Agriculture insurance in india

By Deepa Venkatraman
This study looks at 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.
M I R M X V I – M I B s c h o o l o f M a n a g e m e n t
Agriculture Insurance in India
Challenges and Opportunities

2
Table of contents
INTRODUCTION........................................................................................................................................................3
OBJECTIVES OF THE STUDY:.....................................................................................................................................3
ANALYSIS OF AGRICULTURE INSURANCE IN INDIA.............................................................................4
OVERVIEW ...................................................................................................................................................................4
HISTORICAL BACKGROUND ON VARIOUS INSURANCE SCHEMES IMPLEMENTED IN INDIA...........................5
CHALLENGES RELATED TO AGRICULTURE INSURANCE IMPLEMENTATION IN INDIA....................................8
OPPORTUNITIES.......................................................................................................................................................10
REFERENCES............................................................................................................................................................12
APPENDIX.................................................................................................................................................................13

Introduction
Historically, Agriculture has been the backbone of Indian economy. Agriculture is the primary
source of livelihood for more than 55% of Indian population. This automatically implies that risk
management in Agriculture sector is one of the key focus areas for the current NDA government
in India.
Unfortunately, Agriculture production output as well as farmer’s income in India is frequently
affected by natural disasters such as droughts, floods, storms, cyclone, earthquake etc. The result
is further compounded by the outbreak of epidemics and man-made disasters such as fire, sale of
spurious seeds, fertilizers and pesticides, price crashes,etc. There have been constant efforts
made towards managing risks across the Agriculture value chain but little progress or result
accomplished till date. Although, recent mechanisms like contract farming and derivatives
markets in futures have been established which are expected to bring down some of the volatility
in prices directly or indirectly but agricultural insurance is still considered as a critical risk
management mechanism to effectively manage risks to output and income resulting from various
natural and manmade disasters.
“Agriculture Insurance is considered as a special line of property insurance applied to
Agriculture firms. Agriculture insurance is not limited to crop insurance; it also applies to
livestock, bloodstock, forestry, aquaculture, and greenhouse. Crop insurance is the most
developed sub-line of business of agricultural insurance, accounting for almost 90 percent of the
total premium written worldwide.” (As stated by Ramiro Iturrioz 2009)
Figure 1: Agriculture Insurance Premiums Worldwide
Objectives of the Study:
In this paper, we will primarily focus on Crop Insurance sub-line with a geographical focus on
India. The main objective to prepare this report is to:
I. Understand basic concepts on Agriculture Insurance in India

4
II. Provide a brief historical background on various insurance schemes implemented by the
government over a period of time and the recent modifications to the programs or
schemes
III. Discuss challenges related to Agriculture Insurance schemes,a quick look at farmers
perception in India about Agriculture Insurance and other on-ground issues
IV. Try and explore prospects and suggest some possible recommendations
Analysis of Agriculture Insurance in India
Overview
The risk appetite of an average Indian farmer is very limited. Large farm households or wealthy
farmers are able to diversify risks over time and manage their production or income in an
appropriate manner. Although, severalstudies in this field indicate that the risk strategies or
diffusion mechanisms managed by farmers themselves come at a hefty price hence becomes
unaffordable by any of the average farmers. Individuals especially farmers are helpless and have
no control over the occurrence or impact of a natural event.
Crop Insurance is unique from other insurances because the incidence of crop risk is not
independently or randomly distributed among the insured. Naturaldisasters typically affect the
entire population in the area. Crop risk is distributed across space and time. The losses suffered
by farmers in a particular locality will kick in the mutuality effect by farmers from other areas
bearing the loss or the premium reserves can be used to pay the indemnities. This shows that a
good crop insurance scheme will consider mutuality benefit. Farmers receive protection and
stability of their income via crop insurance. Crop insurance should facilitate adoption of modern
technologies, encourage higher investment that results in increased agriculture output. Crop credit
insurance also reduces the risk of farmer’s defaults on loans. The reimbursement of indemnities
in the case of crop failure facilitates the farmer to repay his loan in time and thus, his credit line
with the formal financial institutions is maintained intact preventing institutional credit defaults.
The other key benefit from various insurance schemes is the indemnification of such risk-averse
individuals who are adversely affected by natural probabilistic phenomenon. When Insurance
offers the possibility of transferring risks, it allows insured to engage in risky activities, which
otherwise they would not pursue.
Some of the biggest drawbacks of this insurance in India is lack of historical data on yield levels
as well as risk position of individual small-scale farmers puts the insurance company in a tight
spot. The good news is a lot of work is going on into data collection and analysis in the recent
years. As in the case of general insurance, agricultural insurance market also faces the problem of
adverse selection and moral hazard. The higher premium rates due to high operational and
specialized skills requirement, discourage majority participation and only high-risk clients
participate leading to adverse selection. Tendency of moral hazard tempts an insured to not invest
in loss prevention techniques than an uninsured counterpart when expected unless placed as a pre-
requisite by the insurer. They end up not using certain expensive fertilizers or pesticides, use low
quality seeds etc Private insurance companies cannot limit their losses due to all of the above
drawbacks leading such agencies in crop insurance market towards bankruptcy.
As we can see, Agriculture Insurance is a profound area and is governed by complex biological

