Indira Gandhi Institute for Development Studies(IGIDR), and the International Food Policy Research Institute (IFPRI) on ‘Harnessing Opportunities to Improve Agri-Food Systems’ on July 24-25 , 2014 in New Delhi. The two day conference aims to discuss the agricultural priority of the government and develop a road map to realise these priorities for improved agri food systems.

1. Agriculture Income Insurance Scheme
IGIDR-IFPRI Conference
Delhi, July 24, 2014

2. Agriculture in India
• Agriculture provides livelihood for two-
thirds of the country’s population
• It contributes to 15% of Indian GDP
• Provides employment to 57% of the
workforce
• Raw material source for large number of
Industries
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3. Agriculture in India
Policy Concerns:
To ensure that livelihoods of the people dependent on
Agriculture are preserved
Traditional Approaches:
Improving Productivity through better variety of seeds,
Increase land under irrigation, ensure marketing of produce
Support Mechanisms:
Minimum Support Price
Insurance Schemes
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4. Risks in Agriculture
Production Risks
• Weather and Climatic aberrations
• Pest and disease attacks
• Improper farming practices
Output Risks
• Price volatility
• Policy related
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5. Risk Mitigation
Mechanisms that dealt with income volatility
Yield insurance
Crop Insurance Schemes
Drought Insurance
Rainfall Insurance
Price insurance
Minimum support price
Governments to buy and hold stock for price
stabilization
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6. Risk Mitigation through Insurance
Agricultural insurance
• Addresses the risk to output and income resulting from
various natural and manmade events.
• Plays an important role in sharing the risks of farmers
in an affordable form.
• Helps the farmers to quickly recover from damages and
losses.
• Promotes savings and investment as regular premium
paid for it.
• Farmers can get loans against the security of insurance
policy from insurance companies and banks.
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7. Agriculture Insurance Schemes in India
• National Agriculture Insurance Scheme (NAIS)
Covers crop failure due to natural calamities
• Farm Income Insurance (Discontinued)
Protection by insuring production and market
risks (yield & Price). Ensures minimum
guaranteed income
• Comprehensive Crop Insurance scheme
Insurance linked to credit. Low premiums.
Covers upto 100 % loan
• Weather Based Crop Insurance Scheme (WBCIS)
Insurance of losses due to vagaries of weather
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8. Support Mechanisms
Price & Non-Price instruments to support farmer’s
Income
• Subsidies on inputs (especially fertilizer, water, power
and credit)
• Mechanism for determining fair price (CACP).
• Comprehensive Crop Insurance Schemes
• Procurement systems for major cereals and
maintenance of buffer stock.
• PDS to provide stable demand to farmers and supplies
at constant controlled price to consumers.
• Tariff policies to protect domestic producers from
unregulated flows of agricultural commodities.
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9. Agriculture Income Insurance
Income= Yield x (Price-Cost) per ton
Insuring Yield , Income or Price?
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10. Agriculture Income Insurance
 To protect against Production Risk
 To protect against price and market
risks
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11. Agriculture Income Insurance
CANADA BRAZIL CHINA
Name of
Insurance
Scheme
Farm Income Protection Act Income Insurance Program China Agriculture Insurance
Scheme
Features Covers both agriculture and
livestock. Guarantees an
income based on the
premium paid by the farmer.
Productivity coverage with a
price guarantee is offered by a
private insurer
Covers both agriculture and
livestock, but coverage is taken
mainly for livestock
Funding
Source
Private. However, premium
subsidy program launched in
2007 to increase coverage
Private, But premium subsidy
program launched in 2005 to
increase offtake
Private, but premium subsidy
provided by government in 2007 to
increase coverage. Government
covers approximately 80% of total
premium
What is
covered
Total Income of farmer can
be covered, but coverage can
be selected based on risk
appetite of the farmer
Total income of farmer based
on productivity as well as
historical prices
Total income from damage of crops
or loss of livestock
Coverage Five provinces in Canada
presently offer this insurance
for farmers
About 10% of the total planted
area of Brazilian agriculture
Administered by provincial
governments. Coverage remains
patchy.
Cost Premium is approximately
between 2% and 8% of the
total sum assured
Premium is approximately 9%
of the total sum assured
8- 10% of total sum assured.
