Thursday, December 1, 2011

How is Poverty Line (& families Below Poverty Line) determined in India

A lot of heat has been raised on the definition of "poverty line" and who is poor ever since the Planning Commission told the Supreme Court in September 2011 that anyone spending more than Rs 965 per month in urban India and Rs 781 in rural India will be deemed not to be poor. Updating the poverty line cut-off figures, the commission said those spending in excess of Rs 32 a day in urban areas or Rs 26 a day in villages will no longer be eligible to draw benefits of central and state government welfare schemes meant for those living below the poverty line.
Lets understand what's poverty line and how is it determined in India.
Poverty Line Basket (PLB)
It is a socially acceptable minimal basket of inter-dependent basic human needs that are satisfied through the market purchases. The all India rural and urban PLB are derived separately for urban and rural areas based on per capita calorie norms of 2400 (rural) & 2100 (urban). It is specified in terms of required per capita total household consumer expenditure to achieve this level of calorie intake.
The existing poverty line is defined in terms of Per Capita Total Consumer Expenditure (PCTCE) at 73-74 prices, adjusted over time for changes in prices keeping the original PLB constant.
While poverty estimates and Poverty line is used extensively by various Government Departments especially those in the welfare sector, the two departments having most relevance are Department of Food and Public Distribution (DFPD)- to determine the Below Poverty Line (BPL) and Above Poverty Line (APL) families for the purpose of subsidized Public Distribution system and Ministry of Rural Development (MoRD) to determine the coverage of population under various schemes. It is also the MoRD which actually takes up the job of devising methodology for identification of families once the poverty line has been defined by the Planning Commission.
The DFPD follows poverty estimates based on 93-94 (50th NSS survey) projected on March 2000 population and the number of families thus covered under the PDS system is:
Planning Commission has revised the poverty line in 2004-05 (based on 61st NSS survey). The poverty line as per 61st round is 27.5% (all India), 28.3% (rural) and 25.7% (urban).
Issues with existing Poverty estimates
• Consumption pattern underlying rural & urban PLBs has remained tied to 73-74 consumption basket & are outdated. For instance
– Share of food in consumption basket has reduced from 80% in 1973-74 to about 65% in 2004-05
– Rural food consumption pattern is shifting gradually from cereal based to non-cereal food items. (Voluntary shift in dietary habits; (though this point has been debated by some experts);
– Expenditure on education is not taken into consideration. Number of rural school age children has increased from 40% in 73-74 to 75% in rural poverty line PCTE class in 2004-05
– Private Household Expenditure on health & education has increased manifold & is not considered in PLB of 73-74
• Further, it follows a Uniform Reference Period (URP) of 30 days based on Consumer Price Index for Agriculture Labour (CPI AL) for rural and CPI for Industrial Workers (CPI IW) for urban areas.
• CPIAL understates the price rise in rural areas thus lowering the rural poverty artificially;
• Moreover its based on calorie intake norms. There is an overwhelming evidence of downward shift in calorie Engel curves overtime. Moreover, calorie consumption intake based on 30 days recall in NSS doesn’t correlate with nutritious outcomes.
Tendulkar Committee Report
An Expert Group headed by Prof Tendulkar was appointed by the Planning Commission in December 2005 to review the methodology for estimation of poverty. The terms of reference for the committee were:
1. Examine issues relating to comparability of the 50th, 55th & 61st round;
2. To review alternative conceptualization of poverty;
3. To recommend any changes in the existing procedures of official estimates of poverty.
The Expert Group has submitted its report in November 2009. The Expert Group recommends that the purchasing power represented by the mixed Reference Period (MRP) equivalent per capita total expenditure (PCTE) underlying the all India urban HCR of 25.7% is to be taken as the new reference PLB for measuring poverty & be made available to both the rural & urban population in all the states after correcting for urban rural differentials.
Based on the shortcomings of the existing poverty estimates, the Committee has suggested the following changes:
Mixed Reference Period
• The new MRP is based on 61st NSS captures 30 days and 365 days recall
• A 365 days recall captures better than 30 days recall the per capita expenditure on low frequency items especially of those on lower end of PCTE.
• MRP captures 23 indices based on
CES on 176 items aggregated into 15 commodity group indices- cereals, pulses, milk, oil, egg-fish-meat, vegetables, fresh fruits, dry fruits, sugar, salt-spices, other food, beverages & tobacco, fuel- light, clothing & footwear
Health (institutional & non institutional);
Other 5 items groups-entertainment, personal care items, miscellaneous goods, miscellaneous services and durables accounting for 10% of urban PLB excluding rent and conveyance.
• It is a move away from calorie intake norms
• New recommended PLB incorporates latest available data on goods & services based on observed pattern of consumer behavior in 2004-05

• It corresponds to 1776 calorie for urban and 1999 calories for rural and is close to 1770 calorie norms of FAO for India.
The comparative poverty estimates scenario is as follows:

(all figures are in % terms & to be read as % of population below Poverty Line)

The actual number of BPL coverage will thus be determined depending upon the population base considered. The best would be to consider the Census 2011 population.

The Planning commission is yet to come out with the revised poverty line and the number of families falling within the BPL category. There also are debates, especially from States like Bihar whether poverty line can be defined in this 'top down' manner and should it not be based on the actual survey of the families. The debate continues and gets more charged as the "Right to Food bill" is being laid in the house of Parliament and general elections are due in 2014!
The Tendulkar Committee had estimated the poverty lines for 2004-05 at a per capita per month consumption expenditure of Rs 578.80 in urban areas and Rs 446.68 in rural areas. In an affidavit filed in the apex court in September 2011, the Plan panel updated these in September 2011 to Rs 965 and Rs 781 for urban and rural areas, respectively. And there has been lot of public outcry since then mainly on account of such an estimate being perceived too low in absolute value terms. While the Tendulkar-led expert group did take into account a few indicators without really restricting itself to calorific value, there has been wide-ranging opinion that a more objective view was needed. Moreover, the estimates are not in sync with the identification of families that is separately undertaken by the ministries of rural development and urban development.

In a reply to Parliament in the ongoing session, it was informed that a new committee of experts will be set up soon to decide on a comprehensive criterion for identifying the BPL families. The committee’s quest will be to arrive at “the most credible methodology to estimate poverty” in consultation with states and other stakeholders.
And so the quest continues......

Sunday, November 27, 2011

Neemrana Fort-Palace "non-hotel" hotel - a perfect weekend getaway

I used to be very intrigued every time I pass through “Neemrana” shop in Khan Market as to the word that Neemrana is and had been waiting for an opportunity to explore the place. I finally could get out of Delhi over the weekend and spent a day in the Neemrana Fort-Palace. Of course, the rooms can be booked online or in the Neemrana shop. The room rents in Neemrana Fort-palace hotel range from Rs 3000- Rs 20000 per night. There’s a discount of 20% during off-season (summers).
The journey to Neemrana
Neemrana is about 120 kms from Delhi, located on the main NH8 highway. Depending upon the traffic and the time of the day, it takes anytime between 2-4 hours to reach here. There are three toll tax points enroute – one at Gurgaon, the next one at Manesar and the third one at Shahjahanpur (at 116 kms point from Delhi ) as one enters Rajasthan. One passes through Gurgaon & Rewari districts of Haryana and Alwar District in Rajasthan. The main towns en-route are i) Gurgaon, ii) Manesar and iii) Dharuhera (in Rewari District of Haryana). The expansion work on NH8 is underway to make it 6 lanes each and this often creates huge bottlenecks on the highway. What amazes me is the fact that the expansion work on this highway seems to be never ending work. I remember driving to Jaipur last time in 1997 and the road was equally chaotic due to the ongoing work to make it four lane. I really wish the work gets completed sometime! Because of the ongoing work in stretches and towns such as Manesar & dharuhera en-route, the journey may get terribly slow in bits and pieces as happened with me. I encountered a traffic jam at i) gurgaon toll point, ii) a 15 kms stretch while passing through Manesar and again iii) while passing through Dharuhera. It gets dusty, horney(remember, we Indians love honking!) and never ending. Thankfully, i am yet to complete “the girl with the dragon tattoo” and it came in very handy in these stretches. I thought of this treacherous bit something worth undergoing to seek a peaceful time in Neemrana, to be with nature and away from the crowds and traffic and this is when i got concerned as I kept noticing huge bill boards promising ‘flats at affordable rates’ and ‘offer to invest in new shopping malls in Neemrana’ throughout the journey. The last thing i wanted to see here was another unplanned, haphazard growth in the name of urbanisation. After entering Rajasthan on this NH8 at Shahjahanpur, the first town is Neemrana, which falls in Alwar District. On my left was a huge Industrial belt of RIICO followed by NIIT Neemrana.
Neemrana Fort-palace
Neemrana Fort Palace is just within first 3 kms on NH8, to the right of NH8 and one has to be careful to look for a signboard on the main highway (a small one though). I took the right turn and passed through “Liberty footwear” factory followed by Neemrana village. One will have to take a right turn from a point where “sub-tahsil office” is on the left and the road leads up to the Fort. Vehicles cants go inside the fort and one has to walk up about 250 meters to reach the reception. It’s a sudden change from all pollution, congestion & traffic I went through the journey and suddenly it was all quiet and quaint and I felt refreshed. It was literally being in nature. The fort-palace is a garden palace, located in an area of 6 acres and built over 12 layers tiered into the hills. There are two parts in the Fort hotel- the original portion and the new block where the architecture has been kept in sync with the original design of the palace fort. The original terrain and vegetation has been left untouched and one sees ‘kikar’ (acacia karoo) trees all around. There are two swimming pools in the Hotel and are well maintained. For an hour or so as one enters the hotel, the place looks like a complete ‘Bhul-bhulaiya’ and one would surely lose his/her way while going up to the room.
I checked into the fort –Resort and realised that there are no numbers to the room and all have names. I was in “Donna” room and had to walk up about at least 50 meters to come up to my room. What amazed me as I entered the room was that there wasn’t

