General Insurance

UNIT 10 AGRICULTURE INSURANCE

Objectives

After studying this unit you should be able to:

 Understand what is Agriculture Insurance

 Discuss different types of agriculture insurance covers

 Discuss about risks in Agriculture/Cultivation

 Explain Weather Based & Index Based Crop Insurance

 Discuss about the Crop Insurance Schemes launched by Government of India

and Growth of Crop Insurance in India

Structure

10.1 Introduction
10.2 Definition and Concept
10.3 Types of Agriculture Insurance
10.4 Determination of Premium Rates
10.5 History and Growth of Crop Insurance in India
10.6 Evolution of Crop Insurance Market in India
10.7 Pradhan Manrti Fasal Bima Yojana (PMFBY)
10.8 Issues and Challenges in Implementation of Crop Insurance in India
10.9 Livestock insurance
10.10 Farm Implement Insurance
10.11 Summary
10.12 Keywords
10.13 Self- Assessment Questions
10.14 Further Readings

10.1 INTRODUCTION
Agricultural is a major economic sector and a critical source of livelihood in India. It
contributes 18 per cent to GDP and engages 47 percent of the work force in India.
Over 58 per cent of the rural households depend on agriculture as their principal means
of livelihood. The share of primary sectors (including agriculture, livestock, forestry
and fishery) is estimated to be around 21 per cent of the Gross Value Added (GVA) at
current prices. The value output contribution from Indian Livestock sector to the GDP
of the country was about 41 percent of total contribution from Agriculture and allied
sector (FAO). Agriculture also provides raw material for food processing sector. Food
processing is India’s one of the largest and fastest growing sectors which contributes
around 9 and 10 per cent of Gross Value Added (GVA) in Manufacturing and Agriculture
226 respectively, 13 per cent of India’s exports and six per cent of total industrial investment
(India Brand Equity Foundation, 2018). It also has huge potential for employment Agriculture Insurance

generation. Thus, sustained growth and development of Agriculture sector is important

for economic growth of the country.

In India Agriculture is mostly rain fed as irrigation is available to only 45 percent of

cultivable land. It is exposed to adverse natural events such as excess or deficit of
rainfall, insect damage, crop diseases and poor weather conditions that negatively
impact production. The situation may aggravate for farmers as the economic costs of
major climatic disasters may increase in future due to fast changing climatic conditions.
To add to these issues, approximately 85 percent of farmers’ in India are small and
marginal farmers, who do not have enough resources to deal with economic shocks
coming from different sources. These smallholders operate in a complex environment
and face a number of constraints, which hold them back from developing their farm
activities and improve their livelihoods. Typical constraints include inadequate access
to means of production, limited farming know-how, difficulties in market access, cultural
restrictions, significant production and price uncertainty. In this scenario, Agriculture
Insurance has great potential to provide value to low-income farmers and their
communities, both by protecting farmers when shocks occur and by encouraging greater
investment in cultivation.

Farmers need advance risk management strategies to cope up with the adverse events.
Agriculture insurance is a financial tool available for farmers to mitigate the impact of
unpreventable risks in agriculture. However, its impact on farmer community needs to
be studied as risk and insurance needs vary across agroclimatic zones as well as
socio-economic parameters of individuals and farmers. Agriculture insurance is also
considered as a desirable alternative to the government provision of ex-post disaster
assistance. The cost of agriculture insurance in general is very high. Because of these
reasons, government involvement in agriculture insurance becomes inevitable.

Agriculture insurance is a financial tool available for farmers to mitigate the impact of
unpreventable risks in agriculture. However, its impact on farmer community needs to
be studied as risk and insurance needs vary across agroclimatic zones as well as socio-
economic parameters of individuals and farmers.Agriculture, insurance is also considered
as a desirable alternative to the government provision of ex-post disaster assistance.
The cost of agriculture insurance in general is very high. Because of these reasons,
government involvement in agriculture insurance becomes inevitable.

Government of India has taken keen interest in development and spread of Agriculture
insurance. Agriculture insurance in India was initiated effectively in 1972. But this initial
initiative had limited impact because of technical and administrative limitation of
agriculture insurance. It got wider reach after launch of National Agriculture Insurance
Scheme (NAIS) in 1999. NAIS became one of the largest agriculture schemes in the
world because of its wide coverage of number of farmers. In 2001, Government of
India setup a dedicated Agriculture insurance company in order to augment initiatives
in this direction. Today, majority of the market share is with Government supported
public sector company Agriculture Insurance Company (AIC) of India Ltd. In 2005,
private sector started its participation in agriculture insurance with help of World Bank.
The market share of private insurers is continuously increasing.
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General Insurance The recent significant development in this direction is launch of Pradhan Mantri Fasal
Bima Yojana (PMFBY). The span of this scheme is so wide that it changed the whole
market dynamics of General Insurance. All public and major Private sector companies
are participating and crop insurance has become one of the important portfolio, for
these companies.

10.2 DEFINITION AND CONCEPT

Agriculture insurance is specifically targeted insurance for agriculture and allied sector.
Agriculture insurance covers production related risks of agriculture and allied sector
viz. sector crops, livestock, aquaculture, and forestry. Agriculture insurance consists of
crop insurance, cattle insurance, farm equipment and production related risks of
agriculture allied activities having direct or indirect impact. However, it does not include
cover of other normal risks of farming community; for example - health, property
(other than crop and agriculture equipment), life and old age risks. Agriculture insurance
forms part of miscellaneous insurance business in India.
Agriculture in India is characterised by high dependence on monsoon, low productivity,
small operational holdings, low investment in technology and high dependence of
population. Both cultivation practices and market of output is unorganised. These
characteristics put together has resulted in low bargaining power of farmers. The issue
becomes complex because of the risks involved in agriculture practices related with
backward linkages as well as forward linkages. The high risk in agriculture makes
farmers a weak link in the whole agrarian economy. It is important to understand the
risk profile of agriculture to get right perspective of agriculture insurance in India. The
next section elaborates the risk profile of Indian Agriculture.
Risk in agriculture originates from different variables such as- biological, climatic,
agricultural practice and price. Biological variables are adversities coming from pests
and diseases. Climatic variables account for vagaries of nature in form of drought and
flood or change in weather parameters. Variables associated with agricultural practices
are types of agricultural inputs used, and method of cultivation. Price variables are
associated with volatility of output prices in the agricultural commodity market. A farmer
faces risks in both favourable and unfavourable cropping conditions. In favourable
condition, it faces risk of price whereas in unfavourable conditions it faces risk of low
production.
The risks faced by agriculture are identified as:
(a) Production risks: Production risks impact the net income from farm because of
uncertainty associated with amount of crop output. Production risks originates
from two principal factors- change in expected weather parameters (rains, wind
velocity, temperature etc.) and incidence of pest and diseases; which impact overall
productivity of crop
(b) Price/Market risk: Price or market risks as the name represents originate from
price volatility of input and output prices in the primary agriculture market.
Information asymmetry related with use of input and price of output adversely
impacts farmers.