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12. Agriculture Income Insurance
Features of the Agri Income Insurance
• Protects farm incomes-Guaranteeing income to
farmers
• Ensure Sustainable production by encouraging
long-term investment
• Enhance Food and Livelihood security
• Encourage Crop diversification
• Increase Competitiveness
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13. Agriculture Income Insurance
Which is the best insurance mechanism? Yield, Price
or Income ?
Since aggregate price and aggregate yield are
inversely correlated , we hypothesise
σ income =<σ yield x σ price
Therefore overall claims under farm insurance scheme will be lower
than either yield or price insurance
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14. Agriculture Income Insurance
How expensive will the Scheme be?
It is an opportunity to target those who need
subsidy most. Targeting the small and
marginal farmers with capping on sun
assured allows reduced expenditure than
other type of subsidies such as input
subsidies which increases use of inputs and
over production
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15. Agriculture Income Insurance
How will the scheme be managed?
• Administered by state Governments with
significant level of decentralization
• Yield assessment by gram panchayats vetted
through process of social audit or community
audit
• Use Farmer Producer organizations (FPOs) as
vehicles for delivery
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16. Agriculture Income Insurance Scheme
How will the pay-outs be determined
Expected Pay-out (EP) = SA x DF x (EI-AI)/EI
SA-Sum Assured, will have a upper limit to cover
only small and marginal farmers
DF-Discount factor by Insurance Company
EI-Estimated Income for that season assured on the
basis of yield and price measurement
AI-Average Income is the long-term average income of
a farmer
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17. Agriculture Income Insurance Scheme
Measurement of yield
• Yield would be measured on the basis of a pre-
agreed weather index which is highly correlated
with past yields, such as rainfall total or by period.
Measurement of Price
• Price would be measured as the average price
prevailing in three pre-agreed accessible mandis for
seven days before the pre-agreed pay-out date.
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18. Agriculture Income Insurance Scheme
Total Premium : The total premium to the
Insurance company should cover the total
pay-out, operating costs and profit
Total Premium= EP+OC+∏
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19. Agriculture Income Insurance Scheme
Farmer’s Premium : The premium payable by the
farmer is dependent on the probability of the
expected income falling below Average Income which
is a multiple of the probability of yield falling below
threshold yield based on weather index and
probability of price falling below certain level in three
pre-agreed mandis for seven days before the pre-
agreed pay-out date
Р income = Р yield x Р price
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20. Agriculture Income Insurance Scheme
Unit of Insurance: Per acre, Per crop for specific
piece of land
Cut off yield is required to decide whether crop is
eligible to be classified as yield shortfall
measured on the basis of pre agreed weather
index correlated to past yields
Price shortfall is measured as average price
prevailing in three pre agreed mandis for seven
days before the pre agreed pay out date
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21. Agriculture Income Insurance Scheme
Product to cover expected income and actual
income
Product to cover all or any causes for the gap
viz.Yield shortfall and Price shortfall
Causes for yield shortfall: Drought, Flood, Winds,
Hail storms, pest attack, disease incidence, fire,
theft, cattle grazing etc.
Causes for Price shortfall: Excess supply due to
bumper crop, imports, banning of exports,
withdrawal of MSP.
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22. Agriculture Income Insurance Scheme
Critical aspects for success of the scheme
For a success of a insurance scheme, it is critical that
a large pool of farmers register who have different
levels of risk. It is therefore necessary to avoid
Adverse selection: Refers to a situation when
farmers who more likely need insurance self-
select themselves for the insurance policy.
Moral hazard : Situation where farmer sees little
or no incentive to keep risks of farming methods
low as the insurance policy already covers the
risks
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23. Agriculture Income Insurance
Advantages
• Direct Income benefit to farmers through cash
transfers
• Guaranteed income to farmers that acts as
incentive to invest in farming
• Can promote sustainable farming
• Ensures minimum living income to small and
marginal farmers to move out of vicious circle of
poverty
• Can reduce Input subsidy burden on the
Government
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24. Agriculture Income Insurance Scheme
What Income Insurance aims at
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Low/Uncertain Income
Low Investment
Low Savings
Low Productivity
Income
Insurance