5
processes that require very skilled underwriters; who can understand all of these many variables
and establish link between a loss that is insurable and the cause of loss. With the increasing
modernization of this sector due to introduction of modern and sophisticated technologies,
underwriters need to have the right balance in understanding the biological, traditional (wherever
applicable in Indian sub-regions) and advanced technical process to not only assess premiums but
also advise on improvements of the producers own risk management practices.
Agricultural insurance products
Agricultural insurance products can be classified into three main groups based on the method of
determining how claims are calculated. These classifications are summarized in table 1 below.
Note: A comparative study on various parameters between yield and crop insurance is provided in
Appendix: Table 1. (S.S. Raju and Ramesh Chand, 2009)
Historical background on various Insurance Schemes implemented in India
I. First Individual Approach Scheme 1972-1978
General Insurance Corporation (GIC) of India introduced the first scheme based on
“Individual approach” - Crop Insurance Scheme on cotton and later included groundnut,
wheat and potato. The Scheme was implemented in 6 states and continued up to 1979. This
scheme covered 3000+ farmers only for a premium of approximately Rs.4.5 lakh against

6
claims of Rs.37 lakhs. (S.S. Raju and Ramesh Chand,2009)
II. Pilot Crop Insurance Scheme (PCIS) 1979-1984
“The Pilot Crop Insurance Scheme was launched by the GIC in 1979, which was based on
the ‘Area Approach’ for providing insurance cover against a deficit in crop yield below the
threshold level. The Scheme covered cereals,millets, oilseeds, cotton, potato and chickpea
and it was confined to loanee farmers of institutional sources on a voluntary basis. The
PCIS 1979 was implemented in 12 states till 1984-85 and covered 6.23 lakh farmers for a
premium of Rs.195.01 lakh against claims of Rs.155.68 lakh during the entire period. The
premium paid was shared between the GeneralInsurance Corporation of India 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
subsidized by 50 per cent shared equally between the state and central governments.”
(Source: S.S.Raju and Ramesh Chand, 2009)
Some of the major drawbacks of this scheme were as follows:
o This scheme was linked to only loaned farmers. Small-scale farmers were unable
to participate in this scheme since they have poor access to institutional credit.
o The unit of insurance was huge.
o There was very little awareness among the farmers about the crop insurance
scheme.
o Critical commercial crops like cotton and sugarcane were not part of this scheme
III. Comprehensive Crop Insurance Scheme (CCIS) 1985-99
The Comprehensive Crop Insurance Scheme (CCIS) launched in 1985 was the first nation-
wide Scheme since all of the previous schemes were pilot projects restricted to a small
scope of farmers scattered across states. This scheme was linked to short-term credit and
was based on the ‘homogenous area approach’. The Indian Government introduced CCIS
during the year 1985-86. By 1999, the scheme was adopted by 15 states and 2 union
territories (UTs). Both, PCIS and CCIS were confined only to farmers who had borrowed
seasonalagricultural loans from financial institutions. The main difference between PCIS
and CCIS was that PCIS was on voluntary basis while CCIS was compulsory for loanee
farmers. The CCIS covered 763 lakh farmers for a premium of Rs.404 crore against claims
of Rs.2303 crore.
Important features of this scheme were:
o Farmers who had availed bank loans were required to be covered and growing food
crops and oilseeds. The coverage was restricted to 100 per cent of the crop loan subject
to a maximum of Rs.10,000/- per farmer.
o The premium rates were:2 % for cereals, millets , 1% for pulses and oilseeds.
Farmers‟ share of premium was collected at the time of disbursement of loan. Half of
the premium payable by small and marginal farmers was subsidized and split between
the Centraland State Governments.
o The Premium and Claims were shared by Centraland State Governments in a 2:1 ratio
o The scheme was a multi agency effort, involving GOI, State Governments, Banking
Institutions and GIC. (S.S. Raju and Ramesh Chand, 2009)
The major drawbacks for this scheme were that it was based on “homogenous Area
approach” with coverage restricted to loanee farmers,uniform premium rate for all the
farmers and regions, coverage of few crops and time lag for indemnity payment. (Jain,

