Crop Insurance in India

Crop Insurance in India - Agriculture Insurance Company of India Limited (AIC) Crop Insurance - Earlier attempts: The idea of crop insurance emerged in India during the early part of the twentieth century. Yet it was not operated in a big way till recent years. It is still evolving in terms of scope, spread and structure. J.S. Chakravarti proposed a rain insurance scheme for the Mysore State and for India as a whole with view to insuring farmers against drought. His scheme was based on the area approach. He published a number of papers on the subject since 1915 in the Mysore Economic Journal. In 1920 he brought out a book Agricultural Insurance: Practical Scheme suited to Indian Conditions. There were also attempts prior to independence by princely states like Dewas, Baroda, Madras etc to introduce crop insurance. Crop insurance received more attention after India s independence in 1947. The subject as discussed in 1947 by the Central Legislature and the then Minister of Food and Agriculture, Dr. Rajendra Prasad gave an assurance that the government would examine the possibility of crop and cattle insurance. Some committees were formed and discussions and deliberations continued. In October 1965 the Government of India decided to introduce a Crop Insurance Bill and a Model Scheme of Crop Insurance in order to enable the States to introduce, if they so desire, crop insurance. In 1970 the draft Bill and the Model Scheme were referred to an Expert Committee headed by Dr. Dharm Narain. Thus for over two decades the issue of crop insurance continued to be debated and discussed. Different experiments on crop insurance on a limited, ad-hoc and scattered scale started from 1972-73. The first crop insurance program was on H-4 cotton in Gujarat. All such programs, however, resulted in considerable financial losses. The program(s) covered 3110 farmers for a premium of Rs. 4, 54,000 and paid claims of Rs. 3.79 millions. It was realized that programs based on the individual farm approach would not be viable in the country. Why individual farm based approach is not possible? Obviously, individual farm approach would reflect crop losses on realistic basis and hence, most desirable, but, in Indian conditions, implementing a crop insurance scheme at individual farm unit level is beset with problems, such as: (v) (vi) (vii) Non availability of past record of land surveys, ownership, tenancy and yields at individual farm level Large number of farm holdings (nearly 116 millions) with small farm holding size (country average of 1.41 hectares) Remoteness of villages and inaccessibility of farm-holdings Large variety of crops, varied agro-climatic conditions and package of practices Simultaneous harvesting of crops all over the country Effort required in collection of small amount of premium from large no. of farmers Prohibitive cost of manpower and infrastructure Permission to reproduce and / or queries on the paper could be addressed to Kolli N Rao, Chief Manager at kollirao@aicofindia.org 1

Prof. Dandekar suggested a homogeneous area approach for crop insurance, after a review in the mid-seventies. The General Insurance Corporation of India (GIC) prepared a Pilot Crop Insurance Scheme (PCIS) based on the area approach that was operated from 1979. In all 13 States implemented it by 1984-85. Participation was voluntary. The scheme covered cereals, millets, oilseeds, cotton, potato, gram and barley. The GIC and the State government in the ratio of 2:1 shared the risk. The insurance premium ranged from 5 per cent to 10 per cent of the sum insured. The scheme covered 6,27,000 farmers for premium of Rs. 19.7 millions against claims of 15.7 millions. Comprehensive Crop Insurance Scheme (CCIS) The Government of India introduced the CCIS during the year 1985-86. GIC operated it with the assistance and involvement of the respective State governments. The CCIS envisaged the following objectives: To provide a measure of financial support to farmers in the event of crop failure as a result of drought, flood etc; To restore the credit eligibility of farmers, after a crop failure, for the next crop season; and To support and stimulate production of cereals, pulses and oilseeds The scheme covered cereals, millets, pulses and oilseeds. The particular crops to be covered by insurance in different areas were notified by the State governments subject to availability of historical yield data. The coverage was linked to institutional credit and farmers