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CROP INSURANCE: A Tool to save Farmers from Calamities
EXECUTIVE SUMMARY
Crop insurance is one of the various types of insurance that are offeredto the people. This insurance is directed to the farmers and agriculturists.
This Crop insurance scheme has been going on since the time of Kharif
1985. This insurance offers financial assistance for risk management in
agriculture.
This insurance policy is a relief scheme for the farmers whose crops get
spoiled during natural catastrophe. The insurance amount that is offered
to the farmers is equal to the loan amount that has been disbursed to
them. A certain amount of premium is charged against the crop insurance.
The loss that is incurred due to natural calamities is met by the
Government of India. It is to be noted that the insurance covers only one
crop. The crop insurance does not cover financial assistance to multiple
crops.
Crop insurance services are offered to the farmers for better production of
the crops and introduction of modern technologies. Top quality services
are rendered to the farmers and clients. The risk factor that is involved
with the production of the crops has reduced much because of theintroduction of this insurance policy.
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INSURANCE IN INDIA
What is insurance?
We face a lot of risks in our daily lives. Some of these lead to financial
losses. Insurance is a way of protecting against these financial losses. For
a payment (premium), an insurance company will take the responsibility
of compensating your financial losses.
Insurance in its basic form is defined as A contract between two parties
whereby one party called insurer undertakes in exchange for a fixed sum
called premiums, to pay the other party called insured a fixed amount of
money on the happening of a certain event."
What is General Insurance?
Insurance other than Life Insurance falls under the category of General
Insurance. General Insurance comprises of insurance of property against
fire, burglary etc, personal insurance such as Accident and Health
Insurance, and liability insurance which covers legal liabilities. There are
also other covers such as Errors and Omissions insurance for
professionals, credit insurance etc.
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METHODOLOGY
PRIMARYDATA:
I have not collected any project resources through primary data.
SECONDARYDATA:
I have collected the above and following project resources from books
related to insurance sector which were provided by library and from
websites on Internet.
The above secondary data information is given in detail in bibliography
and webliography.
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CROP INSURANCE
Agriculture production and farm incomes in India are frequently affected
by natural disasters such as droughts, floods, cyclones, storms, landslides
and earthquakes. Susceptibility of agriculture to these disasters is
compounded by the outbreak of epidemics and man-made disasters such
as fire, sale of spurious seeds, fertilizers and pesticides, price crashes etc.
All these events severely affect farmers through loss in production and
farm income, and they are beyond the control of the farmers.
With the growing commercialization of agriculture, the magnitude of loss
due to unfavorable eventualities is increasing. The question is how to
protect farmers by minimizing such losses. For a section of farming
community, the minimum support prices for certain crops provide a
measure of income stability. But most of the crops and in most of the
states MSP is not implemented.
In recent times, mechanisms like contract farming and futures trading
have been established which are expected to provide some insurance
against price fluctuations directly or indirectly. But, agricultural
insurance is considered an important mechanism to effectively address
the risk to output and income resulting from various natural and
manmade events. Agricultural Insurance is a means of protecting the
agriculturist against financial losses due to uncertainties that may ariseagricultural losses arising from named or all unforeseen perils beyond
their control (AIC, 2008).
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Unfortunately, agricultural insurance in the country has not made much
headway even though the need to protect Indian farmers from agriculture
variability has been a continuing concern of agriculture policy.
According to the National Agriculture Policy 2000, Despite
technological and economic advancements, the condition of farmers
continues to be unstable due to natural calamities and price fluctuations.
In some extreme cases, these unfavorable events become one of the
factors leading to farmers suicides which are now assuming serious
proportions (Raju and Chand, 2007).
Agricultural insurance is one method by which farmers can stabilize farm
income and investment and guard against disastrous effect of losses due
to natural hazards or low market prices. Crop insurance not only
stabilizes the farm income but also helps the farmers to initiate
production activity after a bad agricultural year. It cushions the shock of
crop losses by providing farmers with a minimum amount of protection.
It spreads the crop losses over space and time and helps farmers makemore investments in agriculture. It forms an important component of
safety-net programmes as is being experienced in many developed
countries like USA and Canada as well as in the European Union.
However, one need to keep in mind that crop insurance should be part of
overall risk management strategy. Insurance comes towards the end of
risk management process. Insurance is redistribution of cost of losses offew among many, and cannot prevent economic loss.
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There are two major categories of agricultural insurance: single and
multi-peril coverage. Single peril coverage offers protection from single
hazard while multiple peril provides protection from several hazards. In
India, multi-peril crop insurance programme is being implemented,
considering the overwhelming impact of nature on agricultural output and
its disastrous consequences on the society, in general, and farmers, in
particular. This present 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.
Natural disasters hit hard. They may cause heavy losses to farmers and
forest owners. Insurance can assist in managing these losses, and crop
insurance is that branch of this financial mechanism that is especially
geared to covering losses from adverse weather and similar events
beyond the control of growers.
CROP INSURANCE HISTORY
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In our country crop production has been subjected to the vagaries of the
climate. Some of the other problems that the Indian agriculture is
constantly tackling with are the large-scale damages that are caused as a
result of the attack of pests and diseases. It is in a scenario such as this in
India that the issue of crop insurance assumes a vital role in the stable
growth of the agricultural sector. Tracing the Crop Insurance History in
India we see that it was started with the introduction of the All-Risk
Comprehensive Crop Insurance Scheme (CCIS) that covered the major
crops. This scheme was introduced in 1985. In fact this period of
introduction also coincided with the introduction of the Seventh-Five-
year plan. This initial scheme was of course later substituted and replaced
by the National Agricultural Insurance Scheme. This substitution came
into effect from 1999. These Schemes that have been introduced
throughout the crop insurance history have been preceded by years of
preparation, studies, planning, experiments and trials on a pilot basis.
