Progress and Problems in Agricultural Insurance
This article discusses the insurance schemes in place for agriculture and examines problems that prevent them from being implemented on a larger scale.
S S RAJU, RAMESH CHAND
A
This article discusses the genesis of agricultural insurance in India, examines various agricultural insurance schemes launched in the country from time-to-time and the coverage provided by them. Major issues and problems faced in implementing agricultural insurance in the country are discussed in detail.
Genesis and Evolution
The question of introducing a crop insurance scheme was examined soon after independence in 1947. Following an assurance given in this regard by the then ministry of food and agriculture in the central legislature to introduce crop and cattle insurance, a special study was commissioned during 1947-48 to consider whether insurance should follow an individual approach or a homogeneous area approach. The study favoured the “homogeneous area approach” even as various agro-climatically homogeneous areas are treated as a single unit and the individual farmers in such cases pay the same rate of premium and receive the same benefits, irrespective of their individual fortunes. In 1965, the government introduced a crop insurance bill and circulated a model scheme of crop insurance on a compulsory basis to state governments for their views. The bill provided for the central government to frame a reinsurance scheme to cover indemnity obligations of the states. However, none of the states favoured the scheme because of the financial obligations involved in it. On receiving the reactions of the state governments, the subject was referred to a expert committee headed by the then chairman, Agricultural Prices Commission in July 1970 for full examination of the economic, administrative, financial and actuarial implications of the subject.
First Individual Approach Scheme (1972-78): Different forms of experiments on agricultural insurance on a limited, ad hoc and scattered scale started from 197273 when the General Insurance Corporation (GIC) of India introduced a crop insurance scheme on H-4 cotton and later included groundnut, wheat and potato. The scheme was implemented in Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Tamil Nadu and West Bengal. It continued until 1978-79 and covered only 3,110 farmers for a premium of Rs 4.54 lakh against claims of Rs 37.88 lakh.
Pilot Crop Insurance Scheme (PCIS) 1979-84: In the background and experience of the aforesaid experimental scheme, a study was commissioned by the GIC and entrusted to V M Dandekar to suggest a suitable approach to be followed in the scheme. The recommendations of the study were accepted and a PCIS was launched by the GIC in 1979, which was based on the “Area Approach” for providing insurance cover against a decline in crop yield below the threshold level. The scheme covered cereals, millets, oilseeds, cotton, potato and chickpeas and it was confined to loanee farmers of institutional sources on a voluntary basis. The risk was shared between the GIC and state governments in the ratio of 2:1. The maximum sum insured was 100 per cent of the crop loan, which was later increased to 150 per cent.The insurance premium ranged from 5 to 10 per cent of the sum insured. Premium charges payable by small/marginal farmers were subsidised by 50 per cent shared equally between the state and central governments. PCIS 1979 was implemented in 13 states till 1984-85 and
Economic and Political Weekly May 26, 2007 covered 6.27 lakh farmers for a premium of Rs 196.95 lakh against claims of Rs 157.05 lakh in the entire period.
Comprehensive Crop Insurance Scheme (CCIS) 1985-99: This scheme was linked to short-term credit and based on the “homogeneous area” approach. Till kharif 1999, the scheme was adopted in 15 states and two union territories (UTs). Both PCIS and CCIS were confined to farmers who borrowed loans from financial institutions. The main distinguishing feature of the two schemes was that PCIS was on a voluntary basis whereas CCIS was compulsory for loanee farmers in the participating states/UTs. It covered farmers availing crop loans from financial institutions for growing food crops and oilseeds on a compulsory basis. The coverage was restricted to 100 per cent of the crop loan subject to a maximum of Rs10,000 per farmer. The premium rates were 2 per cent for cereals and millets and 1 per cent for pulses and oilseeds. Half of the premium payable by small and marginal farmers was subsidised equally by the central and state governments. The burden of premium and claims was shared by the central and state governments in a 2:1 ratio.