7
2004)
IV. National Agriculture Insurance Scheme (NAIS)
The National Agricultural Insurance Scheme (NAIS),intended to expand coverage of
farmers and types of crops, was introduced in the country from Rabi 1999-2000 replacing
Comprehensive Crop Insurance Scheme (CCIS). This scheme which was implemented by
AIC- Agriculture Insurance Company of India Ltd. mainly focused on addressing loss
coverage against crops damage due to natural calamities like drought, flood, hailstorm,
cyclone, pests and diseases. The other positive aspect of this scheme was it was made
available to all formers irrespective of their size of debt (loanee or non-loanee) and covered
following food crops (cereals,millets and pulses), oilseeds and annual
commercial/horticultural crops, in respect of which past yield data is available for adequate
number of years. “The Scheme was continued till 2013, however, some States are allowed
to implement NAIS during Rabi 2013-14. Since the inception of the Scheme 2084.78 lakh
farmers for a premium of Rs.8,67,121 lakh against the claim of Rs.25,37,558 lakh were
covered until 2012-13. The total area insured was Rs.3137.70 lakh hectares during the
same period. This was supposed to be a more comprehensive Scheme, with aim to cover all
farmers irrespective of loanee or non-loanee.” (S.S. Raju and Ramesh Chand, 2009)
The State-wise coverage details of under “National Agricultural Insurance Scheme” is
available at Annexure-I
V. Modified National Agriculture Insurance Scheme (MNAIS)
Modified National Agricultural Insurance Scheme (MNAIS) was an improvised farmer
friendly scheme,which was implemented on a pilot basis in 50 districts between Rabi
2010-11 in comparison to the earlier scheme which was implemented only in 25 States and
2 Union Territories. During the Five seasons of its implementation in 17 States, the
MNAIS covered 45.80 lakh farmers for a premium of Rs.1,08,800 lakh against the claim of
Rs.86,400 lakh until Rabi 2012-13. The total area insured was 46.79 lakh hectares during
the same period. (S.S. Raju and Ramesh Chand, 2009)
Note: The State-wise coverage detail under “Modified National Agricultural Insurance
Scheme” is available at Annexure-II, Table-A.
VI. Pilot Weather BasedCrop Insurance Scheme (WBCIS)
During the year 2003-04 the private sector came out with some insurance products
in agriculture linked to weather indices. The insurance losses due to vagaries of
weather, i.e. excess or deficit rainfall, aberrations in sunshine, temperature and
humidity, etc. could be covered on the basis of weather index. If the actual index of
a specific weather event is less than the threshold, the claim becomes payable as a
percentage of deviation of actual index. For ex: Rainfall Insurance was a product
released by ICICI-Lombard General Insurance Company. This type of insurance
scheme has the advantage to settle the claims within shortest possible time. The WBCIS is
based on actuarial rates of premium but to make the Scheme attractive, premium actually
charged from farmers has been restricted at par with NAIS.