In the crop insurance history, the question of introducing a crop insurance
scheme was taken up for examination soon after the Indian independence.
The first aspect that was examined related to the modalities of crop
insurance. The issue under consideration was about whether the crop
insurance should be offered under an Individual approach or on
Homogenous area approach.
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CROP INSURANCE RISKS COVERED:
The Crop insurance schemes aim at providing comprehensive risk
insurance which covers the yield losses that occur to the agriculturaloutput of small and marginal farmers due to non preventable risks. The
crop insurance risks covered under the non-preventable category are
listed below:
a. Natural Fire and Lightning
b. Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane,
Tornado etc.
c. Flood, Inundation and Landslide
d. Drought, Dry spells
e. Pests/ Diseases etc.
The crops insurance risk does not cover any of the losses that arise out of
war and nuclear risks, malicious damage and other risks which arepreventable risks.
The sum insured under the crop insurance risks covered usually extends
to the value of the threshold yield of the insured crop. This is usually
subject to the option of the insured farmers. Nevertheless, a farmer may
also choose to insure his crop beyond value of the threshold yield level up
to 150% of average yield of the notified area on payment of premium at
commercial rates.
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Apart from the risks covered in the crop insurance scheme, what is
important is the sum insured. In case of Loanee farmers the sum insured
would be at least equal to the amount of crop loan advanced. Further, in
the case of the Loanee farmers, the insurance charges that will be levied
will be additional to the Scale of Finance for the purpose of obtaining
loan.
Apart from the above mentioned issues, the matters of Crop Loan
disbursement procedures, which have been outlined by the RBI /
NABARD, are binding. The insurance premium issues still stand at an
undecided state as the transition to the actuarial regime in case of cereals,
millets, pulses & oilseeds is expected to be made in a period of five years.
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CROP INSURANCE IN INDIA: FARMERS NEED A
BETTER DEAL
This post is on a fairly technical subject, but one of extreme
importance. Being a farmer is an extremely risky and increasingly life-
threatening occupation. Farmers already involved in hard and risky work
are either forced to take their lives due to Machiavellian moneylenders or
being shot dead by police at the behest of our land-grabbing politicians.
Indias notoriously harsh and unpredictable weather are the fundamental
cause of the risk. Add traditional caste structures and a weak and
increasingly unsupportive state and the life of an Indian farmer starts
looking quite tough. India has had crop insurance schemes since the
1970s, first introduced in Gujarat. The Comprehensive Crop Insurance
Scheme (CCIS) was introduced in 1985 and replaced by the National
Agricultural Insurance Scheme (NAIS) in 1999.
The paper (Vyas, Singh EPW, November 4 2006) from which I got my
data says that through farm insurance
a) The uncertainty faced by individual farmers is transferred to the
insurer, and for availing this benefit, the insured farmers pay a risk
premium;
b) a large number of participating farmers covering a large area over a
period of time enable horizontal spread of risks over a wide area, and
vertical spread over many years;
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CROP INSURANCE: A Tool to save Farmers from Calamities
c) The risk premium reflects the group risk assumed by the insurer; and
d) An indemnity is to be paid to the individual farmer when a loss is
incurred due to causes beyond his control.
Insurance for farmers helps greatly in reducing risk horizontally across
the states (a drought in Rajasthan is mitigated by a bumper crop in
Andhra Pradesh) and vertically across big and small farmers. In fact,
states which have accepted the scheme require that any farmer borrowingfrom any financial instis take insurance too. Unfortunately, data from the
scheme so far shows that only 4 % of the Rabi (winter) crop and 11 % of
the more risk-prone Kharif (monsoon) crop holdings are insured. On the
positive side, the %age of the holdings covered is more than the %age of
area covered indicating better penetration among the small land-holders,
the most vulnerable farmers. Most of the crops covered were food crops
(summer paddy, wheat) indicating that food security is the primary
concern for Indias small farmers.
Inspite of its limited success, the NAIS has paid Rs. 5783.02 crores in
claims since 1999, 30 % of which was paid to small/marginal farmers,
possibly saving many lives. Indias rural financial instis and the
effectiveness of its crop insurance programs need to be strengthened if
the deep problems its agriculture faces are to be solved.
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RISK IN AGRICULTURAL PRODUCTION
Agriculture in India is subject to variety of risks arising from rainfall
aberrations, temperature fluctuations, hailstorms, cyclones, floods, and
climate change. These risks are exacerbated by price fluctuation, weak
rural infrastructure, imperfect markets and lack of financial services
including limited span and design of risk mitigation instruments such as
credit and insurance. These factors not only endanger the farmers
livelihood and incomes but also undermine the viability of the agriculture
sector and its potential to become a part of the solution to the problem of
endemic poverty of the farmers and agricultural labour.
Management of risk in agriculture is one of the major concerns of the
decision makers and policy planners, as risk in farm output is considered
as the primary cause for low level of farm level investments and agrarian
distress. Both, in turn, have implications for output growth. In order to
develop mechanisms and strategies to mitigate risk in agriculture it is
imperative to understand the sources and magnitude of fluctuations
involved in agricultural output.
The present section is an effort in this direction. The section examines
extent of risk by estimating year to year fluctuations in national
production of major crops and also analyze whether risk in the post
reforms period declined or increased. The analysis is extended to district
level as there are vast variations in agro climatic conditions across states
and districts.
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PROGRESS AND PERFORMANCE OF
AGRICULTURAL INSURANCE
The question of introducing an agriculture insurance scheme was
examined soon after the Independence in 1947. Following an assurance
given in this regard by the then Ministry of Food and Agriculture
(MOFA) 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 approachor a Homogenous
area approach. The study favoured homogenous area approach even
as various agro-climatically homogenous 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 an
Expert Committee headed by the then Chairman, Agricultural Price
Commission, in July, 1970 for full examination of the economic,
administrative, financial and actuarial implications of the subject.
