Integrated Insurance & Risk Mitigation solution for diary farmers

Technical Note

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Technical Note

Integrated Insurance &

Risk Mitigation

Solution for Dairy Farmers

Anupama Sharma, Avishek Gupta,

Jai Mohan M*

*Anupama works with IFMR Research’s Centre for Insurance and Risk

Management (CIRM). CIRM designs and disseminates formal risk management

solutions for low income households in partnership with several risk carriers

and design partners.

Avishek works with a dairy supply chain focused company called the Dairy

Network Enterprises (DNE) which is being incubated by IFMR Ventures. DNE

uses a combination of financial investments, technical support and business

linkages to complete the dairy supply chain.

Jai Mohan works with IFMR Rural Finance in new product development and

process innovations. IFMR Rural Finance is working towards creating a network

of Regional Rural Financial Institutions called Kshetriya Gramin Financial

Services (KGFS).

*The views presented in this technical note are solely those of the authors and do not

in any way reflect the views of organizations they work for.

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CONTENTS

Background ...................................................................................... 5

Issues in Cattle Insurance ............................................................... 5

Desirable features of a Cattle Insurance product ......................... 7

Cattle Insurance Product offered at KGFS ................................... 8

Economics of Cattle Insurance .................................................... 10

Role of stakeholders ...................................................................... 11

Conclusion and Way Forward ..................................................... 13

History of Cattle Insurance Products in India ............................. 15

Screenshot of Herdman Software ............................................... 16

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Background

Livestock rearing is central to the livelihood and survival of millions

of small and marginal farmers and landless agricultural labour across

the country, particularly in the dry land regions of India. As livestock

related activities help to maintain a daily inflow of income for these

households, livestock economy is a source of self-insurance for

farmers. It also provides a diversified source of income and mitigates

the uncertainties of seasonal income from their traditional sources

like agriculture.

Despite vaccination schemes and efforts to propagate livestock rearing

by the government, livestock remains a risky business due to non

availability of timely inputs for health care of animals1, lack of suitable

education/training in rearing for skill development; inadequate finances

and poor rural infrastructure for veterinary care. As the risk reduction

strategies have not developed well (in the form of proper vaccination,

de-worming and curative measures) a key concern therefore remains

whether and how the poor in countries like India can be shielded

against risks faced by them on livestock for income. Many households

are pushed into poverty once they lose their livestock to disease,

scarcity of water and fodder and it is often impossible for them to

rebuild their stock.

Of the livestock rearing the rural population is involved in, dairying is

a predominant occupation of the people in rural India. As a result of

which, dairy cattle is the major livestock that small holders possess.

Hence, a cattle insurance product is possibly the most widely

recognized and most needed livestock insurance product.

Issues in Cattle Insurance

Cattle Insurance has been plagued by adverse selection and moral

hazard leading to high premiums to cover the losses accrued and/or

expectation of losses. The major challenges faced by cattle insurance

product in India are:

a) High Transaction Cost:

� High incidence of fraud in claim settlement process: A number

of fraudulent practices are rampant in the cattle insurance sector.

As a result of the high incidence of fraud, the insurance companies

are forced to adopt cautious measures at the time of policy issue

and claim settlement. This leads to an increase in insurance

premium making it unaffordable for dairy farmers.

� Moral hazard: Cases of farmers letting animal die and claiming

insurance is not uncommon. The skin and hide of the dead

1 Report on 10th Five year plan by Planning commission of India, Chapter 5,

section 5.2.17 “Livestock services”

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animal are sold off resulting in a net positive income from death

of the animal.

� High operational cost: Operational factors like issuance of policy

cover and settlement involves a lot of paper work and is

manpower intensive. This increases cost of issue of a single

insurance cover which in turn affects the premium charged.

b) Lack of information:

� Absence of dependable historical data on mortality rates in

different locations: Neither government departments nor

insurance companies have actual data pertaining to the mortality

of milch animals year-wise. The little data that is available with

the public insurers is not digitized and hence not in a usable

form.