8
Note: The State-wise coverage detail under pilot WBCIS scheme is available at Annexure-
II Table-B. (S.S. Raju and Ramesh Chand, 2009)
VII. National Crop Insurance Program (NCIP)
This is the latest scheme introduced b the government in 2013-2014 and was a merger of
all of the existing MNAIS, WBCIS and CPIS programs with enhancements to help further
expand this scheme throughout the country.
Challenges related to Agriculture Insurance Implementation in India
Before we proceed with the concrete problems within the Agri-Insurance itself it is
important to understand the socio-economic characteristics of farmers in India. Indian farmers are
not very educated; it is more of their lineage, tradition and experience that have made them the
experts in this field. Many farmers in India are not even aware of existence of Insurance and
others who do, perceive it in many different ways very different from other countries globally.
When a field survey was conducted to understand socio-economic differences (refer Appendix:
table 2) between loanee and non-loanee farmers,it was observed that there were no significant
difference between their education level and family. However,farm size and crop income, were
the biggest differentiators with the borrowers having a higher value in both of these parameters.
Non-loanee farmers had higher secondary sources of Income. Though average income of
borrower household was much higher than non borrower’s but the difference was only upto 10%.
Feedback from loanee farmers were very positive on agriculture insurance since it was
compulsory for them to take insurance due to bank loans they had shown satisfaction on various
insurance schemes. Some of the improvements suggested were some reduction on premium rates,
inclusion of more food crops and a quicker time desired for claims settlement. When asked on
their inputs on a more effective way to spread awareness to other farmers,the most common
suggestion of source was village melas. (Mela: a fun-n- fair set up in their respective villages
periodically). Non-loanee farmers, the biggest issue why they didn’t take up insurance was
primarily due to lack of awareness. When asked about their financial back-up during bad days or
crop failure they mentioned that they would usually tap into help from family and friends or
hypothecation of jewelry, livestock and assets. Over 3000 farmers committed suicides in the last
3 years. The suicide rate among Indian farmers has risen to 47% higher than the national average.
Hence there is something not working right with all these schemes or other risk mechanisms used
today in the agriculture value chain.
Key issues:
1. Insured area (unit of insurance) too large along with unreliability or unavailability of
historical data
As of now, the National Agricultural Insurance Scheme is implemented on the basis of
"homogeneous area"approach, and unit of insurance is equal to the Mandal / Taluk or
equivalent unit, in most cases. These are large units of insurance covering diverse villages,
which have huge variations due to administrational differences and actual yield that are
impacted due to natural calamities. Hence for the scheme to be more reliable and popular the
unit of insurance should be reduced to the level of “village‟ or a cluster of similar villages
(Panchayats). Ideally, "Individual approach" would reflect crop losses on a realistic basis, and
has been regarded most desirable (Dandekar, 1985). However,implementing a crop insurance
scheme at the "individual farm unit level" is beset with problems that not only adds to the