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CROP INSURANCE APPROACHES
It is important to mention in the beginning that crop insurance is based on
either Area approach or Individual approach. Area approach is based on
defined areas which could be a district, a taluk, a block/a mandal or any
other smaller contiguous area. The indemnity limit originally was 80 per
cent, which was changed to 60 per cent, 80 per cent and 90 per cent
corresponding to high, medium & low risks areas. The actual average
yield / hectare for the defined area are determined on the basis of CropCutting Experiments (CCEs). These CCEs are the same conducted as part
of General Crop Estimation Survey (GCES) in various states. If the actual
yield in CCEs of an insured crop for the defined area falls short of the
specified guaranteed yield or threshold yield, all the insured farmers
growing that crop in the area are entitled for claims.
The claims are paid to the credit institutions in the case of loanee farmers
and to the individuals who insured their crops in the other cases. The
credit institution would adjust the amount against the crop loan and pay
the residual amount, if any, to the farmer. Area yield insurance is
practically all-risk insurance. This is very important for developing
countries with a large number of small farms. However, there are delays
in compensation payments.
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In the case of individual approach, assessment of loss is made separately
for each insured farmer. It could be for each plot or for the farm as a
whole (consisting of more than one plot at different locations). Individual
farm-based insurance is suitable for high-value crops grown under
standard practices. Liability is limited to cost of cultivation. This type of
insurance provides for accurate and timely compensation. However, it
involves high administrative costs.
Weather index insurance has similar advantages to those of area yield
insurance. This programme provides timely compensation made on the
basis of weather index, which is usually accurate. All communities whose
incomes are dependent on the weather can buy this insurance. A basic
disadvantage could arise due to changing weather patterns and poordensity of weather stations.
Weather insurance helps ill-equipped economies deal with adverse
weather conditions (65% of Indian agriculture is dependent on natural
factors, especially rainfall. Drought is another major problem that farmers
face). It is a solution to financial problems brought on by adverse weather
conditions. This insurance covers a wide section of people and a varietyof crops; its operational costs are low; transparent and objective
calculation of weather index; and quick settlement of claims.
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CROP INSURANCE SCHEMES.
First Individual Approach Scheme 1972-1978:
Different forms of experiments on agricultural insurance on a
limited, ad-hoc and scattered scale started from 1972-73 when the
General Insurance Corporation (GIC) of India introduced a Crop
Insurance Scheme on H-4 cotton. In the same year, general insurance
business was nationalized and, General Insurance Corporation of Indiawas set up by an Act of Parliament. The new corporation took over the
experimental scheme in respect of H-4 cotton. This scheme was based on
Individual Approach and later included groundnut, wheat and potato.
The scheme was implemented in the states of Andhra Pradesh, Gujarat,
Karnataka, Maharashtra, Tamil Nadu and West Bengal. It continued up to
1978-79 and covered only 3110 farmers for a premium of Rs.4.54 lakhs
against claims of Rs.37.88 lakhs.
Pilot Crop Insurance Scheme (PCIS) 1979-1984:
In the background and experience of the aforesaid
experimental scheme a study was commissioned by the General
Insurance Corporation of India and entrusted to Prof. V.M. Dandekar to
suggest a suitable approach to be followed in the scheme. The
recommendations of the study were accepted and a Pilot Crop Insurance
Scheme was launched by the GIC in 1979, which was based on Area
Approach for providing insurance cover against a decline in crop yield
below the threshold level.
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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 premium paid was shared between the General
Insurance 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. Pilot Crop Insurance Scheme1979
was implemented in 12 states till 1984-85 and covered 6.23 lakh farmers
for a premium of Rs.195.01 lakhs against claims of Rs.155.68 lakhs in
the entire period. The details about the coverage, in terms of number of
farmers, area covered, premium collected and total claims paid for the
PCIS implemented during 1979 through 1984-85.
Following were some of the shortcomings that impinged upon the
coverage of the crop insurance scheme.
Since crop insurance was linked to crop loans, many small and
marginal farmers could not participate in the crop insurance scheme
because a majority of these farms have poor access to institutional
credit.
The unit of insurance was very large.
Lack of awareness among the farmers about the crop insurance
scheme.
Major commercial crops like cotton and sugarcane were excluded
from the crop insurance scheme.
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Comprehensive Crop Insurance Scheme (CCIS) 1985-99:
This scheme was linked to short term credit and implemented
based on the homogenous area approach. Till Kharif 1999, the scheme
was adopted in 15 states and 2 UTs. Both PCIS and CCIS were confined
only to farmers who borrowed seasonal agricultural loan from financial
institutions. The main distinguishing feature of the two schemes was that
PCIS was on voluntary basis whereas CCIS was compulsory for loanee
farmers in the participating states/UTs. Main Features of the Scheme
were:
1. It covered farmers availing crop loans from Financial Institutions,
for growing food crops and oilseeds, on compulsory basis. The
coverage was restricted to 100 per cent of the crop loan subject to a
maximum of Rs.10, 000/- per farmer.
2. The premium rates were 2 per cent for cereals and millets and 1 per
cent 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 equally by
the Central and State Governments. (Tripathi, 1987).
3. Burden of Premium and Claims was shared by Central and State
Governments in a 2:1 ratio.
4. The scheme was a multi agency effort, involving GOI, State
Governments, Banking Institutions and GIC.
