Opportunities for Crop Insurance
Source: Flickr, CCAFS
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Agriculture is a high risk enterprise. With 60 percent of land still under rainfed conditions, the risk is even higher in India and increasing as the weather becomes more unpredictable and irregular due to climate change. Indian farmers have evolved a variety of strategies to reduce risk and cope with losses such as crop diversification, inter-cropping, use of stress tolerant varieties, etc. Such mechanisms, however, are often inadequate, especially when extreme weather events occur.

Insurance can help lessen the direct risk to the farmer from agricultural activities. However, the risk in agriculture is so often high that most farmers would not be able to pay an actuarially fair premium to cover it. This is true not just for India, but even for the developed countries of the world. Across the world, governments offer s subsidy on premiums for agricultural insurance. In India too, the government has been subsidizing agriculture insurance premiums for 30 years under a number of different programmes like the Comprehensive Crop Insurance Scheme (CCIS), National Agriculture Insurance Scheme (NAIS), Modified National Agriculture Insurance Scheme (MNAIS), Weather Based Crop Insurance Scheme (WBCIS), and National Crop Insurance Programme (NCIP). Even after three decades and millions of dollars spent in subsidies, adoption of crop insurance extends to less than 10 percent of Indian farmers.

The Government of India recently launched a revamped program called the Pradhan Mantri Fasal Bima Yojana (PMFBY) to expand insurance coverage. In his most recent Mann ki Baat, a fireside chat program by Prime Minister Modi, he set an ambitious goal of covering 50 percent of the cropped area under the new insurance program in two years. The new crop insurance scheme removes the capping on premium subsidies when compared to earlier schemes. It also covers risks like post harvest losses, preventive sowings and many localized calamities like cyclones, which were excluded in most of the earlier schemes. Giving high priority to awareness creation is also a welcome step in this new scheme. However, only 5.6 percent of farmers in the Kharif and 4.2 percent of farmers in Rabi season are insured currently. Going from this to 50 percent coverage in two years is a big challenge. It can be accomplished only if we have a better understanding of why the coverage of the existing insurance programs is so low. The Situation Assessment Survey of Farmers (SASF)—a nationally representative survey of 35,200 farmers by the National Sample Survey Organization (NSSO) in 2012-13 offers some clues.

The SASF shows that while only 4.8 and 3.2 percent of farmers self-report being insured in Kharif and Rabi seasons, respectively, out of the 35,200 farmers surveyed by the NSSO, 47 percent reported suffering some crop loss in the recent years. Of the total that had insurance in either season, more than 80 percent of them had purchased insurance not voluntarily, but when it came bundled with the crop loan. Less than one in a hundred farmers bought insurance independently of a crop loan. More farmers buy crop insurance in Kharif than in the Rabi season because Kharif crops are more vulnerable to weather shocks. In addition, more risky crops, like cotton, ground nut and soybean with higher year-to-year variation in yields, are more likely to be insured.  Interestingly, insurance coverage was poorer in districts that had recently experienced a drought.  It was also found that while irrigation significantly reduces weather risk to crops, farmers without access to irrigation are not more likely to buy insurance than their counterparts who grow irrigated crops.

The results seems to demonstrate that agricultural insurance covers only a small portion of relatively “richer” farmers in India. Larger farmers, farmers from upper castes, farmers with higher education and farmers served by the formal extension system are more likely to be insured. Poor performance of agricultural insurance is perhaps the main reason for its poor coverage. More than 80 percent farmers in the SASF sample who had insurance, reported that they did not receive claims even when they had suffered significant crop losses. Among the lucky ones who did receive insurance claims, they received it late.

While SASF did not ask farmers the reasons for the non-payment of claims, we can think of two or three possible reasons. First, the agricultural schemes are area-based where the average value of yield or weather parameters over an entire community development block (covering 100 villages with average area of approximately 500 km2 ) is used to decide claim amounts for farmers in that block. A block is too big a unit of area for such an assessment. Farmers in different parts of a block could experience very different levels of shocks. A more micro-level assessment of losses for settling claims is needed.  

Unfortunately, we do not have mechanisms in place for reliable measurement of weather parameters and crop yields. Crude, and possibly faulty measurements of crop yields and weather parameters could be another reason why insured farmers did not get paid even when they suffered losses.

A third possible reason for non-payment to farmers, in spite of losses, could be the poor design of the insurance products themselves. Research by CCAFS, South Asia shows that the threshold values of weather parameters set to trigger insurance payments are often way off the mark. We cannot design fair insurance products without using good actuarial tables.

The newly launched insurance scheme is more generous to farmers. It has a higher subsidy on the premium and a higher ceiling of the loss value it will cover. However, unless the design and the measurement challenges are not addressed, higher subsidy alone will not make agricultural insurance products more popular or more effective. Even now, some states provide higher subsidies on the premium for crop insurance than others, but the insurance coverage is not necessarily higher in states where the subsidy is higher.

We believe that the state and the central governments of India need to invest resources to create the infrastructure and the mechanisms for more reliable, high resolution and high frequency measurements of weather parameters and crop yields. Development of more accurate crop models for all parts of India and the use of these models to design fair insurance products is needed. Furthermore, insurance becomes viable only if it has a large and diversified pool of clients. Timely payments of claims with minimum hassle would make insurance products more popular. Improvements in design and delivery of insurance should be complemented by aggressive extension efforts to improve the financial literacy of farmers so that they may make more informed choices.   

By: Avinash Kishore (IFPRI-Research Fellow) and K S Aditya (Scientist-ICAR-IARI)

Photo credit:Flickr, CCAFS