� Lack of information about the coverage of Vaccination

Programmes: Though a lot of government and non-government

programmes actively promote preventive cattle healthcare,

concrete data is not available on their coverage. Hence, the

benefit of such programmes is not passed on to the farmers in

the form of reduced premium for cattle insurance.

c) Unfavorable Coverage terms:

In the conventional cattle insurance products, the cover for cattle

insurance often does not begin immediately on payment of the

premium. Moreover, it takes around 40-60 days to get the claim

settled in the event of death of an animal. The initial periods of

non-coverage and delay in settlement ends up exposing the

farmers to financial shocks which the cattle insurance products

actually try to provide protection against.

d) Poor risk reduction strategies:

Due to financial and operational constraints, at times, Government

institutions are not able to deliver most of the preventive livestock

support services like, vaccination and de-worming. Though the

government understands that there is a compelling need to

improve dairying and animal husbandry sector, the efforts are

very thinly spread. All this increases the risk perception and

experience of insurers leading to a high premium.

e) Demand related challenges:

Ability and willingness to pay the insurance premium is a major

area of concern which is aggravated by the high premium rates

for cattle insurance. The unwillingness to pay is again due to

lack of awareness about the benefits of taking the product.

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Desirable features of a Cattle Insurance

product

As evident from the previous sections, there is a need to revisit the

existing product structure and delivery of the Cattle Insurance product.

The product envisaged should blend innovation in both product

and processes leading to a comprehensive risk mitigating tool for

the dairy farmers. Such a product should enable access to dependable

information for insurance companies, access to preventive healthcare

services for farmers, utilization of electronic setup for fast processing

and should reduce moral hazards by multiple procedural and product

related innovations.

Taking all of the above into consideration, an innovative cattle

insurance product has been developed which is now being offered

by HDFC Ergo GIC Ltd through Kshetriya Gramin Financial Services

(KGFS) in partnership with a local Dairy Healthcare Services enterprise

supported by the Dairy Network Enterprise (DNE). A brief introduction

to the different entities involved in the delivery of the product is

given below.

Kshetriya Gramin Financial Services (KGFS) are localized financial

services entities promoted by IFMR Rural Finance2 which provide

high quality financial products and services in remote rural parts of

India. Their customer centric model entails that they develop a deep

understanding of their customers so as to offer customized financial

products and services. The geographical focus enables them to

develop a deep understanding of the needs of the customers and

use the same to offer relevant financial products to their customers.

Each rural branch of KGFS, which serves a population of 2000

households3, is manned by two or three Wealth Managers (WM).

The Dairy Network Enterprise (DNE) is a dairy supply chain focused

company being incubated by IFMR Ventures4. The DNE is trying to

improve access to finance for dairy enterprises. This might entail

supply chain interventions such as training, technology support and

business linkages.

Dairy Healthcare Services Provider is a DNE accredited local entity

which partners with the KGFS to provide support for critical

operational aspects of the product like cattle registration, assessing

the health of animals, and delivery of preventive healthcare facilities

at the farmer’s doorstep. The DNE trains the personnel and equips

them with the necessary devices required to perform the tasks.

2 IFMR Rural Finance is a Brand Name of IFMR Holdings Pvt Ltd, wholly

owned subsidiary of IFMR Trust.3 For More details on KGFS , please visit - http://www.ifmrtrust.co.in/ventures/

ifmrholdings.php4 For More Information please visit - http://www.ifmrtrust.co.in/ventures/

ifmradvisoryservices.php

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HDFC ERGO General Insurance Company Limited is a 74:26 joint

venture between HDFC Limited, a Housing Finance Institution and

ERGO International AG, the primary insurance entity of Munich Re

Group.

Cattle Insurance Product offered at KGFS

While designing a livestock product for KGFS, the major objective

was to reduce adverse selection and moral hazard coupled with

introduction of risk reduction methods. It was ensured that the

product addressed all the concerns and short comings of the current

offering to the best extent p ossible and hence be more relevant to

the rural households. The salient features of this insurance product

are listed below:

a) Use of Radio Frequency Identification (RFID) tag

for tagging:

Electronic RFID tags are being used for the purpose of

identification of cattle. The RFID tags are uniquely coded as per

ICAR5 standards. The usage of RFID tag permits faster and error

free reading of tag number and also enables immediate electronic

recording of cattle data. RFID tags are cheaper and more

convenient than other methods of unique identification like retina

identification. It is, however, costlier than options like bar coding.

