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CROP INSURANCE

BACHELOR OF COMMERCE

BANKING & INSURANCE

SEMESTER VI

(2012-13)

SUBMITTED BY:MAYUR MARU

ROLL NO.59

PROJECT GUIDE:PROF.


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K.J SOMAIYA COLLEGE OF ARTS, & COMMERCE,

VIDYAVIHAR (EAST), MUMBAI-400077

PROJECT ON:

CROP INSURANCE

BACHELOR OF COMMERCE

BANKING AND INSURANCE

SEMESTER VI

(2012-13)

SUBMITTED

In Partial Fulfillment of the requirements

For the award of the Degree of

Bachelor of Commerce-Banking & Insurance

By

MAYUR MARU

ROLL NO.59


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K.J SOMAIYA COLLEGE OF ARTS,& COMMERCE,

VIDYAVIHAR (EAST), MUMBAI-400077

CERTIFICATE

This is to certify that Mr. MAYUR MARU of B.Com. Banking

& Insurance Semester V (Academic Year) 2012-13 has successfully

Completed Project On CROP INSURANCE under

the guidance ofPROF..

_________________ _________________

(Mrs. SMITA DAYAL) (Dr. SUDHA VYAS)Course Coordinator Principal

_________________ _________________Internal Examiner External Examiner

_________________(Mr.)

Project Guide


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DECLARATION

I, Mr. MAYUR MARU the student ofB.Com-Banking &Insurance-

SemesterVI (2012-13) hereby declare that I have completed Project on

CROP INSURANCE. Wherever the data/information has been taken

from any book or other sources have been mentioned in bibliography.

The information submitted is true and original to the best of my

knowledge. The information submitted is true and original to the best of

my knowledge.

Students signature

______________

MAYUR MARU

(ROLL NO: 59)


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ACKNOWLEDGEMENT

On the event of completion of my project CROP INSURANCE. I take the opportunity toexpress my deep sense of gratitude towards all those people without whose guidance, inspiration,& timely help this project would have never seen the light of day.

Heartily thanks to Mumbai University for giving me the opportunity to work on this project. Iwould also like to thank my principal Dr. SUDHA VYAS for giving us this brilliant opportunity

to work on this project.

Any accomplishment requires the efforts of many peoples and this project is not different. I findgreat pleasure in expressing my deepest sense of gratitude

Towards my project guide PROF.. Whose guidance & inspiration right from the

conceptualization to the finishing stages proves to be very essential & valuable in completion ofthe completion of the project. I would like to thank library staff, all my classmates, & friends fortheir invaluable suggestions & guidance for my project work.

Lastly I would like to thanks my parents without whose consent & support it would have notbeen possible for me to this project.

Student Signature

______________

MAYUR MARU


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EXECUTIVE SUMMARY

In recent years, natural disasters, particularly climate-related ones, have increased

both infrequency and magnitude. Scientists the world over have agreed (IPCC AR4,

2007) that human-induced climate change is exacerbating this impact. Agriculture

sector is likely to beaffected most due to extreme weather events like cyclone, flood or

drought. So, the farmersare hit hardest. For floodplain countries like Bangladesh,

structural measures formanagement of disaster risk and its consequences often were

found less effective. So non-structural measures like micro-insurance or crop insurance

are being suggested as a risk management strategy. The rationale is that poverty and

vulnerability to climate changefeed each other, and this nexus warrants that climate

change policies work in concert withpoverty reduction policies. However, traditional

micro-credits and savings are inadequatewhen poor farmers with no safety or security

nets are exposed to risks beyond their meansto cope with. Therefore, micro or crop

insurance , customized to specific needs of thepoor, may be an effective instrument for

the purpose. UN Climate Convention and the Kyoto Protocol have included the

provision of insurance as a mechanism to address therisks from climate change.In

many developing countries including in Bangladesh, cropinsurance has been introduced

about 3 decades ago. Some of these countries arecontinuing, while in some others, it has

stopped functioning, because of incurring heavylosses. As a stand-alone instrument, CI

is not financially viable anywhere in the world. Evenin the industrial countries, it

continues functioning as a public welfare program. In fact,agriculture sector is

subsidized in all countries in many different ways. This happens morewhen a natural

disaster hits the farmers. Therefore, CI as an instrument of adaptation hasto be seen

from a wider angle, not just from conventional cost-benefit analysis.


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INDEX

SR

NO.TOPIC NAME

PAGE

NO.


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CROP INSURANCE

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Crop Insurance

History:

The Crop Insurance in India 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 (NAIS). This substitution came into effect from 1999. These Schemes that


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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 approachor on Homogenous area approach.The Individual

approach of the scheme indemnifies the farmer to the full extent of the losses. Also

the premium that is to be paid by him is determined with reference to his own past

yield and loss experience.

The Individual approach for these schemes necessitates reliable and

accurate data of crop yields of individual farmers for a sufficiently long period, for

fixation of premium on actuarially sound basis. The Homogenous area approach on

the other hand was aimed at envisaging a homogeneous area from the point of

view of crop production and similarity of annual variability of crop production.

The homogenous area approach was found to be more favorable. This is because it

would facilitate the provision of a single unit treatment to various agro-climatically

homogenous areas and the individual farmers and allow them to pay the same rate

of premium and individual fortunes.receive the same benefits, irrespective of their


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individual fortunes.

Introduction:

Agriculture has been a crucial sector in many developing countries

across the world for its perceived ability to contribute significantly to achieve

developmental objectives such as economic growth, employment generation, food

security, poverty reduction, and environmental sustainability. Increasing the

productive capacity of agriculture through higher productivity has been the main

policy agenda in many developing economies. India is not an exception where

agriculture provides employment to millions of people in the rural areas, and

hence the growth and development of this sector assumes important among the

policy makers. With almost little scope for further expansion in arable lands,

there is a need to increase yields to technically maximum possible levels through

appropriate investment in basic infrastructure, human development, and research

and extension services (Chavas, 2006; Zepeda, 2006; Mathur et al, 2006).

There has been a consistent decline in growth of the agriculture sector since

1990 onwards as compared to 1980s. It was 4 per cent per annum during the 1980s

on an average, which came down to 3.2 per cent during 1990s and 2 per cent in

the last five years. Growth in real value of foodgrain production has been an


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abysmal -3 per cent during the 1990s and - 5 per cent during 1999-2000 to 2002-

03, with minor improvements estimated during 2003-04 (Mathur et al, 2006).

While there has been decline in overall agricultural growth, there are considerable

inter-regional variations across the country. With regard to the period 1993 to

2003, the state-wise analysis shows wide variations in growth from 28 per cent to

19 per cent taking the first three years and last three years, viz, 1993-96 and

2000-03.

Over the years, many researchers have attempted to study variations in terms

of agricultural production, productivity, and agricultural growth performance

across regions in the country (Sawant, 1997; Singh et al, 1997; Parveen et al,

1997; Rao and Gopalappa, 2004; Sidhu and Bhullar, 2005; Mathur et al 2006).

These studies by and large found that there are considerable variations in yield,

production, input use in agriculture and agricultural growth across regions.

However, studies on regional differences in farm profitability are limited.

Moreover, growing imbalances in agricultural growth and development led to

disparity in status of farmers across regions. Significant proportion of farmer

households has been trapped to indebtedness. Recent estimates show that nearly 49

per cent of farm households are indebted and the average amount per indebted

household is Rs.12585. This issue made the academicians and policy makers to


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carefully analyse why this happens in the era of globalization, technological

advancement, and economic growth.