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Experimental Crop Insurance Scheme (ECIS) 1997-98
As demanded by various states from time to time
attempts were made to modify the existing CCIS. During 1997, a new
scheme, namely Experimental Crop Insurance Scheme was introduced
during Rabi 1997-98 seasons with the intention to cover even those small
and marginal farmers who do not borrow from institutional sources. This
scheme was implemented in 14 districts of five states. The Scheme
provided 100 per cent subsidy on premium. The premium and claims
were shared by Central and State Governments in 4:1 ratio. The scheme
covered 4.78 lakh farmers for a sum insured of Rs.172 crores and the
claims paid were Rs.39.78 crores against a premium of Rs.2.86 crores.
The scheme was discontinued after one season and based on its
experience National Agricultural Insurance Scheme was started.
National Agricultural Insurance Scheme (NAIS) 1999
The National Agricultural Insurance Scheme (NAIS) was
introduced in the country from the rabi season of 1999-2000. Agricultural
Insurance Company of India Ltd (AIC) which was incorporated in
December, 2002, and started operating from April, 2003, took over the
implementation of NAIS. This scheme is available to both loanees and
non-loanees. It covers all food grains, oilseeds and annual horticultural /
commercial crops for which past yield data are available for an adequatenumber of years. Among the annual commercial and horticultural crops,
sugarcane, potato, cotton, ginger, onion, turmeric, chillies, coriander,
cumin, jute, tapioca, banana and Pineapple, are covered under the
scheme.
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The scheme is operating on the basis of both area approach, for
widespread calamities, and individual approach, for localized
calamities such as hailstorm, landslide, cyclone and floods.
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OTHER CROP INSURANCE SCHEMES
Agriculture insurance in India till recently concentrated only on crop
sector and confined to compensate yield loss. Recently some other
insurance schemes have also come into operation in the country which
goes beyond yield loss and also cover the non- crop sector. These include
Farm Income Insurance Scheme, Rainfall Insurance Scheme and
Livestock Insurance Scheme. All these schemes except rainfall insurance
and various crop insurance schemes discussed above remained in the
realm of public sector.
Farm Income Insurance
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 yield as well as market risks. In
this scheme the farmers income is ensured by providing minimum
guaranteed income.
Livestock Insurance
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 subsidizes premium for IRDP
beneficiaries. Progress in livestock insurance, however, has been slow
and poor.
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In 2004-05 about 32.18 million heads were insured which comprised 6.58
percent of livestock population. The implementation of the livestock
insurance as it obtains now, does not satisfy the farmers much. The
procedure for verification of claims and their settlement is a source of
constant irritation and subject of many jokes. This calls for a re- look.
Weather Based Crop Insurance / Rainfall Insurance
During the year 2003-04 the private sector came out with some
insurance products in agriculture based on weather parameters. 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. One such product, namely
Rainfall Insurance was developed by ICICI-Lombard General Insurance
Company. This move was followed by IFFCO-Tokio General Insurance
Company and by public sector Agricultural Insurance Company of India
(AIC).
Under the scheme, coverage for deviation in the rainfall index is extended
and compensations for economic losses due to less or more than normal
rainfall are paid. ICICI Lombard, World Bank and the Social InitiativesGroup (SIG) of ICICI Bank collaborated in the design and pilot testing of
Indias first Index based Weather Insurance product in 2003-04.
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The pilot test covered 200 groundnut and castor farmers in the rain-fed
district of Mahaboobnagar, Andhra Pradesh. The policy was linked to
crop loans given to the farmers by BASIX Group, a NGO, and sold
through its Krishna Bhima Samruddhi Area Bank. The weather insurance
has also been experimented with 50 soya farmers in Madhya Pradesh
through Pradan, a NGO, 600 acres of paddy crop in Aligarh through
ICICI Banks agribusiness group along with the crop loans, and on
oranges in Jhalawar district of Rajasthan. Similarly, IFFCO-Tokyo
General Insurance (ITGI) also piloted rainfall insurance under the name-
Baarish Bima during 2004-05 in Andhra Pradesh, Karnataka and
Gujarat.
Agricultural Insurance Company of India (AIC) introduced rainfall
insurance (Varsha Bima) during 2004 South-West Monsoon period.
Varsha Bima provided for five different options suiting varied
requirements of farming community. These are
(1) seasonal rainfall insurance based on aggregate rainfall from June to
September,
(2) sowing failure insurance based on rainfall between 15th June and 15th
August,
(3) rainfall distribution insurance with the weight assigned to different
weeks between June and September,
(4) agronomic index constructed based on water requirement of crops atdifferent pheno-phases and
(5) catastrophic option, covering extremely adverse deviations of 50 per
cent and above in rainfall during the season.
Varsha Bima was piloted in 20 rain gauge areas spread over Andhra
Pradesh, Karnataka, Rajasthan and Uttar Pradesh in 2004-05.
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Based on the experience of the pilot project, the scheme was
fine-tuned and implemented as Varsha Bima -2005 in about 130
districts across Andhra Pradesh, Chattisgarh, Gujarat, Karnataka,
Mahrashtra, Madhya Pradesh, Orissa, Tamil Nadu, Uttarakhand and Uttar
Pradesh during Kharif 2005. On an average, 2 or 3 blocks /mandals /
tehsils were covered under each India Meteorological Department (IMD)
rain gauge stations. The scheme covered the major crops provided at least
two coverage options namely, Seasonal Rainfall Insurance or Rainfall
Distribution Index and Sowing Failure Insurance. Varsha Bima-2005
covered 1.25 lakh farmers with a premium income of Rs.3.17 crores
against a sum insured of Rs.55.86 crores. Claims amounting to Rs.19.96
lakh were paid for the season. Further, during Kharif2006, the scheme
was implemented as Varsha Bima-2006 in and around 150 districts/ rain
gauge station areas covering 16 states across the country.
