Agriculture insurance in India, problems and prospectus

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Agriculture production and farm incomes in India are frequently affected by natural disasters such as droughts, floods, cyclones, storms, landslides and earthquakes. Susceptibility of agriculture to these disasters is compounded by the outbreak of epidemics and man-made disasters such as fire, sale of spurious seeds, fertilizers and pesticides, price crashes etc. All these events severely affect farmers through loss in production and farm income, and they are beyond the control of the farmers.

With the growing commercialization of agriculture, the magnitude of loss due to unfavorable eventualities is increasing. The question is how to protect farmers by minimizing such losses. For a section of farming community, the minimum support prices for certain crops provide a measure of income stability. But most of the crops and in most of the states MSP is not implemented. In recent times, mechanisms like contract farming and future? s trading have been established which are expected to provide some insurance against price fluctuations directly or indirectly.

But, agricultural insurance is considered an important mechanism to effectively address the risk to output and income resulting from various natural and manmade events. Agricultural Insurance is a means of protecting the agriculturist against financial losses due to uncertainties that may arise agricultural losses arising from named or all unforeseen perils beyond their control (AIC, 2008). Unfortunately, agricultural insurance in the country has not made much headway even though the need to protect Indian farmers from agriculture variability has been a continuing concern of agriculture policy.

According to the National Agriculture Policy 2000, “Despite technological and economic advancements, the condition of farmers continues to be unstable due to natural calamities and price fluctuations”. In some extreme cases, these unfavorable events become one of the factors leading to farmers? suicides which are now assuming serious proportions (Raju and Chand, 2007). Agricultural insurance is one method by which farmers can stabilize farm income and investment and guard against disastrous effect of losses due to natural hazards or low market prices.

Crop insurance not only stabilizes the farm income but also helps the farmers to initiate production activity after a bad agricultural year. It cushions the shock of crop losses by providing farmers with a minimum amount of protection. It spreads the crop losses over space and time and helps farmers make more investments in agriculture. It forms an important component of safety-net programmes as is being experienced in many developed countries like USA and Canada as well as in the European Union. However, one need to keep in mind that crop insurance should be part of overall risk management strategy.

Insurance comes towards the end of risk management process. Insurance is redistribution of cost of losses of few among many, and cannot prevent economic loss. There are two major categories of agricultural insurance: single and multi-peril coverage. Single peril coverage offers protection from single hazard while multiple –peril provides protection from several hazards. In India, multi-peril crop insurance programme is being implemented, considering the overwhelming impact of nature on agricultural output and its disastrous consequences on the society, in general, and farmers, in particular.

Agricultural Insurance market is on the threshold of a spectacular growth. The support measures proposed by the government in the horticulture sector; potential of organic farming; growing clout of aromatic and medicinal plants; Bio-diesel plants; contract farming; corporate farming and integrated insurance (supply chain and ware housing) etc are likely to put agricultural insurance on high pedestal. The government underlined its priorities for agriculture in 2004 by setting a target of doubling agricultural credit in next three years.

A large chunk of credit for agriculture would be supported by insurance collateral. Considering consumers? preference for branded agricultural products; big corporate houses too have taken up corporate farming, increasing the demand for insurance. Agricultural insurance in future though is likely to be largely demand driven, the efforts of the government to support and finance insurance products and / or facilitate congenial environment as meaningful risk management tool would further enhance the potential and credibility of agricultural insurance.

Despite progress of irrigation and improvement in infrastructure and communication the risk in agriculture production has increased in the country. The risk is much higher for farm income than production, as is evident from lower risk in area and higher risk in production. State wise results show that only in the states where irrigation is very reliable, it helped in reducing the risk. Those states where irrigation is not very dependable continue to face high risk. In some states farmers face twin problem of very low productivity accompanied by high risk of production.

As, with the passage of time, neither technology nor any other variable helped in reducing production risk, particularly in low productivity states, there is strong need to devise and extend insurance products to agricultural production. 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 therefore increase 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. This requires renewed efforts by Government in terms of designing appropriate mechanisms and providing financial support for agricultural insurance. Providing similar help to private sector insurers would help in increasing insurance coverage and in improving viability of the insurance schemes over time.

With the improved integration of rural countryside and communication network, the Unit area of insurance could be brought down to a village panchayat level. Insurance products for the rural areas should be simple in design and presentation so that they are easily understood. There is lot of interest in private sector to invest in general insurance business. This opportunity can be used to allot some target to various general insurance companies to cover agriculture. To begin with, this target could be equal to the share of agriculture in national income.

Good governance is as important for various developmental programmes as for successful operation of an agriculture insurance scheme. Poor governance adversely affects development activities. With the improvement in governance, it is feasible to effectively operate and improve upon the performance of various programmes including agriculture insurance. Crop insurance program works as collateral security, therefore also benefit banks. When claims are paid, banks first adjust the claim against their outstanding dues, and balance if any is credited to the farmers.