Farmers face floods, drought, pests, disease, and a plethora of other natural

disasters. Crop insurance as a risk management tool is being widely adopted both

in developing and developed countries. Agricultural crop insurance has assumed

much importance with large scale damage caused due to pest attacks, crop diseases

and vagaries of weather. The objective here is to provide insurance coverage and

financial support to the farmers in the event of failure of any of the notified crop as

a result of natural calamities, pests and diseases. The list of crops being covered for

insurance differs from state to state. Generally quite a few Kharif and Rabi season

crops are covered. These crops are insured at the community/block/gram panchayat

levels. Agriculture insurance schemes are of immense help to farmers, providing

them with financial security.

Developed countries have a variety of government-supported, agriculture-

related insurance services. But, in India, farmers generally rely on informal

arrangements like diversifying crops, favouring traditional practices over modern

techniques, and entering into share-cropping arrangements. Such arrangements,

however, are not totally gainful in mitigating the risks as efficiently as formal

arrangements. Therefore, crop insurance as one of the means of reducing the


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agricultural risks, indemnifies the losses arising from natural calamities like

drought, flood, storm and pests and diseases. Crop insurance brings in security and

stability in farm income. Crop insurance protects farmers

investment in crop

production and thus improves their risk bearing capacity. It facilitates adoption of

improved technologies and encourages higher investment resulting in higher

agricultural production. Further, it spreads the crop losses that occur due to

uncontrollable natural factors, over space and time and helps farmers make more

investments in agriculture.Realising the importance of potential contribution of

crop insurance in agricultural sector, the present paper aimed at (i) critically review

the various crop insurance schemes in Tamil Nadu state and (ii) work out the

instability index for important crops.

Difination:

Crop insurance is purchased by agricultural producers, including farmers,

ranchers, andothers to protect themselves against either the loss of their crops due

to natural disasters,such as hail, drought, and floods, or the loss of revenue due to

declines in the prices of agricultural commodities.


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The two general categories of crop insurance are called crop-yield insurance

and crop-revenue insurance.

Crop-yield insurance:

There are two main classes of crop-yield insurance

Crop-hail insurance:

It is generally available from private insurers (in countries with private

sectors) because hail is a narrow peril that occurs in a limited place and its

accumulated losses tend not to overwhelm the capital reserves of private insurers.

In early 1820s, crop-hail insurance were available to farmers in France and

Germany. That is among the earliest forms of hail insurance from an actuarial

CROP INSURANCE

CROP-YIELD

INSURANCE

CROP-HAIL

INSURANCE

MULTI-PERIL CROP

INSURANCE (MPCICROP-REVENUE


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perspective. It is possible to implement the hail risk into financial instruments since

the risk is isolated.

Multi-peril crop insurance (MPCI):

Coverage in this type of insurance is not limited to just one risk. Usually

multi-peril crop insurance offers hail, excessive rain and drought in a combined

package. Sometimes, additional risks such as insect or bacteria-related diseases are

also offered. The problem with the multi-peril crop insurance is the possibility of a

large scale event. The Risk Management Agency (RMA) is active in calculating

the premiums based on individual risk factors since 1996.

Crop-revenue insurance: Crop-yield times the crop price gives the crop-revenues.

Based on farmer's revenues, crop-revenue insurance is based on deviation from the

mean revenue. RMA uses the futures prices on harvest-times listed in the

commodity exchange markets, to determined the prices. Combining the future

price with farmer's average production gives the estimated revenue of the farmer.

Accessing the futures market offers enables revenue protection even before the

crop planted. There is a single guarantee for a certain number of dollars. The

policy pays an indemnity if the combination of the actual yield and the cash

settlement price in the futures market is less than the guarantee. In the United

States, the program is called Crop Revenue Coverage. Crop-revenue insurance

covers the decline in price that occurs during the crop's growing season. It does not


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cover declines that may occur from one growing season to another.

Objective:

Provide a sustainable and feasible model for Private Insurance Companies to

offer CropInsurance Schemes to the Rural Sector.

Importance of insurance for farmers:

Commercialization of agricultural products has increased in India. The

fluctuation in the price of the products has affected the income of the farmers

significantly. Insurance of crop production provides a relief to the farmers when

the crop is damaged by attack ofpests, flood, drought or any other mean.

Synthesis:

Initially, the need is to segregate risks into preventable and unpreventable

ones. Only theunpreventable risks would be insured. For example, damage caused

to crops due tofloods, drought, lightning, etc. The initial target market would be

states or regions withmoderate or low risk of natural calamities. Insurance would

be channeled throughFarmers Co-operatives and Farming Clubs. Selection of a
http://www.indiastudychannel.com/resources/154664-Importance-insurance-farmers-crop-production-India.aspxhttp://www.indiastudychannel.com/resources/154664-Importance-insurance-farmers-crop-production-India.aspxhttp://www.indiastudychannel.com/resources/154664-Importance-insurance-farmers-crop-production-India.aspxhttp://www.indiastudychannel.com/resources/154664-Importance-insurance-farmers-crop-production-India.aspx


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homogenous agro-climatic area is essential to have uniform premium rates for

specific regions.

Features of Crop Insurance:

The sum insured generally equals the value of the threshold yield of theinsured crop.

A farmer can get an insurance for an amount greater than the value of thethreshold yield by paying premiums at commercial rates

In case a farmer takes a loan for his crops, the sum insured is at least equalto the amount of crop loan advanced

Insurance charges for loanee farmers are in addition to the loan charges While all loanee farmers are automatically covered under the scheme, non-

loanee farmers need to approach the nearest banks within the stipulated

time

Crop loans disbursed through Kisan Credit Cards are also eligible for thisscheme

In case of damages caused by widespread calamities, claims are settled onarea approach basis. Any insured crop in a notified area recording a yield

which is lower than the guaranteed yield (calculated on the basis of crop


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estimation surveys by the state government) automatically becomes eligible

for an insurance claim.

However, in case of areas notified for experimentation of individual loss

assessment, the farmer needs to intimate the crop loss within 48 hours to the

local revenue or agriculture department.

Need for Crop Insurance:

Crop insurance is one alternative to manage risk in yield loss by the farmers.

It is the mechanism to reduce the impact of income loss on the farmer (family and

farming). Crop insurance is a means of protecting farmers against the variations in

yield resulting from uncertainty of practically all natural factors beyond their

control such as rainfall (drought or excess rainfall), flood, hails, other weather

variables (temperature, sunlight, wind), pest infestation, etc.Crop insurance is a

financial mechanism to minimize the impact of loss in farm income by factoring in

a large number of uncertainties which affect the crop yields. As such it is a risk

management alternative where production risk is transferred to another party at a

cost called premium. The weather based crop insurance uses weather parameters as

proxy for crop yield in compensating the cultivators for deemed crop losses


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It provides a good alternative both to farmers and government. Farmers get on

actuarially fair insurance with swift payments at little administrative costs to the

government. Rainfall insurance is a specific form of weather insurance. As such

weather insurance is not yield insurance while crop insurance is. In both the cases

cultivators pass risk in yield to another party for a premium.

The insurance need for agriculture, therefore, can not be over emphasized as

it is a highly risky economic activity because of its dependence on weather

conditions. To design and implement an appropriate insurance programme for

agriculture is therefore very complex and challenging task. There are two

approaches to crop insurance, namely, individual approach where yield loss on

individual farms forms the basis for indemnity payment, and homogeneous area

approach where a homogeneous crop area is taken as a unit for assessment

of yield and payment of indemnity. In both the cases reliable and dependable yield

data for past 8-10 years are needed for fixing premium on actuarially sound basis.

Homogeneous area approach has the advantage of availability of data on yield

variations.

Data and Methodology:

This study is based on an analysis of data on Area, production and

productivity of selected crops which was taken from publications of Seasonal Crop


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Report of Tamil Nadu. Risk revealed by instability index of area , production and

productivity of selected crops is presented in Tables.

Further, the study used the data on area, yield and production for nine major

crops viz. paddy, Sorghum, maize, groundnut, chilles, banana, cotton and

sugarcane, total pulses for the period 1980-81 to 2004-05. Instability index in area,

production and yield for district level are calculated for five periods. The Districts

have a diversified cropping pattern in different regions depending upon agro-

climatic conditions and hence all the important crops were selected for the present

study.

