Report of the Joint Group

Contents S. No Description Page No.

Executive Summary I - VIPrologue : 1- 4

1. Crop Insurance Programmes in India – A Review1.1. Evolution 1.2. National Agricultural Insurance Scheme (NAIS)

i) Salient features ii) Coverage statisticsiii) Experience Analysisiv) Main issues and perceptions of interest groups

1.3. Farm Income Insurance Scheme (FIIS) i) Basic objectivesii) Experience of FIISiii) Concerns & Constraints

1.4. Weather Insurancei) Concept ii) Advantages over traditional crop insurance iii) Summary of products introduced upto Kharif 2004

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:

:

5-22 5-66-15

16-19

19-22

2. Remote Sensing Technology2.1. Background2.2. Remote Sensing Applications in Agriculture in India2.3. Remote Sensing Applications in Crop Insurance in India

: 23-30

3. Crop Insurance – A Way Forward 3.1. National Agricultural Insurance Scheme (NAIS)

i) Fundamental Issues ii) Suggested Improvementsiii) Actuarial regime

3.2. Farm Income Insurance Scheme (FIIS) i) Key Issuesii) Recommendations

3.3. Weather Insurance i) Future directions ii) Agri-Met & blended Products

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:

:

31-6631-47

48-49

50-66

4. Modified National Agricultural Insurance Scheme : 67-775. Scope for Package Insurance Policy : 78-836. Private Sector Participation in Crop Insurance : 84-90 7. Financing Crop Insurance

7.1. Crop insurance penetration targets 7.2. Financing mechanism

i) Subsidy levels in other countries ii) Farmers’ Capacity to pay Premiumiii) Government’s support

7.3. Financial outlay of the Government (existing & future)

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:

91-104

8. Recommendations’ Summary : 105-1099. References : 11010. Appendices : i - xlvi

Joint Group Report

PROLOGUE

Background:

National Agricultural Insurance Scheme (NAIS) was introduced w.e.f. Rabi 1999-

00 substituting the Comprehensive Crop Insurance Scheme (CCIS), which was

in operation between 1985 and 1999. Despite addressing the shortcomings

noticed during implementation of CCIS and launching of improved version of crop

insurance in the form of NAIS, the scheme failed to appeal to the farming

community. Consequently, only about 10 percent of the farmers could be

covered under the scheme. This is despite nearly 75 percent subsidy in the

scheme, which came in the form of subsidy in premium and deficit financing of

claims. Though the scheme provided for annual review, no review worth

mentioning has been carried out since inception. The government therefore is

keen to address some of the constraints/ bottlenecks to make the scheme more

attractive to the farmers.

The National Agricultural Policy (NAP) 2000 in Para titled Risk Management

reads:

“Despite technological and economic advancements, the condition of farmers

continues to be unstable due to natural calamities and price fluctuations. National

Agriculture Insurance Scheme covering all farmers and all crops throughout the

country with built in provisions for insulating farmers from financial distress

caused by natural disasters and making agriculture financially viable will be made

more farmer specific and effective. Endeavour will be made to provide a package

insurance policy for the farmers, right from sowing of the crops to post-harvest

operations, including market fluctuations in the prices of agricultural produce”.

Union Budget 2004-05: Crop Insurance

The text of Honorable Union Finance Minister’s 2004-05 budget speech

concerning Risk Mitigation on agriculture is produced below:______________________________________________________________________________________

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“The Agriculture Insurance Company (AIC) was incorporated in December 2002.

The National Agricultural Insurance Scheme (NAIS), which insures the yield or

crop, is in operation since Rabi 1999-2000. AIC is redesigning the scheme. We

shall continue with the scheme and make another evaluation. Meanwhile, a pilot

scheme insuring farm income (as opposed to crop) has been launched in 19

districts across 12 States during Rabi 2003-04. The government has decided to

extend the scheme to Kharif 2004 in order to assess its feasibility. I wish to add

that a weather insurance scheme appears to be more promising, at least in the

design. AIC is introducing the scheme on a trial basis in 20 rain gauge stations in

the current crop season. It is difficult to tell at this stage which of the three

schemes will be successful. Agriculture insurance as well as livestock insurance

are complex products and have to be designed with care. I wish to re-affirm

government’s commitment to provide insurance cover to farming and livestock.”

Bearing in mind the shortcomings of existing crop insurance programme, and the

commitment of the Government to the farming community, review of the existing

crop insurance scheme was felt imperative.