a Television or internet! And it was such a big relief. I went around and saw other rooms too. Rooms in the original Fort are at various levels and the room architecture is different in almost all the rooms. Few have stairs as one open the room and washroom are at different level. Each room has a small balcony. I also noticed that there is no intercom and one has to dial the number to access the reception. It’s not only being in nature and a very conscious effort has been made to minimize the interaction with the outside world and that’s the beauty of Neemrama. It is truly peaceful and one feels refreshed and recharged.
In the evening, there was a cultural program and traditional Rajasthani folk dances were performed. Maybe because it was a weekend but it added that extra zing. The dinner timings are from 8-10 pm and which again is a refreshing discipline.
I happened to meet Francis Wacziarg, co-chairman of Neemrana Fort-Palace this morning and complimented him for a very subdued presence of outside interference and almost a perfect blend with the nature. He informed me that there are about 25 Neemrana “non-hotels” and that, in addition to the heritage sites in the North, Neemrana is planning to arrange similar wonders now in South India including Hyderabad. He also explained how they have worked concertedly towards creating a new niche whereby the experiencing of history in once abandoned architectural treasures has now been added to the Indian tourism repertoire and thereby turning India’s neglected architectural ‘waste’ into World heritage assets.
I went to see the Neemrana Baoli in the morning. It’s about a kilometre from the Fort-Palace Hotel, to its right and one has to walk through the village. Built in 1760s it is a 9 storey underground structure of majestic scale and is in a state of complete neglect. It was built by the Rajas of Neemrana for famine relief. Traditionally baolis in Rajasthan have acted as sarai for the travellers. I have seen Baolis in Gujarat (adalaj Vav, Rani ki vav & agrasen vav) which have been restored and are heritage site for the tourists. The one at Neemrana is certainly very impressive in its architecture and I wish its restored and beautified at the earliest. I did go down all the way and it was some exercise. The visit to neemrana is incomplete without visiting the bauli.
I came back in the evening today totally refreshed. I heard a gossip how, Neemrana- a vast and splendid ruin was acquired initially in 1977 for a ridiculously paltry sum of Rs 2.2 millions (just hearsay and am not sure about its authenticity) but then I marvel how it was turned into a world class heritage hotel with painstaking efforts and ensuring the ambience is not polluted in the name of modernity. The “Neemranification” is a term now symbolises a new blend of restoration, rebuilding and revitalization of ruined architectural wonders. The term has become almost synonymous with a foremost example of architectural restoration-for-reuse.
No wonder, Queen Elizabeth’s niece Princess Sarah Armstrong Jones on her honeymoon at Neemrana Fort-Palace wrote “simplicity and style are so difficult to achieve together...Neemrana is one of the most beautiful places we have stayed anywhere in the world”. Another comment in the visitor’s book says “The Neemrana hotel is India’s best-kept secret”.

Neemrana is a phographer's delight and even an amateur novice like me couldnt resist. More photographs can be seen here.
It was my first visit to Neemrana Fort-Palace and certainly not the last....