There were 15 original composite Districts in the year 1980-81 that have

been later subdivided into as many as 29 Districts. For purpose of analysis, later

data relating to subdivided newer administrative Districts were merged with the

corresponding composite Districts to make the data comparable over years. Only

five administrative Districts Erode, Coimbatore, Pudukkottai, Kanniyakumari and

Nilgiris have remained without sub divisions. Erstwhile individual composite

Districts were considered for the analysis.

Benefits:

Crop Insurance helps the farmer by reducing his income fluctuation. It

enhances access to low cost organized credit. It also encourages farmers to adopt


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progressive farming practices and higher technology. From the Insurers point of

view crop insurance is a huge opportunity in rural India. It will help insurance

companies to shift from a mandatory business to a desired business Crop insurance

can be a critical instrument of development in the field of crop production. It will

have a multiplier effect on the economy.

The Road Ahead:

Crop insurance will offer a platform for linking Microfinance to Crop

Insurance. It provides an opening for a sustainable Public-Private Partnership.

Eventually insurance companies can encompass cross selling of other financial

products. Non-Annualized and Group Insurance are innovative ways of providing

insurance. If the Government permits we can link general insurance to life

insurance and offer a hybrid product.

Indian Agriculture: Dependence on Rainfall:

Indian agriculture is heavily dependent on rainfall which largely occurs

during monsoon season of about two and half months. The abnormal behaviour of

monsoon may cause natural disasters such as scarcity conditions or drought,

floods, cyclones, etc. Nearly two thirds of the cropped acreage is vulnerable to


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drought in different degrees. On an average 12 million hectares of crop area is

affected annually by these calamities severely impacting the yields and total

agricultural production.

About two thirds of the cultivated area has no irrigation. Even large part of

irrigated area does not get adequate water supply for intensive cropping (double

cropping). In rainfed areas sowing of kharif crops commences with the onset of

monsoons and the delay in the onset of monsoons delays sowing with its adverse

impact on yield. Further the growth of crops and realization of output are

determined by the quantum of rainfall and its distribution during the monsoon

season. Even sowing of rabi crops is determined by the soil moisture retained from

the rains especially during the later part of the monsoon season. Rainfall pattern

affects the irrigated crops also. Rainfall during flowering period washes the pollens

adversely affecting the crop yield. Excess rainfall may adversely affect the yield

realization. Heavy rains may submerge the growing crops in the early stages and

may cause lodging in the later stages of crop growth. In the catchments heavy rains

may cause floods in the plains. The floods disrupt the sowing schedule and damage

the standing crops resulting in reduced yield or even total loss of crops and farm

income in addition to loss of property. Other weather variables that affect yield

include sunlight, temperature, wind, hails. In fact since time immemorial weather

has been the major adversary that the farmers are not able to control. It has been


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established that 50 per cent of the variations in crop yield is due to variations in

rainfall.

In any climatic zone crop yield among the farms varies with the soil,

topography, tillage operations and use of four complementary inputs, namely, seed,

fertilizer, pesticides and irrigation (soil moisture). Seed is the index of productivity

which may be realized with the proper tillage practices, irrigation and fertilizer use.

Pesticides use avoids the loss in yield because of pests and diseases. Not only

quantum of these inputs but also their quality, and timings and method of use affect

the yield realization. These four dimensions of complementary inputs vary for the

individual farms in a year and for a farm over the years. In other words given the

soil and topography two sets of factors that effect yield on farms are climatic and

managerial. Managerial factors are in the control of farmers climatic factors are

not.

The loss of crop yield affects the farmer and farming in more than one ways.

Their inputs including labour get lost. The low yield of major crops means reduced

income and difficulty in arranging the necessities of life as well as inputs for the

next season. The repayment of outstanding loans becomes irregular some times

resulting in default. Though conversion of loans or their rescheduling helps the

farmers for eligibility for fresh loans from formal sources it may not solve their

liquidity problems completely. In some cases the farmers are compelled to divest


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and dispose off some assets created over past years. Some times, they have to

resort to costly borrowing from informal sources.

The capacity of agriculture to hedge itself from vagaries of nature is

considered crucial for development and growth of the sector in particular and

economy in general. The natural calamities can slow the pace and process of

development by reducing the food supplies and raw materials in the short run.

Successive failure of crops results in indebtedness of farmers with its adverse

impact on farming and farm economy and consequently the

economy in general.


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RISK AND UNCERTAINTY IN AGRICULTURER

Uncertainty refers to an event the outcome of which is not certain i.e. the

outcome may be one of the many possible outcomes. As such it can not be

measured. But certain probability may be attached to individual outcome. Risk on

the other hand refers to the impact of the uncertain outcome on the quantity or

value of some economic variable. The value of the economic variable may be on

either side of the mean value. Repeated events would result different outcomes

having a range of values. Thus risk refers to the variations in value of an economic

variable resulting from the influence of an uncertain event. Since the variations in

the value are measurable risk can be measured.

Agricultural production is an outcome of biological activity which is highly

sensitiven to changes in weather. Important weather variables such as temperature,

humidity, rainfall, wind etc. influence the biological process directly or indirectly.

For instance, low soil moisture due to poor precipitation in the pre-sowing period

adversely affects seed germination resulting in reduced plant population. The poor

precipitation during growth period results in stunted plant growth. Heavy rainfall

during early growth period causessubmersion of plants. Similarly hailstorms, wind

and cyclones damage the standing crops by lodging and uprooting especially the

perennials (trees and shrubs). High humidity may cause outbreak of pests and


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diseases. All these result in partial loss in yield and sometimes complete crop

failure and hence reduced income to farmers. In other words, deviations in the

weather variables from the normal adversely affect the crop yields and hence

production and income on individual farms. As variations in weather are more a

regular phenomenon crop yields are not stable. As if all this is not enough the

sword of uncertain agricultural prices always hangs on the farmers fate. As a

consequence farm incomes fluctuate violently from year to year. These variations

in income are referred to as risk. The variations in income due to changes in yield

are production risk and due to changes in price marketing risk. As such risk

(variations) may be measured in terms of standard deviation or coefficient of

variations for yield, prices and income.

In business risk is treated as a cost. Once in the business one has to bear this

cost. Since, risk is associated with the activity it cannot be eliminated so long the

activity is carried

out. It, however, can be managed i.e., can be reduced or minimized but at a certain

cost. Risk management, therefore, implies minimization of income loss either by

reducing variations in output or ensuring certain minimum price or guaranteeing

certain level of income. It is a process of appraising and reducing risk. The ways

devised to do so are referred to as risk management alternatives. These are

discussed under the following heads.


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a. Avoiding Risk:

Some of the production risks can simply be avoided. For instance,

eliminating more risky enterprises would minimize risk but at the cost of decreased

total production (returns). Laggards always try to avoid risk. They opt for assured

though low income enterprises.

b. Preventing Risk:

Many a time some risks could be prevented by taking advance action. For

instance, risk of loss in crop yield due to pest attack could be prevented by

following preventive pest control. The cost of this risk management alternative is

the cost of preventive pest control.

c. Sharing Risk:

This alternative of risk management is quite common in India. Important

example of risk sharing is the share lease of land to tenants. The production risks

are shared between the landlord and the tenant in the ratio they share some inputs

and the output. The cost of this alternative to the landowner would be equal to the

difference between the net income tenant earns less the cash rent he would have

paid for rental lease.