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(c) Financial/Credit risk: Financial and credit risks emanate from high dependence Agriculture Insurance

of Indian farmer on informal course of credit, high transaction cost and interlinkage
of transactions in terms of purchase of input on credit and sale of output from the
same source.

(d) Institutional risk: Institutions play an important role in wellbeing of farmers as

regulations and policies by Governments highly impact farmers’ decisions.
Institutional risks arise from change in input and output support, input subsidy,
minimum support price, import and export policy etc.

(e) Technology risk/Information risk: High or low use of technology brings with it
associated risks that impact farm income. Use of High Yielding variety seeds,
agrochemicals need information of new agricultural practices and development in
agricultural technologies related with knowledge of soil type and nutrients, weather
forecasts and farm management practices. In absence of complete information,
farmers loose on net income as they make heavy investments without having
adequate knowhow.

(f) Personal risks: Personal risk are risks of life, health, asset, accident faced by a
farming household. Natural calamities impact health and life of the members of
household as well as the productive asset like livestock and farm implements.
Apart from it, they face risks due to exposure to hazardous chemicals that are
used in pesticides and micro-organisms, in handling of agriculture equipment, wild
animals and other agents of nature.

Farmers’ in India so far have been depending on informal risk management mechanisms
like social arrangements as formal risk management opportunities provided by market
were not available. Agriculture insurance fills in this gap of risk management and loss
mitigation. Risk management mechanisms are of two types- ex ante and ex-post. Ex
ante mechanism are applied prior to the occurrence of the risk and ex-post mechanisms
are applied after the risk has occurred. The informal ex- ante strategies adopted by
farmers are crop diversification, mixed cropping and other cultivation practices, stock
accumulation and sharing of land and equipment etc. the ex-post informal mechanism
are primarily income and consumption smoothening mechanism like reduction in food/
nutrition uptake, sale of asset, deferred social events, mutual aid and borrowing etc.
The formal ex-ante mechanism are farmer welfare schemes like agri-extension activities,
subsidies etc. Agriculture insurance offered by government and market constitutes formal
ex-post risk coping strategy. It is considered better option than disaster relief measures
taken by governments, as it does not impact financial planning of Government and is
more sustainable because of active participation and contribution by citizens.

10.3 TYPES OF AGRICULTURE INSURANCE

Agriculture insurance is classified based on type of asset, type of risk, type of risk
assessment method and risk management method. It can be classified in three categories
based on type of Asset-Crop, Livestock and Farm implements. Crop insurance covers
protect farmers’ against uncertainty of crop yield arising out of natural reasons beyond
their control. Crop insurance is further classified on the basis of type of crop in three
categories- food crop, commercial crop and plantation/ horticulture. 229
General Insurance Livestock insurance covers risks of animal husbandry, poultry, fisheries, sericulture,
apiculture etc. it can be divided into cattle insurance, small farm animals, poultry, fisheries
and others. Cattle insurance includes covers for cattle used in dairy farming, meat
production or draft purpose. Insurance cover is also available for small farm animals
like sheep, goat, pigs etc. Poultry insurance provides cover for bird species like chicken
and ducks. Fisheries insurance covers risks involved in fish and prawn farming. Insurance
cover is also available for large animals like elephant, camel, horse etc. insects used in
bee and silk farming. Insurance cover for large farm implements like tractor and thresher
as well as small farm implements like agriculture pump-set, oil engines is available
under agriculture insurance.

Classification based on type of assets is as below:

Figure 10.1: Classification of Agriculture Insurance

The following section describes important aspects of each type of agriculture insurance
covers available in India.

10.3.1 Crop Insurance

Crop insurance is a product aimed at protecting cultivators from farm production related
risks, which are measured in terms of yield or weather parameters. Mahul and Stutely
(2010) define crop insurance as ‘Insurance that provides financial compensation for
production or revenue losses resulting from specified or multiple perils, such as hail,
windstorm, fire, or flood. Most crop insurance pays for the loss of physical production
or yield. Coverage is also often available for loss of the productive asset, such as trees
in the case of fruit crops’. Crop insurance accounts for more than 90 percent of global
agricultural insurance.
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Crop insurance is classified according to a number of different characteristics. There Agriculture Insurance

are policies that pay indemnities based on the occurrence of farm level losses. Other
policies pay indemnities based on shortfalls in an index that serves as a proxy for farm-
level losses. These indices can be area yield or a weather measure. Some policies
protect only against yield losses. There are other policies that protect against shortfalls
in revenue in terms of product yield and output price or margin (revenue minus specified
costs). Some policies are commodity-specific called “whole farm” policies that insure
aggregate farm revenue or margin across multiple commodities. Crop yield insurance
policies are further disaggregated according to whether they offer named-peril or
multiple-peril cover. Named-peril policies protect only against yield losses that are
determined to have been caused by one or more specified perils. Common examples
of named-peril crop insurance policies are those that protect against losses caused by
hail and/or fire. Multiple-peril crop insurance (MPCI) policies protect against losses
caused by any number of perils.
Overall, crop insurance products can broadly be classified into two major groups:
indemnity-based insurance and index insurance or weather index insurance.

Figure 10.2: Classification of Crop Insurance

10.3.1.1 Indemnity-Based Insurance

Indemnity means making compensation payments to one party by the other for the loss
occurred. Indemnity based insurance is a mutual contract between insured and the
insurer where one insurer promises the insured to compensate for the loss against
payment of premiums.