Monday, November 14, 2011

A brief history of Pension system in India -Part I

According to a working paper published by Asian Development Bank (Ageing Asia’s Looming Pension Crisis): “A young continent reaping the demographic dividend of a large youthful workforce is giving way to a greying continent where the ratio of retirees to workers is on the rise. In contrast to industrialized countries, most Asian countries do not yet have mature, well-functioning pension systems”. This makes the task of pension reforms in India rather compelling in nature and a dire social necessity that cannot be forestalled for far too long. The Indian economy is currently basking in the glow of the so-called “demographic dividend”, a fortuitous consequence of what was earlier considered a millstone for the economy – the country’s burgeoning population. But, this dividend can also turn into what has been termed as a “demographic echo”. Over time, this huge bulge in the working force – which is being considered as an economic windfall -- is expected to retire. At the same time, the lower dependency ratio will see fewer younger people joining the workforce, resulting in a graying of the economy. A larger number of older and retired people, in the absence of a dependable pension system, will pose a danger to the old age income security in the country and put enormous pressure on the government of the day to re-route expenditure earmarked for public goods and services towards providing for health and pension spending. This causes a drain on the state of the fiscal and, subsequently, on the economy.
The proportion of those aged 60 and above is expected to climb from 4.6% in 2000 to 9% in 2030. In absolute numbers, the number of people above the age of 60 will increase from 87.5 million in 2005 to 100.8 million in 2010 and this is expected to jump to 200 million by 2030. By 2050, it is expected to be over 320 million (Source -- World Population Ageing: 1950-2050, United Nations). What makes this data-point chilling is the fact that improved economic development is bound to lead to a higher life span. The inability to implement a properly functioning pension system now is likely to affect a larger number of people in the future
What further complicates matters is that only about 12% of the working population participates – and is eligible to participate -- in the mandatory, formal programmes designed for providing income security during the non-earning years. These employees are largely part of the formal sector (private sector and the government). The rest is either part of the informal sector (which goes unreported in the broader economic scheme) or does not enjoy adequate income streams that can be accommodated in the existing pension schemes.
Any pension system in the world can be said to broadly conform to any one, or a combination, of three basic pillars.
Pillar-I: This pillar essentially comprises all the state-funded pension plans, which in theory should ideally cater to every citizen in the country. This is also the pillar under which the government launches some of its poverty alleviation programmes aimed specifically at the aged. Under this pillar, the system is publicly managed, the liabilities are not actuarially funded and the scheme works on what is termed as Pay-As-You-Go. This means that current revenues are used to meet current expenditures. But, in fiscal terms, the consequences need a slightly more detailed look – the current generation’s tax payments are used to pay the pension liabilities of an earlier generation. The World Bank’s now famous report on pensions, called Averting The Old Age Crisis (1994), defines Pillar-I thus: “…a publicly managed system with mandatory participation and the limited goal of reducing poverty among the old…”. In India, the defined benefit pension system in vogue for the civil services at both the Centre and the state level – including in the railways, defence and telecommunication services – fall under Pillar-I, where the system is essentially non-contributory in nature and any particular year’s pension liabilities are met from the government’s annual revenue expenditure account for that year.
Pillar-II: This typically comprises a mandatory savings programme at the employment level which is either privately or publicly managed. In simple terms, it is a forced savings pillar that provides benefits only to contributors, and, in general, incorporates a direct linkage between the volume of contribution and the extent of benefits received. In India, the Employees Provident Fund, which is India’s largest defined contribution and publicly managed plan, is an example of this. In addition, there is the Employees Pension Scheme, a publicly managed scheme carved out of the EPF scheme with the objective of paying a monthly pension to workers after their retirement.
Pillar-III: This pillar includes all kinds of voluntary savings, available to everyone including those looking to supplement their Pillars I & II pension provisions. In India, the Public Provident Fund scheme fits the definition.
The Journey from Defined Benefit to Defined Contribution
The government began to take note of the looming pension crises necessitated by an existing anachronism in the civil service pension scheme – a defined benefit scheme inherited from the British administration, which was showing all signs of being fiscally unsustainable and, secondly, by an important event in the mid-nineties in which a part of the age-old defined contribution scheme, the Employees Provident Fund Scheme, was converted into a defined benefit scheme in the form of the Employees’ Pension Scheme, 1995. This marked a curious move by the Indian government, particularly at a time when the rest of the world was moving away from DB to DC. However, the introduction of NPS a few years later might be seen as an attempt to make course corrections.
The Ministry of Social Justice and Empowerment (earlier called the Ministry of Welfare), in 1998, commissioned the first comprehensive study of India’s pension sector under the chairmanship of former UTI Chairman Dr S A Dave, under the name of Oasis Project – Old Age Social and Income Security Project. While the original remit of the Oasis Committee was to provide a pension solution for the 90% of the informal sector workers, the committee ended up providing a prescription for overall pension reforms. As part of its overall recommendations, the Oasis committee (which submitted its final report in January 2000) suggested a completely new and radically different architecture through portable individual retirement accounts, across-the-counter service delivery platforms, centralized record keeping, competing pension fund managers, extensive use of information technology, freedom to choose investment menus, among other things. While observing that there was a separate working group looking into the aspect of government pensions, the Oasis committee expressed its view on the issue rather succinctly: “…measures should be taken so that Government Pension liabilities become fully funded out of contributions made by government employees. This goal can be achieved over a period of the next ten years.”
The turning point came on February 28, 2001, when former Finance Minister, Mr. Yashwant Sinha, announced this in his Budget speech for 2001-2002: “The Central Government pension liability has reached unsustainable proportions: as a percentage of GDP, it has risen from about 0.5 per cent in 1993-94 to 1 per cent in 2000-2001. As such it is envisaged that those who enter central government services after October 1, 2001 would receive pension through a new pension programme based on defined contributions. In order to review the existing pension system and to provide a roadmap for the next steps to be taken by the Government, I propose to constitute a High Level Expert Group, which would give its recommendations within 3 months.”The Finance Minister Jaswant Singh announced in his Budget speech of February 2003: “My predecessor in office had, in 2001, announced a road map for a restructured pension scheme for new Central Government employees, and a scheme for the general public. This scheme is now ready. It will apply only to new entrants to Government service, except to the armed forces, and upon finalisation, offer a basket of pension choices. It will also be available, on a voluntary basis, to all employers for their employees, as well as to the self-employed. This new pension system, when introduced, will be based on defined contribution, shared equally in the case of Government employees between the Government and the employees. There will, of course, be no contribution from the Government in respect of individuals who are not Government employees. The new pension scheme will be portable, allowing transfer of the benefits in case of change of employment, and will go into ‘individual pension accounts’ with Pension Funds. The Ministry of Finance will oversee and supervise the Pension Funds through a new and independent Pension Fund Regulatory and Development Authority.”Thus began the transition from the age-old defined benefit scheme to the fiscally prudent defined contribution scheme as part of the National Pension System. In December 2003, the Interim Pension Fund Regulatory and Development Authority was created as the watchdog and promoter for the pension sector. Simultaneously, all government employees joining service on or after January 1, 2004, were compulsorily brought under the coverage of the New Pension System (NPS)—a defined contribution scheme replacing the defined benefit scheme available to the Government employees until then. Most of the states have also migrated to the DC system under NPS, except three states. Only one category of government employees has been exempted from mandatorily moving to NPS: personnel from Armed Services. NPS was introduced for all citizens from May 2009.

Each government employee contributes 10% of his salary (basic+DA+DP) to the pension account, which is then matched by a government contribution of an equal amount. However, non-government employees do not get the benefit of a matching government contribution. In both the cases, investors are free to contribute higher than what has been mandated. All these contributions are accrued in a pension account called Tier-I from which funds cannot be withdrawn. Once the account-holder reaches the proper exit age (60 years, relaxed to 50 years for Swavalamban beneficiaries in Budget 2011-12, see below), he/she can withdraw only up to 60% from the accrued savings corpus. The balance 40% in the savings corpus has to be used to compulsorily purchase annuities sold by any life insurance company. This annuity then provides for regular pension streams over the non-working life of the investor. In addition, there is a tax issue at work here as well. The contributions to this account and the savings accrued are exempt from income tax, as per Section 80CCD. However, when the investor withdraws the amount on maturity, it is taxable. The Direct Tax Code is proposing to convert retirement savings from the current Exempt-Exempt-Taxable regime (which exempts contributions and the accumulated sums from income tax but levies tax on the final corpus) to a completely Exempt-Exempt-Exempt regime.

Over 12 lakh government employees are currently registered with NPS. However, when weighed against the fact that it has been more than six years since NPS was first made mandatory for government employees, the enrolments at 12 lakh do seem to be on the lower side. In May 2009, NPS was thrown open to the general public. The subscription levels so far have remained rather tepid and do not seem to reflect any investor interest in the product. The scheme has managed to draw less than 55,000 subscribers so far (October 2011). This is a rather low number, given that the scheme architecture was designed to make it attractive to the general public. In terms of money managed by the PFMs, as of March 31, 2011, the total assets under management by all PFMs amounted to Rs 8,585 crore. Of this, the contribution from the nongovernment sector does not exceed Rs 100 crore. This reflects the sluggish growth of NPS.

While the transition from DB to DC is a financially prudent and viable in terms of long term sustainability, the progress under NPS scheme has been sluggish, staggered and far below the potential. We need to look into what ails NPS and what can be done to popularise the scheme.