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d. Transferring Risk:

Risk may be transferred from one entity to another. For instance, marketing

risk could be transferred to buyers by way of forward contract. It guarantees to pay

an agreed price for the produce to be realized in future. The cost of this alternative

is the difference in value of output at post harvest/market price less the value

realized at the agreed price. Crop insurance is another example of transferring

production risk to another entity i.e., insurance company. In case the crop

prospects are reduced below certain minimum, proportionate indemnity is paid for

the expenditure incurred. The cost of this alternative is the premium paid by the

farmer.

e. Spreading Risk:

Risk may be spread over a number of enterprises with varying degree of risk

and of course with varying level of net income. This is known as diversification.

Diversification could be in terms of mixed farming, diversified farming or even

mixed cropping. The idea is not to put all eggs in one basket. It would ensure some

income realization from enterprises/crops even in the event of adverse weather

conditions etc. As net returns from combination of different enterprises/crops

would be less than the net returns from the most paying crop (pure) the difference

between the two would be the cost of this alternative.


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f. Taking Risk:

Taking risk could be one of the alternatives to manage risk where the

management cost is nil because no attempt is made to reduce risk. The idea is to

plan for maximum returns even at high risk. Innovators and early adopters are the

two categories of people who always are willing to take risk. They go for high

return enterprises exposing themselves to high risk.

Typical Measures against Agriculture Risk Technical measures:

Dykes or embankment to protect from flood, assured irrigation from

surface or groundwater sources, use of pesticides, fertilizer, judicious use of

land, crop rotation/mixed cropping, choice of plant varieties and animal

breeds, crop and animal husbandry practices, genetic modification of crop

pattern to adjust to the calamities, etc. Other than these, economic measures

like diversification of farm enterprises and by improvements in marketing and

institutional set-up might also work there. In many countries the state

provides aid or relief to the agricultural sector in the event of a natural

catastrophe as a matter of Public Policy. In some countries this is done on an

ad hoc basis while in others there are formal arrangements and even

legislation for this purpose. It is true that globally agricultural production


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could be significantly improved adopting such measures but the residual risk

from the natural hazards still affecting agricultural sector enormously. As

already mentioned, in the changing climate it might aggravate further.

Moreover, the technical measures sometimes found to be not effective like

some of them might be counter-productive.


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EVOLUTION OF CROP INSURANCE IN INDIA

The question of introduction of crop insurance in India was taken up for

examination soon after independence in 1947. A special study to work out

modalities of crop insurance was commissioned in 1947-48 following an assurance

given by the Ministry of Food and Agriculture to introduce crop and cattle

insurance in the country. The first aspect regarding the modalities of crop

insurance considered was whether it should be on Individual Approach or

Homogenous Area Approach. The individual approach seeks to indemnify the

farmer to the full extent of the losses and the premium to be paid by him is

determined with reference to his own past yield and loss experience. As such it

necessitates reliable and accurate data of crop yields of individual farmers for a

sufficiently long period for fixation of premium on actuarially sound basis. The

homogenous area approach envisages that in the absence of reliable data of

individual farmers and in view of the moral hazards involved in the individual

approach, a homogenous area would form the basic unit, instead of an individual

farmer. The homogeneous area would comprise of villages that are homogenous

from the point of view of crop production and whose annual variability of crop

productivity would be similar. The study favoured homogenous area approach.

Various agro-climatically homogenous areas to be treated as units and the

individual farmers in those area units would pay the same rate of premium and


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receive the same benefits, irrespective of differential loss in individual yields. The

ministry circulated the scheme for adoption by the state governments but the states

did not accept.

In 1965, the Central Government introduced a Crop Insurance Bill and

circulated a model scheme of crop insurance on compulsory basis to constituent

state governments for their views. The bill provided for the Central Government

framing a reinsurance scheme to cover indemnity obligations of the states.

However because of very high financial obligations none of the states accepted the

scheme. On receiving the responses of state governments, the subject was

considered in detail by an Expert Committee headed by the then Chairman

Agricultural Price Commission set up in July 1970 for full examination of the

economic, administrative, financial and actuarial implications of the subject.

Different experiments on crop insurance on a limited, ad hoc and scattered scale

started in 1972-73. By now we have the experience of a number of products

including some of weather insurance. In what follows is a brief on the past

experience and availability of different products at present.

Though, agricultural insurance is largely in the public domain some private efforts

especially in weather insurance have also been there for some time. Their

experience is not all that discouraging. The real challenge is to scale up the

distribution and ensure fast claim settlement. India, thus, has a publicly


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administered crop insurance scheme since 1972. All the variants of the scheme

introduced from time to time had flaws. Nevertheless India is not alone where

public crop insurance has not been successful. In both developed and developing

countries such insurance schemes have incurred losses without offering an

effective product.. Public crop insurance schemes are available to cultivators as

means of reducing the cost associated with crop failure. The schemes, however,

suffers from moral hazards and adverse selection and are very costly as payment

eligibility is determined by crop damage assessment for each individual farmer.

There is a feeling that it is not profitable proposition at all.


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RATIONALE OF CROP INSURANCE

The modern insurance sector can play a major role to solve the problems

mentioned there, and considerably strengthen the financial security of farmers.

Agricultural Insurance is a more efficient instrument and an effective

institutionalized mechanism for dealing with the problem. It helps to streamline the

relief efforts and reduces the direct and indirect costs on the national economy.

(Jain, 2004). For a number of reasons demand for crop insurance is increasing day

by day, which can be grouped as;

Evidence is accumulating of connections between climate change, and theincreasing incidence of crop damaging weather events of extreme severity.

Farming is becoming steadily more commercialized, with greater financialinvestment.

Farmer / investors and their banks frequently examine the feasibility of usinga financial mechanism i.e. insurance, in order to address part of the risk.

The World Trade Organization (WTO) regulations generally forbid willincrease subsidization of agricultural in governments from subsidizing


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agriculture directly; however, they permit the insurance premiums. In the

case, demand for crop insurance those economies that wish to implement a

policy of permitted subsidization of their farmers.

Insurance can also assist in managing the on-farm production risksconsequent changes in past management practices. Such changes are

increasingly required in order to address environmental protection and food

safety concerns

Problems associated with Crop Insurance Implementation:

There are some problems of implementing crop insurance at field level. The

major ones are finding the right client, the provider and the product design.

Firstly, without the right group of farmers and approach this might look like a

relief to farmers, which will hamper the objective of the programme.

Secondly, three different channels of providers can work:

1. Full service provision by an NGO/MFI,

2.

Full service provision by a mainstream insurance company and

3. Collaboration between the two within a partner-agent model


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Many issues influence the selection of the channel of provision for offering

crop micro insurance. These issues include the motivation and goals of the

provider, the costs of provision, human resources and information capabilities,

access to clients, access to reinsurance and support by subsidies and donors.

Another problem is product design. Developing a viable insurance plan begins

with the identification of the risks, deciding upon the method for estimating the

loss of crops, setting the premiums etc. Without the right amount of premium the

insurance will neither be viable nor sustainable for long.

Many countries, including the US, are doing crop insurance. In India, multi-

peril crop insurance, by the name of National Agriculture Insurance Scheme

(NAIS), is being implemented. This is implemented by Agriculture Insurance

Company of India, an Indian government-owned company. The scheme is

compulsory for all the farmers who take agricultural loans from any financial

institution. It is voluntary for all other farmers.