who took crop loans for the specified crops were eligible for coverage of insurance. The scheme was optional to States. Once the State opted, the participation of farmers who took short-term crop loan from cooperative credit institutions, commercial banks and regional rural banks was compulsory. GIC on behalf of the Government of India and the State government in the ratio of 2:1 shared the claims and premium. In the original scheme the sum insured for the farmer was 150 percent of the crop loan disbursed to him for growing the insured crop; it was reduced to 100 per cent of the loan, subject to a cap of Rs. 10,000 per farmer in 1988. The rate of premium was uniform all over the country; it was 2 per cent of the sum insured for cereals & millet crops, and 1 per cent for pulses and oilseeds. For small and marginal farmers there was a premium subsidy of 50 per cent, shared equally by the Government of India and the State governments. CCIS was based on the homogenous area approach. Area units called defined areas were identified for the purpose of assessment of claims. The defined area could be a district, a taluka, a block or any other smaller contiguous area. The indemnity (coverage) limit originally was 80%, which was changed to 60%, 80% & 90% corresponding to high, medium & low risk areas. Actual average yield per hectare for the defined area was determined on the basis of Crop Cutting Experiments (CCEs). These CCEs were the same conducted as part of General Crop Estimation Surveys (GCES). If the actual yield 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 were calculated using the formula: (Guaranteed Yield Actual Yield) * Sum Insured of the farmer Guaranteed Yield 2

Claims were paid to the credit institutions from which the insured farmer had borrowed. Credit institutions would adjust the amount against the crop loan outstanding and pay the residual amount, if any, to the farmer. The scheme till 1999 was implemented in 16 States & 2 Union Territories (UTs) and in all insured 76.3 million farmers for a premium of Rs. 4.04 billions and paid claims of Rs. 23.19 billions. Deficit rainfall accounted for 75 percent of claims, followed by cyclones / floods (20 percent). The claim ratio (claims: premium) was 5.75 and loss cost (claims: sum insured) was 9.29 percent. 3

National Agricultural Insurance Scheme (NAIS) National Agricultural Insurance Scheme (NAIS) was introduced from Rabi 1999-00 season by expanding the scope and content of CCIS. The NAIS is, like the CCIS, primarily based on the homogenous area approach. It covers all farmers: borrowing and non-borrowing farmers. It envisages coverage of cereals, millets, pulses, oilseeds and annual commercial / horticultural crops for which adequate yield data are available. Under annual commercial / horticultural crops, presently 13 crops are covered. These are sugarcane, potato, cotton, ginger, onion, chilly, turmeric, cumin, coriander, jute, tapioca, annual banana and annual pineapple. During 2005-06, 23 States & two Union Territories are implementing the NAIS. These are - 1. Andhra Pradesh, 2. Assam, 3. Bihar, 4. Chhattisgarh, 5. Goa, 6. Gujarat, 7. Haryana, 8. Himachal Pradesh, 9. Jammu & Kashmir, 10. Jharkhand, 11. Karnataka, 12. Kerala, 13. Madhya Pradesh, 14. Maharashtra, 15. Meghalaya, 16. Orissa, 17. Rajasthan, 18. Sikkim, 19. Tamilnadu, 20. Tripura, 21. Uttar Pradesh, 22. Uttaranchal, 23. West Bengal, 24. A&N Islands, 25. Pondicherry. NAIS envisages area approach for widespread calamities and individual farm approach for localized calamities such as hailstorm, landslide, and flooding. However, individual approach to begin with, is implemented in limited areas on experimental basis. Each participating State/UT is to ensure in three years that the unit of insurance is lowered to village panchayat (group of 2 to 4 villages). However, because of infrastructural and financial constraints States could not lower the unit to village panchyat till Kharif 2006. Sum insured for borrowing farmers is the amount of loan availed which can be increased to value of guaranteed yield and further up to value of 150 per cent of the average yield. For non-borrowing farmers the sum insured is value of guaranteed yield, which can be extended up to value of 150 percent of the average yield. Premium rates during Kharif are 3.5 per cent of the sum insured or actuarial rate whichever is less for pearl millet and oilseeds, 2.5 per cent for other Kharif crops (June to October); 1.5 per cent for wheat, and 