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Is Disaster Insurance a Form of Planning? Field visit to disaster-‐prone areas in India Summary of Initial Findings
My interview with farmers in Pasaladivi village, West Godavari district, Andhra Pradesh
Author: Alpen Sheth, PhD Candidate, DUSP at MIT Submitted to: Aga Khan Program for Islamic Architecture at MIT Subject: Final Report
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Summary In this report, I highlight core findings from my research of India’s weather insurance program. The core question I address in this report are my findings as they relate to whether and in what ways private weather insurance addresses core concerns of disaster planning in the context of agro-‐ecological risks. Policy makers in India highlight farmer suicides, high levels of financial indebtedness and the heightened vulnerability of small farmers to weather uncertainty as core rationales for the national crop insurance programs. Overall, I find that new insurance programs through subsidized actuarial policies are taking fiscal precedent over earlier modes of state based relief schemes. Through my examination of underwriting practices, I learned about the underwriting rubric insurers use to discriminate between the risks that can be financial absorbed or not. On the ground, the program’s contractual arrangements and payment structure privilege loan-‐receiving, often propertied, farmers over all other farmers. However, “non-‐loanee” (non-‐loan-‐receiving) farmers account for more than 50% of the total farmer base in India in the context of formal sources of credit. Even though they face severe and sometime more usurious financial risk as well as climate risk, non-‐loan-‐receiving farmers are largely left out of a several governmental programs including the crop insurance program. I elaborate how insurance companies frame this problem. Lastly, I summarize the issues related to the role of insurance providers in risk reduction, which as of yet, is minimal, but an important area for future development building on innovations in the use of new technologies for data collection. In order to understand how insurance programs correspond to disaster planning I examined what kind of insurance is sold to the target population of farmers, the main implementation issues and how, if at all, are they resolved. I employed field observations across several states, conducted interviews, and reviewed government documents in order to triangulate my findings.
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Background “Climatic facts are not facts in themselves; they assume importance only in relation to the restructuring of the environment within different systems of productions”1 What I have found is that development planning in India has witness a consistent lack of distributive investments to address the glaring inequalities that were a cornerstone of post-‐independence economic thinking. as early as the Green Revolution, the policy imperatives of the Ford and Rockefeller foundations as well as the U.S. Agency for International Development confirmed that efforts to raise agricultural output needed to concentrate initially on the country's more “responsive,” larger farming areas. The government’s agenda had narrowed significantly to focus on rapid, increased production (“output”) rather than income distribution and rural poverty, which were defining “development idioms” of the Post-‐independence government. It eventually became apparent that growth focus was being translated directly into preferential support, for instance, towards better-‐off farmers in the Punjab, which emerged as the leading edge of the Green Revolution success. In the contemporary period, although the “rural” population has been declining for over three decades, 70% of the population still relies on agricultural production for income, making it the largest “rural” population in the world. Yet, there is substantial regional variation in agricultural production. India is divided into 27 states and 5 union territories, in which agricultural growth and employment vary significantly. For example, agriculture accounts for 40% of economic growth in Punjab and 2% of growth in New Delhi, and state governments retain constitutional control over agriculture. Yet, the aggregate statistics show challenging trends. Small holders (farmers with less than 2 hectares of land) constitute 83% of total landholdings and cultivate 42% of operated land. According to Rawal’s study of landlessness (2008), 41.63% of rural households were landless.2 That works out to 61.5 million households and 307 million people in rural India alone. While the disparities of asset ownership have continued to increase, the impact on households have led to “fragmentation of labor.” This means that people make a living by combining agriculture with other types of employment activities that are extremely fragmented as they are constantly moving between work sites and further along caste, religion, gender lines as they compete for scarce employment opportunities.3 In India, the effects of this “reproduction squeeze,”4 has led
1 Davis, Mike. 2002. Late Victorian holocausts: El Niño famines and the making of the third world. London: Verso. p 19. 2 Rawal, Vikas. (2008). Ownership holdings of land in rural India: Putting the record straight. Economic and Political Weekly, 43-‐47. 3 Lerche, Jens. (2011). Agrarian crisis and agrarian questions in India. Journal of Agrarian Change, 11(1), 104-‐118. 4 Bernstein, Henry (2004). "‘Changing before our very eyes’: agrarian questions and the politics of land in capitalism today." Journal of Agrarian Change 4.1-‐2: 190-‐225.