Obstacles to implement Crop Insurance in Developing countries:

o Lack of reliable long period data on crop yields and losseso Wide variety of agricultural practiceso General ignorance and poverty of farmerso Lack of trained personnel


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o Limited financial resources of the countrieso Lack of insurance consciousness amongst farmers

PAST EXPERIENCE IN CROP INSURANCE

First Ever-Individual Approach Scheme:

In 1972-73, the General Insurance Department of Life Insurance Corporation

of Indiaintroduced a Crop Insurance Scheme on H-4 cotton. Later in 1972, general

insurancebusiness was nationalized by an Act of Parliament, and the General

Insurance Corporation ofIndia (GIC) was set up. The new corporation took over

the experimental scheme in respect ofH-4 cotton in Gujarat. The Scheme was

based on "Individual Approach". Subsequently thescheme included groundnut,

wheat, potato and gram and was implemented in the states ofGujarat, Maharashtra,

Tamilnadu, Andhra Pradesh, Karnataka and West Bengal. The schemecontinued

till 1978-79. However, it covered only 3110 farmers for a premium of Rs.4.54

lakhs against claims of Rs.37.88 lakhs indicating its non-viability and non-

popularity


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Pilot Crop Insurance Scheme (PCIS)1979:

the background and experience of the aforesaid experimental schemes for

cropinsurance, a study was commissioned by GIC and entrusted to eminent

agriculturaleconomist, Prof. V.M. Dandekar. Based on the recommendations of

Prof. Dandekar, a PilotCrop Insurance Scheme was introduced by GIC in 1979.

The important features of the scheme were:

The scheme was based on "Area Approach".

1) The scheme covered cereals, millets, oilseeds, cotton, potato and gram.2) The scheme was available to loanee farmers only and on voluntary basis.3) The risk was shared between General Insurance Corporation of India and State

Governments in the ratio of 2:1.

4) The maximum sum insured was 100 per cent of the crop loan, which was laterincreased to 150 per cent.

5) A 50 per cent subsidy was provided for insurance charges payable by smallandmarginal farmers by the State Government and the Government of India on

50:50basis. The PCIS launched in 1979 continued till 1984-85 and was

implemented in 13 states. During this period it covered 6.27 lakh farmers for

total premium of Rs.196.95 lakhs against claims of Rs.157.05 lakhs.


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Comprehensive Crop Insurance Scheme (CCIS):

On the basis of experience gained from implementation of PCIS a

Comprehensive Crop Insurance Scheme (CCIS) was introduced with effect from

1st April 1985 by the Government of India with the active participation of State

Governments. The Scheme was linked to short term crop credit and implemented

on homogeneous area basis. Though the scheme was available to all states it was

not mandatory. In all 15 states and 2 union territories implemented the Scheme

until Kharif 1999. These were Andhra Pradesh, Assam, Bihar, Goa, Gujarat,

Himachal Pradesh, Karnataka, Kerala, Madhya Pradesh, Maharashtra, .Meghalaya,

Orissa, Tamilnadu, Tripura and West Bengal among the states and Andaman &

Nicobar Islands and Pondicherry among union territories. The states of Rajasthan,

Uttar Pradesh, Jammu & Kashmir, Manipur and Delhi had initially joined the

scheme but subsequently opted out after few years. The main features of the

scheme were:

1) It covered farmers availing crop loans from financial institutions for growingfoodcrops and oilseeds on compulsory basis. The coverage was restricted to 100

per cent of crop loan subject to a maximum of Rs.10 thousand per farmer.

2) The premium rates were 2 per cent for cereals and millets and 1 per cent forpulsesand oil seeds. Small and marginal farmers were given a subsidy of 50 per


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cent of the premium payable shared equally by the central and state

governments.

3) The central and state governments shared the premium and claims in the ratio of2:1.

4) The scheme was optional to state governments.5) The scheme was a multi-agency effort, involving Government of India,

StateGovernments, Banking Institutions and General Insurance Corporation of

India.

The summary of coverage particulars until Kharif 1999 since inception is

given inTable 1. The data clearly reflects on the non-viability of the scheme though

it was becoming popular. A majority of claims were paid in the states of Gujarat

Rs.1086 crores (47%), Andhra Pradesh Rs.482 crores (21%), Maharashtra Rs.213

crores (9%) and Orissa Rs.181 crores (8%).

Table 1: Summary of Coverage till 1984-85

Total number of farmers covered 7,62,65,438

Total area covered (Hectares) 12,75,70,282

Total sum-insured (Rs. Crores) 24,949

Total insurance charges (Rs. Crores) 404


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Total claim (Rs. Crores) 2303

Experimental Crop Insurance Scheme (ECIS)

While in operation attempts were made from time to time to modify the

CCIS as demanded by the states. During 1997 a scheme viz. Experimental Crop

Insurance scheme was introduced from Rabi 1997-98 which was implemented in

14 districts of five states. The scheme was similar to CCIS except that it was meant

for all small and marginal farmers with 100 per cent subsidy in premium. The

central and state governments shared the premium, subsidy and claims in 4:1 ratio.

The scheme was discontinued after one season due to administrative and financial

difficulties. The scheme covered 454555 farmers. The sum insured was Rs.168.11

crores and claims paid Rs.37.80 crores against premium of Rs.2.84 crores.

Pilot Project on Farm Income Insurance Scheme:

Under the project comprehensive risk insurance was provided against loss in

actual farm income against the guaranteed income in a notified area arising out of

adverse fluctuations in yield due to one or more non-preventable perils and adverse

fluctuations of market prices as measured against minimum support price (MSP)

for the crops covered. The project covered paddy and wheat crops and all farmers

(loanee on compulsory and others on voluntary basis) in selected states and


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districts which gave their consent for inclusion. The sum insured was guaranteed

income per unit area arrived at using average yield of past 7 years, current MSP

and indemnity level. The premium rates were actuarial for states and crops

(irrigated and un-irrigated separately) at 75 per cent subsidy for small and marginal

farmers and 50 per cent subsidy for others. Area approach was followed. Capping

and cupping of 20 per cent of MSP was applied. Claims exceeding 100 per cent of

premium less components of loading towards administration and marketing

expenses were borne by the Government of India. A commission of 5 per cent of

gross premium in case of non-loanee farmers was payable to the Rural Agents and

2.5 per cent of gross premium for all farmers was payable to banks as service

charges. In all 18 districts from 10 states for wheat and three districts from 3 states

for paddy were selected in 2003-04.

Sookha Suraksha Kavack (Drought Risk Insurance):

Sookha Suraksha Kavach was specially designed for Rajasthan to cover 23

districts and popular and widely grown crops like guar, bajra, maize, jowar,

soybean and groundnut. There is high spatial and temporal variation in rainfall

across West Rajasthan. The average rainfall ranges from 10mm in northwest part

of Jaisalmer to 40mm along the western fringes of the Aravalli range. Variation in

rainfall is as high as 39 per cent. The sum insured per hectare ranged from cost of


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cultivation to value of produce given in the Benefit Table showing claims at

different levels of deficiency in weighted and actual rainfall indices. The

premium ranged from 5 to 8 per cent. Claims assessment was based on rainfall

indices for June to October using appropriate weights and caps. The weighted

actual rainfall index was compared with weighted normal rainfall index to compute

deficiency in rainfall index. A claim trigger is basically a threshold deficiency

percentage of the weighted actual rainfall index as compared to normal rainfall

index. The deficiency greater than or equal to claim trigger makes the participating

farmers eligible for claims as per the Benefit Table. Rainfall indices are prepared

on the basis of data from specified rain gauge station. Claims are automated and

directly credited to bank account. The non-loanee insured are required to submit a

proof of insurance. The proposals are received up to 30th June.

National Agricultural Insurance Scheme:

Keeping in view the demands of States for improving scope and contents of

CCIS, abroad-based National Agricultural Insurance Scheme (NAIS) has been

introduced in thecountry from Rabi 1999-2000 with the following objectives.


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To provide insurance coverage and financial support to the farmers in the event of

failure of any of the notified crop as a result of natural calamities, pests and

diseases.

1) To encourage the farmers to adopt progressive farming practices, high valueinputs and higher technology in Agriculture.

2) To help stabilize farm incomes, particularly in disaster years.