Usage of bar coding for the purpose of cattle identification is

limited by the fact that any scratch on the surface of bar codes

or dirt accumulation would impair readability of the tags. The

same RFID tag is being used to store data on details of the cattle

with respect to healthcare, breeding, feeding. This would enable

recording of entire history of cattle around the unique code

which would lead to future benefits in cattle valuation and breed

improvement.

b) Health services along with cattle insurance:

Each cattle is guaranteed access to basic preventive healthcare

measures in the form of de-worming and vaccination required

to maintain the health of the animals a year. A detailed history of

de-worming, vaccination and health records of the animals is

maintained in dairy health and productivity management software

called Herdman6 which has been customized to suit the needs of

the cattle insurance product.

5 International Committee for Animal Recording (ICAR) is an international

body which aims to promote the development and improvement of the

activities of performance recording and the evaluation of farm livestock.

6 Herdman is Dairy Cattle Health and Productivity software developed by

Infovet. DNE worked with Infovet to build the insurance and RFID modules in

the software.

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c) Use of electronic cattle registration and real time

data upload system:

The registration of animals is taken care of by the health and

productivity management software that has been customized for

use. This reduces the paperwork in the issuance of the policy

and thereby reduces the operational cost.

d) 85% coverage:

Upon death of the cattle, only 85% of the value of cattle is paid

out. This acts like a deductible in health insurance and is expected

to minimize the risk of moral hazard like letting the animal die.

e) Integration of systems:

The process is designed in such a way that the Dairy Health and

Productivity Management Software of DNE, the Customer

Management system (CMS) of KGFS and the policy issuance

system of HDFC Ergo are integrated real-time so as to enable an

on the spot issuance of cattle insurance policy – A first time in

this market in India.

f) Claim Settlement Process:

Should there be a claim upon death of the animal; the KGFS

WMs play an important role in verifying the genuineness of the

claim and coordinating submission of documents. This expedites

the claim settlement process making the claim settlement take

place within 72 hours of the death of the animal. This process

reduces the long Turnaround time (TAT) for settlement that exists

in the products available in the market.

Figure 1: Process flow of Cattle Insurance

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Economics of cattle insurance

Insurance Premium charges:

The cattle insurance that are currently offered by most insurers are

in the range of 4% to 5% for a one year policy and are around 12%

for a 3 year policy. Due to the risk mitigation mechanisms and cost

reduction mechanisms proposed in this product, a reduction in the

premium has been made possible. The product offered at KGFS is

priced at 2.9% for a year and 7% for 3 year policy.

Table 1.1: Comparison of existing and the

IFMR-HDFC product cattle insurance product

Value of cattle Existing IFMR-HDFC

Products Products

(Rs.) For 4%7 5%7 All Inclusive8

Premium Premium

(Rs.) (Rs.) (Rs.)

10000 400 500 510

15000 600 750 655

20000 800 1000 800

25000 1000 1250 945

Dairy Healthcare charges:

It is a common practice for the veterinary doctor’s to charge

anywhere between Rs.100- Rs.150 for a visit to the doorstep of the

farmer. In order to get the cattle vaccinated outside the schedule of

the Government would require the farmers to take the animals to

the nearest veterinary dispensaries. This not only results in

inconvenience and loss of wage but the farmer also incurs cost in

carrying the animal to the nearest veterinary dispensary. In cases

where the vaccination is done by a private veterinary doctor, the

farmer has to arrange for at least 10-15 more cattle to get vaccinated

at the same time or else one farmer will have to bear the cost of the

entire bottle which costs anywhere between Rs.140-Rs.180 for one

vaccine. In case, the cattle is not vaccinated and it gets affected by

any of the diseases it may result in permanent reduction in milk

productivity along with treatment charges and sometimes even death.

The Dairy healthcare package provides two vaccines and two de-

wormers at the doorstep of the farmer over the period of a year for

a total cost of Rs.220.

7 Does not include charges for the doctor or other processing charges which

varies between Rs.100-Rs.200.

8 The charge is inclusive of the premium and the Healthcare Package charges.

The package includes not just vaccines and de-wormers but also includes

charges for the doctor and the RFID tag charges. This charge is for coverage

of 85% of the value of animal.