There are two main indemnity products:

(i) Damage-based Indemnity Insurance also called as Named Peril Crop

Insurance and

(ii) Yield-based Crop Insurance or Multiple Peril Crop Insurance, MPCI.

(i) Damage-based Indemnity Insurance (Named Peril Crop Insurance)

Damage-based indemnity insurance is crop insurance in which the insurance claim

is calculated by measuring the percentage damage in the field soon after the damage
occurs. The damage measured in the field, less a deductible expressed as a
percentage, is applied to the pre-agreed sum insured. The sum insured may be
based on production costs or on the expected revenue. Examples of damage 231
General Insurance based indemnity insurance are hail insurance, frost insurance and excessive/deficit
rainfall insurance. Since this kind of cover compensated losses caused by a single
peril, it is also called as Named Peril Crop Insurance (NPCI), ex. hail insurance,
frost insurance etc. Named peril crop insurance has operated as a financially
sustainable, market-based insurance in developed countries for more than a century,
generally without subsidy or government intervention.

(b) Yield-based Crop Insurance (Multiple Peril Crop Insurance, MPCI)

Yield-based crop insurance an insured yield (for example, tons/ha) is established

as a percentage of the farmer’s historical average yield. The insured yield is typically
between 50 percent and 70 percent of the average yield on the farm. If the realized
yield is less than the insured yield, an indemnity is paid equal to the difference
between the actual yield and the insured yield, multiplied by a pre-agreed value.
Yield-based crop insurance generally protects against multiple perils, hence it is
also called MPCI. It is a relatively standardized policy, irrespective of crop type
because of which it is preferred for Government interventions. MPCI has some
major issues in terms of loss adjustment, moral hazard, adverse selection, and high
operational costs. The high operational cost of MPCI makes it necessary to depend
on subsidy to bring viability for insurers.

10.3.1.2 Index-Based Crop Insurance

Index based insurance makes indemnity payments based on measures of an index that
is assumed to be proxy to actual losses instead of indemnity payments based on an
assessment of the policyholder’s individual loss. There are two types of index products
explained below.

(i) Area Yield Index Insurance

Here the compensation is based on the realized average yield of an area such as a
country or district or taluka and not the actual yield of the insured party. The insured
yield is established as a percentage of the average yield for the area. Compensation is
paid if the realized yield for the area is less than the insured yield regardless of the
actual yield on a policyholder’s farm. This type of index insurance requires historical
area yield data. Area yield index insurance is a relatively well established product,
adopted by Govt of India in National Agriculture Insurance Scheme (NAIS).

This given area is called as ‘insurance unit’. The actual yield of the insured crop in the
insurance unit is compared to the ‘threshold yield’ (TY) computed using actual data for
previous years. If the actual yield is lower than the threshold yield, all insured farmers
in the insurance unit become eligible for the same indemnity payout. The actual yield is
determined by harvested production measurements taken at a series of randomly chosen
crop cutting experiment (CCE) locations. The probable yield (PY) is based on a three-
year moving average of seasonal area-yields estimated from CCEs for rice and wheat
crops and a five-year moving average for all other crops.

(ii) Weather Index Insurance (WII)

Weather Index Insurance are contingent claims contracts for which payout are
determined by an objective weather parameter (such as rainfall, temperature, or soil
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moisture) that is highly correlated with farm-level yields or revenue outcomes. In this Agriculture Insurance

type of insurance, compensation is based on realizations of a specific weather parameter

measured over a pre-specified period of time at a particular weather station. The
insurance can be structured to protect against index realizations that are either so high
or so low that they are expected to cause crop losses. For example, the insurance can
be structured to protect against either excess rainfall or deficit rainfall.

Compensation is paid whenever the realized value of the index exceeds a pre-specified
threshold (for example, when protecting against excess rainfall) or when the index is
less than the threshold (for example, when protecting against deficit rainfall). The
indemnity is calculated based on a pre-agreed sum insured per unit of the index. It is a
relatively new development for agricultural insurance, where experiments are happening
all across the globe. Many pilot projects have been started, but scaling up of weather
index has happened only in a few countries, especially, in India with launch of Weather
Based Crop Insurance Scheme (WBCIS) by Agriculture Insurance Company Ltd
(AIC), a Govt undertaking and ICICI Lombard, a private insurance company.

10.3.2 Approach to Crop Insurance

There are two approaches to crop insurance depending on unit of insurance, individual
and Area

10.3.2.1 Individual approach

Under this approach, the basic unit of insurance is individual farmer. This approach
indemnifies the loss of individual farmer based on past yield data and loss experience
of the farmer. The premium paid by the farmer is also decided by the historical yield
and loss data of the farmer. Transaction cost is relatively high under this approach as
underwriting and loss assessment is to be done at individual farm level. Since the
landholding size is small in India, it is difficult to follow this approach.

10.3.2.2 Homogeneous Area Approach

In homogeneous area approach, the basic unit of insurance is an area homogeneous in

terms of crop production and variability. The unit of insurance under NAIS was taluka/
block, whereas it is village/panchayat in case of Pradhan Mantri Fasal Bima Yojana
(PMFBY) scheme. Area approach addresses the issue of reliable historical production
data of individual farms. It also reduces moral hazard, loss assessment is cheaper as
unit of insurance is large.

10.3.3 Underwriting and Claims in Crop Insurance

Crop insurance is different from other lines of business as it provides cover, season
wise and crop wise. The nature of crop and its productivity varies according to season
and geographical location. The productivity of plants depends on vegetation stage,
weather conditions and agricultural practices. Because of the number of variables
involved in determining productivity of a crop, the process of providing insurance cover
is highly complicated. Risk assessment, pricing and claim assessment are important
activities that determines success of crop insurance. Following section explains pricing
and claims process for different types of crop insurance.
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General Insurance
10.4 DETERMINATION OF PREMIUM RATES
As discussed earlier, the indemnity based crop insurance covers are single peril crop
insurance covers-ex. Hail insurance, frost etc. These perils have impact on certain
locations. Occurrence of the event triggers heavy losses to the crop in that area.