Constitution of Joint Group:

The Hon’ble Prime Minister while reviewing the status of National Common

Minimum Programme (NCMP) directed the Ministry of Agriculture to constitute a

Joint Group to expeditiously study the improvements required in the existing crop

insurance schemes. Ministry of Agriculture vide letter no. 16012/05/2004-Credit

II dated 31st August 2004 constituted a Joint Group under the chairmanship of

Shri A K. Singh, Additional Secretary (Ministry of Agriculture). The other

members of the Group are Shri Satish Chander, Joint Secretary (Ministry of

Agriculture), Shri. G. C. Chaturvedi, Joint Secretary (Ministry of Finance) and

Shri. Suparas Bhandari, Chairman-Cum-Managing Director (Agriculture

Insurance Company of India Limited).

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Terms of the Reference

The Terms of the Reference of the Group were as under:

i) To review the status position of existing Crop Insurance Schemes i.e.

National Agricultural Insurance Scheme (NAIS), Pilot Project on Farm

Income Insurance Scheme (FIIS), Varsha Bima Yojna and other

agriculture related schemes floated by Private General Insurance

Companies.

ii) Improvements required in National Agricultural Insurance Scheme.

iii) To develop broad parameters/ concept paper of an appropriate and

farmers friendly crop insurance scheme after taking into account the

professional inputs obtained from experts and private sector general

insurance companies.

iv) To make assessment of up front subsidy, if any, to be paid by the

government.

The communication for constituting Joint Group is appended as Annexure-1.

Meetings and Interactions

The Joint Group held 15 meetings on 10th, 21st & 29th September; 20th & 27th

October and 3rd, 6th, 9th, 10th, 15th, 18th, 19th, 25th November, 10th & 15th December,

2004.

The Joint Group in the course of discussions, consulted experts in different fields.

These included- Dr. J.S. Parihar, Group Head (ARG), ISRO (Ahmedabad), Dr. S

K. Goel, Commissioner for Agriculture (Maharashtra), Dr. R. K. Parchure,

Professor at National Insurance Academy (Pune), Dr Gurbachan Singh, ADG

(Agro), ICAR (Delhi), Dr J.P. Mishra, ADG (PP&IPR), ICAR (Delhi), and Shri

Rajiv Mehta, Member Secretary, CACP (Delhi).

The Group made extensive use of statistical data available with implementing

agency of NAIS in analyzing the present situation. The Group also made

conscious effort to examine views and suggestions received from various interest

groups – Farmers, States, Members of the Parliament, Banks etc.______________________________________________________________________________________

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The Group also interacted with many private sector insurers, took presentations

on private sector perspective of crop insurance, and explored possibilities of

package policy and weather insurance.

Members of the Joint Group also visited Space Applications Centre (SAC) within

Indian Space Research Organization (ISRO), Ahmedabad to understand the

applications of remote sensing technology in agriculture, particularly in the field of

crop insurance. Shri G.C. Chaturvedi and Shri Suparas Bhandari of the Group

also interacted with ‘National Commission on Farmers’ to understand their

perceptive of risk mitigation and role of crop insurance.

This Report is the result of collective efforts of many people. The Joint Group

gratefully acknowledges inputs and guidance received from all concerned and

wishes to thank all those, too numerous to be mentioned by name, who

contributed to various aspects of preparing this report.

The report is being submitted by the Joint Group with the hope that its

recommendations and the initiatives based on these recommendations will find

acceptability by all the stakeholders who look forward to having a better crop risk

protection system, committed to the cause of minimizing the impact of crop failure

on the income cycle of farmers.

(A. K. Singh)Additional Secretary

Ministry of Agriculture Government of India

(Chairman)

(Suparas Bhandari)CMD,

Agriculture Insurance Company of India Ltd.

(Member)

(Satish Chander)Joint Secretary

Ministry of Agriculture Government of India

(Member)

(G. C. Chaturvedi)Joint Secretary

Ministry of Finance Government of India

(Member)______________________________________________________________________________________

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1. CROP INSURANCE PROGRAMMES IN INDIA – A REVIEW

1.1. Evolution:

Agriculture continues to be the mainstay of Indian economy. It contributes 22

percent of GDP, provides 58 percent of employment, sustains 69 percent of

population, produces all the food & nutritional requirements of the nation,

important raw materials for some major industries, and accounts for about 14

percent of exports. Heavy dependence on weather conditions and its long

production cycle makes agriculture a risky economic activity.

Crop insurance is a mechanism to protect the farmers against uncertainties of

crop production due to natural factors, beyond the control of farmers. It is also a

financial mechanism, which minimizes the uncertainty of loss in crop production

by factoring in large number of uncertainties having impact on crop yields,

thereby distributing the burden of loss. In a country like India, where crop

production is subjected to vagaries of weather and large-scale damages due to

attack of pests and diseases, crop insurance assumes a very vital role.

