Crop Insurance: Meaning, Advantages, and Progress in India PDF

Crop Insurance-meaning and its- advantages-progress of crop insurance scheme in India-limitations in application-Agricultural Insurance Company of India-National Agricultural Insurance scheme (NAIS) - salient features-Weather insurance Origin and Importance of crop Insurance scheme: Insura...

Crop Insurance-meaning and its- advantages-progress of crop insurance scheme in India-limitations in application-Agricultural Insurance Company of India-National Agricultural Insurance scheme (NAIS) - salient features-Weather insurance Origin and Importance of crop Insurance scheme: Insurance-meaning Insurance is a legal contract that transfers risk from a policy holder to an insurance company in exchange for a premium. Risk: The possibility of financial loss Policyholder: The person who has purchased and owned an insurance policy. Insurance Company: A company that provides the insurance coverage for its policyholders Premium: The cost of insurance The desire to introduce two pilot schemes viz., crop insurance and cattle insurance with the objective of protecting the farmers from the heavy losses of crop and livestock by Government of India was dates back to 1948 soon after the independence. But due to paucity of funds, none of the state governments agreed to implement the programme. The Government of India during the year 1970 appointed an expert committee on crop Insurance under the chairmanship of Dharam Narain to examine and analyse the administrative and financial implications of the scheme. Sri. Dharam Narain ruled out the possibility of implementing the scheme in India. In contrast to the above committee, Prof. Dhandekar strongly supported the implementation of the scheme. By accepting Prof. Dhandekar’s views in 1973, the GOI had set up General Insurance Corporation (GIC) to carry out all types of insurance business throughout the country with four subsidiary insurance companies. They are 1. National Insurance Company Limited 2. The New India Assurance Company Limited 3. The oriental Insurance Company Limited 4. United India Insurance Company Limited On pilot basis in 1973, the GIC introduced the crop Insurance scheme in selected centres of Gujarat covering only H4 variety of cotton. Later on the same was extended to West Bengal, Tamilnadu and Andhra Pradesh for the cotton crop and this scheme was in operation till 1979. In 1979, area based crop Insurance scheme was introduced on pilot basis in selected areas. If the actual average yield of the crop in the area was less than the guaranteed yield of the crop, then the indemnity would be payable to all the insured farmer-borrowers. Sum insured under crop insurance was 100 per cent but with a ceiling limit of Rs.5000 per farmer in the case of dry land and Rs.10, 000 per farmer – borrower in the case of irrigated areas. The scheme was implemented in 12 states up to 1984. Comprehensive Crop Insurance Scheme (CCIS): In the year 1985, the Comprehensive Crop Insurance Scheme (CCIS) was introduced by GIC in all the states. This scheme covers all farmers who availed the crop loan and it is limited to cereals such as paddy, wheat, millets, oil seeds and pulses. The loans given from 1st April to 30th September were considered for kharif insurance business. The loans granted from 1st October to March 31st of next year qualify for rabi insurance. Therefore the insurance cover will be considered as built-in-aspect of crop loan. Crop insurance risk is taken by GIC and the respective state governments in 2:1 ratio. The sum insured is 100 per cent of crop loan taken by the farmers during that season. Here the sum insured was limited to Rs. 10000 /- per farmer for all insurable crops irrespective of the quantum of loan taken by the farmer. Only that part of crop loan is insurable which is utilized for the purpose of covering insured crops. The insurance premium is fixed at 2 per cent of sum insured for paddy, wheat and millets and for oilseeds and pulses it is one per cent. The premium is sanctioned as an additional loan to the farmers and should not be deducted from original loan amount. For small and marginal farmers, 50 per cent of insurance premium is subsidized by the central and state governments in equal proportion. Indemnity payable under the scheme is calculated on the basis of “threshold yield” and it is equal to 80 per cent of the average yield for a given crop for the previous 5 years. Normally 80 per cent of the average annual yield of the given crop in a given area over the last preceding five years is considered as “threshold yield” of that area. Short fall in yield of crop is difference between threshold yield and actual yield of the crop in particular area for the year under consideration. Shortfall in the yield of the crop Indemnity = _____________________________ x Sum insured. (Guaranteed Compensation) Threshold yield of the crop The yield data for this purpose is obtained from the crop-cutting experiments conducted by the state Government in accordance with the prescribed procedure as approved by National Sample Servey organization (NSSO), Ministry of Planning, Government of India. Advantages of CCIS: Comprehensive crop insurance scheme has some specific advantages, which is in operation in all the states from 1985 onwards. They are 1. It stabilizes the farm business during the periods of crop failure. 2. The farmer can act much more confidently in farm business as there is protection against hazards of farming. 3. It prevents the farmers to approach non-institutional agencies at times of crop failure. 