Premium rates are determined by factors like frequency of occurrence to the location
and type of crop. Crops respond differently to different types of perils. Few crops are
selected as having basic rate of premium. Ex- wheat, barley etc. Premium of other
crops having high impact of the event leading to higher level of losses are fixed in
multiples of basic rates. Ex. 2 or 3 times of basic rates, lentils or peas have 2 times
basic rate. Presence of historical data of occurrence and loss helps in deciding the
rates.

The risk premium rate is then loaded for administrative cost and margins of profit,
catastrophic losses, high accumulation areas and uncertainty pertaining to statistical
data available. Sum insured is taken as ‘scale of finance’ for crop loan for a specific
crop in an area/district. These insurance covers also come with deductibles. Deductible
is the percentage of loss / sum insured that is borne by insured. The policy is valid for
one season only.

Claim settlement is done by using the formulae -

Claim per acre = Damage (%) - Deductible (%) x Sun Insured

Ex: If sum assured per acre = Rs 10000/-,

Damage = 80%, Deductible = 10%

Claim payable per acre = (80%-10%) x 10,000 = Rs.7000/-

Index Based Crop Insurance

1. Area Yield Index Based Crop Insurance

The prerequisite for weather index insurance is availability of crop wise, area wise
yield data. The index used in this cover is an area average of yield. The insurer constructs
an index based on a guaranteed yield for the insured unit, normally in the range of 50%
to 90% of the expected yield. The sum assured is arrived at by formulae - Threshold
Yield x (Minimum Support Price/Gate Price) of the insured crop. Premium rate is
decided on the basis of Loss Cost (Claim as a % of Sum Insured) observed for a crop
in unit area during the preceding ten similar (kharif/rabi) crop seasons. Premium loadings
are done for management/administrative expenses, insurers’ profit margin, non-parametric
risks etc.

There is a guaranteed yield termed as Threshold Yield for every crop in every
homogenous area e.g. taluka, block or gram panchayat etc. Threshold Yield is moving
average of past five years actual yield (three years in case of Paddy and Wheat) multiplied
by applicable level of indemnity. Indemnity level is the percentage of loss covered
under an insurance policy. For example, 90% indemnity means insurance cover for
90% of loss, rest 10% loss is to be borne by insured.
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If current season’s actual yield recorded is lower than the Threshold yield, then claims Agriculture Insurance

become payable. Yield data used for claims is generated under General Crop Estimation
Surveys (GCES) by way of crop cutting experiments (CCEs).

The claim amount is calculated using the formulae below.

Claims payable = (Threshold Yield – Actual Yield) x Sum Assured/ Threshold Yield;

Whereas, Threshold Yield = Avg Yield in last 5/7 years x level of Indemnity (%)

2. Weather Index Based Crop Insurance

The prerequisite for weather index insurance is availability of crop wise, area wise
weather data. It also requires data of crop yield variation corresponding to variation in
weather parameter. In weather-based index insurance compensation is not determined
by the actual loss of yield at the individual level (each farmer) but by a defined weather
event that is correlated with the lifecycle of the insured crop. The payout is triggered by
changes in an index correlated to crop yield, such as rainfall, temperature, soil humidity,
number of storms a year, or wind velocity. The weather parameters indexed in India
are Rainfall (deficit, excess, dry-spell, and wet-spell), Temperature (minimum, maximum,
and mean), humidity and wind speed.

The claim amount is calculated on the basis of specific index (for example, rainfall), for
a said period and area, the threshold, the sum insured and indemnity limits. If the
rainfall is less than the index at the specified measurement point and over the period
specified in the contract, the insurer will be liable for a payout. The quantity of the
payout is determined according to the total sum insured and the extent of deviation of
actual parameter from the index following a pay-out table, which indicates amount to
be paid corresponding to deviation in weather parameter.

10.5 HISTORY AND GROWTH OF CROP

INSURANCE IN INDIA
The Government of India (GoI) has historically focused on crop insurance as a planned
mechanism to mitigate the risks of natural perils on farm production. The first attempt
on agriculture insurance in India was done by the Mysore state in 1915. Mysore state
proposed a rain insurance scheme for the farmers with view to insure them against
drought taking ‘area approach’. Similar attempts were made by certain princely states
like Madras, Dewas, and Baroda, to introduce crop insurance relief in various forms,
but with little success (AICL website).

Crop insurance took formal shape in independent India in 1970. Major conceptual
contribution to this step came from Prof. V. M. Dnadekar, a prominent economist,
who strongly advocated for introduction of crop insurance based on an area approach.
The first crop insurance scheme was introduced by the Government in 1972. Country
has come long way since then covering about 30% of the total number of land holdings
in the country. The next big leap in this direction came after launch of ambitious crop
insurance scheme ‘Pradhan Mantri Fasal Bima Yojana’ (PMFBY) launched by central
Govt. in 2016. A brief description of crop insurance schemes implemented by
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General Insurance Government of India and subsequently through Agriculture Insurance Company of
India since inception is chronologically presented in next section.

10.5.1 First Crop Insurance Program

A number of models of crop insurance were considered for feasibility by the Government
and the ‘first crop insurance program’(FCIS) based on ‘Individual Approach ’was
introduced in 1972-73 for cotton, Groundnut, Wheat and Potato and implemented in
the states of Gujarat, Maharashtra, Tamil Nadu, Andhra Pradesh, Karnataka and West
Bengal. This experimental scheme continued up to 1978-79 and covered only 3110
farmers for a premium of Rs 4.54 lakhs against claims of Rs 37.88 lakhs. It was
realized that crop insurance programs based on the individual farm approach would
not be viable and sustainable.

10.5.2 Pilot Crop Insurance Scheme

Based on the learning’s of FCIS a second scheme named Pilot Crop Insurance Scheme
(PCIS) was introduced in1979. The scheme was linked to institutional credit, i.e.,
crop loan and was based on ‘area approach’. Participation by the State Governments
was voluntary in this scheme. The scheme covered cereals, millets, oilseeds, cotton,
potato, gram and barley. The risk was shared by General Insurance Corporation (GIC)
and the respective State Govt. in the ratio of 2:1. The insurance premium ranged from
5 to 10 per cent of the sum insured. The scheme ran till 1984-85 and 13 States
participated in the scheme. The scheme covered 6.27 lakh farmers. The premium
income from the scheme was Rs 1.97 crore against claims of Rs1.57 crore.