CCIS covered 763 lakh farmers for a premium of Rs 404 crore against claims of Rs 2,303 crore. As can be seen from Table 1, the benefits of CCIS were highly skewed towards Gujarat, as more than half (58 per cent) of total indemnities under CCIS were paid to groundnut farmers in this state alone. Other participating states which contributed 84 per cent of the premium during 1985-99 received only 42 per cent of total claims. The claimpremium ratio was nearly 20.74 for Gujarat, whereas it was only about 5.72 at the all India level. National Agricultural Insurance Scheme (NAIS) 1999-date: The NAIS was introduced in the country from the 1999-2000 rabi season, replacing the CCIS which had been in operation since 1985. This scheme is available to both borrowers as well as non-borrowers. It covers all foodgrains, oilseeds and annual horticultural/commercial crops for which past yield data is available for an adequate number of years. Among the annual commercial and horticultural crops, sugar cane, potato, cotton, ginger, onion, turmeric, chillies, corriander, cumin, jute, tapioca, banana and pineapple are covered under the scheme. The scheme is operating on the basis of both the “area approach”, for widespread calamities, and the “individual approach” for localised calamities such as hailstorms, landslides, cyclones and floods.
The premium rates that apply on the sum insured are: bajra and oilseeds – 3.5 per cent; other kharif crops – 2.5 per cent; wheat – 1.5 per cent; other rabi crops –
2.0 per cent; and annual commercial/horticultural crops – actuarial rates depending upon the crop.
The premium in the case of small and marginal farmers is subsidised by 50 per cent, which is shared equally by the government of India and the concerned state/ UT. The premium subsidy was to be phased out over a period of five years, and during 2005-06, only a 10 per cent subsidy was provided on premium payable by small and marginal farmers. At present, the NAIS is being implemented by all the states except Punjab, Arunachal Pradesh, Manipur, Mizoram and Nagaland. During the last five years of its implementation, the scheme covered 10-15 per cent farmers, 9-16 per cent crop area and 2.25 -3.56 per cent of crop output in value terms in different years (Table 2).
The amount of claims is much higher than what the premium was, which indicates a magnitude of loss from the operation of the scheme. During 2000-01 and 2002-03, claims were more than five times the premium paid. During 2003-04 and 2004-05, the amount of claims were more than double the amount of premium collected. As claims exceeded premium, there was a net loss in the scheme even without considering administrative costs.
The magnitude of loss can also be seen by comparing the ratio of “claims to sum assured” with the ratio of “premium to sum assured”. During the year 2004-05 claims constituted 7.06 per cent as against 3.16 per cent premium on the sum assured. This implies a loss of 3.90 per cent of the assured value of output.
Other Schemes in Operation
The agricultural insurance schemes discussed above cover only crops and yield loss. Some other insurance schemes are also in operation in the country which go beyond yield loss and also cover the non-crop sector. These include Farm Income Insurance Scheme, Rainfall Insurance Scheme and Livestock Insurance Scheme.
The Farm Income Insurance Scheme was started on a pilot basis during 2003-04 to provide income protection to the farmers by integrating the mechanism of insuring production as well as market risks. The
Table 3: Progress of Livestock Insurance
| Year | Number of | Per Cent livestock |
|---|---|---|
| Animals Insured | Population Insured | |
| (millions) | ||
| 1988-89 | 18.60 | 4.20 |
| 1992-93 | 13.80 | 2.90 |
| 1997-98 | 22.83 | 4.70 |
| 1998-99 | 23.50 | 4.84 |
| 1999-2000 | 17.10 | 3.52 |
| 2000-01 | 15.35 | 3.16 |
| 2001-02 | 16.49 | 3.40 |
| 2002-03 | 29.40 | 6.09 |
Source: Various issues of Basic Animal Husbandry Statistics, GoI.
Table 1: Statewise CCIS Performance during 1985-99
State Premium Collected Claims Claim-Rs Crore Per Cent Share Rs Crore Per Cent Share Premium Ratio
Gujarat 64.45 16 1336.93 58 20.74 Maharashtra 60.42 15 253.33 11 4.19 Andhra Pradesh 100.70 25 322.70 14 3.20 Other states 177.24 44 3918.60 17 2.21 India 402.81 100 2305.04 100 5.72
Source: Agriculture Insurance Company of India, New Delhi.