An all-risk Comprehensive Crop Insurance Scheme (CCIS) for major crops was

introduced in 1985, coinciding with the introduction of the VII-Five-year plan and

subsequently National Agricultural Insurance Scheme (NAIS) w.e.f. Rabi 1999-

00. These Schemes have been preceded by years of preparation, studies,

planning, experiments and trials on a pilot basis. A brief chronology preceding

the present NAIS would be a fruitful introspective exercise:

1. Scheme based on ‘individual’ approach (1972-1978): The first ever

scheme started on H-4 cotton in Gujarat, extending later to a few other crops

& states. The scheme covered 3110 farmers for a premium of Rs. 4.54 lakhs

and paid claims of Rs. 37.88 lakhs.

2. Pilot Crop Insurance Scheme – PCIS (1979-1984): PCIS was introduced

on the basis of report of late Prof. V.M.Dandekar and was based on

‘Homogeneous Area’ approach. The scheme covered food crops, oilseeds,

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Joint Group Report

cotton, & potato; and confined to loanee farmers on voluntary basis. The

scheme was implemented in 13 states and covered 6.27 lakh farmers for a

premium of Rs. 196.95 lakhs and paid claims of Rs. 157.05 lakhs.

3. Comprehensive Crop Insurance Scheme – CCIS (1985-1999): The

scheme was expansion of PCIS, and was compulsory for loanee farmers.

Premium rates were 2 percent of sum insured for cereals & millets and 1

percent for pulses & oilseeds, with premium and claims shared between

Centre & States in 2:1 ratio. The scheme was implemented in 16 States & 2

UTs and covered 7.63 crore farmers for a premium of Rs. 403.56 crores and

paid claims of Rs. 2319 crores. The State of Gujarat received 47 percent of

total claims, followed by AP (21 percent), Maharashtra (9 percent) and

Orissa (8 percent). Deficit rainfall accounted for 75 percent of claims,

followed by cyclones / floods (20 percent). The claim ratio (claims: premium)

was 5.75 and loss cost (claims: sum insured) was 9.29 percent.

4. Experimental Crop Insurance Scheme – ECIS (Rabi 1997-98): ECIS was

introduced as an experiment to additionally cover non-loanee small /

marginal farmers in 14 districts of 5 States with 100% premium subsidy. It

covered 4.55 lakh farmers for a premium of Rs. 2.84 crores and paid claims

of Rs. 37.80 crores.

1.2 National Agriculture Insurance Scheme (NAIS):

NAIS was introduced during Rabi 1999-00 by improving the scope and content of

erstwhile CCIS.

1.2.1. Salient features of the Scheme:

(a) States and Areas covered: The Scheme is available to all States and

Union Territories on optional basis. A State opting for the Scheme will have

to continue for a minimum period of three years.

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Joint Group Report

(b) Farmer covered: All farmers including sharecroppers and tenant farmers

growing the notified crops in the notified areas are eligible for coverage. The

scheme is compulsory for farmers availing loans and voluntary for others.

(c) Crops covered: The Scheme covers

Food crops (Cereals, Millets & Pulses)

Oilseeds

Annual Commercial / Horticultural crops of Sugarcane, Cotton,

Potato, Onion, Chilly, Turmeric, Ginger, Jute, tapioca, annual

Banana & annual Pineapple

(d) Sum insured: The minimum Sum Insured (SI) in case of loanee farmer is

the amount of loan availed, which can be further extended upto 150% of

average yield. For non-loanee farmer, it can be upto value of 150% of

average yield.

(e) Premium Rates: The premium rates are 3.5% for oilseeds & bajra and

2.5% for cereals, millets & pulses during Kharif; 1.5% for wheat & 2% for

other food crops and oilseeds during Rabi. The rates for annual

commercial / horticultural crops are actuarial.

(f) Premium subsidy: Small / Marginal farmers are subsidized in premium to

the extent of 50 percent, to be shared equally between the Centre & States.

The premium subsidy is, however, to be phased out over five years period

on sunset basis. Accordingly the eligible subsidy during 2004-05 is 10

percent.

(g) Scheme approach: The scheme covers losses from sowing to harvesting, and operates on ‘area approach’ for widespread calamities. For

this purpose a unit of insurance is defined which may be a Village

Panchayat, Mandal, Hobli, Circle, Phirka, Block, Taluka etc. to be decided

by the State govt. / UT. However, each participating State govt. / UT was

required to reach the level of Village Panchayat as the unit within a

maximum period of three years.

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Joint Group Report

The Scheme is to operate on ‘individual’ basis for specified localized

calamities. However, individual assessment of losses is experimented only

in a few areas – one block / taluka in each state.