NATURAL DISASTERS AND CROP PROTECTION
Since Independence, India has borne the brunt of a large number of
natural disasters like earthquakes, floods, drought and pest attacks. The
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main reason why India is susceptible to such disasters is because of its
geographical location, weather and other physical features. The rising
population of the country has driven farmers to settle in risky areas like
flood plains, drought-prone areas, cyclone-prone areas and seismic zones.
Natural disasters leading to a failure of crops play havoc with the
economy of a country. Prices would rise to an extremely high level and
the poor would starve. The best way to deal with such disasters is to be
prepared for any eventuality. Keeping this in mind the government has
developed contingency plans for farmers to tackle natural disasters before
they strike. The government also provides compensation and other
financial aid to farmers who are affected by natural disasters. This is done
to encourage them to continue to invest in and produce agricultural
commodities.
FLOOD
The monsoons play a critical role in determining whether the harvest willbe bountiful, average or poor in any given year. Excess rainfall leads to
the overflowing of rivers, streams and lakes. This extra water fills low-
lying fields and creates a flood situation. Floods destroy not only lives
and property but also the entire crop production work carried out in the
summer. Certain crops cannot bear excess water and they die leaving the
farmer with a burden of debt. The National Commission on Floods has
assessed the flood prone area in India to be around 12 per cent of the total
area.
When floods take place, both the Central and State Governments
announce various plans to minimize the damage. Farmers are covered
under schemes of the government. Activities of the government include
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provision of shelter, food supplies, clearing of debris and vocational
training. The Prime Minister announces compensation from the Prime
Minister's National Relief Fund to the next of kin of those killed in
natural disasters whenever they occur.
EXCESSIVE RAIN
Crops need water, and much of the developing worlds arable and
horticultural production relies on rainfall. Too much rain at any time can
damage a crop, but there are periods of special vulnerability, described
below. The first danger point is excessive rain just after germination and
emergence. Entire crops can be washed out of the ground, necessitating
resowing. This is an insurable risk, where the indemnity which would be
written into the policy would be the costs of re-sowing, plus a possible
additional amount in those cropping situations (common in tropical,
rained agriculture) where a delay in sowing means that the eventualharvested crop is smaller than would have been the case had the crop
been able to take advantage of the whole of the normal growing season.
The next common point of vulnerability is at or near to harvest. Maize
and other grains can sprout prematurely while still growing in the field.
Various fruits (e.g. cherries) can be damaged by excessive rain or even
any rain just prior to harvest. Other crops can be lost when excessive rain
prevents harvest. An example is a crop such as tomatoes grown for
processing. The processing factory schedule of crops for harvesting
means that the date of harvest is fixed. Moreover, it is now common
practice with commercial tomato crops to spray with ethrel (ethephon) in
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order to accelerate the ripening (reddening) of fruit which are still green,
in order to allow once-over harvesting. If excessive rainfall is
experienced just when the critical readiness for harvest is achieved, then
harvest may be prevented, and the crop lost.
WINDSTORM
Crop insurance programmes in the Windward Islands (bananas) and in
Mauritius (sugar cane) have already been mentioned. Both were set up to
assist in managing the losses from excessive wind - cyclones in Mauritius
and hurricanes in the Caribbean. High wind speeds affects nearly all
crops - and can cause serious damage in forests.
As with other weather perils, the first move in risk management lies in
appropriate farm management - correct attention to plant density (for
mutual support), to the provision of shelter belts for those crops highly
sensitive to wind (e.g. kiwifruit), and care with harvesting in the case of
forests. It is not uncommon for problems to arise when partial harvesting
takes place in forests. Those trees that are too immature to harvest are
suddenly exposed, and may be blown over by high winds.
In writing wind-storm insurance, insurers take these sorts of management
practices into account. They make certain that it is only exceptional
events that will trigger the insurance, when normal practices are
insufficient to prevent damage.
Windstorm is associated with catastrophic losses to life and property, as
well as to crops. Hurricane Andrew, one of the most destructive storms
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ever recorded, hit Florida and Louisiana on 25 August, 1992. Storms of
this magnitude, and lesser but still serious weather events of this nature
are believed to be increasing in frequency.
FROST
Although not at all common in developing countries generally, there are
some regions where this is an occasional risk, especially to vegetable and
fruit crops. This applies especially to Eastern Europe and the Middle
East.
Frost causes damage by the freezing of the water content of plant cells,
and their subsequent rupture. It will be evident that it is not only the
temperature which matters; it is also the time when the temperature is
below a certain minimum level which causes a damaging event. Crop
insurers write policies accordingly, sometimes constructing a damage
point (i.e. insurance trigger) curve which plots temperature against time.
Frost conditions can impact a wide area, causing extensive damage.
However, the micro-climate in a given site can increase the likelihood of
frost damage. For example, fruit and vegetable production often takes
place in valleys because of the presence of deep topsoil, washed down
from surrounding hills, together with the availability of water from
surface or groundwater sources. These same valleys can also be frost-
pockets because freezing, still air accumulates readily in this type of
topography.
Again, an insurer may expect growers to take normal precautions against
frost damage, through the use of devices to move the air (burning frost
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pots as commonly used in Eastern Europe, propellers mounted on towers,
as being introduced in some of the fertile fruit growing valleys in Syria).
Perhaps the most effective preventative of frost damage for horticultural
crops especially is the use of sprinkler irrigation.
It will be clear to the reader that all of these measures involve a cost.
Design of an insurance policy to respond to frost damage will take into
account the inevitable trade-off between the costs of physical and
financial measures of managing the risk. Usually the most cost-effective
approach is a blend of the two, with insurance acting as a final safety net,
to be triggered if the physical devices fail to prevent damage.
HAIL
Hail holds a special place in the history and also the current practice of
crop insurance. It was the first crop peril to be insured by a modern
insurance company - the first policies being issued, in Germany, in 1791.
