ON INSURANCE

8/7/2019 ON INSURANCE

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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.

Lala Lajpatrai College of Commerce and Economics 1


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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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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.

http://india.gov.in/outerwin.php?id=http://www.icar.org.in/Drought/Drought00.htmhttp://india.gov.in/outerwin.php?id=http://www.icar.org.in/Drought/Drought00.htmhttp://india.gov.in/outerwin.php?id=http://www.icar.org.in/Drought/Drought00.htmhttp://india.gov.in/outerwin.php?id=http://www.icar.org.in/Drought/Drought00.htm


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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.

http://www.fao.org/docrep/008/y5996e/y5996e04.htm#fn28%23fn28http://www.fao.org/docrep/008/y5996e/y5996e04.htm#fn29%23fn29http://www.fao.org/docrep/008/y5996e/y5996e04.htm#fn28%23fn28http://www.fao.org/docrep/008/y5996e/y5996e04.htm#fn29%23fn29


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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.

http://www.fao.org/docrep/008/y5996e/y5996e04.htm#fn31%23fn31http://www.fao.org/docrep/008/y5996e/y5996e04.htm#fn31%23fn31


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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.



47/48


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.

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