(h) Loss assessment, Levels of Indemnity & Threshold Yield: The Threshold

Yield (TY) or Guaranteed Yield for a crop in a Insurance Unit shall be the

moving average yield based on past three years in case of Rice & Wheat

and five years yield in case of Other crops, multiplied by the level of

indemnity. Three levels of Indemnity, viz., 90%, 80% & 60% corresponding

to Low Risk, Medium Risk & High Risk areas shall be available for all crops.

The insured farmers of unit area may also opt for higher level of indemnity

on payment of additional premium.

If the ‘Actual Yield’ (AY) per hectare of the insured crop for the defined area

falls short of the specified ‘Threshold Yield’ (TY), all the insured farmers

growing that crop in the defined area are deemed to have suffered shortfall

in their yield.

(i) Sharing of Risk: Until transition is made to actuarial regime, Govt. of India

and States shall share claims beyond 100% of premium for food crops &

oilseeds on 50:50 basis. In case of annual commercial / horticultural crops,

claims beyond 150% of premium in the first 3 or 5 years and 200%

thereafter are borne by Centre and State on 50:50 basis

A copy of National Agricultural Insurance Scheme is appended as Annexure-2

1.2.2. COVERAGE UNDER NAIS: Following 23 States & 2 UTs are presently implementing the scheme:

1. Andhra Pradesh, 2. Assam, 3. Bihar, 4. Chhattisgarh, 5. Goa, 6. Gujarat, 7.

Haryana, 8. Himachal Pradesh, 9. Jammu & Kashmir, 10. Jharkhand, 11.

Karnataka, 12. Kerala, 13. Madhya Pradesh, 14. Maharashtra, 15. Meghalaya,

16. Orissa, 17. Rajasthan, 18. Sikkim, 19. Tamilnadu, 20. Tripura, 21. Uttar

Pradesh, 22. Uttaranchal, 23. West Bengal, 24. A&N Islands, 25. Pondicherry.

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Joint Group Report

Following 5 States & 5 UTs are not implementing the scheme:

1.Arunachal Pradesh, 2. Manipur, 3. Mizoram, 4. Nagalad, 5. Punjab, 6.

Chandigarh, 7. Dadra, Nagar & Haveli, 8. Daman & Diu, 9. Delhi, 10.

Lakshwadweep.

Till Rabi 2003-04, NAIS covered 461.99 lakh farmers for a premium of Rs. 1242.66 crores and finalized claims of Rs. 4751.78 crores. The season-wise

coverage since its inception is given in Table – 1 below:

Table- 1Season No. of

covered States/UTs

Farmers covered (lakhs)

Area covered (lakhs ha.)

SumInsured

(Rs.crores)

Premium(Rs. crores)

Claims(Rs. crores)

Farmers Benefited

Kharif      2000 17 84.09 132.20 6903.38 206.73 1222.48 36352522001 20 86.96 128.88 7502.46 261.62 493.27 31457762002 21 97.69 155.33 9431.69 325.47 1821.85 43370412003 23 79.70 123.30 8114.06 283.26 634.17 1617802TOTAL 348.44 539.93 31951.59 1077.08 4171.77 12735871Rabi1999-00 9 5.80 7.81 356.41 5.42 7.69 552882000-01 18 20.92 31.11 1602.69 27.79 59.49 5266972001-02 20 19.55 31.46 1497.51 30.15 64.66 4533252002-03 21 23.27 40.38 1837.53 38.50 188.34 9263922003-04 22 44.01 92.21 3027.09 63.72 259.83 1070725TOTAL 113.55 202.97 8321.23 165.58 580.01 3032427Grand Total 461.99 742.90 40272.82 1242.66 4751.78 15768298

Note: Claims of Rabi 2003-04 are provisional, as a few States are yet to report

1.2.3. Experience Analysis:

Analysis of crop & crop-group wise, state wise and farmer category wise

performance of NAIS upto Rabi 2003-04 (since its inception) is presented in

Tables 2 - 4:

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Joint Group Report

Table-2National Agricultural Insurance Scheme: Crop-wise Premium (as % total), Claims (as % total), Claims Ratio, and Loss Cost for Rabi 1999-00 to Rabi 2003-04 (All Seasons) (Premium & Claims Rs. Crores)

Crop Premium (% of total

for all crops)

Claims (% of total for all

crops)

Claim Ratio (Claims/

Premium)

Loss Cost (Claims as % of Sum Insured)

Paddy (rice) 328.06(26.40%)

1225.02(25.81%)

3.73 9.08

Wheat 34.09(2.74%)