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to the development of the controversial and politically-‐sensitive Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)—the world’s largest public works program, granting workers an assured 100 days of employment in the countryside.5 As late as February 2017, the Finance Minister announced a 25% increase in funds allocated to the MGNREGA program to Rs 48,000 crore ($7.16 bn). Increasingly poverty increases as a result of people who experience “damaging fluctuations” often from agro-‐ecological risks.6 Michael Lipton (2005) makes note of this fact in reviewing the statistics in many developing countries including India. One compelling explanation for widespread and increasing risks of famine-‐related disasters has been attributed to the breakdown of traditional methods of insurance. According to Sen and Dreze (1999), this entails the disruption of “traditional symbiotic relationships” and “seasonal rhythms” caused by commercialization and the subsequent dependency on marketability of labor, commodities and resources. Under these conditions, for people with limited income, individual precaution at the household level is not adequate. Sen and Dreze argue for the need for insurance in some form to address “climatic shifts,” “output fluctuations,” and “variation in exchange rates,” especially within a market-‐based economy (primarily because of what he calls the “decline of exchange entitlements”).7 Thus, expansion of market relationships according to this argument necessitates new instruments to manage risks that are corollaries. The Emerging Role of Insurance As Rob Paarlberg stated during a Senate Foreign Relations Committee hearing, “if the Green Revolution in India was proposed to the World Bank today, it would be turned down. By the 1980s, public investment in roads, research, irrigation, fertilizers, and seeds was politically unacceptable to the Washington consensus on the right–and on the left, among environmentalists opposed to chemical fertilizers, road building, and
5 https://qz.com/900077/budget-‐2017-‐18-‐after-‐demonetisation-‐india-‐has-‐unveiled-‐a-‐budget-‐to-‐make-‐everyone-‐happy-‐except-‐politicians/ 6 Sinha, Saurabh, and Michael Lipton. "Damaging fluctuations, risk and poverty: A review." Background paper for the World development Report 2001 (2000). Link: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.322.8448&rep=rep1&type=pdf 7 Sen, Amartya and Dreze, Jean (1999). The Amartya Sen and Jean Dreze Omnibus:(comprising) poverty and famines; Hunger and public action; and India: Economic development and social opportunity. OUP Catalogue. Sen and Dreze (1999) pursue this argument premised on a diverse set of “entitlements” that are necessary preconditions to avoid deprivation in a market-‐based society. In the case of peasants, he distinguishes between general food availability versus “food entitlement.” Regarding pastoralists, more specifically, he highlights how and increase in uncertainty triggers various forms of insurance—for example, of pastoralists increasing herd size on ever smaller lands and contributing to “over-‐grazing”—which Sen points out is sensible for the individual pastoralist and unjustifiably dubbed the tragedy of the commons (128).