Management of the Scheme:

In respect of loanee farmers, the banks play the same role as under CCIS. In

respect of non-loanee farmers, banks collect the premium along with the

declarations and send it to IA within the prescribed time limits. However, in areas

where IA has requisite infrastructure, a non-loanee farmer has the option to pay

premium along with declaration directly to IA within the time limits. The selection

of the banks would be on the basis of Service Area Approach of the RBI or at the

option of the Banks (where Co-operative Banks have good network). The

Department of Agriculture, Directorate of Economics and Statistics, Department of

Cooperation, Revenue Department of the state governments would be actively

involved in smooth implementation of the scheme. The scheme is be implemented

in accordance with the operational modalities as worked out by IA, in consultation

with Department of Agriculture and Co-operation. During each crop season, the


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agricultural situation is closely monitored in the implementing state / UT.

Department of Agriculture and district administration set up a District Level

Monitoring Committee (DLMC), who would provide fortnightly reports of

agricultural situation with details of area sown, seasonal weather conditions, pest

incidence, stage of crop failure (if any) etc. The operation of the scheme would be

reviewed annually, and modifications as may be required would be introduced.

Periodic Appraisal Reports on the Scheme would be prepared by Ministry of

Agriculture, the Government of India or Implementing Agency. Efforts would be

made by IA to obtain appropriate reinsurance cover for the proposed NAIS

in the international Reinsurance market.

Weather Based Crop Insurance Scheme

Weather Based Crop Insurance Scheme (WBCIS) is a unique weather based

insurance product designed to provide insurance protection against losses in crop

yield resulting from adverse weather incidences. In provides payout against

adverse rainfall incidence (both deficit and excess) during Kharif and adverse

incidence in weather parameters like frost, heat, relative humidity, un-seasonal

rains etc. during rabi season. As such it is not yield guarantee insurance. WBCIS

has been piloted in the country since Kharif 2003 season. Some of the states where

the scheme is piloted over the years are Andhra Pradesh, Bihar, Chattisgarh,


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Gujarat, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Rajasthan,

Uttar Pradesh etc.

Rabi Weather Insurance

Weather Insurance (Rabi) is a mechanism for providing effective risk

management aid to those individuals and institutions likely to be impacted by

adverse weather incidences.

The most important benefits of Weather Index Insurance are:

1) Trigger events like adverse weather events can be independently verified andmeasured.

2) It allows for speedy settlement of indemnities, as early as a fortnight after theindemnity period.

3) All growers, be it Small /Marginal; Owners or tenants/Sharecroppers can buythe weather insurance.

Wheat, Mustard, Gram, Potato, Masoor, Barley and Coriander are the major

Rabiseason crops mostly in the states of UP, MP, Maharashtra and Rajsthan. These

crops areextremely vulnerable to weather factors, such as excess rainfall, frost, and

fluctuation in temperature etc.


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Wheat Insurance Policy:

Wheat insurance policy is a unique technology based insurance product

combining crop vigour / biomass (Normalized Difference Vegetative Index -

NDVI) and weather (temperature / raifall) parameters. The NDVI component of

cover measured at peak vigour stage provides effective risk management aid to

those wheat growers who are likely to be impacted by poor growth of the crop

arising out of non-preventable natural factors. It is insurance against the likelihood

of diminished wheat yield resulting from lower NDVI within the specified taluka

preferably during February and/or high temperature consecutively for specified

number of days above specified levels in 1st and / or 2nd fortnight of March as

measured at RWS.

Benefits expected from scheme:

The scheme is expected to

1. Be a critical instrument of development in the field of crop production,providing financial support to the farmers in the event of crop failure.

2. Encourage farmers to adopt progressive farming practices and highertechnology in Agriculture.

3. Help in maintaining flow of agricultural credit.


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4. Provide significant benefits not merely to the insured farmers, but to theentire community directly and indirectly through spillover and multiplier

effects in terms of maintaining production and employment, generation or

market fees, taxes etc. And net accretion to economic growth.

5. Streamline loss assessment procedures and help in building up huge andaccurate statistical base for crop production.

Comparison of NAIS and WBGIS

S.

No.

National Agricultural

Insurance Scheme (NAIS)

Weather Based Crop Insurance

Scheme

(WBCIS)

1 Practically all risks covered

(drought, excess rainfall, flood,hail, pest infestation, etc.)

Parametric weather related risks like

rainfall, frost,heat (temperature), humidity etc. are

covered.However, these parametric weather

parametersappear to account for majority of crop

losses

2 Easy-to-design if historical

yield data up to 10 years is

available

Technical challenges in designing

weather indices

and also correlating weather indices

with yieldlosses. Needs up to 25 years historical

weather

data


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3 High basis risk [differencebetween the yield of the Area

(Block / Tehsil) and the

individual farmers]

Basis risk with regard to weather couldbe high for

rainfall and moderate for others like

frost, heat,humidity etc.

4 Objectivity and transparency is

relatively less

Objectivity and transparency is

relatively high

5 Quality losses are beyond

consideration

Quality losses to some extent gets

reflected

through weather index

6 High loss assessment costs No loss assessment costs

7 Delays in claims settlement Faster claims settlement


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CROP INSURANCE IN BANGLADESH

Crop Insurance offering Institutions in Bangladesh :

Though there are currently no crop insurance schemes in Bangladesh, a crop

insurance programme was introduced in Bangladesh by the Sadharan Bima

Corporation (SBC) in 1977. Insurance coverage was extended to the crops of

Aus, Aman and Boro rice, wheat, jute and sugarcane. Premiums were based on the

market values of the insured crops and ranged 3-5% of the value. The insurance

scheme covered losses from multiple perils including natural disasters. Under this

scheme, a total of 15,420 farmers were covered by crop insurance. The plan was

not successful as claims consistently exceeded premiums by a significant amount.

Recently, BRAC has been proactive in its efforts to reintroduce insurance for

farmers, and the government is also planning to restart the program. Green Delta

Insurance Company Limited and Bangladesh Institute of ICT in Development

(BIID) have signed a Memorandum of Understanding (MoU) recently to reduce

the risk of the farmers vulnerability and cover their financial fatalities. This MoU

will eventually lead to introduce crop insurance in Bangladesh, says a press

release. Farzana Chowdhury, additional managing director and group chief

financial officer, Green Delta Insurance, and Shahid Uddin Akbar, chief executive

officer, BIID, has signed the MoU. Traditionally, governments effort to manage


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the natural disaster revolved infrastructural measures such as embankments,

shelters and post disaster relief measures etc.

Why Crop insurance is so important for Bangladesh:

Bangladesh is a developing country, prone to flooding because of its unique

geographical location. Bangladesh is surrounded by India, Myanmar (Burma) and

the Bay of Bengal and has a relatively low topography. That is why, about 68% of

the country is prone to flooding. Three major river systems, Ganges, Brahmaputra

and Meghna, carry a huge flow of water from a wider catchment area lying in

India, Nepal, Bhutan and China through Bangladesh towards the sea. And as the

melting rate of glaciers in Himalaya is increasing because of changing climate, the

scale and frequency of flood is also increasing.

In essence, this makes the country the biggest river delta of the world. During

normal monsoon, 25-30% of the land area is flooded and in extreme case the area

affected is nearly 70%. This is why Bangladesh, seen as the hardest hit by the

climate change, will suffer most in the agriculture sector. Agriculture accounts for

one quarter of Bangladesh's GDP and is the source of employment for more than

80 per cent of the rural population, 65% of them are directly related to agriculture.

Another 15 to 20 % are indirectly related to it. Rural people's 60 to 70 % income is


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generated from agriculture; so, the food security and income of these farmers' good

harvest and production has to be ensured.

Marginal farmers have insufficient means to cope with floods and disasters.

Along with it, the poverty rate among the rural population is high; about 20 per

cent of the rural households live in extreme poverty and 30 per cent are considered

moderately poor. In Bangladesh, most farmers lack financial capability to reinvest

in production of next crop after losing one to flooding.