Sunday, November 13, 2011

Comprehensive Social Security Insurance Scheme - A concept note

Most of the insurance policies in India presently are exclusively in the domain of life, non-life (health) & pension. While life & non-life insurance schemes are regulated by Insurance Regulatory Development Authority (IRDA), pension schemes are regulated by Pension Fund Regulatory & Development authority (PFRDA). With the opening up of the Insurance sector in 1999, the number of companies, both in life and non-life, have gone up to 49 and the new era has seen the entry of international insurers, the proliferation of innovative products & distribution channels and raising of supervision standards. Insurance penetration (ratio of insurance premium underwritten as a percentage of GDP) in life insurance is 4.4 % and non-life insurance penetration is 0.7% in 2010 India . While less than 15% of total population is covered under some sort of health insurance (including government supported schemes), Pension coverage is even lower with only about 12 % of the working population covered under the formal pension schemes. At present rate, only 50% of the population is likely to get covered under health insurance by 2033 . However, most of these Insurers have confined their operations in cities and gradual penetration in tier II & tier III cities. The insurance coverage in rural areas is extremely low and is confined mainly to the top 3 % of the rural population. Insurance companies in rural areas are reluctant to enter aggressively mainly on account of low levels of insurance literacy, perceived lower levels of the ability to pay premiums, fear of sparse coverage geographically and thus low levels of premiums. Clearly, there is a need for quicker and wider coverage.
Rural market is supposedly tough for insurance companies and it’s only the subsidy based co-contributory insurance schemes for certain categories promoted by PSU Insurance companies that have made some inroads in rural areas. While LIC promotes Aam Aadmi Bima Yojana (AABY) & Janashree Bima Yojana (JBY) schemes in Life segment, it’s Universal Health Insurance Scheme (UHIS) by non-life PSU Insurers and Rastriya Swastha Bima Yojana (RSBY) by Ministry of labour & Employment in non-life- Health sector and “Swavalamban” ( NPS-lite) for pensions managed by PFRDA.
Insurance sector, since opening up of the insurance sector has undergone two phases –the first one being from 2000-2005 which was focussed on increasing coverage followed by the second phase of 2005-2010 where the focus of insurance companies was on profitable growth. The sector now is entering in the third phase which aims at ‘stable profitable growth’.
In an effort to ensure a balanced and speedy expansion of insurance coverage in the country, IRDA came out with regulations (Obligations of Insurers to Rural or Social Sectors), 2002. These regulations imposed obligations on insurers to sell a specified percentage of policies to rural public and cover a specified number of lives/assets belonging to people below poverty line or those pursuing certain traditional occupations. The Government of India set up a consulting group in 2003 to examine the existing insurance schemes for the rural poor; and on the basis of the group’s recommendations, the Authority issued IRDA (Micro insurance) Regulations, 2005. Consequent upon this notification, even though there has been a growth in the design of products catering to the needs of the poor, the rural penetration and density of Insurance products remains abysmally low. Not only the rural insurance and pension literacy is low but it gets further accentuated by the fact that insurance companies have not made any major efforts aimed at creating and capturing rural markets. It’s the beneficiary who is supposed to approach the insurance agent (unlike the urban market) as of now. Given the fact that there are plethora of schemes and each of them segmented on mutually exclusive domains and managed by different insurance company, it becomes almost impossible for the rural poor/ worker in an informal sector to make up his/her mind on the insurance policies to go in for. Moreover, because of the poor insurance literacy, the felt need is extremely low. And due to the fact that most of these poor / workers in informal sector have little savings on a long term basis, very little remains when one retires and the family is exposed to worst of economic hardships in case of any eventuality of the bread earner of the family. Moreover, there’s nothing left when one retires or has no job and the entire family suffers in old age. There also is an issue of what’s should be premium chargeable from them as too little makes the scheme unsustainable and ‘too high’ makes it impossible for this segment to contribute for.
All this makes a strong case for a “Comprehensive Social Security Insurance scheme” covering life, non-life and pension under one scheme. IRDA has already allowed insurance companies to offer “health plus life combi product”, a policy that provides life cover along with health insurance. Presently, a tie-up is permitted between a life and a non-life co. Under the ‘combi products’ the underwriting of the respective portion of the risks is underwritten by respective insurance company. While this was intended to facilitate policy holders to select an integrated product of their choice under a single roof, the ‘combi product’ somehow hasn’t really been a success and we need to look into the reasons.
The Standing Committee of Finance
(2010-11) in its fortieth report submitted on August 30, 2011 in fifteenth Lok Sabha has made the following observation...
“55. As the unorganized sector is a very important part of our society and economy, the Committee desire that their social security should be adequately safeguarded in the present era of craving for social inclusion. The Committee would, therefore, like the Government to work out a tripartite kind of a scheme where the State Government, the Central Government and the unorganized sector workers could make contributions. With such a comprehensive coverage, the present pension scheme which is rather narrow in scope now could move forward so as to truly justify its nomenclature as the National Pension System.”
Further, the recently concluded G20 Cannes Summit Final Declaration “Building our common future: renewed collective action for the benefit of all” dated November 4, 2011, inter-alia, declares:
“We recognize the importance of investing in nationally determined social protection floors in each of our countries, such as access to health care, income security for the elderly and persons with disabilities, child benefits and income security for the unemployed and assistance for the working poor.”
Target Group
The scheme is meant to provide a comprehensive Insurance coverage to workers (& their family) working in the informal/unorganised sector. The basic objective of having a social Security Insurance scheme is to bring in all those, who are otherwise left out of formal insurance cover especially Pensions, under Insurance coverage. As such, without restricting the coverage eligibility to an artificially defined line, it is proposed that anybody who is not presently covered under a formal pension scheme, such as Employee Provident Fund (EPF), Employees Pension Fund, Employees Deposit Link Insurance Scheme, Central Government Health Scheme (CGHS) & Employee State Insurance Scheme (ESIS), New (National) Pension Scheme (NPS) (tier I) and any other such scheme which is compulsory in nature for the employees and where the employer makes a co-contribution, will be eligible.
Components of the Comprehensive Insurance Scheme
1. Life – based on the existing schemes which are based on 50% co-contribution from Government of India (Aam Aadmi Bima Yojana & Janashree Bima Yojana), the life coverage will be as under:
a. Premium – Rs 300 pa.
b. Coverage-
i. Rs 50,000 – natural death
ii. Rs 100,000 – accidental death
iii. Rs 100,000 – total permanent disability
iv. Rs 60,000 – partial permanent disability
It will be a group insurance scheme and the family will be the unit. In the existing AABY & JBY scheme, the annual premium is Rs 200 and the coverage is Rs 30000, 75000, 75000 and 37500 for each of these categories respectively.
2. Health – Health insurance has to be an integral part of any comprehensive insurance scheme. It was initially felt that a health insurance scheme on lines of RSBY should be a part of this scheme. Since, it is envisaged to have a separate comprehensive Universal Health Insurance Scheme including preventive health, Maternity benefits and child care also, the health insurance is not being considered under this scheme.
3. Scholarship for Girl children – all the girl students, studying in class IX-XII will be eligible for scholarship whose parents opt for the comprehensive Insurance Scheme. The amount of scholarship will be @ Rs 800, 1200, 1800 & 2400 pa once the girl completes class IX, X, XI and XII respectively and will be given once a year at the end of the academic year and after she has passed the examinations. This will act as a conditional incentive linked aimed at encouraging the girl child to complete the secondary education. There will not be any limit on the number of Girl children to be covered under this scheme for a family.
4. Pension- the most crucial missing link presently leading to insecurity at the old age and associated issues is the presence of a pension system for workers and their families in the unorganised sector. Keeping in tune with what’s practised globally and pension principles, most of the pension schemes in the country have moved away from Defined Benefit to Defined contribution based system. The NPS scheme launched in 2004 is the latest such scheme. Funds are invested under a pattern defined by the regulator by the Pension Fund Managers with a twin objective of minimising the risk and maximising returns.
In order to encourage workers in the informal sector to save for pensions voluntarily, a scheme called “Swavalamban” was launched by the Central Government in September 2010, wherein for a saving of Rs 1000-12000 pa, the Central Government makes a co-contribution of Rs 1000 pa for the first five years starting 2010-11. The funds are invested by the Pension Fund managers and annuities will be provided to the policy holders once they attain the retirement age. Due to various factors such as low awareness, lack of proper marketing of the product and structural issues, the coverage under Swavalamban has remained very low. However, a fact that the scheme as envisaged aims to target workers who can save in the range of Rs 1000-12000 pa and there are large number of workers who can’t save Rs 1000 pa. Moreover, it needs to be studied as to what’s been the average saving per account for every Rs 1000 contribution of the Central Government and as such the issue whether targeting wasn’t done properly needs to be examined.
Taking Swavalamban as a guiding scheme in terms of Central Government contribution being Rs 1000 for a worker saving between Rs 1000-12000pa and its experience in terms of its failure to take off, it is proposed that Central Government contribution towards pension funds should be atleast Rs 2000 pa. Depending upon the age at which a worker enters the scheme, his annuity payable at the time of retirement will be determined. Moreover, it is a Pension scheme and not a saving scheme and as such, withdrawals before the retirement age will not be possible.
Premium structure – whether beneficiary should pay and how much?
We need to answer whether beneficiary should pay for such a scheme. The scheme basically by definition is based for the worker in the unorganised sector. The issues to be addressed are regarding his capacity to save voluntarily in the normal course and which he is willing to contribute as his share in the scheme. I am presuming that a worker is willing to save @Rs 5 per day ie Rs 150 per month or upto Rs 1800 per annum as the upper limit. Any premium above this will not be affordable by him. There’s also an issue of the collection cost and whether it will outstrip the premium itself. Regarding the willingness to pay, in a study conducted in 2005, it is established that there is a willingness to pay for health insurance . It is thus felt that there are tremendous advantages in mandating beneficiary contribution under such a scheme. The beneficiary will be a stakeholder and will be more aware about his entitlements. It will also imply the actual coverage of real beneficiaries and will guard against any misuse or inflated coverage. In the long run, it will ensure sustainability of the scheme.
Accordingly, it is felt that there should be tri-partite agreement between Central Government, State Government and the beneficiary. While there are apprehensions whether the State Governments would agree to contribute in such a scheme, the experience under NPS-lite ( Karnataka and Haryana) and some of the other schemes (MSP based procurement of foodgrains – in MP, Bihar etc) have shown that States may like to get involved if they see a ‘political value addition’ in such a scheme. Moreover, it is felt that State Government’s involvement will ensure against wastage under the scheme and against any exaggerated coverage.
The funding pattern of the annual premium on a per beneficiary basis is suggested as under:
In a typical first year scenario it is presumed that the beneficiary contributes Rs 500, State Government Rs 700 and Government of India Rs 1500 and thus the annual premium will be Rs 2700 per beneficiary.
With Rs 300 as annual premium for life coverage, and Rs 150 for the annual administrative charges, Rs 2250 will remain for towards annuity contribution under the pension accounts. Depending upon the age at which the beneficiary enters the scheme, the derivable pension structure per beneficiary per month will be:

Figures in column 1 is age in years, the figures in column 2,3,4,5 represent annual figures in Rs while figures in last column are monthly pension due to the beneficiary. The above calculations are based on an average return of 7% pa (the actual return is higher in the range of 9-12 % and thus the yield would be better) and the returns based on the actuarial valuation are thus likely to be higher.
However, these figures are not adjusted for inflation and considering a nominal inflation of 5% pa for this entire duration, the additional contribution required per annum, to keep the inflation adjusted value at the same level will be Rs 1845 pa for the age group 20 years to Rs 570 pa for the 55 age group.
The requirement of funds from Central Government will be Rs 1800 crores (Rs 1500 crores towards life & pension coverage @ Rs 1500 pa and Rs 300 crores for Girl child scholarships) for every 10 million family coverage. The State Government’s contribution will be Rs 700 crores pa. Depending upon the increasing coverage overtime, the requirement of funds will increase @Rs180 crore for a million coverage for GOI and Rs 70 crore per million for the state Government.
Implementation architectureSince two separate products – life (which is annual) and pension (which is annuity based accumulation) will have to be managed, an un-bundled architecture is proposed to manage the comprehensive social Security Insurance scheme, based on the NPS architecture being followed to manage the pension funds by the PFRDA and some of the best global practices in pension fund management. The unbundled architecture focuses on keeping the entry level agencies (Aggregators/point of presence), CRA (Central record keeping agencies) and Fund Managers separately.
The key constituents are:
Point of Presence (POPs): POPs are the interface between the policy holder and Insurance authorities. Effectively, the POP is only a conduit between the investor and the Central Record Keeping Authority (CRA) for information and between the investor and the Fund Managers for managing the reverse flow of keeping the investor apprised with regular NAV updates. There are three broad categories of PoPs:
1) POPs -So far, the POPs have included branches of banks (from both the public and private sectors), post office branches, depository participant offices and NGOs.
2) Aggregators - Aggregators shall be intermediaries identified and approved by the Central Nodal agency to perform subscriber interface functions in respect of their constituent groups. The Aggregators shall be entities already in existence having continuous functional relationship with a known customer base for delivery of some socio-economic goods / services. LIC, State Govt departments, State govt Societies such as SERP, WCD, NGOs etc are some of the institutions who could be an Aggregator. The Aggregator must be a registered body. The aggregators shall be responsible for a) Promotion of the scheme and awareness about the need for old age income security among its constituent group members; b) Meeting the ‘Know Your Customer’ requirements in respect of potential subscribers as mandated; c) Discharge of responsibilities relating to fund and data upload within prescribed time limits. d) Collection of contributions from subscribers and ensuring its passage to Trustee Bank;e) Ensuring availability of services to its underlying subscribers as mandated under the pension scheme; f) Handling grievances received from subscribers and their resolution.
Each of the Aggregators will operate through a system of Facilitators.
3) Facilitators – the facilitators are the individuals who are based in the locality where the beneficiaries are and they are the last mile connectivity in the link of enrolment of beneficiaries and will provide the necessary hand-holding to each of the beneficiary. The existing network of LIC agents (about 14 lakhs), Business Correspondents (BCs), aanganwadi workers, ASHA workers, ANMs, Teachers are some of the categories who will be facilitators. They will all work on a commission on a per enrolment basis, to be decided by their Aggregators.
CRA - the Central Recordkeeping Agency (CRA) will be a centralised agency at the national level to maintain the records of contribution and its deployment in various pension fund schemes for the Subscribers. CRA will carry out the functions of Record Keeping, Administration and Customer Service for all Subscribers under the proposed comprehensive pension scheme. The records of the contributions of each Subscriber will be kept in an account known as the Permanent Retirement Account which shall be identified by a Permanent Retirement Account Number (PRAN) (similar to what’s already available under the NPS system). CRA shall issue a PRAN to each Subscriber on his/her successful registration and maintain database of each Permanent Retirement Account along with recording of transactions relating to each PRAN.

Trustee Bank – A nationalised Bank will be appointed as a Trustee Bank who will manage the banking of the Pension Funds in accordance with applicable provisions of the pension funds, the schemes and the guidelines/notifications issued by the Government of India from time to time as per applicable law.

Exit clause: the purpose of having such a comprehensive insurance scheme is to provide old age income security and it is thus clear that the pension funds getting accumulated are not to be taken as a savings accounts and are not withdrawable before retirement.

Sunday, October 30, 2011

A look into the personality types based on the SMS texting during festivals -

Remember the festival time we had as children? I especially recall Diwali and New year when all of us used to get so many greeting cards, all colourful and we used to put them up all decoratively. The arrival of Archies card changed it for the better as more custom made cards made our day. Then came the internet and "123 greeting cards" earlier in the decade and it became an instant hit especially on Birthdays.

And then came 'mobile telephony' and the era of 'text messaging'. It all started with innocuous personalised messages which included greetings on festivals too. And then came the season of "forwards". A nice message is received and is promptly forwarded to all in the friends list. The same is true for all the jokes...which fall in two categories - i) "non-veg" jokes which are promptly forwarded to all the close 'buddies' and ii) decent 'gyan' pseudo-philosophical jokes/statements which are then forwarded to all uncles/relatives and all those whom one is trying to make an impression upon.
Such 'greeting forwards' have become the order of the much so that one ends up receiving anything starting with 100 text messages upwards. I counted roughly the smses I received this Diwali ( and i must confess I am not one of those very social types) and I was surprised that I had received around 170 smses during those two days. I do try and respond to each of the text messages I receive and it was during this exercise that I started noticing a very interesting trend emerging from these text messages! And based on the kind of texts sent, I have tried and put the senders in the following categories:

1. Family type of a person

He/she is the one whose message reads soemthing like this
" Preeto, Bittoo, Pammi, Guddi, Pappu & Maxi (our doggie!) join me in wishing you all a very happy and prosperous Diwali".

And worst is when the sender forgets to write his own identity and if the number is not saved then one is left wondering to make out who he could be whose descendents are mentioned so royally in the message! In my irritation scale ranging from 1-10, with 1 as interesting and 10 as the most irritating one, such messages would get a rating of 7!

2. A person who wants to spread the light of knowledge

" Diwali is a festival of victory of good over evil. Lets join hands and defeat the evil with goodness".

Now, either I am a foreigner visiting India for the first time during Diwali or am too dumb not to be knowing anything about the festival. Why do people presume that others wont know such basic facts about Diwali. Such messages would get a rating of 8.

3. An environmentalist

"Lets take a pledge this diwali that we shall not burn any crackers! Lets light up earthen 'diyas' and lets not add to the pollution"

I still recall my childhood days when I used to look forward to Diwali so that we could all burn "cock brand" crackers..that sound, that smell ! And the senders of such messages are the guys who themselves will have 2-3 cars at home, 3-5 ACs ( of course, all these wont add to pollution 24/7, 365 days an year!). I personally hate all such pseudo concerns towards environment from people who themselves pollute on a daily basis little reaslising that we are depriving our younger generation of real cracking fun which is confined just one day in an year. Ofcourse, one should be careful and I feel our messages should be confined to that extent. I do burn crackers even today and gift them to all the kids I can get hold of. Such a message would get a rating of 8!

4. A non-veg "langotia yaar"

"**** ka Rocket

***** phuljhari

***** anaar

****** charkhari

****** ****** and it goes on"

Such messages cant be shared with family and you can see a guy smiling quietly, having 2-3 pegs down, as he goes through such a message. It's a reaffirmation of the 'langotia' yaari among friends and they are all surely going to recite them together as and when they catch up next. Such a message doesnt deserve a rating (censored hai bhai).

5. A boring conformist

"I wish you all a very happy Diwali"

It's the most routine text and conveys nothing. The only personal touch by the sender is his name (if he decides to write it as an add on ie). My rating would be 7.

6. Miserly person

"Happy Diwali"

It's as if the sender will have to pay for every extra word sent even within that 160 characters limit. Nothing personal and its better if a person is not wished at all . Rating of 7.