116.23(2.42%)

3.41 5.15

Jowar 22.39 (1.807%)

179.21(3.78%)

8.00 19.79

Bajra 16.62(1.34%)

61.21(1.27%)

3.68 18.01

Other cereals 17.34(1.40%)

130.74(2.70%)

7.54 18.17

All cereals 418.50(33.68%)

1712.41(35.98%)

4.09 9.67

Groundnut 279.93(22.47%)

1603.08(33.78%)

5.74 19.70

Other oilseeds 90.15(7.25%)

301.37(6.37%)

3.34 11.05

All oilseeds 369.40(29.73%)

1904.45(40.16%)

5.16 17.52

Pulses 45.13(3.63%)

305.64(6.46%)

6.77 16.94

Sugarcane 57.17(4.60%)

120.18(2.50%)

2.10 2.88

Cotton 287.91(23.17%)

498.71(10.50%)

1.73 12.44

Other Commercial

Crops

64.54(5.19%)

210.38(4.41%)

3.26 11.53

All Commercial crops

409.62(32.96%)

829.27(17.40%)

2.02 8.31

All crops 1242.65(100%)

4751.77(100%)

3.82 11.78

Source: Agricultural Insurance Company of India (AIC) Ltd.

As can be seen from Table-2, the Loss Cost is 11.78 percent in case of NAIS as

compared to 9.29 for the Comprehensive Crop Insurance Scheme. However, the

claim ratio for the NAIS is lower i.e. 3.82 as compared to 5.75 for the CCIS, even

though the indemnity as a percentage of the sum ensured is higher. This is

because of higher premium rates under NAIS. The average premium in case of

the NAIS was 3.08 percent, compared to 1.62 percent under CCIS.

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Joint Group Report

Groundnut crop accounts for a major part of the indemnity in the NAIS (Table-2).

It has the highest Loss cost of 19.70 per cent and accounts for 34 per cent of the

total indemnity though its share in the premium is only 22 per cent. Oilseeds and

Pulses have high loss cost at 17.52 percent and 16.94 percent, while annual

commercial crops and cereals have lower loss cost at 8.31 percent and 9.67

percent.

Six States, viz. Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Andhra

Pradesh, and Orissa account for major part of the indemnity. As can be seen in

Table- 3, these States account for 83 per cent of the sum insured, 88 per cent of

the premium and 91 per cent of the claims for the entire country. The States of

Gujarat and Karnataka posted the maximum loss cost with 21.57 percent and

18.78 percent, respectively. Andhra Pradesh posted least loss cost with 6.92

percent, while Maharashtra, Madhya Pradesh and Orissa had loss cost in

between, at 9.24 percent 10.04 percent and 11.90 percent, respectively. Deficit

rainfall accounted for 90 percent of claims.

Table -3NAIS: Coverage & Financial aspects of Major States

for Rabi 1999-00 to Rabi 2003-04 (All Seasons)

States Sum Insured (Rs.crores)

Premium (Rs.crores)

Claims(Rs.crores)

Claims Ratio (Claims / Premium)

Loss Cost (Claims as % of Sum Insured)

Gujarat 7663.57 324.16 1652.68 5.10 21.57Karnataka 3790.01 112.52 711.77 6.33 18.78

Maharashtra 6571.50 231.96 607.45 2.62 9.24Andhra Pradesh 8667.45 230.59 599.84 2.60 6.92Madhya Pradesh 3718.87 117.94 373.66 3.17 10.04

Orissa 3141.07 78.50 373.76 4.76 11.90Total of 6 States 33552.47 1095.67 4319.16 3.94 12.88% of All India 83.31% 88.17% 91.34%

Others 6720.34 146.98 432.62 2.94 6.43Grand Total 40272.81 1242.65 4751.78 3.80 11.74

Source: Agricultural Insurance Company of India (AIC) Ltd

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Non-Loanee Participation and Adverse Selection:

Non-loanee farmers’ participation in NAIS is mostly guided by the nature of the

season, meaning poor participation during normal seasons and high participation

during adverse seasons. Further, the non-loanee farmers’ participation had come

from those areas and crops, which most likely were to report high crop losses in

the states of Maharashtra, Karnataka and Orissa. Their participation was

predictably highest during adverse seasons from the above states. This kind of

selective participation is known as “adverse selection” in insurance parlance.

Based on coverage between 1999 and 2003-04, the loss cost for non-loanee

farmers was a staggering 29 percent, compared to 10 percent for loanee farmers

(Table-4). In other words, the claim experience of non-loanee farmers is nearly

three times higher compared to loanee farmers. Extension of cut-off dates for

participation of non-loanee farmers particularly during Kharif seasons has sent

the loss costs through the roof. The situation certainly merits corrective action in

terms of advancing cut-off dates for non-loanee participation. There is also a

strong case for not extending the cut-off dates after it has been fixed once at the

beginning of the season.