10.5.3 Comprehensive Crop Insurance Scheme

Based on the learning’s of PCIS, a scheme called Comprehensive Crop Insurance
Scheme (CCIS), was implemented from Kharif 1985 at the all-India level. This Scheme
was also optional for the State Governments. It took ‘Homogeneous Area approach’
and was compulsory for short-term crop credit. The CCIS was implemented for 15
years, from Kharif 1985 to Kharif 1999. Fifteen States and two UTs participated
during its tenure. In this entire period, the scheme covered Rs. 7.63 crore farmers
under an area of 12.76 crore hectares, for a sum insured of Rs. 24,949 crore at a
premium of Rs. 403.56 crore. Correspondingly, the total claims outgo was Rs. 2303.45
crore, thus having a claim ratio of 1: 5.71. About 59.78 lakh farmers were benefitted,
and the majority of the claims were paid in the States of Gujarat with Rs 1086 crore
(47%); Andhra Pradesh with Rs. 482 Crores (21%); Maharashtra with Rs. 213 crores
(9%) & Orissa with Rs. 181 Crores (8%).

10.5.4 National Agricultural Insurance Scheme

This scheme was replaced by a new and improved scheme in 1999 named National
Agricultural Insurance Scheme (NAIS). NAIS was launched with the aim to make
crop insurance schemes sustainable by shifting to an actuarial regime. The scheme was
based on an indexed approach, where the index used was ‘crop yield’ of the given
area. Three coverage levels were made available under NAIS and the threshold yield
was set at 60, 80 and 90 percent. The NAIS offered insurance for Food Crops
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(Cereals, Millets & Pulses), Oilseeds, Commercial/ Horticultural crops through state Agriculture Insurance

owned insurer GIC and subsequently byAgriculture Insurance Company of India (AIC).
NAIS was available to borrowers and non-borrowers of crop loan.

Premiums for crop insurance depend on the crop grown and was subsidized by 50%
for small and marginal farmers. Farmers have the option of buying additional coverage
to a maximum of 150 percent of the threshold yield multiplied by a defined price. The
defined price could be the market price or floor price established by government.

The scheme was implemented in 23 States and UTs (except Punjab, Manipur, Nagaland,
Mizoram and Arunachal Pradesh among the States and Chandigarh, Daman & Diu,
Delhi, Dadra & Nagar Haveli and Lakshadweep among the UTs). The scheme covered
22.90 crore farmers in 30 implementation seasons as on May 2015. The area covered
under the scheme is 33.97 crore hectares. With about 25 million farmers insured, it
was the largest crop insurance program in the world (GFDRR, 2011).

10.5.5 Weather-Based Crop Insurance Scheme

In the year 2007, Weather-Based Crop Insurance Scheme (WBCIS) was piloted by
the AIC in Karnataka. Presently, these products are being offered in selected regions
for different crops by AIC and private insurers ICICI Lombard General Insurance
Company and IFFCO Tokyo General Insurance Company (ITGI).

WBCIS also operates on the concept of “area approach”. WBCIS is based on actuarial
rates of premium with a cap at 8-10% for food crops and oilseeds and 12% for
commercial crops. The scheme is made attractive by charging premium “at par” with
the NAIS. The difference between flat premium rates and the actuarial premium rates
are borne by the Central and the implementing State Government on a 50:50 basis.
The private companies are extended the same level of financial support by the
Government as is available to Government company AIC. Unlike NAIS, the entire
claim under the WBCIS scheme is borne by the insurers. Weather insurance scheme
(WBCIS) is treated as an “alternative” to NAIS as the WBCIS is not available to the
farmers in areas where the NAIS is notified. WBCIS was replaced with Restructured
WBCIS (RWBCIS) in the year 2016.

10.5.6 Modified National Agricultural Insurance Scheme

NAIS was replaced with Modified NAIS (MNAIS) after 2010-11 in phased manner.
The scheme was implemented by AIC on behalf of the Ministry of Agriculture. The
farmer insurance premiums and claim payments were channelled through the banking
system under the scheme. Under MNAIS, premium rates charged was actuarial.
Provision was made for up to 70 % subsidy by government in premium for all farmers.
Only upfront premium subsidy is shared by the Central and State Government on
50:50 basis and all claims liability is on the insurance Company. The scheme made
provision for immediate relief to farmers by paying up to 25% of likely claims in case of
calamity or natural disaster. The scheme was compulsory for loanee farmers and voluntary
for non loanee farmers. Participation of private sector insurers was allowed for the first
time in this scheme for creation of competitive environment. The states participating
actively under the scheme are Rajasthan, Andhra Pradesh, Bihar, West Bengal,
Karnataka and Uttar Pradesh. 237
General Insurance 10.5.7 National Crop Insurance Programme
In the year 2013-14 Government of India launched a new scheme called National
Crop Insurance Programme (NCIP) / Rashtriya Fasal Bima Karyakram (RFBK) in all
districts of the country. The scheme was formulated by merging MNAIS, WBCIS and
CPIS and incorporating changes based on the inputs from past performance and
recommendations to make it more farmer-friendly. Private participation on selective
basis was allowed under this scheme by state governments. The crops covered under
the scheme are Food crops (Cereals, Millets & Pulses), Oilseeds and Annual
Commercial/Horticultural crops. The program emphasised implementation of schemes
at panchayat level by reducing unit area of insurance to the village/village panchayat
level.

In 2015, government announced a new scheme PMFBY with aim to cover 50% of
farmers in next three years. PMFBY was an improved version of MNAIS with defined
expected outcome. Main features of PMFBY are explained in section10.7 of this unit.

A panoramic view of evolution of crop insurance in India indicates that constant efforts
by Government in this direction, has helped development of crop insurance in India.
India is looked upon as a role model for development and growth of crop insurance. It
has evolved as a laboratory for large scale implementation of government subsidized
schemes and many developed countries including the USA have studied schemes
launched by the Government and drawn learning for improving in their crop insurance
products. The next section presents a scenario of development of crop insurance
market in India.