It is also the simplest of weather perils to handle from an insurance point
of view. Its incidence is readily confirmed by observation of damage, and
compensatory growth factors are reasonably well understood for most
major insured crops (see also under Loss Assessment below).
Moreover, over time, the likelihood of hail events in any given
agricultural area can be estimated in a manner that permits actuaries to
confidently set premium levels at values which both sides, insured and
insurer, find reasonable. This is due also to its long history, and the
manner by which records of damage have been prepared and retained
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over the years. This means that there is a wealth of data on the incidence
of the peril, and of the crop damage which has been caused as a result.
Again, when hail strikes it is usually very confined in terms of thedamage zone. This can be just a few square metres, a few hundred square
metres, or, more rarely a few square kilometers. It is seldom larger than
this.
There is little that a grower can do against hail damage. Lengthy research
has proven that injecting hail clouds with silver iodide via rockets or
planes is not very effective. Areas with very high hail exposure and
expensive crops can resort to hail nets.
SUNBURN (SUNSCALD)
Sunscald, under exceptionally adverse conditions, causes damage to fruits
such as pip and stone fruit, grapes and nuts. It is associated with the
premature loss of foliage from the plant. The risk is insurable, often as an
extra-cost option under multi-risk policies.
SNOW
Snow can damage all types of crops, including fruit trees and it also a
peril of note in forests, where excessive weight loading can cause
breakage of parts of trees, or even toppling of the whole tree. Developing
countries vulnerable include those in Central Asia, Eastern Europe and
the Middle East regions. Snow is an insurable peril in many
circumstances. In forests damaged by breakage through snow loading, the
presence of broken tree parts can facilitate the build up of pest and
disease organisms.
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DROUGHT
Drought is said to have occurred when the principal monsoon fails or is
deficient. It leads to crop failure due to insufficient irrigation, shortage of
drinking water as well as undue hardship to the rural and urban
community. There is no provision for declaration of drought by
Government of India. Drought is declared for each State or part of the
State by the State Governments. The important steps followed in India to
control and manage drought are as follows:
Monitoring and early warning: The Indian Meteorology
Department carries out the function of drought monitoring and
forecasting. The agricultural department comes out with
contingency plans to help farmers save their crops in case a
drought like situation emerges. Here is the latest weather situation
and crop advisory (External website that opens in a new window). Drought Declaration: States monitor rainfall at mandal or tehsil
levels and gather information from remote sensing agencies. If the
information proves that drought has occurred then the State
Government may declare a situation of drought. The Central
Government then aides the financial and institutional processes to
provide relief to the affected. Monitoring and management of drought impacts: The Central
Government provides financial assistance in accordance with relief
norms laid by the Finance Commission. Assistance to the States is
given in the form of Calamity Relief Fund, which is released to the
States in two installments, one in May and the other in October.
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PEST AND DISEASE ATTACK
Insurance cannot substitute for sound management of the risk of pests,
parasites and diseases. Indeed, this is a significant area of modern farm
and forest management, with very substantial losses resulting from
failures in this area.
Moreover the growing importance of international trade in agricultural
commodities impacts on the pest and disease issue in developing country
farming in several ways:
Phytosanitary regulations mean that any evidence of pest or disease
in a consignment may disqualify produce from entry to the country
of destination;
similarly, pesticide residues are subject to very tight limits under
the standards for international trade; Competition in the market is fierce, and even if produce is allowed
to enter, blemishes on fruit etc. mean the produce is unlikely to
find a buyer.
Insurance implications can similarly be summarized in a brief list:
It is sometimes possible for growers to obtain cover against pestsand diseases where there is no generally accepted management
control;
in an attempt to reduce the adverse environmental impact of some
well-established chemical spray routines for pest and disease
control (e.g. certain chlorinated hydrocarbons) alternative, benign
regimes have been developed. Insurance may be utilized in the
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future in order to provide temporary risk assurance to growers using
the new routines;
Frequently damage to fruit and other crop products provides an
entry point for disease organisms. Perforation of the skin due to
hail damage is a common example. In this case any hail policy
needs to be clear as to whether the consequential loss from disease
is also covered.
FIRE
One of the oldest perils to be covered in property insurance, fire is a
major peril for many crops (especially broad field crops such as grains)
and for virtually all forests. It is commonly included in multi-peril crop
insurance, and is frequently the key peril under forestry covers (which
may also include wind and snow damage).
Fires are caused by human action (and carelessness) and also by lightning
strikes during electrical storms. Whatever the cause, there are control
measures to reduce any losses. These may be through early detection and
the subsequent means to take action and/or through the use of clearedfirebreaks.
Insurance policies will normally state the expectations under the policy of
the means to control fire losses. Again this is an example of insurance
being just a part of a cluster of measures used to control risk.
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PLANT PROTECTION
One of the most significant pest management schemes run by the
government is the Integrated Pest Management Scheme (IPM). This
scheme aims at the best mix of all known pest control measures to keep
the pest population below the economic threshold level or ETL. The
scheme is 100 per cent centrally sponsored. The Central Government also
runs a scheme to monitor and control the locust population.
The government has set up the National Plant Protection Training
Institute in Hyderabad to impart training in plant protection methods.
This institute specializes in human resource development in plant
protection technology by organizing long and short duration training
courses on different aspects of plant protection. It also imparts training to
foreign nationals sponsored through bilateral programmes with various
agencies.
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One of the factors which can determine whether or not a particular
crop/peril combination is suitable for insurance is the ease and economyby which losses can be satisfactorily assessed. This will be touched on
below, with some of the more general loss assessment issues discussed in
greater detail under the section, Loss Assessment.
