A Self-Help Group Modelfor Farmer Insurance
This note suggests a self-help group model for farmers so as to set up a simple and feasible arrangement to insure their enterprises against risk and uncertainty caused by weather and
price fluctuations.
V M RAO
S
to stand for their rights and insist on being treated with dignity rather than as supplicants, which has been their lot for long decades. These are hopeful breakthroughs and need to be further developed and extended in new directions. The Nobel Award given last year to Muhammad Yunus
– the SHG innovator in Bangladesh – is an eloquent testimony to the endorsement received by the SHG model at the highest international level.
The purpose of this note is to suggest an SHG-type model for farmers in order to set up a simple and feasible arrangement for insuring their enterprises against risk and uncertainty caused by weather and price fluctuations. Insurance for farmers has been discussed and experimented with for long without much success. While an SHG-type model would not be adequate by itself to protect the farmer from the hazards of his occupation, it could be of help as a base and an initial framework for developing an insurance system to meet the requirements of modernised agriculture.
This model is presented here briefly. Let us assume a community of farmers in a given village. We assume that all farmers in the community participate in the programme for farmer insurance. Farmer insurance is to be done activity-wise, i e, separately for each crop and enterprises like dairying. Assume the activity is growing crop A. Then the data needed for setting up the insurance system for crop A is as follows.
Data from the Individual Farmer
Data for the Community as a Whole
(iii) For each year beginning with the sixth year, the simple moving average of per acre yield of crop A and per acre income from crop A for the community as a whole during the preceding five years. This will serve as the threshold value for that year for the community as a whole. A simple average is suggested so that equal weight is given to good years as well as bad. The threshold value of per acre income for the community as a whole for a given year will be the basis for calculating the premium to be paid by a farmer in that year and the compensation he is entitled to receive if it is a deficit year as explained below.
Economic and Political Weekly March 10, 2007
per acre income for the first year. The simple average of the threshold value for the first year and the per acre income from crop A for the community as a whole for the first year will be the threshold value for the second year. The threshold values for years three to five will be worked out as the simple average of threshold value for the first year and the per acre income from crop A for the community as a whole for all the preceding years beginning with the first year. The threshold values for the per acre yield of crop A will be worked out in a similar manner.
In the first year, each farmer indicates the per cent of normal per acre income from crop A for the community as a whole, which he is prepared to pay as premium for insurance for one acre under crop A. This can vary from, say, 1 per cent to 5 per cent (these limits can vary from situation to situation) but the premium chosen by a farmer remains fixed for a block of five years. One per cent can be called one unit and a farmer indicates the number of units of premium he pays annually during the relevant block of five years. From second year onwards, the base for calculating the premium to be paid for that year will be the threshold value for that year calculated as per the procedure described above.
The annual premium paid by the farmers accumulated over years will form the fund from which compensation will be paid to farmers during deficit years according to the following procedure.
A year in which the average per acre yield and income for the community as a whole are less than the threshold values for that year, the difference between the average per acre income for that year and the threshold for that year multiplied by the total acreage under crop A in the community in that year will be the compensation to be paid to the farmers growing crop A in that year. This will be divided by the total number of units of premium paid by the farmers in the community to get the value of compensation per unit of premium. The compensation will be distributed among the farmers according to the number of units of premium paid by each farmer and his acreage under crop A. If the accumulated fund available in a year is less than the total amount of compensation to be paid, the lower amount will be used to calculate the amount of compensation to be paid per unit of premium per acre. More generally, in a year in which compensation becomes payable, the community will hold a meeting to decide the total amount of compensation to be paid subject to the maximum of accumulated funds available for that year. The community will be free to fix a lower amount of compensation so that more will be available to cover the really bad years.
In the event of a lack of agreement among the farmer members about the status of the activity in a deficit year, an expert can be asked to estimate the seriousness of the loss in that year. The community can have a standing procedure for this purpose. Alternatively, the community can resort to voting by members to reach a decision.
A variant of the above model can include a contribution by the government/NGO/ funding agency that sponsors the programme to the premium fund of the community. Each year this contribution can be a fixed percentage of the total amount of premium collected by the community in that year and will be paid to the community at the end of the year. This can serve as an incentive for the community to start operating the insurance programme and augment the funds available for the payment of compensation during deficit years.
Appropriate rules will have to be framed to provide for the moving out and moving in of farmers in the insurance programme due to changing activities from year to year and for defaults in paying premium.
This is an SHG model for farmer insurance in the sense that it does not involve any subsidy other than that in the variant where the community receives a contribution from the outside. There is no moral hazard as reporting lower yield and income over years will depress the threshold and, thus, reduce the amount of compensation in a year in which compensation has to be paid. The yield and income reported by each farmer will be recorded and will be known to all in the community. The contribution paid by an external agency in the variant mentioned above is linked to the premium amount collected for each year. The community has the freedom to decide what part of the accumulated funds is to be paid in a deficit year subject to the maximum of accumulated funds available in that year. Peer pressures will work to make the scheme viable.
Administrative Costs
The administrative costs can be borne by the sponsoring agency or village panchayat. In any case, there is no need for any extra personnel or heavy expenses other than the modest costs of maintaining records. The community will make arrangements for recording the data provided by members and for their processing along the lines indicated above. They will discover that they can do this on their own by entrusting this task to a member elected as secretary. He may be paid a reasonable amount for this work. The insurance scheme will be planned and operated by the community with minimal interventions from the outside. This is important to ensure that the community acquires the capacity and confidence to work together and set up essential facilities for themselves without waiting for initiatives or help from outside. Once the community becomes mature in terms of these attributes, the dream of having strong and viable grassroot level institutions of the poor and disadvantaged, which has eluded us so far will move towards realisation. A likely way this will happen is that the community which begins with farmer insurance ventures into other areas in the same self-reliant way as in the case of insurance. Currently, institution building at the grassroot level faces the formidable barrier of all initiatives and ideas remaining with people and agencies from outside who are eager to do quick turnkey jobs without giving much thought to the health and status of the institutions beyond their active presence. It would be interesting to do some research on the high infant mortality among such institutions!
Finally, a valuable by-product of the SHG model will be the data base on farmer-wise acreage, output and income of different crop and non-crop activities in
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Economic and Political Weekly March 10, 2007 the community over a period of years. The community itself should learn to monitor these data carefully to improve their capacity to cope with the risks inherent in their occupation. They could also open up new vistas for analyses of the farm economy and weather and market fluctuations by researchers and policy-makers. Further, insurance companies will find the database invaluable for developing new insurance products for farmers. Thus, the SHG model for farmer insurance could trigger innovative developments within farmer communities and, also, in catering to the insurance needs of the modernising agriculture and rural economy. Large sample surveys by organisations like the National Sample Survey Organisation do bring in lot of rigour and sophistication in data collection. But their estimates remain at a level too aggregative to serve the needs of the grassroots. Field investigations by researchers are usually too modest in scale and time points covered to help the stakeholders at the ground level. As far as we know, practically nothing has been done to preserve them in data banks for wider future use. The only way to build up an adequate, reliable and continually updated data base at the ground level is to involve the rural communities themselves in collecting, using and preserving data in the development activities undertaken by them. The SHG model for farmer insurance suggested in this note could give a lead in this direction.
EPWEmail: vmadiman@hotmail.com
Economic and Political Weekly March 10, 2007