2 per cent for other Rabi crops (November to March). In case of annual commercial/horticultural crops, actuarial rates are applied. The sum insured beyond value of 100 percent of guaranteed yield attracts commercial rates of premium for all crops. The premium in case of small and marginal farmers is subsidized by 50 per cent, which is shared equally by the Government of India and the State/UT. The premium subsidies to be phased out on sunset basis, over a period of five years, and at present its 10%. Three levels of indemnity, i.e. 90 per cent, 80 per cent and 60 per cent respectively for low risk, medium risk and high-risk areas, are available for different crops. The insured farmers of a unit area may opt for a higher level of indemnity on payment of additional premium. As regards sharing of risks, till transition to actuarial regime is made in a period of five years, all claims above 100 per cent of the premium incase of cereals, millets & pulses will be borne by the Government of India and the States on a 50:50 basis. In case of annual commercial / horticultural crops, all claims above 150 percent of the premium in the first three years will be paid out of Corpus Fund to which contributions are made by central & State governments on 50:50 basis. This would be above 200 percent of claims thereafter. 4

In terms of the number of farmers covered, it is the largest crop insurance program in the world. It s covering more than 35 different crops during Kharif and over 30 crops during Rabi season. Since inception (till Rabi 2005-06) the scheme covered 78.96 million farmers growing crops in 128.99 million hectares with a sum insured of Rs. 755.81 billions, earning a premium of Rs. 23.27 billions. The claims finalized for the period were Rs. 72.18 billions. The details of season-wise coverage till Rabi 2005-06 are as follows: Season No. of covered States/UTs Farmers covered (millions) Area coveresum (mln. Hec.) Insured (Rs. Blns) 5 Premium (Rs. Blns) Claims (Rs. Blns) Farmers Benefited Kharif 2000 17 8.41 13.22 69.03 2.07 12.22 3635252 2001 20 8.70 12.89 75.02 2.62 4.93 1741873 2002 21 9.77 15.53 94.32 3.25 18.22 4296882 2003 23 7.97 12.36 81.14 2.83 6.50 1704419 2004 25 12.69 24.27 131.70 4.59 10.36 2659376 2005 25 12.64 20.84 134.54 4.48 9.78 2448065 TOTAL 60.18 99.11 585.75 19.84 62.01 16485867 Rabi 1999-00 9 0.58 0.78 3.56 0.05 0.08 55288 2000-01 18 2.09 3.11 16.03 0.28 0.59 526697 2001-02 20 1.96 3.15 14.98 0.30 0.65 453325 2002-03 21 2.33 4.04 18.38 0.39 1.89 926408 2003-04 22 4.42 6.47 30.49 0.64 4.91 2072892 2004-05 23 3.53 5.34 37.74 0.76 1.60 772729 2005-06 23 3.87 6.99 48.88 1.01 0.45 42305 TOTAL 18.78 29.88 170.06 3.43 10.17 4849644 Grand Total 78.96 128.99 755.81 23.27 72.18 21335511 Note: 2005-06 figures are provisional and doesn t include all claims Agriculture Insurance Company of India Limited (AIC) Prior to 2002-03 General Insurance Corporation of India (GIC) was implementing NAIS. Recognizing the necessity for a focused development of crop insurance program in the country and an exclusive organization to carry it forward, Government created an exclusive organization - Agriculture Insurance Company of India Limited (AIC) on 20 th December 2002. The Company took over the implementation of NAIS w.e.f. 2003-04. The coverage took a quantum jump during 2005-06, with nearly 17 million farmers and premium of over Rs. 5.50 billions. National Agricultural Insurance Scheme (NAIS) - drawbacks Despite high claim ratio of almost 1: 4 and low premium rates, farmers are not coming forward to avail crop insurance in a big way. In the course of implementation in the past four years, many suggestions were made by Farmers Associations, States, Members of the Parliament, including criticism for low penetration. The major concerns expressed for improving acceptability of NAIS are listed below:

(v) (vi) (vii) (viii) (ix) The insurance unit presently is large (taluka / block etc) and not reflecting yield experience of individual farmers. Guaranteed Yield, which is some percentage of preceding 3 or 5 years average is not reflecting reasonable aspirations of farmers The present indemnity levels, which is only 60% for majority of crops and areas is grossly inadequate Inordinate delay in settlement of claims, often taking as much as 12 months because of link with crop cutting experiments conducted by the state Inadequate risk / loss coverage, as the scheme presently covers only standing crops from sowing to harvesting Localized calamities (hailstorm etc) under area yield insurance do not provide even a small compensation to affected farmers Poor infrastructure facilities for coverage of non-loanee farmers Insurance coverage is not available for Fruits and Vegetables Bodily injury of farmers in the course of agricultural activities not covered in the scheme. The Hon ble Prime Minister while reviewing the status of National Common Minimum Programme (NCMP) directed the Ministry of Agriculture to constitute a Joint Group to expeditiously study the improvements required in the existing crop insurance schemes. Accordingly, a Joint Group was set up on 31 st August 2004 in the Ministry of Agriculture. The Terms of the Reference of the Group were as under: To review the status position of existing Crop Insurance Schemes i.e. National Agricultural Insurance Scheme (NAIS), Pilot Project on Farm Income Insurance Scheme (FIIS), Varsha Bima (rainfall insurance) and other agriculture related schemes floated by Private General Insurance Companies. Improvements required in National Agricultural Insurance Scheme. To develop broad parameters/ concept paper of an appropriate and farmers friendly crop insurance scheme after taking into account the professional inputs obtained from experts and private sector general insurance companies. To make assessment of up front subsidy, if any, to be paid by the government. The Group after detailed study submitted the Report to the Government on 20 th December 2004. The Group, besides NAIS, also studied weather based insurance products, existing network of weather stations of India Meteorological Department (IMD), use of remote sensing technology etc and made recommendations. However, the recommendation w.r.t. NAIS are the most important and significant. The major recommendations made keeping in mind the concerns expressed earlier by various quarters, are as follows: Reduction of Insurance Unit to Gram Panchayat for major crops Guaranteed Yield to be based on best five out of preceding seven years There would be only two levels of indemnity, viz. 80% and 90% in place of existing 60%, 80% & 90%. Pre-sowing risk particularly prevented sowing on account of adverse seasonal conditions to be covered, wherein upto 25% of sum insured could be paid as compensation covering the input cost incurred till that stage (v) Post-harvest losses on account of cyclonic rains to be covered upto two weeks after harvesting where the losses would be assessed on individual basis 6

(vi) Compensation upto 50% of likely claims could be released during the season, which would be finally adjusted against claims worked out on the basis of Yield data. The ad-hoc / onaccount release of compensation would be based on parameters, such as crop condition reports, weather data, satellite imagery etc. (vii) The localized risks like hailstorm, landslide, damage by wild animals to be assessed and settled on individual basis (viii) Uniform seasonality discipline for Loanee and Non-loanee farmers ranging between 15 th June to 15 th July for Kharif (based on onset of South-west Monsoon) and 31 st December for Rabi seasons. This is aimed at minimizing adverse selection and moral hazard problems. (ix) The scheme to be put on actuarial regime in which the government s liability is limited to subsidy in premium. The premium rates would be actuarial and the rates paid by farmers are capped at 8%. The premium subsidy by the government ranges from 40% to 75% depending on the slabs. The lending banks to bear premium upto one percentage point of premium. It is aimed at inducing financial discipline and proper budgeting for the government and professionalism and accountability on the part of the insurer. (x) Introducing coverage for fruit & plantation crops on pilot basis (xi) Providing personal accident coverage and insurance for dwelling & contents at zero cost to insured farmers, and coverage for a pair of cattle at 50% subsidy in premium. The Government of India is presently examining the recommendations made by the Group. Farm Income Insurance Scheme (FIIS) NAIS protects the farmers only against the yield fluctuations. The price fluctuations are outside the purview of this scheme. Farmers income is a function of yield and market prices. Therefore, despite normal production, farmers often fail to maintain their income level due to fluctuations in market prices. To take care of variability in both the yield and market price, the government introduced a pilot project, viz. Farm Income Insurance Scheme (FIIS) during