Case Study in Mutual Insurance

(Deepak Alok and Atul)

Govindpura village is situated about 50 kilometers from Mehsana, in the Bijapur taluka of the Mehsana district. The Dairy Cooperative society in the village is unique in the sense that it has evolved its own cattle insurance scheme for its members. This is in a situation when the cattle insurance schemes in all the places are facing a lot of problems including that of high premium rates, moral hazards etc.

The scheme started on 15 th August 1996. Need for such a scheme came out of a crisis that the society faced about that time. It had a contract for the group insurance of the cattle of the members of the cooperative society. That year there was an unusually high death rate of the cattle in the village and the insurance company raised the premium rates. The society decided to sever its links with the company. The villagers sat together and decided to have their own fund to insure the cattle of the village.

In the first year 200 members joined the scheme with a contribution of Rs. 400 each. That year 7 cattle died and their owners were compensated each Rs. 8000 for the same. This resulted in a saving of Rs 47000 including interest. The cumulative savings in the funds have now become about 1.92 lakhs. The progress of the scheme is shown in Table 10.

The scheme is running with very simple rules and regulations. All the members have to contribute an agreed premium at the beginning of the year. Against this premium all their cattle are insured for Rs. 8000. However the claim will be restricted to only one cattle per year. Thus if a member has 3 cattle he will get Rs. 8000 on the death of any one of the cattle. Entry and exit from the scheme are voluntary. (Even non-members of the dairy cooperative society can avail of the scheme provided they are pouring a given quantity of the milk in the society.) If any body wants to opt out of the scheme, he will get his share of the net worth. If anybody wants to join the group he will have to contribute an amount equal to a member’s net worth. (For example at the end of the insurance year 1996-97 the total net worth of the society is Rs. 47000, or Rs. 235 per member. If somebody opts out of the scheme he will get Rs. 235 as his share. If somebody wants to join the scheme he will have to contribute Rs. 235 as his share in the net worth of the society.)

At the beginning of every insurance year (an insurance year runs from 15th August one Year to 14th August next Year) a survey of the households in the village is carried to determine a list of the insurable cattle in the village. Only the healthy animals are insured. The cattle, which are uninsurable, are tagged. Upon any reported death, a team is sent from the society to investigate if it was the insured cattle that died. Upon establishment of this the claim is settled immediately. This hardly takes two days of time.

Let us now consider how this arrangement has solved various problems related to insurance. First this system has a very low (almost negligible) transaction cost. There is no medical certificate. No paperwork, no post-mortem. Only thing that is maintained is a small register where the names of the owners of the cattle that are held uninsured are written along with their identification marks. There is another register where the total transactions for the year are recorded.

The premium rates here are very low as compared to the other schemes. For a 2.5% premium in the current year, you get all your healthy cattle insured. It cannot be a coincidence that the death rate of healthy animals is quite low in the village (17 deaths in five years out of about 900 cattle). This only points out to the fact that in other arrangements there is an adverse risk selection that many high risk and therefore uninsurable animals are also insured. Then there is also the problem of moral hazards in case of other animals when claims are made for cattle that were not insured in the first place.

Written rules of Govindpura Insurance Society

Period of the Insurance is for 1 Year.
Premium is to be paid yearly.
Amount of claim is Rs. 8000.
At the most only one animal death claim will be entertained, that is one claim per year per family.
Animal will be insured only after calving.
Members are free to take insurance from other companies.
In case of loss to the group every member has to contribute equally to meet the loss.


This system also checks moral hazard to a great extent. First there is a social watch on everybody that they do not underfeed their cattle, deliberately starving it to death to get the insurance amount. This is more likely to work in this mechanism, as people understand that if someone is unduly benefiting it is at the cost of everyone else. This reasoning is difficult to understand in the case of third party insurance.

This System could not have evolved after the negotiations with the insurance agencies failed, had there been no sufficient need perception for cattle insurance. This supports the argument that there has to be a felt need for the security provided by insurance (utility) for it to work.

This system draws a lot from the social capital that a society possesses. In a particular society higher is the social capital; higher are the chances that such an arrangement will succeed. Govindpura is homogenous in the sense that this is a small village all of whose residents belong to a single community. The socio economic status is also rather homogenous. This is not to say that this arrangement will not succeed in other villages where there are multiple castes and socio economic groups. If there is an adequate quantum of social capital this can be replicated in other places as well.


REPLICATION OF GOVINDPURA

The evolution of Govindpura is a result of the villagers’ own initiative. The scheme was readily accepted and its provisions and requirements quickly disseminated because the villagers had themselves been responsible for these. An external initiation of a similar model may face resistance, as the cost of formation of a new group would have to be overcome. Hence a proper selection of the villages where a similar model is to be externally initiated becomes important. Equally important is the agency that would initiate the scheme.

The selected villages should fulfill the following criteria in order to achieve a successful implementation.
The villages should be homogenous with respect to socio economic variables like caste and annual income.
Dairying should be central to the lives of the people.
The levels of human and animal death should not be too high.
The village should not have a history of conflicts.
The members of the selected village DCS should have some experience with Group insurance schemes of the Dairy Union.

The agency that takes the responsibility to initiate this model must have some experience in similar exercises. The CS/CD group that helps in the formation of the women self help groups has the expertise to take this responsibility as the activities to be undertaken in this case are similar and involve group formation. Once the villages have been selected he scheme can be initiated in the following manner.

Visit 1:This visit entails the following objectives:
Identification of the potential participants.
Informing these potential participants about the success of Govindpura.
Detailed outline of the scheme in Govindpuraa, its rules and provisions to be provided to them.
Target setting for the next visit/meeting, which must include a targeted group size.

Visit 2:The objectives are:
Enabling the group to express to security needs.
Enabling the group to decide its insurance needs.
Enabling the group in to evolving its own rules.
Selecting a committee from the group to clearly lay down these rules.
Target setting for the next visit.

Visit 3:The objectives are:
Discussion of the rules and modifications if suggested.
The necessary assistance in paper work
Facilitation of collection off the member’s contributions.
Announcement declaring the scheme open.

Thereafter follow-up visits are suggested to see whether the schemes are functioning smoothly. Adding some incentives (like capital infusion after a certain number of years) is also suggested.