9
administrative, operational and financial constraints but also many others as stated below:
o Non-availability of the past records of land surveys, ownerships, tenancy and yields
at individual farm level
o Small size of farm holdings and inaccessibility of some farm-holdings
o A large variety of crops, varied agro-climatic conditions, diverse practices and
inadequate infrastructure.
There can be a more realistic yield loss risk assessment if the insurance unit is reduced to the
Gram Panchayat (GP) level, however, data being the lifeline of insurance, the actuarial rating
of the product at GP level would be possible only if the historical yield data at that level (GP)
is available for a reasonably long period. In reality, such data at the GP level is not available
and therefore challenges the insurer to work out premium rates on sound actuarial principles
(Planning Commission, 2007).
2. Threshold / guaranteed yield assessment
Presently, Guaranteed Yield, based on which indemnities are calculated, level of indemnity
multiplied by the moving average yield based on last 3 years of historical data for rice and wheat,
and past 5 years for other crops. This calculation doesn’t provide adequate data or protection to
farmers especially in areas with consecutive adverse seasonal hits, pulling down the average
yield. Hence Indian council of Agriculture research proposed to consider the best 5 out of the
preceding 10-years yield.
3. Settlement ofClaims – untimely or never settled
Indian government requires Crop cutting experiment is a crucial step required to assess claims
payout and release of funds from central and state governments. These assessments can be done
only post crop harvest time. The problem is there is a huge time lag of atleast more than 8 months
between the time loss occurred to actual claim payment.
4. Premium rates too high and no responsibility ofbanks today in sharing % of premiums
Considering the overall benefits of Crop Insurance and its indirect protection to lending activities,
it is only justified for banks to share the burden of high premium rates in such instances.
Currently when a claim is settled the bank first settles its respective dues against the farmers and
then passes on anything if remaining to the farmers. It is only justified that atleast a small % of
premium rates are also shared by the banks along with the governments so as to reduce the
burden of price to farmers.
5. Lack ofawareness of crop insurance amongst farmers
Majority of the farmers are not even aware of Agriculture insurance. They need to understand
how Insurance can not only protect their production but also income during bad seasonal rain or
natural disasters. There has to be more than 1 media of advertisement and marketing to reach out
to this rural population of India in a creative manner like village melas, local farmer committees,
roadshows, television etc
6. Lack ofappropriate forums or risk advisory mechanisms to prevent or control loss for
farmers
There are no formal forums, committees or advisory medium to reach out to the farmers to
provide their subject matter expertise by assessing their current life cycle and introduce various
mechanisms, methodologies and practices to reduce risks by managing losses that could have
been either prevented or controlled by use of modern technologies or innovative methods.
Recently there has been many farmers within states coming together to small forums and sharing
their know-hows and success factors to help spread knowledge and awareness regarding various

10
ways to control crop damages in a cost effective manner. This system should be more researched
and formalized so as to benefit a larger farmer base across the nation.
7. Lack ofadequate public-private partnership
There are a lot of private players in this insurance arena like Reliance, Tata-AIG,Royal
Sundaram, IFFCO-Tokio, Bajaj-Allianze, ICICI-Lombard, HDFC-Chubb etc but with little actual
contribution or participation in this sector of crop insurance. The Insurance Regulatory and
Development Authority (IRDA) has stipulated that “every new insurer undertaking general
insurance business, has to underwrite business in the rural sector to the extent of at least 2 per
cent of the gross premium during the first financial year,which is to be increased to 5 per cent
during the third financial year of its operation. Crop insurance is included in the rural sector
insurance for this purpose.” These targets set forth by IRDA are minimal and additional only a
nominal amount is required as a penalty in case any insurer does not meet above mentioned
business targets. With this condition, many get away by paying small penalties hence reducing
private participation. IRDA has a major role to play by increasing these business targets to ensure
more private participation in the rural segment for crop insurance.
Opportunities
In this section we will list out the areas of opportunities to address many of the core and long
standing issues listed out earlier within the Agriculture insurance implementation within India.
Most of the Agricultural areas are rain fed there isn’t good infrastructure like irrigation,
greenhouse etc available to help reduce yield risk. There has to be formal policy and budget put in
place by respective state governments to increase infrastructure spending to alleviate some of
these troubles for their local farmer population. In order to reduce the unit of insurance and go
based on the more reliable “Individual based approach” for accurate actuarialassessments and
pricing, it is key to obtain historical data and manage the operational/administrative setbacks.
There has to be more research carried out in this area to help in sound data collection, validation
and maintain this data in a centralized database,to be made available to all interested parties like
financial institutions, IRDA,research centers etc in order to carry out their respective
assessments. If this particular problem is resolved by the government then there can not only be
better premium assessments benefiting insurers, there can be better risk advisory performed to
help farmers maximize their yields, draw in more capacity from insurers/reinsurers and banking
institutions also benefit loss assessment and claims settlement in a timely manner.
To ease out the time delay on settlement of claims, Agriculture council has suggested to introduce
'on-account' settlement of claims, without waiting for the receipt of yield data,to the extent of 50
per cent of likely claims, subject to adjustment against the claims assessed on the yield basis.
Many of the farmers may not even hold bank accounts for the claims to be credited directly to
them. Many of this has to be considered ground up by the central government and incorporate the
basic fundamentals during policy planning. For ex: recently Reserve bank of India has given
directive to all public banks to increase the coverage to all rural areas including ATM’s this will
hopefully ensure that the pre-requisites are in place for Agro-insurance to widely spread amongst
non-loanee farmers.
Today there is more public – private competition than public private partnership in India.

