Crop Insurance in India

Contents

1. Crop Insurance and Agricultural Risks - An Introduction        2

1.1 Overview        2

1.2 Agricultural Value Chain and Risk        4

1.3 Risks in Indian Agriculture        5

1.3.1 Yield Risk        5

1.3.2 Price Risk        5

1.3.3 Roles of future markets        6

2. Analysis of Crop Insurance in India        7

2.1 Outline        7

2.2 Crop Insurance Schemes in India        7

2.2.1 National Agriculture Insurance Scheme (NAIS)        8

2.2.2 National Crop Insurance Programme (NCIP)        9

3. Challenges in Crop Insurance        14

3.1 Key Issues        14

3.1.1 Unreliability and inaccessibility of recorded information        14

3.1.2 Proper yield assessment        14

3.1.3 Claim Settlement        15

3.1.4 High premium rates and no obligation of banks in sharing percentage of premiums        15

3.1.5 Lack of awareness        15

3.1.6 Inappropriate risk advisory mechanisms        15

3.1.7 Lack of Public-Private partnership        15

4. Opportunities and Recommendations        16

4.1 Opportunities        16

4.2 Recommendations        16

References        18

1. Crop Insurance and Agricultural Risks - An Introduction

1.1 Overview

Recent years have seen Agriculture emerging as a business rather than just a necessary activity.  Farmers are now seen as small and budding entrepreneurs. And as with other businesses, there is involvement of risk in it too and so farmers have to think of systematic & organized options for risk mitigation. One of the effective techniques for this is Insurance, particularly crop insurance. The following chart shows the major cause behind Crop Insurance indemnity program in US.

[pic 1]

Exhibit 1

(Source: US Department of Agriculture)

North America leads in global agricultural insurance premium. The total downside risk for agricultural insurance was more than US$20 billion, and almost 80 percent of this was reinsured. North America alone accounted for downside of more than US$12 billion.

Exhibit 2

(Source: Adapted from Schneider and Roth, 2013)

[pic 2]

Exhibit 3

(Source: Adapted from Swiss Re, 2013)

Growth in Agricultural insurance has mostly been due to the following three reason. First, there has been increase in value of agricultural production and it is now seen more as a business. Second, increase in value of agricultural assets has also increased the need for insurance. Third, development of agricultural insurance markets thus leading to more demand. The following curve shows the continuous increase in Insurance premiums on YoY basis.

[pic 3]

Exhibit 4

(Source: Author from Swiss Re, Hannover Re and Munich Re, 2009)

In India, Agriculture has been the backbone of Indian economy since beginning.  Currently, Agriculture is the primary source of livelihood for around 55% of the population. This automatically implies that risk management in Agriculture sector is one of the key focus areas.

Unfortunately, Natural disasters like floods, droughts, storms, cyclones etc. as well as man-made disasters like fire, fertilizers and pesticides, sale of spurious seeds have drastically affected agriculture production output as well as farmer’s income in India. So there has been constant work towards mitigating and minimizing this risk across the agricultural value chain. Agricultural Insurance is always considered the most essential for it. Other mechanisms like contract farming and derivatives market have also helped to bring down the volatility in prices. Recently, Prime Minister of India launched the Pradhan Mantri fasal Bima Yogana in this respect. It guaranteed a uniform premium of 2% for Kharif Crops, 1.5% for Rabi crops and 5% for commercial and horticultural crops.

Agriculture insurance is not only limited to crop insurance, but it also applies to other agri-business elements like livestock, bloodstock, forestry, aquaculture and greenhouse.        

[pic 4]

Exhibit 5

(Source: Swiss Re, 2009)

1.2 Agricultural Value Chain and Risk

      [pic 5]

The above chart shows the various stakeholders involved in Agriculture value chain. Every part has certain risk involved with it as mentioned below:

[pic 6]

1.3 Risks in Indian Agriculture

1.3.1 Yield Risk

One of the major factors of yield risk in India is Rainfall. The irrigation system, being unreliable and inadequate, puts so much pressure on unpredictable rainfall.

The annual total rainfall in India has 11% variation, while the same is 10%-44% of the annual southwest monsoon, depending on the meteorological divisions (Annexure 1). So rain variability has a systematic component of risk associated with it along with an unsystematic component. Apart from that, crops require appropriate amount of rainfall at appropriate amount of time in their crop cycles, thus the pattern of rainfall becomes more important.

Weather affects agriculture in another way. It plays an important role in the growth of pests and diseases. But no major step can be taken in this direction as the relationship between factors of weather, such as temperature, rainfall etc. and pests, crops is quite complex and specific.