Table 2: Performance of National Agricultural Insurance Scheme
Year Farmers Area Covered Sum Assured Premium/ Claims Ratio Claims/Sum Covered (Per Cent as Per Cent of Sum Assured (Claims/ Assured (Per Cent) GCA) Value of Crop (Per Cent) Premium) (Per Cent) Output
1999-00(rabi) 0.53 0.41 0.09 1.60 1.40 2.25 2000-01 9.55 8.59 2.25 5.45 2.76 15.06 2001-02 9.69 8.44 2.18 1.91 3.20 6.20 2002-03 11.00 10.30 2.95 5.52 3.23 17.84 2003-04 11.26 9.91 2.37 3.29 3.11 10.22 2004-05 14.75 15.58 3.56 2.24 3.16 7.06
Source: Authors’ calculation based on data taken from Economic Survey, 2006-07, National Accounts Statistics 2005 and AIC 2007.
Economic and Political Weekly May 26, 2007
farmer’s income is protected by ensuring minimum guaranteed income.
The private sector has recently come out with financially viable insurance products in agriculture based on weather parameters. The insurance losses due to vagaries of weather, i e, excess rainfall or deficit rainfall, aberrations in sunshine, temperature and humidity, etc, could be covered on the basis of the weather index. If the actual index of a specific weather event is less than the threshold, the claims become payable as a percentage of deviation of the actual index from the pre-specified threshold. One such product, namely, rainfall insurance has been developed by ICICI-Lombard General Insurance company and by IFFCO-Tokio General Insurance company. Under the scheme coverage, deviation in the rainfall index is extended and compensations for economic losses due to less or more than normal rainfall are paid. The advantages of the rainfall insurance scheme are:
Livestock insurance is provided by public sector insurance companies and the insurance cover is available for almost all livestock species. Normally, an animal is insured up to 100 per cent of the market value. The premium is 4 per cent of the sum insured for general public and
2.25 per cent for Integrated Rural Development Programme (IRDP) beneficiaries. The government subsidises premium for IRDP beneficiaries. Progress in livestock insurance, however, has been slow and poor (Table 3). In 2002-03 about 29.40 million heads were insured which comprised 6.09 per cent of livestock population.
A brief account of all the crop insurance schemes launched in India is provided in Table 4.
Related Issues
As mentioned before, for crop insurance to be successful, public support is required. This could be in terms of subsidies on premium, meeting part of the administrative expenditure, and reinsurance, etc. Global experience shows that due to the special nature of agricultural production, in several countries, premiums payable by farmers are subsidised by the government. In case farmers are asked to pay the full premium themselves, chances of adoption of insurance are bleak. Perils to be covered: The fundamental issue in the design of a crop insurance scheme is whether to cover all or only certain specified risks. The former implies yield insurance. In other words, an insured farmer is eligible to get indemnity if the yield is below a certain guaranteed level for any reason. As it is very difficult to identify losses arising out of uninsured events, it is more practical to ensure yield rather than yield loss due to specific factors. A scheme based on named perils is feasible if the insured crops are affected by specific perils causing damage, which are measurable. If a scheme envisages the coverage of all risks, it is necessary to provide adequate safeguards to minimise the incidence of moral hazard.
Involvement of public or private sector:
The above discussed crop insurance schemes that have been developed in the public sector are often of multi-risk or allrisk type. Most of these schemes are linked to agricultural credit. Public sector insurance companies are helped by the government in various forms such as: (a) bearing the full or part of the cost of administration; (b) sharing a part of the indemnity or paying a part of the premium with a view to ensuring that farmers can afford to buy insurance. Private agricultural insurance has been in existence from 2003-04 in the form of rainfall insurance in India. Private sector insurance is voluntary and it covers specific risks which are insurable. There is no direct government support to private sector players. It is worthwhile to seek increased involvement of the private sector in agriculture by extending similar support to them as available to the public sector.