10.6 EVOLUTION OF CROP INSURANCE MARKET

IN INDIA
If we examine the market structure of crop insurance in India, it was managed by the
General Insurance Corporation (GIC) since inception till 2004. Rural financial institutions
played important role in implementation of crop insurance as it was tied to crop loans.
In the year 2002, the government of India established a separate company named
‘Agriculture Insurance Company’ (AIC) with capital participation of GIC, the four
public sector general insurance companies, and NABARD. Since then, AIC was
implementing the crop insurance schemes run by Government. These schemes were
subsidized by the central and state governments.

After liberalisation of insurance sector in 1999, private sector companies like ICICI
Lombard and IFFCO Tokyo General Insurance Company launched their crop insurance
products. In 2003, ICICI Lombard launched weather-based insurance for groundnut
and castor in Andhra Pradesh with help of World Bank. This initiative was followed by
the pilot rainfall insurance scheme by IFFCO-Tokyo General Insurance (ITGI) in 2004-
05 in Andhra Pradesh, Karnataka and Gujarat. ICICI Lombard and other insurers use
brokers, or partner with local financial institutions which have well-established networks
for the provision of financial services to rural households, in reaching rural areas.
Intermediary receives a commission for each sale to cover marketing costs and payout
disbursements.
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Participation of private sector insurance companies in Government schemes was allowed Agriculture Insurance

when WBCIS was opened under certain conditions up for private sector in 2008.
ICICI Lombard, HDFC Ergo and IFFCO Tokyo participated in the implementation.
The revised WBCIS scheme is being implemented by both public and private companies.
The scenario changed with launch of PMFBY, when participation of all general insurance
companies was allowed under certain conditions. Along with AIC, four public sector
general insurance companies and 14 private sector insurance companies are
participating in implementation of crop insurance scheme - PMFBY. The insurance
companies have to get empanelled for participating in the scheme and area of
implementation is allocated on the basis of tendering by state Governments.
The crop insurance premium in India was Rs. 1,500 Cr in the year 2009, which was 4
percent of total gross premium earned by General Insurance Industry. It grew to Rs
5,550 Cr in the year 2015, which was approximately 6 percent of the General Insurance
premium. The scenario dramatically changed in the year 2016 with launch of PMFBY.
The crop insurance premium jumped to Rs 20,000 Cr in 2016 which was 260 percent
of the earned premium in crop insurance in 2015. With this increase, crop insurance
premium became almost 16 percent of General insurance industry premium and third
largest portfolio in India after Motor and Health. This line of business is poised to
become second largest portfolio surpassing health in coming years. This growth in
premium attracted attention of the insurers all across the world. It became lucrative
proposition for reinsurers both in India and across the globe. GIC Re also registered
phenomenal growth because of phenomenal increase in reinsurance business in crop
insurance and joined league of large global reinsurers.

10.7 PRADHAN MANRTI FASAL BIMA YOJANA

(PMFBY)
Pradhan Mantri Fasal Bima Yojana (PMFBY) is an area based yield based crop
insurance scheme introduced by Government of India in January 2016. The Defined
Area (i.e., unit area of insurance) for this scheme is Village/Village Panchayat level.
The unit of insurance for loss assessment is the affected insured field of the individual
farmer for Risks of localised calamities and Post-Harvest losses on account of defined
peril. There is provision of Individual farm level loss assessment for localised peril and
Unit level loss assessment for Yield losses. All the Crops for which past yield data is
available and grown during the notified season are covered under the scheme.

The crops covered under the scheme are:

1) Food crops (Cereals, Millets and Pulses),

2) Oilseeds

3) Annual Commercial / Annual Horticultural crops

The scheme provides insurance cover for all stages of the crop cycle from preventive
sowing to post-harvest risks in specified instances. All farmers growing notified crops
in a notified area during the season who have insurable interest in the crop are eligible.
Enrolment is compulsory for Crop Loan account/KCC account (called as Loanee
Farmers). It is voluntary for non-loanee farmers. Voluntary coverage may be obtained
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General Insurance by all farmers not covered in compulsory category, including Crop KCC/Crop Loan
Account holders whose credit limit is not renewed. Farmers need to have a bank
account in case of claim as the claim amount is transferred though NEFT.

10.7.1 Benefits available under the Scheme

The Risks Covered under the scheme are:
• Yield losses (standing crops, on notified area basis)
• Prevented sowing (on notified area basis)
• Post-harvest losses (individual farm basis)
• Localised calamities (individual farm basis)

The exclusions under the scheme are - Risks and Losses arising out of war & kindred
perils, nuclear risks, riots, malicious damage, theft, act of enmity, grazed and/or destroyed
by domestic and/or wild animals. In case of Post - Harvest losses the harvested crop
bundled and heaped at a place before threshing, other preventable risks are excluded.
The Sum Insured under the scheme are equal to Scale of Finance.

The premium (maximum charges) from farmers’ are

• 2 % of SI or actuarial premium, whichever is less for Kharif crops,
• 1 % of SI or actuarial premium, whichever is less for Rabi Crops and
• 5 % of SI or actuarial premium, whichever is less for Commercial/
Horticulture crops

The difference between premium and the rate of Insurance charges payable by farmers
is treated as Rate of Normal Premium Subsidy, which is shared equally by the Centre
and State.

The scheme is implemented through a multi-agency framework by selected insurance

companies under the overall guidance & control of the Department of Agriculture,
Cooperation & Farmers Welfare (DAC & FW), Ministry of Agriculture & Farmers
Welfare (MoA & FW), Government of India (GOI) and the concerned State in co-
ordination with various other agencies

10.7.2 Implementation/Distribution
Implementation of PMFBY is done on the basis of operational guidelines issued by
Ministry of Agriculture. The revamped operational guidelines replaced the earlier
guidelines from the Kharif 2020. Distribution of the scheme is done by AIC, four
public sector insurance companies and thirteen empanelled private insurance companies.
Selection of Implementing Agency (IA) is made through adopting the cluster approach
under which bunch of about 15-20 good & bad districts / areas with reference to risks
are bid together.

