance (2006–2007), aimed to develop an actuarially sound rating methodology and improve contract design to reduce delays in claim settlement; to propose design and rate making of new weather-indexed insurance products; to conduct pilots of new products; and to perform a risk assessment of the AICI’s insurance portfolio and suggest cost-effective risk financing solutions (including reinsurance). This project built on the progress of the policy dialogue carried out by the World Bank and the Swiss Agency for Development and Cooperation in the earlier TA completed in 2006. 

Under FIRST’s TA, eight weather insurance pilots were conducted, based on which the consultants and AICI were able to build a new product design and rating methodology for the development of financially sustainable weather insurance products that do not require heavy government subsidies. The technical and operational aspects of weather insurance in developed countries (United States and Canada) and in middle-income countries (Mexico and Spain) were shared with the AICI. Focus group discussions, individual interactions with various stakeholders, and consultations with experts were conducted. The team also developed a software tool to help the AICI estimate the premium and payout parameters, and develop weather insurance contracts. The stakeholders operational manuals for each of eight pilot crops were developed, which would help the AICI in summarizing the key policies and procedures for implementation. The manual gives details of eligibility criteria, contract features and results, the underwriting process used, pricing (applicable for both historical and simulated weather data), enrollment, and the claim settlement process. In addition, a Microsoft Excel-based support application enabled the AICI to monitor contracts and settle claims quickly. Overall, the contracts and pricing of the weather insurance products were designed to be flexible enough for the AICI to replicate in other agro-climatic areas. The Reinsurance Strategy also addressed risk management challenges faced in the AICI’s portfolio.


In 2013, the government of India replaced the subsidized program, the NAIS, with the National Crop Insurance Program, which includes the Weather-Based Crop Insurance Scheme. As of May 2015, the AICI has introduced new schemes for 35 crops for over 30 million farmers in 19 states.

It is worth noting another successful FIRST engagement with the Indian government in expanding financial services for low-income households, the two projects, Expanding Housing Finance Market and Expanding Access to Housing (Housing Finance Projects I & II). These projects have helped the National Housing Bank of India to introduce new housing finance products and mobilize technical and funding supports from the World Bank, IFC, DFID, and other agencies to expand housing finance to millions of low-income households. According to Findex 2014, housing finance penetration has risen to 4 percent, helping 14 million more people to own a home than in 2007. FIRST’s partnership with India has proved to be fruitful, as evidenced by tangible results from previous projects. The partnership would not have been effective without the commitments of India’s counterparts, and the harmonization and timely cooperation of development partners.