Agriculture Insurance

India is an agrarian society with 75% of the population depending on it, for their livelihood. Agriculture or crop insurance has assumed importance with large scale damage caused due to pest attacks, crop diseases and vagaries of weather. The objective is to provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crop as a result of natural calamities, pests & diseases. The list of crops being covered for insurance differs from state to state. Generally quite a few Kharif and Rabi season crops are covered. These crops are insured at the community/block/gram panchayat levels. Agriculture insurance schemes are of immense help to farmers, providing them with financial security.

Comprehensive Crop Insurance Scheme (CCIS) has been in operation in the country since Kharif 1985 as an instrument of risk management in agriculture and as a measure of providing relief to farmers whose crops are damaged due to natural calamities. The sum insured is equal to crop loan disbursed subject to a maximum of Rs. 10,000 per farmer. The premium is charged at the rate of 2 per cent for rice, wheat and millets and 1 per cent for pulses and oilseeds. Since inception of the Scheme in 1985, about 6.45 crore farmers have been covered up to rabi 1997-98 season. The total amount of claims paid was Rs. 1623 crore as against a premium collection of about Rs. 313 crore up to rabi, 1997- 98 season. The Scheme is thus unviable. The losses incurred are met by the Government of India and the concerned state Governments in the ratio 2:1. The main drawback of the scheme is seen in the claims entertained for one single crop, namely, groundnut, because of which Gujarat state alone received Rs. 792 crores as claims compensation out of all India claims of Rs. 1623 crores. Thus one single crop (groundnut) in just one state (Gujarat) alone claimed 48.8 percent of total claims between 1985 to rabi 1997-98.

An Experimental Crop Insurance Scheme was introduced by the Government of India during rabi 1997-98 season covering non-loanee small and marginal farmers growing specified crops in selected districts. The scheme could be implemented only in 14 districts of 5 States. The premium was totally subsidised. Premium and claims both, were shared by Central and State Governments in the ratio of 4:1. About 4.78 lakh farmers were covered for a sum insured of Rs. 172 crore under the scheme during the rabi 1997-98 season. The total premium collected was Rs. 2.86 crore and against that, the claims amounted to around Rs.

39.78 crore. The Scheme has since been discontinued from kharif 1998 season. However, an expanded crop insurance scheme that will cover all farmers and more crops is under active consideration of the Government.

Economists have proven that farmers stand to benefit from crop insurance, even unsubsidized crop insurance. However, private markets for crop insurance worldwide are not highly developed, except for in a few cases. Skees (2000) documents several reasons for the underdevelopment of private crop insurance. Subsidized crop insurance crowds out private insurers and stifles innovation. Farmers are considered to know their risks better than the government or the private sector, so knowledge of agriculture is essential for insurers. The need for information increases the cost of insurance. Agricultural risk is unique—natural disasters can be widespread and are neither completely independent nor correlated. Studies have indicated that farmers/decision makers tend to underestimate the risk of damage by natural causes.

In the United States crop insurance is subsidized by the government but

administered through private companies. Hail insurance is not subsidized, so most insurers offer hail insurance along with the subsidized government policies. Rates are based upon the history of crop losses due to hail in the county and competition also plays a factor in keeping rates low. Adverse selection is not an issue because companies set rates higher for high-risk areas. Moral hazard is also less of a problem, as hail is a natural event. The multiple-peril insurance subsidized by the government is considered to be too expensive if offered without subsidies. A crop insurance agent from Midwest estimated that over half of the farmers who purchase subsidized multi-peril crop insurance also purchase hail insurance. The model used for hail insurance can also be used for other natural disasters, like drought, flood, and wind. The current subsidized insurance program administered

through private companies is relatively new. This program is considered to be a significant improvement over the previous unpopular programs administered by the government, although it is not flawless. An option for the Indian government is to administer its crop insurance program through private companies and gradually phase out the subsidy. This option could best be used for a “transition” period. Initially subsidizing premium rates for crop insurance offered through private companies would give the private sector incentive to enter the agricultural sector and time to gain experience before the withdrawal of subsidies. Crop insurance in South Africa was started in 1929 when a group of farmers started a pool scheme. Subsidized multi-peril insurance was offered for some time, but for the past fifteen years no subsidies have been given. Hail is the main peril covered and many other perils are also covered. Historical data and past claims play a role in determining the premiums and damage assessment is the biggest challenge for crop insurers. Crops at different stages are affected differently by hail, making knowledge essential for insurers. There are several players and new ones are

continuously targeting this market. Several crops are covered, including maize, wheat, sunflowers, and citrus fruits. The South Africa case illustrates how private individuals can offer crop insurance that is beneficial to farmers and how crop insurance can still exist after subsidies are withdrawn. In Canada crop insurance was administered through an area approach, similar to that of India. Research from 1995 by Turvey and Islam indicated that the area approach was not only inequitable but also inefficient. The empirical research from 537 farms confirmed the belief that individual crop insurance is better in terms of

risk reduction, but premiums would also be higher. The area approach in Canada was concluded to be inequitable, as benefits were not fairly distributed. The most benefits to be accrued would be by the farmers with yields closest to the average.

The crop insurance in Canada was voluntary at this time, unlike the NAIS. Adverse selection would be less of a problem at the individual level when insurance is mandatory. Cross-subsidization would be more of a problem, because the better farmers having to purchase insurance would indirectly subsidize the worse farmers. A 1997 study by Sakurai and Reardon indicated that there was an unmet demand for formal drought insurance in Burkina Faso. Burkina Faso is a part of the West African Semi-Arid Tropics (WASAT) and experiences frequent drought. Much of the farmland in India is in the semi-arid tropics. The demand for drought insurance was found to decrease in households with higher overall incomes or more self-insurance. The authors suggest that crop insurance alone is not sufficient; that policy and programs that supports self-insurance, such as micro credit or increase of off-farm employment, are also important. Perhaps in India public funds and government policy would be better aimed at strengthening self insurance mechanisms, while leaving crop insurance to the private sector.