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irrigation projects.”8 In addition, the lack of distributive policies early on in India’s development path such as land reform and a debt-‐based agricultural investment approach, rural indebtedness has continued to worsen. According to the Situation Assessment Survey in 2003 conducted by the National Sample Survey Organization (NSSO Report No. 497), 96 percent of farmers were running into a deficit as their consumption exceeded their income (negative investment). The deficit increases after factoring in net investment in productive assets. As Gine et al (2008) note, continuous shocks to agricultural income, such as a drought-‐induced harvest failure, generate movements in consumption for households who are not perfectly insured, and at the extreme, may lead to famine or death.9
From the perspective of government disaster management, droughts constitute a significant contingent (ad-‐hoc) fiscal impact relative to floods, earthquakes, and other disasters for countries with large populations dependent on agricultural cultivation. The potential revenue risks are from direct transfers to disaster victims (crop loss, livestock loss, lost revenue, damage, death), higher crop prices, increase in imports, GDP impacts. For instance, in the United States during the 1970s, after many years of providing disaster relief and massive investment in protective works, conservative critics observed losses from natural disasters had not declined. Indeed, such losses had steadily grown because dams, levees, and flood walls had encouraged the development of floodplains10 Debates about the use of federal funds in this regard led to the expansion of the Federal Crop Insurance Program in the United States. Formal actuarial systems (public and private) attest to reducing fiscal liability and fiscal volatility that come from ad-‐hoc disaster events. In India, Since the 1990’s balance of payments crisis and structural adjustment policies, India has faced concerns related to fiscal solvency and debt and pursued privatization of insurance programs that can support drought relief for farmers. In this context, insurance-‐based financial innovations have seen significant expansion particularly for rural households. In particular, Insurances Based on Meteorological Indices (IBMIs) are an important development in countries like India. The difference from traditional crop insurance is that indemnification is not triggered by damage to the crop, but by the level of a meteorological index, which is itself correlated to crop yield. IBMIs are analogous to weather derivatives, which reduce the impact of harmful weather on firms whose margins widely depend on climate. Those products initially appeared in the 1990s, first distributed to energy suppliers. The main difference of IBMIs relative to traditional insurance is that there is no need for damage assessment.
8 Rob Paarlberg, an agricultural-‐policy expert at Wellesley College. “Evaluating, and Improving, America’s Response to Global Hunger,” Statement of Robert Paarlberg To United States Senate Committee on Foreign Relations Hearing on “Alleviating Global Hunger: Challenges and Opportunities for U.S. Leadership” Tuesday, March 24, 2009 Dirksen Senate Office Building, Washington, D.C. http://www.foreign.senate.gov/imo/media/doc/PaarlbergTestimony090324a1.pdf 9 (Gine et al 2008:1). Giné, Xavier, Robert Townsend, and James Vickery (2008). "Patterns of rainfall insurance participation in rural India." The World Bank Economic Review 22.3: 539-‐566. 10 (Congressional Research Service 1974, p. 5).
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Initial Findings: Disaster Impacts and Actuarial Awareness
Extensive inundation I observed in Ghatal block, West Medinipur District, West Bengal, Credit: Author
Farmer and Insurance Engagement Based on my observation in Andhra Pradesh, insurers are not incentivized to be proactive about their outreach to farmers, and farmers confirm this. Insurance is primarily conducted through bancasurance. In the case I examined, this means that bank staff deducts an insurance premium from an existing loan amount. However, because of lack of communication, many farmers do not know that they even have insurance and may not know the full range of products. In areas where they participate fully, many farmers seem to have a less positive experience with insurance. I met several farmers who found out about “prevented sowing” clause in their insurance policy well after they experience 10 July flooding. They consequently contact or notify people too late to submit claims.
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Farmer from West Medinipur, West Bengal, showing the destruction of his crops and explaining his lack of
knowledge of the insurance claim timeline for prevented sowing, Credit: Author
Paddy field recently converted for aquaculture in West Godavari district, Andhra Pradesh, Credit: Author
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I observed several insurance and risk awareness campaigns during my fieldwork. The awareness campaigns carried out in West Godavari and Krishna districts were a great idea in this direction. Empirically, the current engagement rate involved 5000 farmers over July-‐August (2 months), averaging about 2,500/month and 625/week. These campaigns provided information about disaster risk and measures to reduce it while explaining the role of purpose of insurance to farmers. Infrastructural assessments of area-‐wide risks include for potential damage to infrastructure, maintenance, replacement, and measurement for better tracking of existing infrastructure in rural areas. One of the important measures of risk assessment involves a very specific method that is used across the country for several purposed beyond disaster risk reduction. Currently, damage is assessed based on crop cutting experiments (CCEs), which were developed in the 1950s in order to measure food production and crop productivity following horrific famine.11 The agricultural sector, insurance providers, and farmers to measure shortfalls in crop yield as well as overall production and supply use this approach. Yet, there are several challenges facing this method and this has been a major argument in favor of index-‐based insurance policies.
