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Crop Insurance in India – A study
INTRODUCTION
All over the world agriculture is synonymous with risk and uncertainty. Agriculture contributes to 15.7 % of the GDP and any change has a multiplier effect on the economy as a whole in India. Crop insurance helps in stabilization of farm production and income of the farming community. It helps in optimal allocation of resources in the production process. Indian Government has been concerned about the risk and uncertainty prevalent in agriculture.
THE OBJECTIVES OF THE CROP INSURANCE IN INDIA
 Financial support to farmers in the event of crop failure as a result of drought, floods.
 Credit eligibility of farmers after a crop failure for the next crop season. To estimate price / yield risk involved in different crops at national level and at disaggregate level
 To examine the performance of the existing and earlier national agricultural insurance schemes implemented in India
 To discuss and explore the problems and prospects of agriculture insurance in the country
 To look into the role of government in implementing various agricultural insurance schemes
HISTORY OF CROP INSURANCE IN INDIA
The government of India started offering widespread crop in insurance in 1985 on all-India level, with the Comprehensive Crop Insurance Scheme. All natural risks were covered excluding nuclear and war risks. Premium as well as the indemnity rate for notified crop was uniform for all insured farmers irrespective of their actual yield. Indemnities were paid to all insured farmers when average output of a given area fell below the normal output. The CCIS was in operation until Rabi 1999. The CCIS has been replaced by the National Agriculture Insurance Scheme.
On June 23,1999 the Prime Minister launched a new crop insurance scheme called Rashtriya Krishi Bima Yojana (RKBY) under the National Agricultural Insurance Scheme(NAIS).
Who is insured?
The CCIS was mandatory for loanee farmers growing covered crops and insured 100% of the crop loan. The NAIS is also mandatory for loanee farmers growing covered crops in implementing states. The indemnity is based upon the value of the threshold level for each crop grown in a set area. The threshold yield is based upon a moving average of the yield over past five years. In case of loanee farmers, the Sum insured was equal to the amount of crop loan advanced. The farmer had the option to insure the amount equivalent to the value of threshold yield of the insured crop. A farmer may also insure his crop beyond the value of threshold yield level upto 150% of average yield of notified area on payment of premium at commercial rates.
Anyone remotely familiar with agriculture would understand that five years yield data does not accurately represent complex weather patterns. Additionally, non-loanee farmers are allowed to participate in the NAIS, but up to this point very few, except in Maharashtra, have chosen to do so. Participation in RKBY was compulsory for farmers growing notified crops and availing crop loans from formal credit Institutions.
The risks covered under the NAIS are: Fire & Lightning , Storm, Cyclone, Hailstorm, Typhoon, Tempest, Hurricane, Tornado, Flood, Inundation & Landslide , Drought, Dry spells , Pests / Diseases.
The NAIS has premiums of 1.5 to 3.5, varying from crop to crop. Under NAIS, premium rates are 3.5% of sum insured for Bajra and oilseeds, 2.5% for other Kharif crops, 1.5% for wheat and 2% for other Rabi crops. Small and marginal farmers are entitled to a premium discount of 10%. In the case of commercial / horticultural crops, actuarial rates are being charged. NAIS is being implemented by 23 states and two Union territories. During the last 12 crop seasons (from Rabi 1999-2000 to Kharif 2005), 7.51 crore farmers have been covered over an area of 12.2 crore hectares insuring a sum of Rs.70, 696 crore. Claims paid Rs.7207 crore against premium income of Rs.2226 crore benefiting more than two crore farmers in the implementation of NAIS so far.
Although premiums are higher than those of previous schemes, based on past experience, they are still not high enough to cover claims. The loss between premiums paid and insurance claims amounted to 184,446 lakhs, exclusive of administrative costs (five to seven percent typically). Only four of the 22 participating states had insurance charges greater than claims.
Within five years the NAIS is supposed to become financially sustainable, charging farmers premiums based on actuarial rates and administrative costs. A data based analysis of the NAIS is not possible, as data for only two seasons exists. However, shortcomings of previous crop insurance schemes, general trends of agricultural insurance in other countries, and inherent theoretical flaws in the NAIS all point towards disaster. The CCIS only charged premiums of 1-2% percent, while claims made were approximately 9% of the sum insured. Factoring in administrative costs, participating farmers as a whole would have had to pay approximately 15% of the sum insured without the subsidy. The NAIS makes insurance mandatory for loanee farmers, so adverse selection is more apparent at the state level. Non-loanee farmers have no obligation to purchase crop insurance and will most likely follow the pattern of adverse selection. If the NAIS can become financially viable, premiums would have to continually rise due to adverse selection.
The main flaws of the NAIS can be summarized as follows:
Lofty goal of financial viability
Mandatory for loanee farmers
Adverse selection, in the case of non-loanee farmers
Premiums do not equal Risk level
The area approach
Farmers growing commercial or horticultural crops covered under the NAIS are supposed to pay actuarial rates. For all crops, the NAIS is supposed to become financially viable within five years, with yearly increases in premiums based on administrative costs and actuarial rates. If the NAIS becomes financially viable, private crop insurance would also be feasible. The effect of the opening of insurance markets in India is still to be seen. However, if the government stays in the crop insurance market private companies will be discouraged from entry, especially considering the state controls on almost every aspect of agriculture.
Thus Government set up an organization called Agriculture Insurance Company of India Ltd (AIC) with support from the general insurance companies and NABARD for effective implementation of the above scheme. All major cereals and pulses and oilseed crops were covered under CCIS and few horticultural crops like onion, potato were covered in NAIS. Spread of CCIS was poor. But the CCIS has helped financial institutions to reduce over dues and maintain the flow of crop loans / short term credit at least in areas where indemnities were paid by the GIC of India. There are also other schemes like ‘Varsha Bhima’, ‘Sowing failure policy2’ being operated on a pilot basis.
Twenty-two states/union territories participated in the CCIS, while only 16 are participating in the NAIS. Punjab and Haryana are two of the leading agricultural states, but have yet to participate in the CCIS or NAIS. Agriculture in Punjab and Haryana is less risky than that of other states. However, one cannot assume that no demand exists for crop insurance in these states, as no cropping system is without risk. Three levels of indemnity do exist within the NAIS, but three risk levels can in no way address the diverse climate and agriculture in India. If premiums were based upon true risk levels, farmers in any agricultural system could avail of crop insurance if it fit their risk-management needs. If a farmer faces such high risks that he cannot survive without subsidized insurance the cropping system is not sustainable