Therefore, the Crop Insurance Scheme also benefits the banks. In Philippines, banks are made to share a part of the premium burden. For rice where the premium is 10. 81 per cent, borrowing farmer pays only 2. 91 per cent, while the government pays is 5. 90 per cent and the lending institution, 2. 00 per cent. A similar arrangement can be recommended for participating banks in India. Such arrangement would also bring non-loanee farmers into the fold of banking network, thus institutional lending of crop loans.

Remote sensing is the emerging technology with potential to offer plenty of supplementary, complimentary and value added functions for agricultural insurance. The present technology available shall not only provide the insurers with tools like crop health condition, area-sown confirmation, yield modeling which are very important, but also strengthen the position of insurers vis-a-vis re-insurance market. Some of the possible applications of for agricultural insurance could be as follows: 1.

Estimating actual acreage – sown at insurance unit level to check the discrepancy of „over-insurance? (area insured being more than area sown). 2. Monitoring crop health through the crop season, and investigation on ground for advance intimation of yield reduction. 3. To check adequacy and reliability of CCE data. 4. Developing satellite based crop productivity models for cereals and other crops. There is a need to promote private sector participation in agriculture insurance. First license for the private sector, was issued in October 2000.

As of today, there are ten private sector insurers in the general insurance business: Reliance, Tata-AIG, Royal Sundaram, IFFCO-Tokio, Bajaj-Allianze, ICICI-Lombard, HDFC- Chubb, Cholamandalam, ECGC and Star Health. The latter two, are limited to only a few lines of general insurance. The fact remains that these insurers have not yet undertaken agricultural insurance to a significant extent. Only two companies in the private sector have initiated crop insurance, albeit on a small scale. ICICI-Lombard was the first company to experiment with rainfall insurance in 2003.

The concept is further extended to weather insurance since 2004. IFFCO-Tokio General Insurance (ITGI), the second company in private sector, started piloting rainfall insurance, since 2004. The Insurance Regulatory and Development Authority (IRDA) has stipulated that every new insurer undertaking general insurance business, has to underwrite business in the rural sector to the extent of at least 2 per cent of the gross premium during the first financial year, which is to be increased to 5 per cent during the third financial year of its operation.

Crop insurance is included in the rural sector insurance for this purpose. The business targets stipulated in rural insurance apparently are very small. Those who do not meet even these small targets, are getting away by paying penalties of nominal amounts. If private insurers are to be spurred to enter the rural insurance market in a significant manner, the business targets have to be raised substantially by IRDA. The experience of government supported and subsidized crop insurance and the recent entry of private insurers, raise questions about the co-existence of government and private agriculture insurance.

One view is that the private sector will be unable to compete with government insurance, given the subsidies and access to the administrative machinery for delivering insurance. An alternative view is that given only 15 per cent coverage by government insurance, the private sector can carve out a reasonable market for itself based on improved efficiency, better design and superior services. Here one can even think of public-private partnership in providing agriculture insurance as against public-private competition.

However, it is possible only when crop insurance can be run in a more professional manner with clear objectives. Providing Government help to private sector insurers would help in increasing insurance coverage and in improving viability of the insurance schemes over time. There should also be insurance provided by seed companies so that farmers who paid high prices for seeds such as GM crops did not suffer in case of crop failure.

In order to promote public – private participation in agriculture insurance GOI should follow the USA model to work out premium rate through an exclusive technical agency, and offer the product to all insurers. Insurers can implement the product, enjoying the same level of support and subsidy. As a variation from the USA method, the government would not provide reinsurance support and reimbursement of administrative and operating expenses, as these costs would be loaded in the actuarial rates.

The government can decide whether or not different insurers compete in the same area, or allocate specific crops and areas to a particular insurer (Planning Commission, 2007). With increased commercialization of agriculture price fluctuations have become highly significant in affecting farmers? income. Accordingly, market risk is now quite important in affecting farmers? income. We feel that implementation of market insurance to cover price risk is much easier than yield insurance.

This can be done by requiring interested farmers to register their marketable surplus with insurance agency or market committee at the time of sowing of crop. The insurance agency should offer insurance cover to include price guarantee which could be minimum support price in some cases or market based price from the past. Farmers should pay premium for this kind of price insurance and initially government should share some burden of the premium. During harvest if price in the notified market falls below the guaranteed price then insurance agency should pay indemnity.

Modalities to be worked out for implementation of this kind of model. The farming community in India consists of about 121 million farmers of which only about 20 per cent avail crop loans from financial institutions and only three fourth of those are insured. The remaining 80 per cent (96 millions) are either self-financing or depend upon informal sources for their financial requirements. Most of the farmers are illiterate and do not understand the procedural and other requirements of formal financial institutions and, therefore, shy away from them.

Therefore, while the institutional loanees are insured compulsorily under the NAIS, only about 15 per cent of the non-loanee farmers avail insurance cover voluntarily. This is quite indicative of the enormous insurance potential that exists for addressing the needs of the farming community and enhancing the overall efficiencies as also the competitiveness of the agriculture sector. This also signifies the tremendous potential of agriculture insurance in the country as a concept, which can mitigate the adverse impacts that such uncertainties would have on the individual farmers.

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