Crop evaluation based on the CCE randomized selection method from West Medinipur, West Bengal,
Credit: Author
11 Rationale of CCEs: Multiple Phase Stratified Sampling Method (1961) Hubback and Mahalanobis based on Sukhatme (1946).
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Beyond, the assessment methodology, there are widespread problems and constraints related to the political and administrative concerns of insurance in India. Because of the farmer suicide crisis in India, the profits of financial institutions such as insurance companies pose unique questions. Increasingly, there has been political opposition to the government’s insurance scheme.12 In addition, as mentioned above, there is a lack of transparency about land records, land insurance, insured crops, and other parameters that are the basis for distributing claims and other resources. Lastly, because insurance is mostly applicable in India’s rain-‐fed lands, water distribution and access had heightened relevance. Conflicts between farmers over the management and distribution of water as well as insufficient maintenance of irrigation channel more generally are exacerbating risks related to flood, saltwater intrusion and drought.13
Team of flood loss surveyors in West Medinipur, West Bengal, Credit: Author.
12 mentioned to me in the context of Haryana 13 discussed with regards to the fact that given the geographical properties of upland and lowland farming, there is a need for coordination and controlled distribution in order to ensure farmers at various scales have adequate access to water.
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Applied DRR lessons from Area Risk Reduction pilots: Reduce risk to cultivation: What is the best measure to reduce major risks? Which is the time to sow? The following is an overview of your approach so far: -‐ Problem #1: cyclone risk peaks in October and risk total loss at harvest -‐ Solution #1: complete harvest before onset of risk (early sowing) -‐ Problem #2: How to prevent high cyclone-‐force winds from affecting crops -‐ Solutions #2: Grow Maize as wind breaks
o Sub-‐Problem: the bund size it two small o Solution: suggest min bund width for next cropping season if possible.
-‐ Problem #3: Farmers sow paddy after paddy, reducing yield -‐ Solution #3: Add one more crop: pulses so that will increases (fixes) nitrogen in the
soil – differentiation of soil nutrition system -‐ Problem #4: Heavy rainfall in the Godhavari and Krishna Basin à flow causes
flooded (because it is in the catchment area) -‐ Solution #4: Keep the drainage clean.
o Sub-‐problem #4a: Water User Association are in charge of maintenance but downstream is not maintained well
• Waste accumulation • Broken lack of repairs (gates) • Aquatic plants
o Solution #4a: Suggest and proactively coordinate solutions to the District Collector and Chief Engineer
-‐ Problem #5: Farmer do not implement “land development” practices and fertility of land is decreasing because many of tenants and not the owners (e.g. plowing, tilling, leveling, not increasing nutritional content (organic matter) à which increases land erosion).
o Sub-‐problem #5a: Owners don’t give lease agreement to the actual leasee – they give it to their friend and submit to the DC (according to Andhra Pradesh experience). Then most agricultural landholders lease informally. So insurance and credit is with the owner or formal lessee, and rarely with the actual de facto farmer.14
o Sub-‐problem #5b: Loan officer prioritize repayment so they prefer giving to land owners only.
-‐ Solution #5: Tenant/Leasee farmer identification in order to sell services, products that don’t require land records—ideally those that will incentivize better land management practices
o Sub-‐solution #5a/b: look into the legal ramifications of insuring non-‐farmers. Possibly enforce that landholders formally lease so that tenant farmers get access to insurance. Do due diligence to see that this formalization doesn’t
14 According to field surveyors, In the 2 districts, West Godhavari and Krishna, of all the cultivators, 80% are leasing land in the coastal belt, 20% owners. Majority of owners live in Hyderabad. Leasing agreements and insurance is done by S/M farmers, and not with actual tenant farmers.
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inadvertently undermine tenant farmers, who are farming at a rate of 80% of the active holdings in Andhra Pradesh15
o Sub-‐solution #5a/b: Research another mechanism to provide insurance and/or loans to tenant farmers, given that they are the majority of actual farmers: Co-‐operative mechanism, FPO, etc.
-‐ Problem #6: Increasing turn-‐over from agriculture to aquaculture. -‐ Solution #6? This seems to be happening rapidly, what kind of effects will this
have and what kinds of intervention are possible
15 Discussion with Insurer