There needs to be increased participation from the private sector,there are a number of private
players in Agriculture insurance but their participation or undertaking is very low. The
government should ensure that these firms are incentivized appropriately to accept more risks and
expand their client base. One of the ways that globally countries have included the private sector
is by providing reinsurance or IRDA to increase the business target mandate for crop insurance in
rural sector participation.
Further the government has recently announced that it is going to come up with a new
“Agriculture income Insurance scheme” to ensure that the farmers minimum income is
guaranteed in case of crop loss by 2016. More details and discussions around this scheme are still
being carved and not finalized. This is still good news on the works.
Lastly, more effective ways of image building and campaigns to spread awareness of Agriculture
insurance to farmers across the rural population of India is desired. There needs to be more
farmers being covered across the nation. India has more than 100 million farmers of which only
20% take bank loans and even less being insured. There is yet a lot of work needs to be done in
this area and scope to expand and cover about 80% of the remaining population is a huge
opportunity within agriculture insurance.
This projects the enormous insurance growth potential that exists in order to address the needs of
the farmer community, enhance overall efficiencies and competencies within this sector.

12
References
Economic times, ‘Less than 20% farmers take crop insurance: Study’, April 12 2015. -
article
Pandaraiah & Sashidhar, K.V, ‘Crop Insurance: Farmers perception and awareness’, Jan
2015, Vol 3, Issue 1, 131.
Trivedi, Sashikant (2015), Business standard: ‘Centre to come up with agriculture income
insurance scheme’, June 16 2015. - article
Iturrioz, Ramiro (2009): Agriculture Insurance; primer series on insurance issue 12, June
2009, 35.
Loksabha Secretariat (2014): Crop Insurance in India; November 2014, 11.
Dandekar,V.M (1985): Crop Insurance in India A Review, 1976-77 to 1984-85,
Economic and Political Weekly, 20(25&26): A-46 to A-59.
Planning Commission (2007): Report of working Group on “Risk Management of
Agriculture” XI five year plan, May 2007, 143-167.
Raju,S.S and Chand, Ramesh (2008), Agriculture Insurance in India – problems and
prospects, National Centre for Agricultural Economics and Policy Research, March 2008,
87.
Ministry of Agriculture (2012): ‘Agricultural Statistics at a Glance’, Agricultural
Statistics Division, Department of Agriculture and Co-operation, Nov 27 2012, 387

Appendix
Table 1: Comparative study between yield and weather based insurance
(Source: S.S. Raju and Ramesh Chand)
Table 2: Socio-economic characteristics of sample households in Andhra Pradesh
(Source: S.S. Raju and Ramesh Chand)

Agriculture insurance in india

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Agriculture insurance in india

Similar to Agriculture insurance in india (20)

Recently uploaded

Recently uploaded (20)

Agriculture insurance in india