Individual/area approach and coverage:
Agricultural insurance in India has so far been based mostly on the “area approach” because of several problems associated with determining indemnity for individual farmers. However, pressure from the farming community to pursue the “individual approach” is growing. Obviously “individual approach” would reflect crop losses on a realistic basis and hence, is most desirable but in Indian conditions, implementing a crop insurance scheme at the “individual farm unit level” is beset with serious problems like (i) non-availability of past records on production and performance of individual farm to assess risk, (ii) monitoring a large
Table 4: Various Schemes Related to Crop Insurance in India and Their Features
Insurance Period Approach Crops Covered Farmers Magnitude Salient Features Scheme Covered (Rs Crore)
(Lakh) Premium Claim
Crop Insurance 1972-78 Individual H-4 cotton, groundnut, 0.03 0.05 0.38 Voluntary. Implemented in 6 states Scheme wheat, potato Pilot Crop 1979-84 Area Cereals, millets, oilseeds 6.27 1.97 1.57 Confined to loanee farmers. Voluntary. Insurance Scheme cotton, potato and chick pea 50 per cent subsidy on premium for small and marginal farmers Comprehensive Crop 1985-99 Area Foodgrains and oilseeds 763 404 2303 Compulsory for loanee farmers Insurance Scheme National Agricultural Insurance Scheme 1999-continuing Area and Food crops,annual commercial 858 2566 7507 Available to all farmers. Premium
individual and horticultural crops subsidy for small and marginal farmers be phased out over a period of five years.
Farm Income Insurance Scheme 2003-04 Area Wheat and rice 2.22 15.68 1.5 Insurance against to yield and price risks Rainfall Insurance 2003-04 Area Groundnut, castor, 3.00 N A N A Voluntary. Based on rainfall received continuing paddy, wheat, oranges, at the IMD/mandal rain gauges grapes, vegetables, etc
Economic and Political Weekly May 26, 2007 number of small units, (iii) moral hazard, and (iv) high transaction cost. Innovative mechanisms need to be developed to gradually shift from the “area approach” to the “individual approach”.
Assured value, loss assessment and premium: The sum insured is usually based on the cost of production or amount of crop loan. In most of the schemes, the sum insured is based on the cost of production. The reason is that it is easier to assess the cost of production. Such cost of production data is available from independent sources like statistics and research organisations. This serves the purpose of the “area approach”. There is a need to encourage farmers to maintain production/cost records, at least by farmers where some family member is literate.
For a viable crop insurance scheme, the premium rate needs to cover (a) pure risks; (b) administration costs; and
(c) reasonable returns, as incentives for private sector companies. A related issue is whether and to what extent the government should subsidise the premium. In many situations, even a premium rate based on pure risks would be too high for some farmers to afford [Jain 2004]. Till agricultural production becomes highly commercialised, profitable farmers cannot be motivated to pay for full premium. At present, indemnity limit is taken at 60-80 per cent of the threshold which is the average of the three best years out of the last five years. The indemnity limit needs to be raised and threshold yield should be computed from a somewhat longer period.
Conclusion and Policy Suggestions
Despite various schemes launched from time-to-time in the country, agricultural insurance has served very limited purposes. The coverage in terms of area, number of farmers and value of agricultural output is very small, payment of indemnity based on the “area approach” misses affected farmers outside the compensated area, and most of the schemes are not viable. This requires renewed efforts by the government in terms of designing appropriate mechanisms and providing financial support for agricultural insurance. Providing similar help to private sector insurers would help in increasing insurance coverage and in improving the viability of the insurance schemes over time. With the improved integration of the rural countryside and communication networks, the unit area of insurance could be brought down to the village panchayat level. Insurance products for rural areas should be simple in design and presentation so that they are easily understood. With increased commercialisation of agriculture, price fluctuations have become highly significant in affecting farmers’ income. Accordingly, market risk is now quite important in affecting farmers income. We feel that implementation of market insurance to cover price risk is much easier than yield insurance. This can be done by requiring interested farmers to register their marketable surplus with an insurance agency or market committee at the time of sowing of crops. The insurance agency should offer insurance cover to include price guarantee which could be the minimum support price in some cases or the market based price from the past. Farmers should pay the premium for this kind of price insurance and initially the government should share some of the burden of the premium. During harvest, if the price in the notified market falls below the guaranteed price, then the insurance agency should pay indemnity. There is lot of interest in the private sector to invest in the general insurance business. This opportunity can be used to allot some targets to various general insurance companies to cover agriculture. To begin with, this target could be equal to the share of agriculture in national income.
EPWEmail: raju@ncap.res.in
References
Economic Survey (2006-07): Government of India.
Jain, R C A (2004): ‘Challenges in Implementing
Agriculture Insurance and Re-insurance in
Developing Countries’, The Journal, January-
June, pp 14-23. National Accounts Statistics (2005): CSO,
Government of India.
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