Table-4

NAIS - Loss Cost for Loanee & Non Loanee since RABI 1999-2000

(Rs. in crores)S.NO. SEASON LOANEE NON LOANEE

Sum Insured Claims Loss Cost Sum Insured Claims Loss Cost1 Rabi 1999-00 348.21 7.10 2.04 8.20 0.59 7.182 Kharif 2000 6807.91 1185.91 17.42 95.47 36.57 38.303 Rabi 2000-01 1532.07 44.44 2.90 70.61 15.06 21.324 Kharif 2001 7182.26 406.99 5.67 320.20 86.25 26.945 Rabi 2001-02 1455.77 47.20 3.24 41.74 17.46 41.836 Kharif 2002 8247.67 1450.55 17.59 1184.03 369.35 31.197 Rabi 2002-03 1682.38 148.94 8.85 155.06 39.40 25.418 Kharif 2003 7439.94 386.28 5.19 652.45 247.89 37.999 Rabi 2003-04 2117.96 72.17 3.41 932.72 189.62 20.33

TOTAL 36814.16 3749.59 10.19 3460.48 1002.19 28.96

1.2.4. Main Issues and Perceptions:______________________________________________________________________________________

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Joint Group Report

Despite high claim ratio and low premium rates, farmers are not coming forward

to avail crop insurance in a big way. It is a pointer that the scheme is falling short

of expectations of farmers. NAIS was discussed at different levels both formally

and informally to understand the reasons for low acceptability. The suggestions

and views expressed for improving acceptability of NAIS are listed below:

Coverage related:

Package policy covering crop and other assets of the farmers to be made

available through single window

Inclusion of perennial horticulture crops

Inclusion of vegetable crops

Pre-sowing risks should be covered in instances where sowing is

prevented.

Post harvest losses should be covered

The Maximum coverage to be restricted to 100% of the threshold yield

Irrigated and unirrigated areas within a crop should be notified separately

The scheme should be restricted to Loanee farmers only

Specific measures such as improved marketing facilities for inclusion of

large number of non-loanee farmers under the scheme

The seasonality discipline should be uniform for both Loanee and Non

loanee farmers

Premium related:

Actuarial premium rates in case of Annual Commercial and Horticulture

crops be capped at 3 percent. Alternatively, the scheme be made

voluntary for these crops.

Restoring premium subsidy in case of Small and Marginal farmers

All small and marginal farmers in rainfed areas to be given 100 percent

subsidy in premium.

Regional premium rating to be adopted instead of uniform State Level

Rates.______________________________________________________________________________________

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Joint Group Report

Farming community feels that premium rates are already high, while

implementers / administrators feel it is low.

Indemnity related:

Claims to be paid immediately after loss

Ad-hoc/on account settlement of claims

Individual assessment of claims

Objective loss assessment procedures

Guaranteed yield to be based on 3-5 best years out of past 10 years

Indemnity limit should be at least 80%

No claim bonus to be allowed

Single series of Crop Cutting Experiments (CCEs) should not be insisted

Individual assessment in case of localized calamities should be

implemented in all areas

Areas where stipulated number of CCEs is not completed should be

considered for claims by using appropriate method such as clubbing with

neighboring areas etc.

Insurance Unit size should be small so that losses reflected are closer to

reality

Surplus premium over and above claims in normal/good years should be

carried forward

Risk sharing between Government of India and the State Govt. should be

4:1 or at least 2:1

State share of claims may be met out of Calamity Relief Fund of the

Government of India

Administration related:

Sample size of Crop Cutting Experiments should be reduced

Time schedule should be prescribed for various activities under the

scheme, particularly settlement of claims

Delay in receipt of yield data and / or funds from states leading to longer

settlement periods for claims should be avoided

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Joint Group Report

Implementing agency should strengthen its infrastructure and manpower,

including network at district level to have a good reach to the farmers.

Central Govt. should take steps to create awareness and bear the

publicity expenditure.

The entire expenditure on additional CCEs required for lowering the

insurance unit to village panchayat should be borne by Government of

India

Banks should streamline their functioning and stop perceiving the

administration work involved as additional burden.