Annual field crops
Wheat, maize, rice, soybeans, sorghums, cotton, beans etc. are all insured
in various parts of the world. As annuals, any loss or damage is just to
one seasons crop - unlike for perennial crops and forests. This simplifies
loss assessment, in contrast with the situation of Perennial Crops, taken
up below.
As a general rule, the more commercial the nature of the crop, the greater
will be both the potential demand for insurance, and the likelihood of acost-effective role for crop insurance in risk management. Crops of the
high value input - high value output variety are often financed with the
assistance of banks, and lenders increasingly insist on insurance
coverage, when this is available.
Another important issue in commercial crop production is the marketing
chain. With crops such as sugar cane, coffee, tea and cotton, virtually all
of the harvested production enters the commercial market, and requires
processing. This means that there is control over quantities produced,
year after year, together with an opportunity for establishing a strong
database of producers and of details of production enterprises.
Information management of this sort is vital to creating the climate of
confidence necessary for efficient and economical insurance transactions.
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It will be evident from the above that food crops, especially those for
which there is an active, unrecorded local market, are difficult to traceafter harvest. This means that insurance assessments are similarly
difficult for this type of crop.
Perennial crops
Perennial crops pose a special problem. In the event of a loss event,
should the loss be calculated solely on the basis of the current seasonsexpected production, or should reduced production levels for the next
season(s) be included? The difficulty of making accurate assessments for
future years will be evident, and crop insurers in Chile and Cyprus, for
example, include only the current seasons lost production.
On the other hand, when a peril such as windstorm causes serious damage
to tree crops such as oil palm, coconut, rubber, and mango or to
temperate fruit crops such as pip and stone fruit, growers naturally expect
the longer term loss to be indemnified. Technically, when losses are
severe, it is possible to make assessments. These could even include the
costs of replanting and/or regrafting. Paradoxically, the problem is greater
when the damage to the wooded parts of the plants is less severe, but still
sufficiently serious to mean a diminution in the following seasons crop.
In such cases the approach taken by Chile and Cyprus appear to be
appropriate. An alternative is to formulate wording such that fruit and
trees are separate parts of the same policy. This is done in the British
Columbia Ministry of Agriculture crop insurance programme.
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Glasshouse crops
Crops grown under glass, plastic or other coverings generally fall into thehigh value input - high value output category. As such, risk
management planning is very important, since loss of the crop and/or the
structures can mean a heavy financial blow. In fact in those countries
where glasshouse and plastic house cultivation is important, insurance is
usually an integral part of the production financial plan, and the potential
liability for insurers is very substantial. Sometimes insurers offer policieswhich cover the structure together with the growing crop. Generally these
also specify minimum standards for construction and the materials used
in the structure.[28]
Forests
The economic role of forests is undergoing a partial change. This changeaffects risk management, and also insurance as part of risk management.
[29] The transition of national economies from a commodity to a service
orientation, and stream of products, also affects forestry. This is because a
forest today is not just a source of timber, for paper, for building and for
furniture, but is also a provider of environmental services. Increasingly it
is becoming possible for forest owners to generate income from the sale
of carbon credits. This opens up forestry to a new, more commercially
oriented class of investor, and this change will affect developing and
developed countries similarly.
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A further change is the move towards the certification of forests as
environmentally sound entities, under some sort of recognizedcertification system. The implications for forest managers are twofold.
Firstly, such certification opens up access to markets which will only
accept timber from forests certified as being sustainably managed.
Secondly, when insurance is involved, such certification, since it is based
on the achievement of a high standard of management, including risk
management, could lead to substantial reductions in insurance premiums.
The major risks to forests, namely fire and windstorm, will affect
virtually all species of timber trees, although some are more at risk than
others. For example, in recent years there have been extensive
commercial plantings, in many parts of the word, of various types of
Eucalyptus species. This tree type is popular because it is very fast
growing and has considerable drought resistance. However, it also has a
high content of oily, volatile sap, meaning that it burns readily.
When forests are insured against fire risk then considerable attention is
given to management procedures to reduce the possibilities of loss in the
event of a fire outbreak. Some of these points have been made above,
under the heading, Fire.
In summary, the changes to the forestry scene, worldwide, mean greater
commercialization of tree cultivation, and therefore greater opportunities
for introducing insurance as a risk management device.
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Loss Assessment Issues
A key design constraint
Loss assessment is a key element of standard insurance.[31] With crop and
forestry insurance it is essential that loss assessment procedures can be
designed for the crop and the perils involved. This is not always the case.
A common problem is when a loss occurs which could have been caused
by more than one peril. When the policy is not all-risks but rathernamed-perils then any loss assessment process should be able to
ascertain as to whether the loss was caused by an insured peril. Unless
this is possible then the crop/peril combination may be impossible to
insure.
In any insurance contract it is vital that the process of loss assessment is
made clear, so that in the event of a loss, the assessment process can start
in a manner which has the prior agreement of both insurer and insured.
The first element is to check that the loss falls within the scope of the
policy. This is not always a straightforward issue, since some losses have
more than one cause, and some of these might be covered by the policy,
others not.
The loss must then be measured, and the indemnity to be paid
determined. The whole process of assessing the loss, determining the
indemnity and paying it is known as loss adjustment.
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Unlike other types of property insurance, when a loss can be assessed
without the biological factor, crops and trees have the capability ofcompensating for damage. This is covered in section 3.6.2 below, which
is followed by a brief note on the closely associated issue of salvage.
Compensatory growth
Compensatory growth is a plants response to damage. Some examples
will illustrate how this can impact on insurance and on the assessment of
losses. Hail can do devastating damage to grapevines. If the hail event is
in the spring, fruiting parts can be knocked off. However, the plant will
normally grow new fruiting parts from existing buds, and a crop will
result. The loss in this case is likely to be a reduction in the quantity and
also in the quality of the fruit, but there will be something to harvest.