State Governments issue Notification/GR before cropping season specifying names of

the districts under certain crops for which crop insurance will be available. State
Governments invite tenders from insurance companies based on the notifications. After
240 scrutinising the bids offered by insurance companies, State Governments allocate areas/
clusters to insurance companies offering lowest bidding. Few states have issued Agriculture Insurance

notification for both Kharif and Rabi together, some states issue separate notification.
Some states are allocating clusters to insurance companies for a duration of three
years.

Rural and Cooperative banks are playing important role in implementation of PMFBY.
They enrol farmers and upload the data on web-portal specifically designed for the
schemes. The web address of the portal is http://pmfby.gov.in .The liability of the
Insurance companies in case of catastrophic losses computed at the National level for
an agricultural crop season, shall be up to 350 percent of total premium collected
(farmer share plus Govt. subsidy) or 35 per cent of total Sum Insured (SI), of all the
insurance companies combined, whichever is higher. The losses at the National level in
a crop season beyond this ceiling will be met by equal contribution (i.e. on 50:50 basis)
from the Central Government and the concerned State Governments.

10.7.3 Claim Process

The Claim Settlement Process for the scheme is explained below:

The scheme has four types of claims for crop loss as per the risks covered - Pre-
harvest (prevented sowing), Crop Failure, Post-harvest losses and Localized Risks

Presented below are the risk wise detail of claim settlement procedure:

(a) Pre-harvest (prevented sowing): The assessment of loss is done on individual

farm basis. The responsibility of loss assessment done by committee of
Representative of Insurance Company, Govt Official and Farmers. Immediate
relief amount is transferred to the insured account.

(b) Crop Failure: In the case of crop failure/ Crop damage a Joint Committee decides
the eligibility for on-account payment based on the weather data /long term average
rainfall data/satellite imagery supported by estimated yield losses at notified insurance
unit level. Based on joint committee report, a joint inspection of the affected area
is done by Insurance Company, State government officials and farmers is done for
ground truthing and extent of loss is decided. This loss is intimated to the concerned
insurance company, which in turn does the claim settlement.

After receiving the claims amount from the concerned Insurance Companies, the
financial institutions/banks remit/transfer the claim amount to the account of
beneficiary farmers within a week and also display the list of the beneficiaries
(both loanee and non-loanee) on the notice board of the branch within seven days
with details of beneficiaries and send a copy to concerned insurance companies
with utilization certificates within 15 days for further verification and audit.

(c ) Post-Harvest Claim Settlement: For the claims arising out of crop damage due
to post-harvest losses and localized risks, assessment of damage is made on
individual farm basis. The scheme provides for assessment of yield loss on individual
plot basis in case of occurrence of cyclone, cyclonic rains and unseasonal rains
throughout the country resulting in damage to harvested crop lying in the field in
‘cut and spread’ condition up to maximum period of two weeks (14 days) from
harvesting for sole purpose of drying. Immediate relief is provided to insured farmers 241
General Insurance in case of adverse seasonal conditions during the crop season viz. floods, prolonged
dry spells, severe drought etc., wherein expected yield during the season is likely
to be less than 50% of Threshold yield.

(d) Localized Risks: It is intended to provide insurance cover at individual farm

level to crop losses due to occurrence of localized perils/ calamities viz. Landslide,
Hailstorm and inundation affecting part of a notified unit or a plot. In this case
surveyors are appointed by the insurance company to do loss assessment by
visiting individual farms. The remaining procedure is the same for claim settlement.

The scheme has following special features with reference to claim settlement
procedure:
• In case of farmers covered through Financial Institution, claims is released
only through electronic transfer, followed by hard copy containing claim
particulars.
• In case of farmers covered on voluntary basis through intermediaries, payable
claims are directly credited to the concerned bank accounts of insured farmers
and details of the claims are intimated to them. The list of beneficiaries is
uploaded on the crop insurance portal immediately.
• The scheme has provisions to use proxy indicators for deciding claim conditions
in addition to normal Crop Cutting Experiments (CCE).
• The scheme also allows use of new technologies to improve speed of claim
settlement. The scheme will also consider use of mobile phones and pictures
sent via mobile phones to assess losses.

10.8 ISSUES AND CHALLENGES IN

IMPLEMENTATION OF CROP INSURANCE IN
INDIA
India has seen systematic and unexpected growth of crop insurance in past few decades.
Still it has not been able to make desired impact in growth and development of agriculture
sector in India. The reason lies in complexity of the crop insurance and humongous
issues faced by the government and implementing agencies. Few of the challenges
faced by the sector is listed below.

(i) Issues related with Asymmetric Information: Crop insurance at present is

facing asymmetric information issues like adverse selection, moral hazard, which
is inherent in initial stage of development of insurance. It impacts implementation
as farmers enrol under the scheme if they foresee a bad weather and avoid enrolment
if weather looks promising. The resulting poor performance of the insurance product
may cause the insurer to raise premium rates across all risk classifications.

(ii) High Cost of Insurance: Agriculture insurance premium is high compared to

other products. The premium rate ranges from 2 % to 12 %. Under PMFBY,
companies have quoted premium rate as high as 40%. Cost of insurance adds to
the cost of cultivation. Crop insurance becomes unaffordable for farmers, especially
242 in county like India, where 85 % of farmers are Small and Marginal farmers. Since
 government subsidizes premium for farmers, it has huge fiscal burden, which comes Agriculture Insurance

in way of making it sustainable.

(iii) Lack of Awareness: Farmers have limited information about crop insurance.
They are not aware how it works and in what conditions they can get compensation.
They do not know the claim structures, which at present are highly technical and
complicated. Even the insured farmers seldom have any knowledge of the various
covers as also the extent of weather deviation that would result in claims.They are
also not aware about the premium paid by them, as it is deducted by banks from
the loan amount. Farmers are also not aware which crops are covered in crop
insurance and what is the basis of coverage. It limits the scope of offtake of voluntary
crop insurance.