7. Hindi lover

"aapke ghar dhan, dhanya, sukh, smridhi ki vridhi ho...etc etc"

Interesting message but the receiver must know Hindi . In percentage terms, the hindi messages will not be more than 10-15% and thats why sometimes they are a pleasure to read. I give them a rating of 2.

and the list goes on.....

An overview of Crop Insurance in India - status and issues

Benjamin Franklin is likely to be the first person to have thought about Crop Insurance. Based on a severe storm of 24th October 1788 in French countryside which destroyed crops, he observed – ‘I have sometimes thought that it might be well to establish an office of insurance for farms against the damage that may occur to them by storms, blight, insects etc. A small sum paid by a number of farms would repair such losses and prevent much distress’.
The first crop insurance programme in the form of hail insurance started in 1820s in France and Germany for Grapes, while it started in USA in 1883 for tobacco crop. The earliest Multi-Peril Crop Insurance (MPCI) started in USA in 1939, with formation of Federal Crop Insurance Corporation (FCIC). In India although a few concrete ideas were documented between 1912 and 1920, the crop insurance programme, albeit as a pilot become a reality only during 1972!!

Let's first understand, what's Crop Insurance
Crop Insurance is a tool for protection against loss or damage to crops due to natural calamities and other specified non-preventable risks. It is a financial mechanism in which the uncertainty of loss in crop yields is minimized by pooling large number of uncertainties that impact on crop yields so that the burden of loss can be distributed.
World over, there are two broad categories of crop insurance - crop-yield insurance and crop-revenue insurance.
1. Crop-yield insurance: There are two main classes of crop-yield insurance:
Crop-hail insurance This is among the earliest forms of hail insurance from an actuarial perspective. It is possible to implement the hail risk into financial instruments since the risk is isolated. It is generally available from private insurers (in countries with private sectors) because hail is a narrow peril that occurs in a limited place and its accumulated losses tend not to overwhelm the capital reserves of private insurers.
Multi-peril crop insurance (MPCI): Coverage in this type of insurance is not limited to just one risk. Usually multi-peril crop insurance offers hail, excessive rain and drought in a combined package. Sometimes, additional risks such as insect or bacteria-related diseases are also offered. The problem with the multi-peril crop insurance is the possibility of a large scale event. Such an event can cause significant losses beyond the insurer's financial capacity. To make this class of insurance, the perils are often bundled together in a single policy, called a multi-peril crop insurance (MPCI) policy. MPCI coverage is usually offered by a government insurer and premiums are usually partially subsidized by the government. U.S. Department of Agriculture is known to implement the earliest Multi Peril Crop Insurance program in 1938. Federal Crop Insurance Corporation managed this multi-peril insurance program since then. The Risk Management Agency (RMA) is active in calculating the premiums based on individual risk factors since 1996. National Agriculture Insurance scheme (NAIS) in India is of this category.
2. Crop-revenue insurance: Crop-yield times the crop price gives the crop-revenues. Based on farmer's revenues, crop-revenue insurance is based on deviation from the mean revenue. RMA uses the futures prices on harvest-times listed in the commodity exchange markets, to determine the prices. Combining the future price with farmer's average production gives the estimated revenue of the farmer. Accessing the futures market offers enables revenue protection even before the crop planted. There is a single guarantee for a certain number of dollars. The policy pays an indemnity if the combination of the actual yield and the cash settlement price in the futures market is less than the guarantee. In the United States, the program is called Crop Revenue Coverage. Crop-revenue insurance covers the decline in price that occurs during the crop's growing season. It does not cover declines that may occur from one growing season to another. In India, Crop Revenue insurance, in a way, is provided by the Government through a mechanism of Minimum Support Price (MSP) for almost 90% of the overall cereal based foodgrains and as such, there is no need for a separate revenue insurance.
Agriculture in India and Crop Risks
Agriculture in India despite its relatively diminishing contribution to Gross Domestic Product (GDP), accounts for over 50 percent of employment, and sustains close to 70 percent of the population. An important feature of the Indian agriculture sector is the large number of small sized landholdings. Of the estimated total 120 million farm-holdings and 63 per cent of farm-holdings was less than one hectare in size, with average holding size of merely 0.4 hectares.
Because of the dominance of the monsoon, India’s climate and weather risk exhibit the heaviest seasonal concentration of precipitation in the world. Nearly 2/3rd of the land is rain-fed, and almost 20 percent of India’s total land area is perennially drought prone. The Ganges-Brahmaputra and Indus river systems are highly prone to flooding. The magnitude of flooding, despite all the claimed measures, has actually increased in recent decades, from approximately 19 million hectares in fifties to 40 million hectares in 2003 which is about 12 % of India’s geographical area. As a result, the production risk continues to the most important one. Indian agriculture is often and rightly termed as ‘gamble of monsoon’ and is characterized by high variability of production outcomes. Many external and internal factors during crop cycle make it almost impossible for farmers to predict with certainty the amount of output that the production process will yield.
Various methods have been adopted for helping farmers to compensate, at least partially, for loss of their crops. Reduction or suspension of land rent, taxes, cancellation of accumulated agricultural debts, and relief from Calamity Relief Fund (CRF) / National Calamity Contingency Fund (NCCF) are the more usual of the methods applied so far. Useful though these means have been, but the farmers cannot expect them as a right. Secondly, the continued prospects of relief are liable to ‘soften’ its recipients and are also likely to be questioned by the non-farming community. The basic difference between ‘Relief’ and ‘Crop Insurance’ is outlined in table below. An important measure that is largely free from the above complications is crop insurance against all natural and unavoidable hazards. Thus Crop insurance spans crop failure gap. Crop Insurance evolution in India
(i) Program based on ‘individual’ approach (1972-1978): The first ever crop insurance program started in 1972 on H-4 cotton in Gujarat, and was extended later, to a few other crops & States. The program by the time its wound up in 1978, covered merely 3,110 farmers for a premium of Rs. 0.45 millions and paid claims of Rs. 3.79 millions.
(ii) Pilot Crop Insurance SchemePCIS (1979-1984): PCIS was introduced on the basis of report of Prof. V.M. Dandekar and was based on the ‘Homogeneous Area’ approach. The scheme covered food crops (cereals, millets & pulses), oilseeds, cotton, & potato; and was confined to borrowing farmers on a voluntary basis. The scheme was implemented in 13 states and covered about 627,000 farmers, for a premium of Rs. 19.7 millions and paid indemnities of Rs. 15.7 millions.
(iii) Comprehensive Crop Insurance Scheme – CCIS (1985-1999): The scheme was an expansion of PCIS, and was made compulsory for borrowing farmers. Sum insured which was initially 150 percent of the loan amount, reduced to lower to a maximum of Rs 10,000 per farmer. Premium rates were 2 percent of the sum insured for cereals & millets and 1 percent for pulses & oilseeds, with premium and claims, shared between the Centre & States, in 2:1 ratio. The scheme when wound up in 1999, was implemented in 16 States & 2 Union Territories and cumulatively covered about 76.3 million farmers, for a premium of Rs. 4.035 billions and paid indemnities of Rs.23.19 billions.
(iv) National Agriculture Insurance Scheme –NAIS (1999 onwards till date)
NAIS replaced CCIS starting from Rabi 1999-00 season, presently administered by Agriculture Insurance Company of India Limited (AIC), (incidentally, I am one of the directors in its Board!)which provides coverage to approximately 35 different types of crops during the Kharif season and 30 crop types during the Rabi season.
Till Rabi 2009-10, NAIS cumulatively covered 244.58 million hectares of crops grown by 158.63 million farmers covering a risk of Rs. 1869.110 billions for a premium of Rs. 55.837 billions and paid or finalized indemnities of Rs. 204.37 billions. The overall loss cost (indemnities to sum insured) stands at 10.55 percent. NAIS is the world’s largest area yield index insurance programme.
There are some serious shortcomings in NAIS esp. when one looks at it from the farmer's point of view. The basic premise of yield index based insurance scheme is "homogeniety" on the insurance unit, which in NAIS is Tehsil/block/Mandal etc. It often happens that crop in a particular area of that block gets damaged (& not the entire block) and a situation may occur that while the farmer has lost everything, the notified area still has a yield above the threshold level and thus the farmer is ineligible! Also, the claim settlement process is tedious and lengthy, based on a time consuming 'crop cutting experiment'. Further, NAIS is often criticised as a 'Bank Loan insurance' rather than 'crop insurance' as the participation of non-loanee farmers is abysmally low.
(V) Modified National agriculture insurance Scheme (MNAIS)
The Government of India introduced “Modified National Agricultural Insurance Scheme” (MNAIS) w.e.f. Rabi 2010-11 season on a pilot basis in 50 districts in 12 States. Some salient features of MNAIS, inter-alia, include (i) Insurance Unit for major crops is village panchayat or other equivalent unit; (ii) Includes post-harvest losses caused by cyclonic rains are assessed at farm level for the crop harvested and left in ‘cut & spread’ condition up to a period of two weeks; (iii) Individual farm level assessment of losses in case of localized calamities, like hailstorm and landslide; (iv) On-account payment up to 25 percent of likely claim as advance, for providing immediate relief to farmers in case of severe calamities; (v) Minimum indemnity level of 70 percent is available (instead of 60 percent as in NAIS); and(vi) Non-loanee farmers can also be serviced by insurance intermediaries, including micro insurance agents.
MNAIS seem to have resolved some of the key shortcomings of NAIS. Besides qualitative improvements like reduction of insurance unit size, prevented / failed sowing benefits, ‘on-account’ payment of claims, individual farm assessment of hailstorm & landslide losses, coverage of post-harvest losses, MNAIS is quantitatively much better than NAIS.
However, MNAIS has its own problems. While the Insurance unit for major crops has been lowered to village / village panchayat which is good for the farmers, but it has exponentially increased the work load required for crop cutting experiments (CCEs) and as a result, many States (its they who have to conduct the CCEs) are shying away from the pilot because of the enormity of the workload. Some states have also requested GoI to share part of the cost of CCEs. Moreover insurers also fear that the local pressures on the primary workers (those who conduct CCEs) to show lower yields, affect the actuarial soundness of the programme and it may be worthwhile in the long run to employ technologies like satellite imagery for estimating the yield, which is largely free from human interference.But then, it involves cost.
(VI) Weather Index Insurance
Weather index based insurance caught the imagination of the policy makers at the beginning of 21st century, and international financial institutions such as the World Bank encouraged pilots in low income countries where traditional crop insurance could not take off for various reasons, including lack of historical yield or loss data. The basic purpose of ‘weather index’ insurance is to estimate the percentage deviation in crop output due to adverse deviations in weather conditions. There are crop modeling and statistical techniques to precisely workout the relationships between crop output and weather parameters. This gives the linkage between the financial losses suffered by farmers due to weather variations and also estimates the payouts that will be payable to them.
Agriculture Insurance Company of India (AIC) developed a pilot weather risk index-based insurance product in 2004. Building on the existing weather risk insurance products, the Government asked AIC in 2007 to design the Weather risk-Based Crop Insurance Scheme (WBCIS) as a pilot.
AIC developed parametric weather risk based crop insurance for a variety of crops ranging from seasonal to perennial crops and low value to high value crops. During 2010-11 as many as 15 States have implemented the pilot programme in 116 districts covering more than 800 Blocks / tehsils. Rajasthan has implemented the pilot in all areas of the State, while Bihar has implemented the scheme in all but three districts of the State. During 2010-11 AIC piloted weather index based crop insurance for over 35 different crops, and as per the estimates, insured almost 8 million farmers with acreage of more than 12 million hectares for a sum insured of approx. Rs. 96.35 billions for a premium of Rs. 88.3 millions. The weather insurance market as a whole in the country estimated to have insured during 2010-11 over 9.27 million farmers for an acreage of over 13.23 million hectares covering a risk valued at Rs.143.00 billions with a premium of Rs. 12.90 billions.
There has been a spectacular increase in coverage under WBCIS in the recent years and there appears to be greater awareness and acceptance among the farming community. However, just like any other scheme, there are challenges in WBCIS too. Substantial premium subsidies and the market demand for regular payouts rendered weather index insurance more like a ‘money-back’ policy that pays small amounts of payouts every second or third year, rather than working as insurance product that compensates medium and large losses once in five to ten years. Another grey area is the likely difference in rainfall and weather experience between the weather station location and the farmer’s field. With a weather station being referenced to a radius of more than 10 KM, in the present circumstances there are bound to be differences in weather, particularly the rainfall between the location of weather station and the farmer’s field. The result may either lead to undeserved payouts and vice versa. This problem in index insurance is known as ‘basis risk’. Ideally every village should have a weather station to reasonably minimize the basis risk, which would require almost 50 fold increase in the existing weather station network.
Moreover, in order to cover the entire country, a total of 35000 rain guages, and 10000 weather stations are required to have a "weather-grid". It has cost implications and also the issues of security and tempering of these instruements.

