Climate change in India: what role for insurance and the private sector?
LSE’s Susannah Fisher and Swenja Surminski argue that the commercial viability of crop insurance must be considered before private insurance companies can play an effective role in climate change adaptation.
India is highly vulnerable to the effects of climate change due to its long coastline, dependence on agriculture and reliance on the annual monsoon, and is in need of comprehensive climate change adaptation planning. Climate change adaptation, often regarded as the poor relative of climate mitigation, is now an accepted part of climate policy. Developing a response to actual or expected impacts of climatic change has so far largely involved public actors such as governments and international agencies. However, there is an increasing focus on the potential role of private sector organisations both as implementers of climate change adaptation policies but also as funders of adaptation measures.
This engagement of the private sector has become a growing paradigm, particularly in a time of constrained public finances. Despite the widespread enthusiasm for private sector involvement, the terms on which the private sector could play a role in managing climate risks remain unclear. Insurance is one example of a possible adaptive response to climate change that has a long history of private sector involvement; it therefore offers an insight into the potential role of private actors in climate change adaptation in the future.
In India, as elsewhere, agriculture is a crucial sector that will be affected by climate change; two-thirds of the Indian population is dependent on agriculture as their main source of livelihood with 70 per cent of the farming community described as small and marginal farmers. These farmers are particularly at risk from unexpected changes in the climate and are likely to benefit from robust crop insurance regimes.
Crop insurance is an important tool for risk transfer in the current climate. Insurance risk transfer has been used for centuries as a tool to manage the risk of uncertain losses. In its most basic form, insurance is a mechanism by which risks, or part of a risk, are transferred from the insured to the insurer in return for a premium payment. This reduction in uncertainty is widely seen as an important mechanism driving our economic systems: without insurance, many activities and processes would be deemed too risky and would not be undertaken, and those affected by a loss might struggle to recover.
Crop insurance in India has existed in some form since the 1970s. The National Agricultural Insurance Scheme (NAIS) is currently the largest crop insurance scheme in the world, insuring 25 million farmers. Crop insurance schemes are subsidised for small and marginal farmers and are usually compulsory if the farmer takes out a loan to buy seeds etc. The main public schemes running today are NAIS, modified NAIS, and the Weather-Based Crop Insurance Scheme (WBCIS). Since 2003, private players have also been able to develop and provide crop insurance in India and run pilots in conjunction with NGOs and private companies. More recently, the Indian government has also allowed private companies to become involved in delivering some of the large public insurance schemes.
Crop insurance has clearly played an important role in supporting Indian farmers through the losses incurred during drought years. But whether insurance is in fact an adaptation measure remains an open question, not just in India. Having insurance does not necessarily reduce the physical risk that a farmer faces—it simply transfers the risk of financial loss. A global survey of 123 insurance schemes in low and middle-income countries (the Climatewise Compendium) shows that the full potential for using risk transfer for adaptation is far from exhausted.
Very few of those schemes show a direct link between risk transfer and risk reduction and only one has explicitly taken into account the impact of climate change on risk levels. For those schemes where a direct link between risk transfer and risk reduction is recorded, the public sector plays a larger role than in those schemes without risk reduction linkage, suggesting a degree of disconnect between the private sector insurance business model and risk reduction (Surminski and Oramas-Dorta 2011).
Although private insurance companies are playing an increasing role within crop insurance, their activities remain limited. These limitations must be taken into account when considering the possible future role for private players in climate change adaptation. In keeping with the survey results, private companies working within government schemes in India found it difficult to incorporate risk reduction measures in their policies. The manner in which risk reduction is incorporated into risk transfer mechanisms is crucial for determining if, and how, climate change adaptation can be achieved through public-private partnerships.
Moreover, issues of viability must be fully addressed if private companies are to be significant players in this field. Despite enthusiasm in the National Action Plan on Climate Change for private sector involvement in crop insurance, commercial viability remains a major constraint for many private actors.
Lastly, mere involvement does not necessarily utilise all the skills and expertise that the private sector has to offer. The current model of engagement between private and public actors in India does not provide the private insurers the governance space to harness the theoretical advantages of private sector involvement. For example, there has been limited innovation and competition between actors. And although the liability has been transferred to the private sector – a key government objective – there is still limited evidence that this model of engagement has created better products that reduce as well as transfer risk. The public-private relationship dynamic as well as surrounding transnational and national governance frameworks will be key to the success of future private sector involvement in climate change adaptation.
A working paper on this topic is due to be published in August 2012. This project is part of a wider research programme on the economic impacts of climate change in the BRIC economies, conducted by CCCEP/GRI under the Munich Re Programme.