(iv) Issues Related with Distribution Channel: Crop insurance is distributed

through cooperative and rural banks. It is given as a mandatory part of crop loan.
Banks take it as an extra burden on them thrust by Government, which does not
form a part of their performance criteria. Banks do not have enough resources to
handle the schemes. They are reluctant in giving any information to the farmers.
There is no documentation handed over to the farmers as an evidence of their
coverage in crop insurance scheme. The loan pass-book does not have any entry
for the premium paid by the farmer. Because of discouraging attitude taken by
banks, crop insurance is not developing as a separate product with distinct
distribution channel.

(v) Delay from Government: State government is expected to announce the list of
notified crops and notified area. Delay in announcement from State Government
leads to delay in implementation of the schemes. Delay also occurs in release of
the subsidy of premium. In many cases there is delay in crop cutting exercise,
which delays the claim settlement process. Delay in announcement of drought also
leads to delay in claim settlement.

(vi) Lack of Basic Infrastructure/Resources: Implementation of crop insurance at

large scale requires trained human resource and basic infrastructure. Implementation
of weather based insurance, needs presence of weather stations at insurance unit
level. These issues impact efficiency of schemes.

(vii)Non Availability of Data: The success of crop insurance is critically dependent

on availability of accurate yield and weather. Many crops are not covered because
of lack of historical yield data.

(viii)Climatic Changes: Weather risks are spatially correlated and cause systemic
risks for insurance providers; for example, frequent droughts or unseasonal rains.
The volatility of weather is attributed to climatic changes, change over time in
some regions. Because of this, weather risks show characteristics that violate
classical requirements for insurability as risk is high.

10.9 LIVESTOCK INSURANCE

Livestock is important for balanced growth of agrarian economy as it is important
alternative source of income and food. Livestock substantiate the farm income by 243
General Insurance using by-products of farming. At the same time, by products of livestock add to the
fertility of the land. Thus, cultivation and livestock form a symbiotic relationship in
agrarian economy. However, livestock insurance has not developed because of inherent
issues like adverse selection, morale hazard and fraud. Due to these reasons, cost of
insurance is high, so it becomes deterrent for farmers. At the same time, loss ratio is
high, so it becomes deterrent for insurers.

The protection offered under livestock products includes against losses arising from
death, injury and loss of function as a result of accidents, natural causes, fire, lightning,
acts of God and acts of individuals other than the owner. Additional coverage can
generally be purchased for veterinary expenses, transport and non-epidemic diseases.

The sum insured is based on the market value of the animal and can be reduced based
on the animal’s age. Premium rates range from 1.5 percent to 10 percent of the sum
insured based on the type of animal, its age, location and the functions it performs.
Deductibles range from no deductible to ten percent. Insured animals are differentiated
from each other from ear tagging, which is numbered and facilitated identification of
animal.

Traditionally, epizootic (general or widespread) diseases have been a standard exclusion

under livestock policies although some companies have begun to offer cover on a very
selective basis. Apart from this, theft, accident, injury during transportation are excluded.

The new technological advancements like Radio Frequency Identification Device

(RFID), tagging and muzzle printing can revolutionize cattle insurance. Livestock
mortality index insurance is a relatively new form of livestock insurance that was
introduced into Mongolia.

10.10 FARM IMPLEMENT INSURANCE

Farm Implement insurance includes insurance for large implements like tractors, threshers
and other farm vehicles. It also covers small farm implements like agriculture plumpest
insurance, animal driven cart insurance.

Tractor insurance covers against burglary, theft, accidental external damage, natural
causes (Flood, storm, lightning, earthquake, landslide), third-party liabilities to any
injury, death, property damage etc. there is also option to insure paid driver & electrical
accessories.

Agriculture pump set insurance covers centrifugal pump sets (electrical/diesel/oil) and
submersible pump sets used for agriculture purpose. It includes pump, driving unit and
starter.

Future of Crop Insurance

The future of crop insurance lies in use of ICT. Use of mobile application in crop
cutting experiments (CCE), automated weather stations in recording and transmission
of weather data, use of satellite imagery in monitoring of crop yield may solve the
current issues faced in implementation of crop insurance schemes. Online registration
under the scheme can ease out the pressure on implementing agencies and increase
access to non-borrowing farmers.
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 Agriculture Insurance
10.11 SUMMARY
Agriculture insurance is important for economic and social development for a county
like India where majority of population is dependent on Agriculture and Allied Activities
for their livelihood. Crop insurance in India has come a long way with launch of PMFBY
being the biggest crop insurance scheme in the world. Crop insurance being a complex
product faces many challenges in implementation. The future of crop insurance lies in
finding technological solutions that will deal with the challenges without cost implications.
Livestock insurance in India has not seen the same kind of growth because of inherent
issues. It will require similar push from Government for growth and development.

10.12 KEYWORDS
Pradhan Mantri Fasal : is an area based yield based crop insurance
Bima Yojana (PMFBY) scheme introduced by Government of India in
January 2016.

National Agricultural : NAIS was launched with the aim to make crop
Insurance Scheme (NAIS) insurance schemes sustainable by shifting to an
actuarial regime. The scheme is based on an
indexed approach, where the index used is ‘crop
yield’ of the given area.

Indemnity-Based Insurance : Indemnity based insurance is a mutual contract

between insured and the insurer where one insurer
promises the insured to compensate for the loss
against payment of premiums.

Index-Based Crop Insurance : Index based insurance makes indemnity payments

based on measures of an index that is assumed to
be proxy to actual losses instead of indemnity
payments based on an assessment of the
policyholder’s individual loss.

Yield-based crop insurance : It is an insured yield (for example, tons/ha)

established as a percentage of the farmer’s
historical average yield.

10.13 SELF- ASSESSMENT QUESTIONS

1. Why agriculture insurance is important for India?

2. Explain difference between Agriculture insurance and Crop insurance. What are
different types of agriculture insurance?

3. What is difference between yield index and weather index insurance?

4. What are different types of crop insurance?

5. What are major crop insurance schemes in India? Which type of crop insurance is
growing fast? Give reasons.
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General Insurance 6. PMFBY is considered to be a game changer in general insurance sector. Justify.

7. What are basic features of cattle insurance in India?

10.14 FURTHER READINGS

Agriculture Insurance (IC 71) and Crop Insurance (S 09) by Insurance Institute of
India, Mumbai;

Papers available on line by World Bank, Innovation facility, ILO, Geneva

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