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Role of stakeholders

The role of each of the stake holders in this innovative product

design and structure are given below:

Role of KGFS

a) Increasing awareness about product:

KGFS on enrollment of a customer as its client collects all the

details like, house hold cash flows, asset, liability details etc. So,

they have the details pertaining to the livestock pertinent to all

their enrolled customers in the area. This helps them to

communicate all the details of the product to the relevant group

of clients.

b) Reduction in moral hazard:

KGFS branches have a close local presence. Owing to this, the

KGFS WMs have become an integral part of the social fabric of

KGFS villages. This, together with the stress on Know Your

Customer (KYC) norms makes KGFS a more effective agency in

reducing cases of moral hazard.

c) Customer verification:

KGFS have Unique Reference Numbers (URN:) for all their clients.

For all the cattle being insured with KGFS, the respective tag

no’s are assigned to the URN of the client. This links the

households with their livestock assets and acts as a double check.

d) Funding for Cattle Insurance premium:

KGFS on its part would advocate the benefits of the product and

would fund the premium, if necessary through easily repayable

small loans to the clients.

e) Quick Claim Settlement:

KGFS makes the payment to the client within 72 hours of

intimation of the claim after the same has been admitted by

HDFC Ergo.

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Role of DNE

a) Maintenance of electronic platform for the

product:

In order to enable on the spot issue of insurance policy, it was

necessary to develop a system where the animal registration is

done at the customer doorstep and the data reaches the

insurance company in real time. A system was also required to

track health and productivity related details of each animal to

ensure that the basic preventive measures were being taken care

of. The DNE has worked with partner Software Company and

customized the Dairy Animal Health and Productivity Management

Software which enables registration of animal and also enables

real time upload of data for the insurance company to issue the

policy. The software also maintains detailed records of preventive

healthcare measures taken. Over a period, it would also have

concrete data on mortality rates of insured animals.

b) Training of Local Dairy Healthcare Services

Provider:

DNE trains the Local Dairy Healthcare Services Provider in

performing the tasks of cattle registration, scheduling for

vaccination and helps in setting parameters for the different

activities to be performed by the local entity.

c) Linkage for inputs and equipments:

The DNE provides the linkages for the vaccines, de-wormers and

other equipments required to the local dairy healthcare services

provider. The DNE also takes care of the hardware and software

requirements of the product.

Role of Local Dairy Healthcare Services Provider

a) Approval of Health Condition of dairy animal:

DNE accredited veterinarian verifies the health of the animal.

The veterinarian allows only healthy dairy animals to be tagged

and issued insurance. The veterinarian also ascertains the age of

the animal and records other identification details.

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b) Tagging of cattle using RFID ear tags:

In order to ensure that the each animal is identified with a

unique Identification number, ICAR certified RFID Ear Tags are

being used instead of plastic tags. The tags have a unique code

which cannot be allocated to any other animal in the world. The

RFID tag enables fast and error free recording of tag numbers

and immediate recording of cattle details in electronic form. The

same tag may be used for multiple uses like for Healthcare data

recording, breeding data recording and other requirements for

the same animal. Usage of such unique ID for identification of

cattle is a step ahead in the direction of ensuring availability of

complete history of cattle during its lifetime. This would lead to

benefits like better suited premium rates and clear knowledge

about valuation of each cattle in future. Moreover, the Dairy

Health and productivity Management software has been designed

in such a way that if the veterinarian has to issue cattle insurance

or update data about vaccination being done on a particular

animal, s/he has to visit the animal and read the tag. Only then

can s/he update the data that the animal has been vaccinated.

This reduces chances of veterinarian not administering vaccines

but simply entering the data that the animal has been vaccinated

while at his/her office.

c) Dairy Animal Registration and maintenance of

records:

The Local Dairy Healthcare Services Provider is entrusted with

the responsibility to register healthy cattle for the purpose of

insurance. The details of the cattle are entered into an electronic

form on the data entry device and uploaded whenever internet

connection is available.

d) Access to Preventive Healthcare Support:

Dairy Healthcare Services Provider ensures that the customers

are able to have easy access to preventive healthcare facilities

like de-worming and vaccination at their doorstep. De-worming

and vaccination acts as a basic preventive measure to reduce

chances of animal mortality due to diseases. By adopting

vaccination, the farmer is not only reducing chances of sudden

loss of cash flows due to death of animals but also contributing

to the confidence of the insurance company to offer the

insurance products at a lower premium.