More than half of agricultural production in Bangladesh is contributed by the

crop sub-sector. The inherent risk associated with agricultural crop production is

the key challenge in the development and poverty reduction program of

Bangladesh. Traditionally, government efforts to manage natural hazards have

revolved round infrastructural measures such as building embankments, shelters

and post-disaster relief measures etc. But in recent years, the concept of 'pro-active

adaptation' has gained foothold in poverty alleviation programmes to deal with

natural disaster risks. The National Adaptation Programme of Action (NAPA),

prepared by the Ministry of Environment and Forest (MOEF), suggests crop

insurance so that marginal farmers can be better prepared to cope with the

increased risk of crop damage.

Although crop insurance cannot increase the yield directly, it ensures that the

farmer can cultivate in the next season after a disaster. Moreover, if crop insurance


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companies and banks or financial institutions work together, then on the basis of

crop insurance as collateral, financial institutes can give loan to the farmers. This

loan can substantially increase the yield by giving the farmer the access to the best

quality seeds and required.

Current scenario of Crop insurance in Bangladesh:

Agriculture comprises nearly 15 percent of Bangladeshs GDP. Considering

the importance of this sector in providing for over 145 million people, it is

surprising that there is no comprehensive crop insurance system in place for

farmers.


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Crop insurance is a valuable tool to protect against financial risks stemming

from crop damage due to unforeseeable hazards droughts, floods, pests, and so

on. The mechanics are quite simplea farmer can take out an insurance policy on

his expected yield of crops, and pay a fixed premium every month to the insurance

company. If bad weather results in under production, or destroys the farmers

crops, the insurance policy pays out, ensuring that the farmer is protected

financially and is not left with very little income for the year.

Many types of sophisticated mechanisms of insurance exist to protect against a

variety of risks. For instance, in developed markets, futures contracts are available

that lock in prices for future delivery of a certain volume of crops. With these

contracts, farmers are protected against losses due to fall in prices of agricultural

produce in the event of bumper production.

In theory, crop insurance offers additional benefits besides financial

protection. It encourages innovation in production methods by encouraging risk

taking. For instance, insurance limits the downside risk to farmers who may be

interested in using newer varieties of seeds and fertilizers in their fields, but are

unable to do so because of the uncertainty surrounding the production yields of

these new varieties.

Insurance also protects financial institutions that lend to farmers. Thus in the

event of crop failure and subsequent loan defaults, lenders are protected and are


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able to continue their operations. The strength and health of these financial

institutions is critical for the success of the agriculture sectorwithout access to

lines of credit, poor farmers would be unable to invest in fertilizer or irrigation

technology.

Given Bangladeshs reliance on its agricultural sector, and its propensity for

natural disasters, crop insurance schemes can play a crucial role in stabilizing and

promoting food production while reducing the likelihood of sudden spikes in rural

poverty.

Although the concept of crop insurance has been around for decades, its

applications in most developing countries fail due to lack of planning and

implantation. Crop insurance was implemented in Bangladesh in 1989 as a

government program, but was shut down in 1995 after massive losses. Recently,

BRAC has been proactive in its efforts to reintroduce insurance for farmers, and

the government is also planning to restart the program.

There are many potential missteps to the success of such programs. Insurance

works by spreading individual risks across a large pool of buyers. Because of

Bangladeshs numerous rivers and flat geography, it becomes harder to spread

these risks when flooding occurs, a large segment of the cultivated land would

likely be affected, triggering payouts that may cripple the insurance providers.


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Raising the premiums can prevent this problem, but finding a rate that is not cost-

prohibitive to farmers is a matter of detailed analysis and research.

Setting the comprehensiveness of insurance policies is another matter. What

types of risks should crop insurance cover? Studies in India have shown that

providing a wide range of coverage can be inefficient. Leaving private sector

players to decide which types of risks to cover will inevitably lead to a market with

the most profitable schemes; on the other hand, governments are notoriously

inefficient in deciding what types of coverage to provide, and may also be

influenced by political factors. Striking a balance is difficult, yet critical.

Finally, the schemes must be implemented so as to reduce the common

problems of insurance moral hazard (when a farmer deliberately neglects his

crops and then collects on payments) and adverse selection (when only the people

who need insurance the most tend to buy it, thus the insurance provider is left with

a pool of the riskiest buyers).

Causes of failure of the Crop Insurance project in Bangladesh (197796)

- The program was introduced hastily without adequate preparation like a clear

policy and well defined structure and proper training of the Sadharan Bima

Corporationstaffs and other relevant people. Including Sadharan Bima Corporation


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officials, the other people involved in the processes were seriously lacking

adequate understanding on CI process.

- The CI project was not integrated with the mainstream agriculture development

policy, rather a discrete effort by SBC simply as an insurance scheme. It could be

integrated with the other agri-credit systems like those of Krishi Bank and BRDB

as a package program. Later it could be integrated with micro-credit programs as

well. There was no appreciation and support from Central Bank regarding as well.

Actually, instead of a simple insurance scheme, it should be introduced as a means

of supporting farmers to recover from disaster, which required integrating different

agencies involved together.

- Later the program was also expanded abruptly without evolving any workable

models and fine tuning of the programme packages and delivery mechanism. At

the beginning two Thanas were selected as pilot project sites to experiment, and

later its expansion should be based on the experience gathered at two sites with

proper research and evaluation. However, the expansion was made as usual with

the same structure adopted from the very beginning.


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paddy, maize and ground nut is Rs. 10,000. While the premium for paddy and

maize is Rs. 276, it is Rs. 386 for ground nut. The compensation for various crops

is in the range of Rs. 5,000 an acre to Rs. 40,000. The premium is in the range of

Rs. 138 to Rs. 2,647.

Current issues on crop insurance in Tamil Nadu:

For Dindigul District government has sanctioned Rs.25 lakh to assist farmers

in insuring their crops for 2009-10. Paddy, maize, cotton, millet, groundnut,

sugarcane, banana, onion and all kharif crops, will be insured during this season.

Those who wanted to insure their crops could contact the Primary Agriculture

Cooperative Banks and nationalised banks for details. Even leased farmers can

avail the benefits. The State government would pay 50 per cent of the total

premium. Compensation would be given for crop damage owing to flood, cyclone,

drought, fire and lightening and pest attacks.

In case of Nagapattinam District Farmers in the Cauvery delta region have

urged the Government to extend the time limit for paying crop insurance premium

to November 30 to those farmers, who had not secured loans from cooperatives

and commercial banks. Thanjavur District Farmers Association said farmers were

entitled to have their crops insured by paying a premium of two per cent of the

total cost of cultivation. As per the national agricultural insurance scheme, the


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premium would be deducted from loans of farmers, who got loans from primary

agricultural cooperative banks and commercial banks on or before November 30

every year. But farmers, who could not get loans or avail themselves of loans from

commercial banks or cooperatives, should have paid the premium before

September 30 directly through the respective PACBs with all particulars

including the total extent of the land and expenses incurred towards cost of

cultivation and also large number of farmers did not pay the premium before

September 30 since they anticipated that they would get crop loan in time.

The Cauvery Delta farmers, in an appeal to the State Government, have

sought extension of time limit in paying crop insurance premium to November 30.

Thanjavur District Farmers Association, farmers are entitled to avail themselves of

crop insurance by paying a premium of 2 per cent of the total cost of cultivation.

As per the scheme in vogue, the premium could be deducted from the loans

obtained from primary agricultural cooperative banks and the commercial banks on

or before November 30 every year.

Crop insurance scheme is gaining popularity among farmers in the State.

There had been a gradual increase in the number of farmers covered under the

scheme. About 5.5 lakh farmers had been covered in the last financial year

compared to one lakh farmers in 2005, and about three lakh farmers in 2006.

Premium rates for different crops per hectare has been fixed by the Agricultural


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Insurance Company of India and paddy, dhal, groundnut, cotton, sugarcane,

turmeric and oilseeds are some of the crops covered. The State Government is

meeting 50 per cent subsidy on premium and for this the State has allocated Rs. 3

crore in 2006-07, Rs. 15 crore in 2007-08 and Rs. 40 crore in the current financial

year.