Rabi 2003-04 season. The objective of the scheme was not only to protect the income of the farmer, but also to reduce the government expenditure on procurement at Minimum Support Price (MSP). The other main objectives were to encourage crop diversification and also to give fillip to private trade, etc. The following are the salient features of the FIIS: (v) (vi) The crops covered are rice and wheat. The scheme is based on the homogeneous area approach and notified area can be an administrative unit such as a gram panchayat, mandal, revenue circle, block, taluka or district. The scheme is compulsory for loanee farmers and voluntary for non-loanee farmers. The premium rates are actuarial, determined for each State at the District level. The Government of India subsidizes the gross premium payable by the insured farmers. The subsidy will be 75 per cent of the premium for small/marginal farmers and 50 per cent for other farmers. Two levels of indemnity, i.e. 90 per cent for low-risk areas and 80 per cent for high-risk areas. 7

(vii) (viii) (ix) If the actual income (current yield X current market price) is lower than guaranteed income (average yield of 7 years X level of indemnity [80% or 90%] X MSP), the insured farmer receives the compensation. The government procurement at MSP is suspended in the pilot districts for covered crops. NAIS is suspended for the selected districts/crops where the pilot FIIS is implemented. Business coverage: The Scheme was implemented during Rabi 2003-04 season in 18 Districts of 11 States for wheat and / or rice and during Kharif 2004 season in 19 Districts of four States for rice. In all the scheme covered 4,15,032 farmers with 4,01,812 hectares for a sum insured (guaranteed income) of Rs. 4.20 billions, collecting a premium of Rs. 285 millions and paid claims of Rs. 287.5 millions. FIIS - Key Issues and Constraints: As it was initially intended to implement FIIS in 100 districts during Kharif 2004, a general review of FIIS was done at the beginning of Kharif 2004 season. It was noticed that many states including Haryana and Punjab had not agreed to implement the scheme. The single most important reason given for non-acceptance was suspension of MSP based procurement in areas where the scheme is implemented. Other important issues noticed in the review were: (v) Majority States were not keen to implement the scheme on the ground that it would not be beneficial to the farmers, as yield and price have offsetting behavior. The premium rates were substantially high despite the premium subsidy given by the government. States demanded that the premium payable by farmer should be restricted to NAIS level. States also desired that coverage of the scheme should be enlarged to cover risky crops like soybean, groundnut, red gram and commercial crops like cotton, etc. Some of the States were of the view that the Guaranteed Income is not attractive since the market prices of the superior varieties grown never go below MSP of Fair Average Quality (FAQ). Since Price and Yield are negatively correlated, the probability of claim arises only when Price and Yield both go below the guaranteed level, which may be a rarity. Improper functioning of Marketing Departments, availability of past as also current data at implementation level was another reason quoted as hindrance for smooth implementation of the Scheme FIIS was shelved after piloting in two seasons. Weather insurance concept: Many agrarian economies owe their strength to favorable weather parameters, such as rainfall, temperature, sunshine etc. However, these economies are ill equipped to deal with adverse incidences of weather. Therefore, reducing vulnerability to weather in developing countries may very well be the most critical challenge facing development in the new millennium. 8

Sixty five percent of Indian agriculture is heavily dependent on rainfall, and, therefore, is extremely weather sensitive. Several studies including those by the National Commission on Water have established that rainfall variations account for more than 50 percent of variability in crop yields. Many agricultural inputs such as soil, seeds, fertilizer, management practices etc. contribute to productivity. However, weather, particularly rainfall has overriding importance over all other inputs. The reason is simple - without proper rainfall, the contributory value of all the other inputs diminishes substantially. An analysis of Indian Crop Insurance Program between 1985 and 2003 reveals