Conclusion and Way Forward

The Integrated Insurance and Risk Mitigation solution thus uses a

mix of product and process innovations to address the issues of

high transaction costs and information asymmetry, thereby

contributing to significant reduction in premium and increasing the

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efficiency of the product. As cattle is an important source of income

for majority of KGFS clients, this product would act as a safety net

and protect the clients from financial shocks and provide support

for buying cattle again. This product may also be seen as a protection

to KGFS loan portfolio when the animal is bought with a KGFS loan.

The structure also demonstrates the value proposition that a co-

ordinated effort of this nature can bring about to the customers

served.

Each of these stake holders mentioned would be keen to offer the

product, process, technologies with entities/ agencies interested in

knowing more about the product or replicating the product.

For entities and individuals who are interested in replicating the

product or interested in knowing more please mail to

[email protected].

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Technical Note





9 All India Rural credit committee (1969) recommended establishment of an agency to assist

small farmers who had not benefitted from gains of green revolution. And as a result Small

Farmer’s Development Agency (SFDA) came into existence, which started working in 1971-

72. Programs based on agriculture and animal husbandry was started. SFDA provided subsidy

to the extent of 25% to identify 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)

Annexure 1

History of Cattle Insurance Products in India

The Government of India pioneered the effort to create a market for livestock

insurance with the help of Small Farmer’s Development Agency9 (SFDA) in 1971

and subsequently various schemes were launched at national level to provide safety

nets for all livestock rearing farmers in the country. Though public insurers have

been in this field for the past 35 years, there has little innovation in product structure.

The Insurance cover remained restricted to death and Permanent Total Disability

(PTD) only, but not for other insurable risks like cattle diseases, epidemics, and

hence this market remains underpenetrated with less than 7% of cattle being insured.

The table below gives the important developments in the Cattle Insurance related

products chronologically:

Table 1.2: History of Cattle Insurance related products

Year Implementing Agency/program Remarks

1971 “Cattle insurance scheme” Nationalized banks began to finance

by Small Farmer’s the purchase of cattle (i.e. credit linked

development agency livestock insurance was provided) and agreed

to collect premium from beneficiaries. Cover

was for one year and premium was collected

annually.

1983 “Cattle insurance policy” under Livestock and asset insurance was

Integrated Rural Development extended to the poor along with the

Program subsidized loans under IRDP.

Cattle Insurance was bundled with the loan and

hence was compulsory. This product was

devised by General Insurance Company (GIC)

and implemented through its four subsidiary

agencies of GIC 1983 onwards. Premium

charged was 2.25% (death) with extra charge

of 0.85% for PTD. No age limit for cattle was

prescribed specifically for this.

1983 Market agreement No subsidy was provided and was offered

(Market agreement is an as a voluntary product. Was also offered to

arrangement done when animals that were not purchased under

government/insurance any schemes animals. Premium charged

company has lesser was 2.85-4%. Cover was available at

experience for the product given premium for milch cow of age

and in this arrangement 2-8 years and buffalo of age - 3-12 years.

livestock insurance was

provided as retail product)

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Annexure 2

Screenshot of Herdman Software

1999 IRDA Inception of IRDA, liberalization of

Indian insurance industry.

2001 Private players registered ICICI Lombard, IFFCO-TOKYO, HDFC ERGO,

on- Royal Sundaram registered as private

wards insurers offering livestock insurance.

2005 Micro-insurance regulation, Micro-Finance Institutions (MFIs),

2005 Non-Government Organizations (NGOs) and

Self-Help Groups (SHGs) can act as an agent

for insurance companies to increase the

penetration of insurance in the rural markets.

2005- “Livestock insurance scheme” Premium of the insurance is subsidized to the

2006 implemented by State tune of 50%; Premium not to exceed 4.5% for

Livestock Development Boards annual policies and 12% for three year

(SLDB and State Animal policies. Scheme is extended in 11th Five Year

Husbandry Departments Plan (2007-2012) to cover entire country.

Ref: “Livestock Insurance in India: A sector Review” by Dr.Anupama Sharma, CIRM, IFMR10

10 www.ifmr.ac.in/cirm/downloads/Session2_Livestock_Insurance.ppt

Year Implementing Agency/program Remarks

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Economy & Finance

Integrated Insurance & Risk Mitigation solution for diary farmers