Has Crop Insurance really benefitted farmers in India - A macro view
While the Agriculture crop insurance has increased in terms of its coverage over the years, it remains far low when seen as a percentage of farmers/acreage covered or when compared internationally.
During 2009-10, just about 20% of the total cropped area got covered under Agriculture insurance (it is >50% in USA). Of the total coverage, small/marginal farmers, during 2009-10, accounted for 65 percent in terms of number and 43 percent in terms of area insured. Similarly during 2010-11, they accounted for 73 percent in terms of number and 48 percent in terms of area insured. What's however worrying is the very minimal coverage of non-loanee farmers which was a meagre 5% and 3% of total NAIS coverage during 2009-10 and 2010-11. These are the farmers who often dont have access to Bank loans and are often most deserving in terms of their credit requirement and are left out. They are the most vulnerable lot and their being left out is a partial failure of the Agriculture Insurance Scheme as a whole.

To conclude, whats required is (i) increasing agriculture insurance literacy in a manner where its not simply reduced as a bank loan insurance scheme and actually caters to the vagaries of the uncontrollable; (ii) brings non-loanee farmers in its fold (iii) based on quick & scientifically based assessment and an equally quick dispersal mechanism. The ultimate test of agriculture insurance success will be when it could be based on individual farm unit based and not for the designated notified area.

Monday, September 19, 2011

Unraveling Sovereign Ratings

A lot of interest at a common man’s level was generated recently when the country rating for USA was downgraded from AAA to AA+ .While it might have been a coincidence, very little actually is known regarding what is a country rating, how it’s done and the implication it carries. Other questions that come to one’s mind are – how many such agencies are involved in such ratings, is there any accepted yardsticks on the basis of which it’s carried out and what’s the source of information on the basis of which such ratings are done?
What is a Credit Rating?
The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations.
A sovereign credit rating is the credit rating of a sovereign entity, i.e., a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad. It takes political risk into account.
There are three major credit rating agencies in the World -
1. Standardandpoors (S&P)
2. Moody's
3. Fitch

Let’s first look at ratings assigned to some of the countries, both ‘emerging’ as well as ‘vulnerable’ and the ratings assigned to them by S&P
It seems a bit strange that while Ireland which has been struggling economically but for the bail out packages is BBB+ while India which has consistently been achieving a GDP growth rate of 8% + is rated BBB-!. India’s internal credit rating is lower than that of countries under severe financial stress. Lets try and unravel some of the factors involved in the country rating.
There are four major pillars determining a country’s rating – its Economic resilience which is dependent on 1) economic strength, 2) Institutional strength and financial robustness which is pillared on 3) financial strength and 4) event risk. While it’s not disclosed by the rating agencies, it is expected that per capita GDP, Real GDP, Inflation rate, Gross Investment/GDP, and openness of the economy determines the economic strength while Government Effectiveness, Rule of law, political stability (all these three terms as defined by the World bank) and the corruption index (as defined by Trans International) determine the Institutional strength of the country. Government financial strength is perhaps determined by Govt. rev/GDP, Govt. primary balance/GDP, Govt. debt/Govt. rev, Current Account balance/GDP and Interest paid on external debt and the susceptibility to an Event risk refers to a risk of debt default due to Financial events such as speculative crises; Economic events such as the earthquakes and other natural disasters or Political which includes war or political chaos/instability.
While the economic resiliency determines the sovereign’s rating range, the final rating is calibrated based on the financial robustness. The sovereign rating mechanics thus is determined by : A study was done recently, based on ordered logistic regression to establish relation between variables & ratings, based on the ratings available for about 100 countries and using 30 variables fitting into the four pillars as mentioned above and based on the statistical analysis, the significant variables and their estimated weightings are
Is there a bias?
A look at the country rating of BRIC countries vis-à-vis some of the vulnerable countries (Portugal, Ireland, Italy etc) often is baffling. While India and Brazil have AAA-, Ireland has BBB+ . While China has AA-, Italy has A+! One often wonders where there’s any bias against the emerging countries. While the exact strategy and the factors which are considered by the rating agencies are not exactly known, based on the above analysis one can make a calculated guess that certain factors which may reflect the prevailing situation more realistically not considered while arriving at the country’s rating. For instance, per capita GDP is considered and this will automatically put countries such as India & China in a disadvantageous position. Also the fact that countries like India and China have a relatively younger population and will have a demographic advantage gets neglected in the process. While countries like Italy may have a higher per capita GDP based on the existing population, it doesn’t capture the equally, if not more important, the fact that the actual population in Italy is declining. More importantly, the Purchasing Power Parity (PPP) is not considered and the absolute GDP is taken into consideration. Automatically thus, countries with higher absolute GDP get an advantage whereas countries such as India whose GDP might be lower in absolute terms but will be higher if PPP is considered are at disadvantage. Also, factors like unemployment ratio etc are perhaps not considered.
It clearly gives an impression that the country ratings are from a commercial view point ie the attraction of the country as a trading destination. While it is important to look into the rating criteria which required institutional strengthening and take up necessary measures accordingly, it is equally important for emerging countries, esp. the BRICS countries to take it up with the rating agencies the fact that ratings should reflect a more realistic scenario. Otherwise, such ratings will continue to be an exercise in ‘self-denial’ as countries like China take off.

