igidr-ifpri- agricultural income insurance scheme- kv gouri, basix

Agriculture Income Insurance Scheme

IGIDR-IFPRI ConferenceDelhi, July 24, 2014

Agriculture in India

• Agriculture provides livelihood for two-

thirds of the country’s population

• It contributes to 15% of Indian GDP

• Provides employment to 57% of the

workforce

• Raw material source for large number of

Industries

2

Agriculture in India

Policy Concerns:

To ensure that livelihoods of the people dependent on

Agriculture are preserved

Traditional Approaches:

Improving Productivity through better variety of seeds,

Increase land under irrigation, ensure marketing of produce

Support Mechanisms:

Minimum Support Price

Insurance Schemes

3

Risks in Agriculture

Production Risks

• Weather and Climatic aberrations

• Pest and disease attacks

• Improper farming practices

Output Risks

• Price volatility

• Policy related

4

Risk Mitigation

Mechanisms that dealt with income volatility

Yield insurance

Crop Insurance Schemes

Drought Insurance

Rainfall Insurance

Price insurance

Minimum support price

Governments to buy and hold stock for price

stabilization

5

Risk Mitigation through Insurance

Agricultural insurance

• Addresses the risk to output and income resulting from

various natural and manmade events.

• Plays an important role in sharing the risks of farmers

in an affordable form.

• Helps the farmers to quickly recover from damages and

losses.

• Promotes savings and investment as regular premium

paid for it.

• Farmers can get loans against the security of insurance

policy from insurance companies and banks.

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Agriculture Insurance Schemes in India

• National Agriculture Insurance Scheme (NAIS)

Covers crop failure due to natural calamities

• Farm Income Insurance (Discontinued)

Protection by insuring production and market

risks (yield & Price). Ensures minimum

guaranteed income

• Comprehensive Crop Insurance scheme

Insurance linked to credit. Low premiums.

Covers upto 100 % loan

• Weather Based Crop Insurance Scheme (WBCIS)

Insurance of losses due to vagaries of weather

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Support Mechanisms

Price & Non-Price instruments to support farmer’s

Income

• Subsidies on inputs (especially fertilizer, water, power

and credit)

• Mechanism for determining fair price (CACP).

• Comprehensive Crop Insurance Schemes

• Procurement systems for major cereals and

maintenance of buffer stock.

• PDS to provide stable demand to farmers and supplies

at constant controlled price to consumers.

• Tariff policies to protect domestic producers from

unregulated flows of agricultural commodities.

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Agriculture Income Insurance

Income= Yield x (Price-Cost) per ton

Insuring Yield , Income or Price?

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To protect against Production Risk

To protect against price and market

risks

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Agriculture Income InsuranceCANADA BRAZIL CHINA

Name of

Insurance

Scheme

Farm Income Protection Act Income Insurance Program China Agriculture Insurance

Scheme

Features Covers both agriculture and

livestock. Guarantees an

income based on the

premium paid by the farmer.

Productivity coverage with a

price guarantee is offered by a

private insurer

Covers both agriculture and

livestock, but coverage is taken

mainly for livestock

Funding

Source

Private. However, premium

subsidy program launched in

2007 to increase coverage

Private, But premium subsidy

program launched in 2005 to

increase offtake

Private, but premium subsidy

provided by government in 2007 to

increase coverage. Government

covers approximately 80% of total

premium

What is

covered

Total Income of farmer can

be covered, but coverage can

be selected based on risk

appetite of the farmer

Total income of farmer based

on productivity as well as

historical prices

Total income from damage of crops

or loss of livestock

Coverage Five provinces in Canada

presently offer this insurance

for farmers

About 10% of the total planted

area of Brazilian agriculture

Administered by provincial

governments. Coverage remains

patchy.

Cost Premium is approximately

between 2% and 8% of the

total sum assured

Premium is approximately 9%

of the total sum assured

8- 10% of total sum assured.

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Features of the Agri Income Insurance

• Protects farm incomes-Guaranteeing income to

farmers

• Ensure Sustainable production by encouraging

long-term investment

• Enhance Food and Livelihood security

• Encourage Crop diversification

• Increase Competitiveness

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Which is the best insurance mechanism? Yield, Price

or Income ?

Since aggregate price and aggregate yield are

inversely correlated , we hypothesise

σ income =<σ yield x σ price

Therefore overall claims under farm insurance scheme will be lower

than either yield or price insurance

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How expensive will the Scheme be?

It is an opportunity to target those who need

subsidy most. Targeting the small and

marginal farmers with capping on sun

assured allows reduced expenditure than

other type of subsidies such as input

subsidies which increases use of inputs and

over production

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How will the scheme be managed?

• Administered by state Governments with

significant level of decentralization

• Yield assessment by gram panchayats vetted

through process of social audit or community

audit

• Use Farmer Producer organizations (FPOs) as

vehicles for delivery

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How will the pay-outs be determined

Expected Pay-out (EP) = SA x DF x (EI-AI)/EI

SA-Sum Assured, will have a upper limit to cover

only small and marginal farmers

DF-Discount factor by Insurance Company

EI-Estimated Income for that season assured on the

basis of yield and price measurement

AI-Average Income is the long-term average income of

a farmer

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Measurement of yield

• Yield would be measured on the basis of a pre-

agreed weather index which is highly correlated

with past yields, such as rainfall total or by period.

Measurement of Price

• Price would be measured as the average price

prevailing in three pre-agreed accessible mandis for

seven days before the pre-agreed pay-out date.

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Total Premium : The total premium to the

Insurance company should cover the total

pay-out, operating costs and profit

Total Premium= EP+OC+∏

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Farmer’s Premium : The premium payable by the

farmer is dependent on the probability of the

expected income falling below Average Income which

is a multiple of the probability of yield falling below

threshold yield based on weather index and

probability of price falling below certain level in three

pre-agreed mandis for seven days before the pre-

agreed pay-out date

Р income = Р yield x Р price

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Unit of Insurance: Per acre, Per crop for specific

piece of land

Cut off yield is required to decide whether crop is

eligible to be classified as yield shortfall

measured on the basis of pre agreed weather

index correlated to past yields

Price shortfall is measured as average price

prevailing in three pre agreed mandis for seven

days before the pre agreed pay out date

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Product to cover expected income and actual

income

Product to cover all or any causes for the gap

viz.Yield shortfall and Price shortfall

Causes for yield shortfall: Drought, Flood, Winds,

Hail storms, pest attack, disease incidence, fire,

theft, cattle grazing etc.

Causes for Price shortfall: Excess supply due to

bumper crop, imports, banning of exports,

withdrawal of MSP.

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Critical aspects for success of the scheme

For a success of a insurance scheme, it is critical that

a large pool of farmers register who have different

levels of risk. It is therefore necessary to avoid

Adverse selection: Refers to a situation when

farmers who more likely need insurance self-

select themselves for the insurance policy.

Moral hazard : Situation where farmer sees little

or no incentive to keep risks of farming methods

low as the insurance policy already covers the

risks

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Advantages

• Direct Income benefit to farmers through cash

transfers

• Guaranteed income to farmers that acts as

incentive to invest in farming

• Can promote sustainable farming

• Ensures minimum living income to small and

marginal farmers to move out of vicious circle of

poverty

• Can reduce Input subsidy burden on the

Government

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What Income Insurance aims at

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Low/Uncertain Income

Low Investment

Low SavingsLow Productivity

Income

Insurance

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