Agriculture Risk Management and Role
of Insurance – Indian Context
Key Risks in Agriculture Sector
Production or Yield Risk
Market Risk
Asset Risk
Operational Risk
Institutional Risk
Financ...
Risk Management Framework
Informal Mechanisms Formal Mechanisms
Market-based Publicly Provided
Ex-ante
Strategies
On-farm ...
Crop Insurance – Key Advantages
Crop insurance is a means to protecting the cultivators against
financial loss on account ...
Crop Insurance – Key Advantages
Crop insurance is a more efficient risk management tool than
traditional strategies such a...
Risk management can unleash
opportunity. Risk management tools—
such as improved information, crop
insurance, and employme...
Models of Crop Insurance
• Traditional Crop Insurance
• The sum insured could be the total expenditure or a
multiple of it...
Yield Based
Insurance
Indemnity equal to actual yield
loss
High administration cost
Adverse Selection
Moral Hazard
Index B...
Crop Insurance in India
The use and coverage of rainfall insurance has increased, but still
remains limited
Weather-based ...
Mutual Insurance
Another form of insurance is Mutual Insurance
Key features:
Sharing risk – cooperation between public and...
Products and Policies in India
Some of the key products and policies in India are:
National Agricultural Insurance Scheme
...
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Agriculture risk management and role of insurance

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Agriculture Risk Management & Role of Insurance in Indian context

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Agriculture risk management and role of insurance

  1. 1. Agriculture Risk Management and Role of Insurance – Indian Context
  2. 2. Key Risks in Agriculture Sector Production or Yield Risk Market Risk Asset Risk Operational Risk Institutional Risk Financial Risk Personal Risk In India, the Agriculture sector is specifically exposed to high risks due to weather conditions due to: •High dependence on rainfall •Limited irrigation facilities •Weak institutional structures •Low use of technology Variation in Weather Conditions and Natural disasters is a risk faced the by agriculture sector which affects the production and incomes of farmers
  3. 3. Risk Management Framework Informal Mechanisms Formal Mechanisms Market-based Publicly Provided Ex-ante Strategies On-farm Avoiding exposure to risk Agricultural extension Crop diversification and inter- cropping Pest management systems Plot diversification Infrastructure Diversification of income source Buffer stock accumulation of crops or liquid assets Adaptation of advanced cropping techniques Sharing Risk with Others Crop sharing Contract marketing and future contracts Informal risk pool Insurance Ex-post Strategies Coping with Shocks Sale of assets Credit Social assistance Reallocation of labour Social funds Mutual aid Cash transfer Source: World Bank, 2001
  4. 4. Crop Insurance – Key Advantages Crop insurance is a means to protecting the cultivators against financial loss on account of anticipated crop-loss arising out of natural factors beyond their control such as natural fire, weather, floods, pests, diseases etc. Key Advantages: Crop Insurance is a means to protect the farmer against the risks faced due to natural factors It helps to minimise the loss to the farmers incomes due to uncertainty and guarantee a minimum level of income/ return Crop insurance can serve as collateral for operating loans which improves producers’ access to credit In times of volatile prices, crop insurance helps protect revenue It provided greater profitability over long term Reassurance to farmers
  5. 5. Crop Insurance – Key Advantages Crop insurance is a more efficient risk management tool than traditional strategies such as crop diversification, inter-cropping, mixed farming, integration of farm It promotes farmers to allocate resources so as to maximise returns, since farmers are assured of financial compensation against any loss It encourages farmers to take more risk by way of growing more of the most profitable crops and adopt advanced technologies Crop insurance not only protects the farmers against natural disasters, shocks adverse weather conditions, but also acts as incentive to use the resources efficiently and achieve higher level of productivity In the long run, it enhances the risk taking abilities of producers by allowing them to invest in technological investments as well as produce high yielding (high risk) crops eventually leading to higher production and productivity
  6. 6. Risk management can unleash opportunity. Risk management tools— such as improved information, crop insurance, and employment diversification— can help people mitigate risk. The ability to mitigate risk, in turn, can allow people, especially the poor, to overcome their aversion to risk and be more willing Source: World Development Report, 2014 ‘Farmers in Ghana and India have been more willing to take on risk in search of higher yields— increasing their investments in fertilizer, seeds, pesticides, and other inputs—because they have rainfall insurance. When aggregated, these gains can have much broader effects, contributing to improved productivity and growth for a country as a whole’ Source: World Development Report, 2014
  7. 7. Models of Crop Insurance • Traditional Crop Insurance • The sum insured could be the total expenditure or a multiple of it or a proportion of expected income from crop(s) for which premium is paid • The indemnity/ claims payable is payable on the basis of shortfall in average yield from the guaranteed yield (threshold yield) • The claims are paid after the loss in yield is ascertained Yield Based Insurance • Weather based Crop Insurance • Weather insurance uses weather parameters as ‘proxy’ for crop yields in compensating the cultivators for deemed crop losses due to reduction in yield • Payouts are linked to a measurable index, such as the amount of rainfall over a given period or commodity prices at a given date • Rainfall insurance is a specific form of Weather Insurance Index Based Insurance
  8. 8. Yield Based Insurance Indemnity equal to actual yield loss High administration cost Adverse Selection Moral Hazard Index Based Insurance Rules out adverse selection and moral hazard Calculation of index and payment objective Low administration costs Difference between payment based on index and actual yield Models of Crop Insurance
  9. 9. Crop Insurance in India The use and coverage of rainfall insurance has increased, but still remains limited Weather-based crop insurance has many inherent advantages, but is faced with many constraints: sparse network of weather stations lack of high quality weather data for locations high premium rates for farmers limited scope of weather insurance Weather-based insurance can act as collateral for encouraging banks to lend more liberally to the agriculture sector Weather indices can be used to make early payouts in area covered by yield crop insurance Weather Insurance, with low administration costs and absence of adverse selection and moral hazard, is more suited to small farmers in rainfall dependent country like India
  10. 10. Mutual Insurance Another form of insurance is Mutual Insurance Key features: Sharing risk – cooperation between public and private sector Socially responsible and sustainable orientation through stakeholder cooperation Instruments for risk retention risk-risk reduction by means of prevention and self-regulation Risk analysis models and data collection, clear risk calculation models It is being implemented in Netherlands and has been well received by the farmers
  11. 11. Products and Policies in India Some of the key products and policies in India are: National Agricultural Insurance Scheme Weather Based Crop Insurance Scheme Wheat Insurance (Weather & Biomass) Rabi Weather Insurance Potato Insurance Poppy Insurance Varsha Bima (Rainfall Insurance) In addition, there are various State specific and crop specific policies

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