Sunday, September 11, 2011

Only 2% of enrolled Students actually get to become an Actuary in India!

Who is an Actuary?
An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms.
Actuaries mathematically evaluate the likelihood of events and quantify the contingent outcomes in order to minimize losses, both emotional and financial, associated with uncertain undesirable events. Since many events, such as death, cannot be avoided, it is helpful to take measures to minimize their financial impact when they occur.
The profession has consistently ranked as one of the most desirable in various studies over the years. In 2006, a study by U.S. News & World Report in included actuaries among the 25 Best Professions that it expects will be in great demand in the future. In 2010, a study published by job search website CareerCast ranked actuary as the #1 job in the United States.
Actuaries' insurance disciplines may be classified as life; health; pensions, annuities, and asset management; social welfare programs; property; casualty; general insurance; and reinsurance. Life, health, and pension actuaries deal with mortality risk, morbidity, and consumer choice regarding the ongoing utilization of drugs and medical services risk, and investment risk. Products prominent in their work include life insurance, annuities, pensions, mortgage and credit insurance, short and long term disability, and medical, dental, health savings accounts and long term care insurance. In addition to these risks, social insurance programs are greatly influenced by public opinion, politics, budget constraints, changing demographics and other factors such as medical technology, inflation and cost of living considerations.
Indian scenario

Institute of Actuaries of India (IAI) is a statutory body established under The Actuaries Act 2006 (35 of 2006) for regulation of profession of Actuaries in India. IAI is the parent body governing the conduct of Actuaries in India.
Who can become an Actuary in India ? Any person with minimum 18 years of age and having a high degree of aptitude for mathematics and statistics can take up this course and become an Actuary. Generally, first class graduates or postgraduates in Mathematics, Statistics or Econometrics will be in a better position than others to qualify as actuaries.
To qualify as an Actuary, a candidate has to pass all examinations in the prescribed subjects. In addition, he has to comply with other criteria such as experience requirement and attendance at a professionalism course prescribed for the purpose.
There is no fixed duration to complete the course.
The subjects for the examinations can be categorized in to three groups:
The first group Comprises of the CT (Core Technical) series- there are 9 subjects to be cleared- these involve development of theory of actuarial science and applications of mathematics and statistics to actuarial applications such as life insurance, general insurance, employee benefits, investment and other areas. An introduction to economics, financial economics and financial reporting is also included at this stage. Although most part of the course is somewhat theoretical, the exercise and the question in the examination are practical in nature as they reflect real life situations of the area of work to which the subject is applicable.
The second group comprises of CA (Core Application) and ST series subjects - there are 3 subjects to be cleared- CA3 subject is mean to develop skills of communication of technical aspect of the CT series subjects in simple language to non-technical persons; here again the stress in examination question is demonstration of the skills of communications in real life environment. The ST series subjects are entirely tuned to development of the practices and related principles in the respective areas of work while some part of the CT series could be learnt either through a distance education approach or through a classroom approach, the ST series subjects can be fully understood only in a practical work environment.
However, having cleared these 12 subjects, the candidate becomes an Associate ( & not a full fledged Fellow). In order to become a fully qualified Fellow Actuary, the candidate has to clear additionally 3 more subjects (out of the third group mentioned below) and also work for three years.
The third group of SA series subjects involve application of knowledge and understanding of principles as well as demonstration of skills professionalism and judgment in an essentially practical situation.

Present scenario of Actuaries in India
Key sectors requiring the services of these Actuaries are Insurance companies, reinsurance companies and consultants. In addition, the off shored actuarial agencies operating in India (presently about 30 such units in India, as informed by IAI) also engage their services. At present, there is no estimate available with IAI of the likely requirement of Fellows in India. However, a very rough requirement at the present level of Insurance and Pension operations in India is around 600 and will increase to about 1000 by 2014. It clearly implies that there is a severe shortage of Fellows in India.
It is also noticed that while 34 % of Actuaries in the World are working in the Pension Sector, the percentage is minimal in India and is practically yet to take off. Pension is an upcoming and emerging market in India and this will bring in additional demand of Actuaries in India in the coming years.
It is also noticed that a number of Associates and Fellows are working in non-actuarial assignments in India. At a time, when we are being faced with a severe shortage of Actuaries, it is paradoxical that they should work in non-actuarial activities. The reasons along with general profile of such individuals need to be examined in detail.

The enrolment of students and the status of Fellows/Associates is as under:
While the enrolment has nearly doubled from 6200 in the year 2007 to about 12000 as on June 2011, the actual number of Fellows has been 217 in 2007 and increased to 236 in 2011. It is less than 2% of the total students enrolled. And this is a cause of serious concern. If one looks at the age profile of these 236 Fellows, 73 of them are aged 65 and above (almost one third)! Even when one considers 137 Associates also, it is only 3 % of the total students enrolled. While the general feeling as gauged by interacting with IAI President and some of the council members is that most of these students don’t have the capacity to clear the exam, it doesn’t also means that only 2% are found eligible. Clearly, there’s something wrong.
The emerging issues are :
There is no entrance exam for the students to be enrolled in the Actuarial course. Along with the demand of Actuaries going up, the number of students seeking out this course has almost doubled in the last 5 years. On the other side, the students actually passing out the exams & becoming Fellows have remained stagnant. Given this scenario, it is felt that there should be an initial screening entrance examination for students seeking admission for this course especially in Mathematics, Statistics, Econometrics and familiarity with IT based mathematical models – subjects which are crucial to work as a Fellow and these are the subjects in which most of the students are not able to clear the exams.
IAI doesn’t conduct any formal classes for the students enrolled and most of the teaching is course-material based. It is felt that IAI should collaborate with (i) reputed & recognized Universities such as Delhi University; (ii) IIMs or equivalent institutes who can conduct classes in these subjects; (iii) specialised institutes dealing with quantitative courses and work out an arrangement wherein students are made to undergo classes on a payment basis so that the quantitative skills required can be honed for the students and pass percentage can be improved. Alternatively, IAI can have an arrangement with some of the Institutes (including National Insurance Academy, Pune) to be its institute to conduct a course as designed by IAI.
The Mutual Recognition Arrangement (MRA) at present exists with (i) Institute & Faculty of Actuaries, UK, and (ii) Institute of Actuaries of Australia. IAI is in touch with Casualty Actuarial Society, USA for MRA. The MRA implies that IAI & the concerned society recognise each other so that the Fellow of them can be considered at par and be employed as an actuary. In order to meet the requirement of Actuaries, it is felt that IAI should examine other Societies such as the one in South Africa, Germany & other such well recognised and reputed societies and work out MRA with them. A number of students from India are enrolled in such courses and MRA will help in increasing the pool of qualified Actuaries. However, some of the Council members informally voiced their concern regarding a very deliberate vested motive in not refining the examination process within IAI so as to favour more entrants from the existing MRAs and to enable more such MRAs.