The Service charges payable to Banks under the scheme are not

commensurate with job involved, and needs to be enhanced

Lack of adequately trained staff with Banks to interact with the farmers

regarding the scheme provisions

Legal cases should not be filed against compulsory provisions of scheme

Insurance Principles related:

Adverse selection problems (choosing to participate in the scheme

selectively even after being certain of crop losses) particularly of non-

loanee farmers

Inflated claims resulting from false coverage or tampered yield data or

both

Lack of spread in risk due to non-participation of important states

The important issues and possible solutions are discussed in Chapter-3.

1. 3. FARM INCOME INSURANCE SCHEME (FIIS)

1.3.1. Basic Objectives:

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Joint Group Report

NAIS protects the farmers only against the yield fluctuations. The price

fluctuations are outside the purview of this scheme. Farmers’ income is a

function of yield and market prices. Therefore, despite normal production,

farmers often fail to maintain their income level due to fluctuations in market

prices. To take care of variability in both the yield and market price, the

government introduced a pilot project, viz. Farm Income Insurance Scheme

(FIIS) during Rabi 2003-04 season.

The objective of the scheme was not only to protect the income of the farmer, but

also to reduce the government expenditure on procurement at Minimum Support

Price (MSP). The other main objectives were to encourage crop diversification

and also to give fillip to private trade, etc.

The following are the salient features of the farm income insurance scheme:

i. The crops covered are rice and wheat.

ii. The scheme is based on the ‘homogeneous area’ approach and notified

area can be an administrative unit such as a gram panchayat, mandal,

revenue circle, block, taluka or district.

iii. The scheme is compulsory for loanee farmers and voluntary for non-

loanee farmers.

iv. The premium rates are actuarial, determined for each State at the district

level.

v. The Government of India subsidizes the gross premium payable by the

insured farmers. The subsidy will be 75 per cent of the premium for

small/marginal farmers and 50 per cent for other farmers.

vi. Two levels of indemnity, i.e. 90 per cent for low-risk areas and 80 per cent

for high-risk areas.

vii. If the actual income (current yield X current market price) is lower than

guaranteed income (average yield of 7 years X level of indemnity [80% or

90%] X MSP), the insured farmer receives the compensation.

viii. The government procurement at MSP is suspended in the pilot districts for

covered crops.

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ix. NAIS is suspended for the selected districts/crops where the pilot FIIS is

implemented.

1.3.2. Experience of FIIS:

The scheme was implemented during Rabi 2003-04 season in 15 districts of 8

States for wheat and 3 districts of 3 States for rice on pilot basis. The coverage

details during Rabi 2003-04 are presented in Table-5.

Table-5

Rs. LakhsSr. No.

State District Farmers Acreage (ha.)

Sum Insured

Premium Claims

Total Total Total Total TotalWHEAT

Bihar Buxar 187 200 24.28 1.77 0.13Chhattisgarh Durg 2541 3745 173.70 15.02 50.12

Rajnandangaon 1389 1638 82.52 12.95 15.37Gujarat Banaskantha 484 611 72.63 2.25 0.00Jharkhand Hazaribagh 778 529 49.01 3.90 2.21

Sahebganj 376 300 26.83 1.82 8.28Madhya Pradesh Hoshangabad 21139 30699 3731.69 322.79 0.00

Tikkamgarh 33068 23422 2396.35 80.28 0.00Raisen 17243 36758 3333.94 155.65 0.00

Maharashtra Parbhani 981 462 33.56 2.92 1.25Uttar Pradesh Mirzapur 12144 14754 1539.05 69.49 3.96

Mathura 53544 46823 7738.89 448.58 22.88Etawah 15856 12429 1812.38 99.41 12.88Kannauj 16649 16291 2657.61 176.46 19.11

Uttranchal Dehradun 1829 854 71.89 5.75 0.41

Total 178208 189515 23744.33 1399.04 136.60RICE

Assam Kamrup 1740 1257 110.52 3.92 7.05Karnataka Mysore 59 41 8.93 0.79 0.00Tamilnadu Madurai 199 214 50.79 2.49 0.00

Total 1998 1512 170.24 7.20 7.05Grand Total 180206 191027 23914.57 1406.24 143.65

Initially it was planned that procurement operations at MSP would be suspended

in the pilot districts. However, due to pressure from states and farmers, the

procurement operations were restored at harvesting time.