4. It enhances the use of modern inputs to boost the productivity in agriculture 5. In high-risk areas crop insurance serves as a catalyst in bringing areas under cultivation, which otherwise would have remained uncultivated. Demerits of CCIS are 1. It provided coverage only to a limited number of crops like wheat, paddy, oilseeds, millets and pulses excluding important cash crops like sugarcane, potato, cotton etc. 2. As the coverage was restricted to rainfed crops only, the scheme was not effective in agriculturally intensive states such as Punjab, Haryana and Western U.P. 3. The scheme covered only those farmers who had availed crop loans from financial institutions. Sum insured per farmer was also limited to a maximum of Rs.10, 000 /- only.  Eminent economists made some suggestions for the satisfactory functioning and improvement of CCIS and they are: 1. All crops and all the farmers should be brought under the purview of the scheme. 2. The premium rates should vary with the nature and indices of crop production in different areas. 3. The unit area considered for paying indemnity should be a village or group of villages as against block/mandal. 4. Threshold yield should be worked out on the basis of crop production indices over a ten year period as against five year period. National Agricultural Insurance Scheme (NAIS)/Bharatiya Krishi Bhima Yojana (BKBY): With a view to take insurance closer to the farmers, a newly improved insurance package over the existing CCIS was launched by the former Prime minister Sri. Atal Bihari Vajpayee on 23-06-1999. It is National Agricultural Insurance Scheme. Irrespective of the size of their holdings, the NAIS would provide insurance facilities to all farmers from 1999 - 2000 season onwards. The NAIS would cover all crops, including coarse cereals, all pulses and oil seeds. Apart from these, three more cash crops viz., sugarcane, potato and cotton were also brought under the purview of the scheme in the first year i.e.1999-2000 itself. All the other crops i.e. horticulture and commercial crops were also proposed to be included under the scheme from the year 2002. There was no maximum limit for the sum insured. The premium rates were 3.5 per cent of sum insured for bajra and oilseeds and 2.5 per cent for other kharif crops. It was 1.5 per cent of sum insured for wheat and 2 per cent for other rabi crops. Similar to that CCIS, in this NAIS also 50 per cent subsidy in premium is there for small and marginal farmers. However, this subsidy will be proposed to be phased out from five years after its inception. i.e 2005 onwards. The scheme would be operated on the basis of area approach. All the farmers in a defined area would be entitled for payment of insurance claim according to the indemnity rates prescribed for that area. Individual claims of the affected farmers would also be entertained in the case of localized calamities like hailstorm, land slip, cyclone, floods etc. Agriculture Insurance Company of India (AIC) Limited: Agriculture Insurance Company of India Limited (AIC) had been formed by the Government of India in 2003 to subserve the needs of farmers better and to move towards a sustainable actuarial regime. It was proposed to set up a new corporation for agriculture Insurance. AIC has taken over the implementation of National Agricultural Insurance Scheme (NAIS) which until 2003 was implemented by General Insurance Corporation of India. In future, AIC would also be transacting other insurance businesses directly or indirectly concerning agriculture and its allied activities. Agriculture Insurance Company of India Limited is a public sector undertaking with headquarters at New Delhi. It currently offers area based and weather based crop insurance programs in almost 500 districts of India. It covers almost 20 million farmers, making it one of the biggest crop insurers in the world. Agriculture Insurance Company of India Ltd (AIC) is promoted by General Insurance Corporation of India (GIC), NABARD and the 4 public sector general Insurance companies. AIC has taken over the implementation of National Agricultural Insurance Scheme (NAIS) in 2003 which until the financial year 2002 – 03 was implemented by GIC. AIC is under the administrative control of Ministry of Finance, Government of India, and under the operational supervision of Ministry of Agriculture. Insurance Regulatory and Development Authority, Hyderabad, is the regulatory body governing AIC. Main objective of AIC: To provide financial security to persons engaged in agriculture and allied activities through insurance products and other support services. Share Capital Authorized share capital - Rs. 1500 crores Paid-up share capital - Rs. 200 crores Promoted by: General Insurance Corporation of India - share holding: 35 % National Bank for Agriculture And Rural Development (NABARD) - share holding: 30 % National Insurance Company Ltd - share holding: 8.75 % New India Assurance Company Ltd- share holding: 8.75 % Oriental Insurance Company Ltd - share holding: 8.75 % United India Insurance Company Ltd.- share holding: 8.75% Weather Insurance: Agriculture is still the dominant sector in India, contributing around 20 per cent of GDP and providing employment to two-thirds of its population. Therefore, even the slightest change in this sector can affect the economy. However, most of it is rain-fed and prone to unfavourable weather conditions like deficit or excess rainfall and variations in temperature. Though phenomenon of unpredictable rainfall in India remains an unresolved issue, weather insurance has emerged as a ray of hope to farmers to tackle the uncertain pattern of their crops. Weather Insurance- an insurance cover against crop losses incurred due to unfavorable weather conditions such as deficit, excess or untimely rainfall or variations in temperature. Weather insurance product is designed on the basis of location’s agricultural and climatic properties and productivity