that rainfall accounted for nearly 95 percent claims 85 percent because of deficit rainfall and 10 percent because of excess rainfall. The basic idea of weather insurance is to estimate the percentage deviation in crop output due to adverse deviations in weather conditions. There are statistical techniques to workout the relationships between crop output and weather parameters. Techniques like multivariate regression could explain the impact of weather deviations / variations on productivity. This gives the linkage between the financial losses suffered by farmers due to weather variations and also estimates the indemnities that will be payable to them. The analysis could also include contingencies associated with the timing and the distribution of weather parameters, particularly rainfall over the season. The two together form the basis for designing rainfall (weather) insurance contracts. Advantages over traditional crop insurance: There are many shortcomings in the traditional crop insurance. The important ones are: (a) moral hazard (b) adverse selection (c) multiple agencies and their huge administrative cost which are hidden in the government budgets (d) lack of reliable methodology for estimating and reporting crop yields (e) delays in settlement of claims (f) program limited to growers (farmers). Majority of these shortcomings could be overcome in the weather insurance, as follows: Trigger events (like adverse rainfall) can be independently verified & measured. India has an independent rainfall reporting system through India Meteorological Department. If the unbiased data can be procured, the moral hazard can be minimized to a large extent. Weather insurance does not encourage potential negligence on the part of insured, and the cultivator s urge for a good harvest remains unaffected. Compared to yield based insurance, weather insurance is inexpensive to operate. Since very few agencies would be involved in implementation, the aggregate administrative cost would be far lower. Weather insurance allows for speedy settlement of indemnities, as claims can be settled even within a fortnight of the expiry of indemnity period. Weather Insurance Pilots: ICICI-Lombard was the first general insurance company in India to introduce rainfall insurance pilot based on a composite rainfall index in 2003. It implemented a pilot project in Mahabubnagar district of Andhra Pradesh for groundnut and castor. Though participation was limited, it held out valuable lessons for future programs. The rainfall index insurance and other 9

weather based insurances have since been extended to other areas and crops beginning with Kharif 2004 season IFFCO-Tokio General Insurance Company (ITGI) piloted rainfall insurance by the name Baarish Bima during 2004 in nine districts of Andhra Pradesh, Karnataka, Gujarat & Maharashtra. The product is based on rainfall index compensating farmers for deficit rainfall. The policy pays for deviations in actual rainfall exceeding 30 percent. The claims are paid on graded scale, with 100 percent claims payable when adverse deviation in rainfall reaches 90 percent. The premium rates vary from 4-5 percent and farmers are covered on group basis. This pilot again is expanded to more crops and areas after Kharif 2004 season. Agriculture Insurance Company of India Ltd. (AIC): Agricultural Insurance Company of India (AIC) introduced rainfall insurance known as Varsha Bima during the 2004 South-West Monsoon period. Varsha Bima provided for five different options suiting varied requirements of farming community. These are seasonal rainfall insurance based on aggregate rainfall from June to September, sowing failure insurance based on rainfall between 15 th June and 15 th August, rainfall distribution insurance with weights assigned to different weeks between June and September, agronomic index constructed on the basis of water requirement of crops at different pheno-phases and (v) catastrophe option, covering extremely adverse deviations of 50 percent & above in rainfall during the season. Varsha Bima has been piloted in 20 rain gauge areas spread over Andhra Pradesh, Karnataka, Rajasthan and Uttar Pradesh. During 2005, Varsha Bima was fine-tuned and extended to 120 locations in 10 States during Kharif 2005, and further to 150 locations in 15 States during Kharif 2006 AIC also introduced weather insurance pilots on wheat insurance, mango insurance, and coffee insurance during 2005-06, and is looking ahead for expansion during 2006-07. 10