Apart from this certain diseases associated with the intensity of monsoon

showers were also identified. Possibility of insurance coverage for flowers would

also be explored after a discussion with the higher authorities of State and Central

Government.

Instability in Tamil Nadu Agriculture :

Instability in farm production is causing serious shocks to supply and farm

income and there is a growing concern about increased volatility in farm

production, prices and farm income. The study has estimated instability in nine

major crops in the state of Tamil Nadu. The increase in instability in agricultural

production is considered adverse for several 27reasons. It raises the risk involved

in farm production and affect farmers income and also the decisions to adopt high

paying technologies and make investments in farming. Instability in production

affects price stability and the consumers, and it increases vulnerability of low

income households to the market. Instability in agricultural and food production is


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also important for food management and macro economic stability.

This state of Tamil Nadu has a diverse set of crops covered under insurance

scheme. Risk associated with agriculture and various crops was estimated by using

instability index as an indicator of risk as below:

Instability index = Standard deviation of natural logarithm (Yt+1/Yt).

Where, Yt is the crop area / production / yield / farm harvest prices / gross

returns in thecurrent year and, Y t+1 represent the same in the next year. This

index is unit free and very robust and it measures deviations from the underlying

trend (log linear in this case). When there are no deviations from trend, the ratio

Yt+1/Yt is constant, and thus standard deviation in it is zero.


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Instability Indices for major crops grown in Tamil Nadu


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During the period 1980-89, the instability in area and productivity was lowest

in groundnut and showed high instability in area for Maize as compared to cotton.

Sugarcane had highest instability in production and yield. Instability was found

low in yield in the case of maize, whereas cotton and sorghum showed least

instability in area and production during 1990-99. The instability index of yield did

not increase much over time in the case of rice, whereas it almost declined in

groundnut from 1980-1989 to 1990-1991. Despite lot of concern about

susceptibility of cotton to various pests in recent years, its productivity has

shownfewer fluctuations after 1980-89.

Sugarcane had highest instability in production and yield. During 1980-99

least instability was found in area for groundnut and banana whereas production

and yield in the case of total pulses higher in case of sugarcane. The cotton and

sorghum showed least instability in area and production during 1990-99. Chillies

had highest instability in production and yield. Least instability in yield was found

in Maize. 31

Among the nine crops, paddy production showed lowest year-to-year

fluctuations. Besidesfluctuations in production, prices received by the farmers for

their produce are equally important in causing variations in farm income. It is

important to point out that the area showed much lower fluctuations than those in

yield and production. Instability in yield of sugarcane and cotton showed a decline


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over and small increase in the case of pulses.

Among the nine crops, area under groundnut and banana showed the lowest

instability, yield instability showed a decline in cotton over time, Instability in

production was found higher than that in area, yield during 1980-89 than others.

The paper has also estimated the instability index at district level to find

dispersion and compare the change in area, production and productivity of these

crops during the periods considered in the study. The district wise instability index

for different crops is given in Tables A.2 through A.10.

The district wise analysis of instability index for paddy indicated highest

production instability in Erode district among various districts especially in the

period 1990-2005. Cuddalore and Ramnad districts showed higher instability in

terms of rice production in all these periods. Thanjavur district exhibited relatively

less production instability. Overall in the state of Tamil Nadu the instability index

was in the range of 0.1 to 0.25 which indicates the production of rice is relatively

more stabilized in the state. The dryland crop of Sorghum exhibited relatively

higher instability during the period 1980-89 than the other periods. During the

other periods of study the increase in the area under dry land and less

water consuming crops and water scarcity attributed for the lower instability in

sorghum crops in the state. Cuddalore district showed higher instability followed

by Kancheepuramfor the period 1980-2005. Instability in yield was higher than the


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instability in area in almost all districts for Sorghum crop. Insufficient

technological development and varietal improvement in millets and minor millets

research resulted high yield instability in the

state that ultimately resulted higher production instability.

Districts like Tirunelveli and Trichy known for irrigated agriculture suffered a

higher instability for maize crop in all the periods under study. At the same time it

is interesting to note that dry district like Ramnad and Dharmapuri also exhibited

relatively high instability for the crop. Coimbatore and Erode districts noted for

their poultry sector are relatively stable in maize production since the product of

maize cultivation is the main stay for the large number of poultry units existing in

these districts for years. As far as cotton is concerned, the crop which contributes

more in the agricultural trade of the state and the country suffered hugely in major

cotton growing districts like the erstwhile Trichy, Coimbatore and Erode districts

as indicated by the increasing trend in the instability index for cotton in these

districts over years. Groundnut an important oilseed crop of the state is relatively

stable in terms of production as the area under this crop exhibited relatively smaller

instability index in the state. Since groundnut crop is suitable for cultivation in

both irrigated and rainfed conditions, the instability is relatively low.

The district wise analysis of instability index for sugarcane revealed that the

instability index is relatively high in Salem district followed by Tirunelveli and


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Private Participation:

ICICI Lombard, a national Indian insurance company piloted in 2003 a

formal rainfallinsurance scheme for groundnut and castor in semi-arid tropical

areas of India. The insurancepolicy was developed with the technical assistance of

Agricultural and Rural DevelopmentDepartment of the World Bank and was

designed as insurance against deficit rainfall. Similarproducts adapted to the

specifics of the local environment were also developed and sold innorthern India.

Two insurance policies were designed for the two crops. The coverage of both

the policies was for the prime crop season, the Kharif. The policy triggers, phases

andpayouts try to maximize the correlation between economic loss and rainfall

events. Thetriggers are set in mm of accumulated rainfall as measured in local

weather stations. If it rainsless than 1st trigger level with in a given period there is

a payout per mm of deficientaccumulated rain per acre insured. If the accumulated

rainfall is below the 2nd trigger levelthen there is a maximum lump sum payout of

the insurance. In order to maximize thecorrelation between rainfall and crop

production Kharif season is divided in to three differentphases each with its own

trigger and payout: sowing, flowering and harvest. In addition to deficit rainfall in

some areas there is also a risk of excess rainfall towards the end of Kharif.The

policy has additional payout for excess rain for those areas. The amount of the

payout iscalibrated to the expected economic loss for the area (mandal).


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The future focus:

There are about 100 million farmers in India who work the hardest and yet

seem to suffer the most. Their occupation is fraught with the highest risk as it is

totally at the mercy of nature. It becomes the primary duty of Government to think

of the welfare of farmers which would necessitate thinking of ways and means of

reducing the risk in farming. 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 thereforeincrease 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 is remote. Insurance products

for the rural areas should be simple in design and presentation so that they are

easily understood.

Results and Discussion:

The main focus of this paper is to examine how far the year to year

fluctuations in crop output changed from one period to another period.

Accordingly instability in area, production and yield of important crops has been


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computed at district level in Tamil Nadu state during different periods. Instability

in crop production is expected to vary over districts. There is lot of variation in

climatic conditions natural resource endowments, the pattern of agricultural

growth and development. The paper has estimated the instability at state level and

then has compared it with district level estimates to find dispersion and compare

the change in instability over time, based on the state level data representing

aggregates and district level data representing disaggregates. The instability index

reveals that higher the value higher is the instability in the particular variable. In

the case of occurrence of risk, higher the instability index, higher is the risk. This

index is unit free and very robust and it measures deviations from the underlying

trend (log linear in this case). Instability at State Level Variability in agricultural

production consists of variability in area and yield and their interactions.

Variation in area under a crop occurs mainly in response to distribution, timeliness

and variations in rainfall and other climatic factors, expected prices and availability

of cropspecific inputs. All these factors also affect the variations in yield. Further,

yield is also affected by outbreak of diseases, pests, and other natural or man-

Crop Insurancefgb

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