On the other hand, late summer hail damages the grape bunches
themselves, and can cause an almost complete loss of the seasons
production. It is too late for compensatory growth, so an insurer, working
with the grower, will assess whether or not any salvage can be
undertaken. Table grape market values are heavily hit by partial hail
damage to the shoulders of the grape bunches. In such cases, even though
the bulk of the fruit in the bunch may be undamaged, the prominence of
hail damage on the shoulders of the bunch means that the grapes may not
find a market. This may lead a loss assessor to declare a constructive
total loss (see under Salvage, below).
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Cotton and maize are among other economically important field crops
which will compensate for damage by a peril like hail. But the newgrowth will not completely replace the lost parts, so some diminution of
yield can be expected, depending largely on the stage of growth at the
time the damage occurs.
Compensatory growth is something that a crop loss assessor will take into
account, drawing on the considerable research which has been done on
the more important field crops, which gives an indication of the extent to
which some of the loss is made up by natural processes.
Salvage
Salvage is the human equivalent of compensatory growth. Sometimessalvage of a damaged crop will involve sale into a different market. For
example, apples grown for whole fruit sale, which are damaged by hail,
might find a market at a juicing factory. Similarly, a forest damaged by
fire or windstorm may yield timber which is marketable, although the
extraction cost might be high.
Again, salvage possibilities are taken into account by assessors in
calculating the indemnity. In the event of a constructive total loss the
insurer pays a full indemnity to the insured grower, and then may try to
salvage some value from the damaged crop or forest.
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CROP INSURANCE TODAY - THE GLOBAL PICTURE
The total annual agricultural and forestry insurance premiums,
worldwide, in 2001 amounted to some US$6.5 billion. Of this amount 70
percent is accounted for by crop and forestry products. This sum must be
compared with the estimated total farm gate value of agricultural
production globally, which is US$1 400 billion. In this case the insurance
premiums paid represent just 0.4 percent of this total.
Geographically these insurance premiums are concentrated in developed
farming and forestry regions, i.e. in North America (55 percent), Western
Europe (29 percent), Australia and New Zealand (3 percent). Latin
America and Asia account for 4 percent each, Central/Eastern Europe 3
percent and Africa just 2 percent.
These figures present a snapshot view of agricultural and crop insurance.
A dynamic rather than static view indicates a changing situation.
Agricultural insurance is a growth business area. This growth is driven
not only by the increasing commercialism of agriculture and the
availability of new types of insurance products, but also by international
trade policy developments. These points are covered in greater detail in
Section 2, Growth in Demand for Crop Insurance Products.
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The previous section makes it clear that crop insurance is primarily a
business which involves developed country farmers. However, some 13percent of global premiums are paid in the developing world. Where do
these business arrangements take place, and what are the characteristics
of the farmers who are insured?
It is not the purpose of this publication to provide detailed country by
country information. This is given, albeit in summary form, in the 1991
FAO publication Compendium of Crop Insurance Programmes. Rather
the aim of this brief section is to illustrate the types of situations where
insurance is used, or is being considered as a risk management
mechanism, across a number of countries, and involving a variety of both
farming systems and agricultural enterprises.
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CONCLUSION
Despite progress of irrigation and improvement in infrastructure and
communication the risk in agriculture production has increased in the
country. The risk is much higher for farm income than production, as is
evident from lower risk in area and higher risk in production. State wise
results show that only in the states where irrigation is very reliable, it
helped in reducing the risk. Those states where irrigation is not very
dependable continue to face high risk. In some states farmers face twin
problem of very low productivity accompanied by high risk of
production. As, with the passage of time, neither technology nor any
other variable helped in reducing production risk, particularly in low
productivity states, there is strong need to devise and extend insurance
products to agricultural production.
Despite various schemes launched from time to time in the country
agriculture insurance has served very limited purpose. The coverage in
terms of area, number of farmers and value of agricultural output is very
small, payment of indemnity based on area approach miss affected
farmers outside the compensated area, and most of the schemes are not
viable. Expanding the coverage of crop insurance would therefore
increase government costs considerably. Unless the programme is
restructured carefully to make it viable, the prospects of its future
expansion to include and impact more farmers are remote.
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This requires renewed efforts by 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 viability of the insurance
schemes over time. With the improved integration of rural countryside
and communication network, the Unit area of insurance could be brought
down to a village panchayat level. Insurance products for the rural areas
should be simple in design and presentation so that they are easily
understood. There is lot of interest in private sector to invest in general
insurance business. This opportunity can be used to allot some target to
various general insurance companies to cover agriculture. To begin with,
this target could be equal to the share of agriculture in national income.Good governance is as important for various developmental programmes
as for successful operation of an agriculture insurance scheme. Poor
governance adversely affects development activities. With the
improvement in governance, it is feasible to effectively operate and
improve upon the performance of various programmes including
agriculture insurance.
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RECOMMENDATION
The farming community in India consists of about 121 million farmers of
which only about 20 per cent avail crop loans from financial institutions
and only three fourth of those are insured. The remaining 80 per cent (96
millions) are either self-financing or depend upon informal sources for
their financial requirements. Most of the farmers are illiterate and do not
understand the procedural and other requirements of formal financial
institutions and, therefore, shy away from them.
Therefore, while the institutional loanees are insured compulsorily under
the NAIS, only about 15 per cent of the non-loanee farmers avail
insurance cover voluntarily. This is quite indicative of the enormous
insurance potential that exists for addressing the needs of the farming
community and enhancing the overall efficiencies as also the
competitiveness of the agriculture sector. This also signifies the
tremendous potential of agriculture insurance in the country as a concept,
which can mitigate the adverse impacts that such uncertainties would
have on the individual farmers.
Recommended