The working group on risk management in
Constraints on augmenting livestock insurance penetration
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| Constraints on augmenting livestock insurance penetration: The claims ratios for livestock insurance stand on the brink of un-profitability – the average for the last 5 years is 82%. If we consider that 15% of premiums are paid as commissions, and management expenses are another 10% of premiums, with other administrative costs more, then the ratio of claims to premiums would stand at about 120%. The adverse claims ratio and hence, adverse probability is what is preventing the supply- side, from extending this branch of insurance vigorously. There is a severe constraint from the demand side too, viz. the demand for livestock insurance, is extremely price elastic. Any attempt to increase the livestock insurance premium rate rapidly, brings drown the number of animals insured, as well as the premium income. As illustrations, are two actual market experiments: Mehsana District Cooperative Milk Union, Gujarat, was experiencing an adverse claims ratio of 180% during the period 1999-2001. To control the claims ratio, the premium rate was hiked up from 5% to 6% in 2001. The result was sharp decline in the number of animals covered from 39,000 to 14,000 and annual premium collection from Rs. 1.08 crores to Rs. 0.58 crores between 2001 and The second example is that of the Sabarkantha District Cooperative Milk Union, which also had an adverse claims experience. The lead insurer, United India Insurance, decided to correct the premium rate and tighten the claims procedure in the year 2001. The number of animals insured dropped sharply from 25,000 to 15,000 and the annual premium collections from Rs. 1.10 crores to Rs. 0.65 crores between 2002 and 2005. Both the case studies above, show how large is the price elasticity of demand, for livestock insurance. There is widespread withdrawal from insurance, with even a small increase, in the premium rate. The cause for such high price elasticity is obvious it is low income. Thus, simply raising the premium rate to make the livestock insurance operation viable may prove to be self-defeating. Clearly, the solution lies in subsidizing the insurance operation to activise the supply side and take advantage of high price elasticity of demand, to increase coverage Increasing coverage and penetration, to reduce the claims probability. Then, de-subsidising the premium rates gradually Claims probability can be expected to improve, as the coverage increases. It is estimated, that at penetration levels beyond 25% or more, of the animal population, the claims probability (on account of death, will reduce to 2.5%. Genetic upgradation of the animal stock, will also reduce the claims probability on account of disease. Thus, over a period of time the premium rates can actually be brought down, so also the subsidy amount. It is expected, that due to genetic upgradation , the average value of animals, is expected, to increase at least 3 times by the year 2010. That also means that income derived from the improved breeds, will increase commensurately and bring down the price elasticity of demand, among other things. The time will then be appropriate, to begin desubsidising premium rates. The livestock insurance scheme devised by the Department of Animal Husbandry, Dairying and Fisheries, has many salient features. The implementing agency would be the Department itself and the State Livestock Development Boards. The main functions would be to manage central funds, call quotations from insurance companies and payment of premium subsidy as well as payment to identified veterinary practitioners, indifferent districts. At present a pilot program is being implemented in 100 districts of the country. The scheme selects insurance companies, on the basis of price quotes and service efficiency. The scheme primarily covers the death of the animals. All additional coverage, such as ‘Disability Risk, must be paid for by the beneficiaries. The premium rate is upwardly restricted to 4.5% for annual policy and 12%, fora year policy. There is a premium subsidy of 50% and the sum insured, is the current market price as certified by a veterinary surgeon. The scheme was begun under the 10 th Five Year Plan and can betaken up in a full-fledged way under the 11 th Five Year Plan, in the form of a National Livestock Insurance Scheme. At present, the livestock penetration is 6.58% of insurable cattle, which is very meager. The total subsidy element assuming 5% annual growth in penetration over the XI Five Year Plan to cover cattle and buffaloes is given in the Table below. The total cattle population is crores. The average premium per animal is Rs. 174.28. If penetration is increased by 5% per annum and a 50% subsidy is envisaged, the financial outlays over the XI th Five-year-plan penetration are presented in Table below: Download 0.68 Mb. Share with your friends:
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