levels over the last several years. This serves as a good alternative to farmers for mitigating their production related losses. Weather insurance is now a common term in countries likes US, Canada, UK and other western countries. In India, ICICI Lombard is the most popular company in the field of weather insurance. In India Weather Insurance was developed by government of India in association with the World Bank and launched in kharif 2007 in Karnataka. In 2008-09 it was extended to states like Andhra Pradesh, Rajasthan, Bihar, Haryana, West Bengal Chhttisgarh, Gujarat, Madhya Pradesh, Maharastra, Orissa, Tamilnadu, Jharkhand, Himachal Pradesh, Kerala, Uttaranchal and Uttar Pradesh. It was launched as a pilot scheme to insure groundnut in Andhra Pradesh during Kharif 2008. There are several benefits of weather insurance. They include: High level of client comfort Low management expenses Scientifically developed objective  Weather insurance provides protection to the farmers, banks, micro-finance lenders and agro-based industries. This in turn results in boosting the entire rural economy. Some vital factors of Weather Insurance are: Peril/ hazard Identification Index Setting Back testing for payouts Pricing Monitoring Claims Settlement There are some examples of deals initiated by Weather Insurance for oranges in Jhalawar, Rajasthan, 782 farmers were aided by the Weather Insurance which provided a cover for 613 acres for a sum insured of Rs.18.3 million to them. Another example states various crops in Andhra Pradesh were provided cover when they faced losses due to deficit rainfall. Weather Insurance – Broad Challenges/limitations 1. Needs large no. of Automatic Weather Stations (AWS) to minimize Basis Risk (Basis risk: Without sufficient correlation between the index and actual losses, index insurance is not an effective risk management tool. This is mitigated by self-insurance of smaller basis risk by the farmer; supplemental products underwritten by private insurers; blending index insurance and rural finance; and offering coverage only for extreme events.) 2. Precise actuarial modeling: Insurers must understand the statistical properties of the underlying index. 3. Education: Required by users to assess whether index insurance will provide effective risk management. 4. Market size: The market is still in its infancy in developing countries like India and has some start-up costs. 5. Weather cycles: Actuarial soundness of the premium could be undermined by weather cycles that change the probability of the insured events 6. Microclimates: Make rainfall or area-yield index based contracts difficult for more frequent and localized events. 7. Reliable and verifiable data 8. Tamper proof weather stations (Automatic Weather Stations - AWS) Weather Insurance for Farmers in Andhra Pradesh The former Chief-Minister Dr Y. S. Rajasekhara Reddy launched the Weather Based Crop Insurance Scheme (WBCIS) in Andhra Pradesh during kharif 2009- 10. The new scheme is intended to provide compensation to farmers who lose their crop due to insufficient rainfall. The scheme in the first phase covered the red chilli crop in Guntur district during kharif 2009-10. The Weather Based Crop Insurance Scheme helps to mitigate the hardships of the farmers against the likelihood of financial losses on account of anticipated crop loss resulting from the incidence of adverse weather conditions like rainfall, temperature, humidity, frost etc. The crop selected is “Red ” which includes both irrigated and unirrigated Red chilli crop under WBCIS for Kharif-2009 season. All the cultivators (including sharecroppers and tenant cultivators) growing the notified crop i.e., red either irrigated or unirrigated in any of the Reference Unit Areas shall be eligible for coverage. Sum Insured is equivalent to the total cost of cultivation i.e. Rs.1,50,000/- per hectare in respect of red chilli (Irrigated) and Rs.1,00,000/- per hectare for red chilli (Unirrigated) crop. For this purpose weather stations were established in the 42 mandals of Guntur district, during the lunching of the scheme. The Chief Minister said the weather-based crop insurance should be extended to all horticulture crops in phases in all the districts of the State. Weather stations will be established in all mandals of the state. The National Agricultural Insurance Scheme (NAIS) which is already in force provided relief only if the crop is damaged to the extent of 50%. However, the new scheme i.e. WBCIS will provide compensation to all farmers irrespective of the quantity of crop damaged. In the last five years (2005-2009), the AP government has allocated RS.19.61 billion for crop insurance scheme as against Rs. 7 billion spent during 1999 to 2004. About 16,500 farmers in the Guntur district of Andhra Pradesh have received the first-ever insurance claim under the Weather-based Crop Insurance Scheme launched by the Agriculture Insurance Company (AIC) for farmers. The scheme covered events like deficit rainfall, excess rainfall and uneven distribution of rainfall. It calculates the crop damages with village as a unit as against block, mandal or district in the other agriculture insurance schemes. The state government received a cheque for Rs 17.34 crore from Agricultural Insurance Company( AIC), towards insurance claims for the farmers who the lost the crop during the kharif season 2009-10 benefiting the farmers of 38 mandals in Guntur district. As the weather-based insurance scheme provided better coverage, the Andhra Pradesh state government had decided to extend the scheme to cotton farmers in Adilabad, Khammam and Warangal districts, sweet lime in Nalgonda districts, palm oil in West Godavari district and mangoes in Chittoor and Rangareddy district,” during 2010-2011.