Kharif 2004 season:

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The Scheme has been repeated in 19 Districts of four States for Rice crop during

Kharif 2004 season. The provisional coverage details is given in Table-6 below:

Table-6

S. No. State District Farmers Acreage (ha.)

Sum Insured(Rs. Lakhs)

Premium (Rs. Lakhs)

Total Total Total TotalRICE

Gujarat Ahmedaqbad 2037 6595 507.08 117.74Baroda 536 788 44.90 8.94Bulsar 1216 1215 136.88 2.12Panchmahals 12829 13561 535.74 173.58Surat 28 21 2.27 0.11

Jharkhand Gumala 12951 9388 613.38 22.70Hazaribagh 25959 18532 1422.02 61.86Ranchi 12902 9668 821.71 33.28E. Singhbhum 8240 5712 416.93 23.97W.Singhbhum 10050 7668 460.75 37.32

Maharashtra Bhandara 22176 28867 2329.19 175.85Chandrapur 22783 30447 2387.67 274.58Gadchiroli 8682 12693 894.27 87.65Raigarh 1708 667 102.11 2.81Thane 16559 13770 1834.55 133.92

West Bengal Birbhum 27595 10957 1931.95 44.43Jalpaiguri 1908 945 89.83 2.64Murshidabad 12076 4626 684.87 44.85North 24-Prgs 16134 9865 1233.85 27.73Total 216369 185985 16449.95 1276.08

Note: Claims position would be known by February’ 05

1.3.3. FIIS - Key Issues and Constraints:

As it was initially intended to implement FIIS in 100 districts during Kharif 2004, a

general review of FIIS was done in the beginning of Kharif 2004 season. It was

noticed that many states including Haryana and Punjab had not agreed to

implement the scheme. The single most important reason given for non-

acceptance was suspension of MSP based procurement in areas where the

scheme is implemented. Other important issues noticed in the review were:

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Majority States were not keen to implement the scheme on the ground

that it would not be beneficial to the farmers, as yield and price have

offsetting behavior.

The premium rates were substantially high despite the premium subsidy

given by the government. States demanded that the premium payable by

farmer should be restricted to NAIS level.

States also desired that coverage of the scheme should be enlarged to

cover risky crops like soybean, groundnut, red gram and commercial

crops like cotton, etc.

Some of the States were of the view that the Guaranteed Income is not

attractive since the market prices of the superior varieties grown never go

below MSP of Fair Average Quality (FAQ). Since Price and Yield are

negatively correlated, the probability of claim arises only when Price and

Yield both go below the guaranteed level, which may be a rarity.

Improper functioning of Marketing Departments, availability of past as also

current data at implementation level was another reason quoted as

hindrance for smooth implementation of the Scheme

1.4. Weather insurance1.4.1. Concept:

Many agrarian economies owe their strength to favourable weather parameters,

such as rainfall, temperature, sunshine etc. However, these economies are ill

equipped to deal with adverse incidences of weather. Therefore, reducing

vulnerability to weather in developing countries may very well be the most critical

challenge facing development in the new millennium.

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Sixty five percent of Indian agriculture is heavily dependent on rainfall, and,

therefore, is extremely weather sensitive. Several studies including those by the

National Commission on Water have established that rainfall variations account

for more than 50 percent of variability in crop yields. Many agricultural inputs

such as soil, seeds, fertilizer, management practices etc. contribute to

productivity. However, weather, particularly rainfall has overriding importance

over all other inputs. The reason is simple - without proper rainfall, the

contributory value of all the other inputs diminishes substantially. An analysis of

Indian Crop Insurance Program between 1985 and 2003 reveals that rainfall

accounted for nearly 95 percent claims – 85 percent because of deficit rainfall

and 10 percent because of excess rainfall.

The basic idea of weather insurance is to estimate the percentage deviation in

crop output due to adverse deviations in weather conditions. There are statistical

techniques to workout the relationships between crop output and weather

parameters. Techniques like multivariate regression could explain the impact of

weather deviations / variations on productivity. This gives the linkage between

the financial losses suffered by farmers due to weather variations and also

estimates the indemnities that will be payable to them. The analysis could also

include contingencies associated with the timing and the distribution of weather

parameters, particularly rainfall over the season. The two together form the basis

for designing rainfall (weather) insurance contracts.

1.4.2. Advantages over traditional crop insurance:

There are many shortcomings in the traditional crop insurance. The important

ones are: (a) moral hazard (b) adverse selection (c) multiple agencies and their

huge administrative cost which are hidden in the government budgets (d) lack of

reliable methodology for estimating and reporting crop yields (e) delays in

settlement of claims (f) program limited to growers (farmers). Majority of these

shortcomings are overcome in the weather insurance, which are discussed here

below:

a. Trigger events (like adverse rainfall) can be independently verified &

measured. India has an independent rainfall reporting system through ______________________________________________________________________________________

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Joint Group Report

India Meteorological Department. If the unbiased data can be procured,

the moral hazard can be minimized to a large extent.

b. Weather insurance does not encourage potential negligence on the part of

insured, and the cultivator’s urge for a good harvest remains unaffected.

c. Compared to yield based insurance, weather insurance is inexpensive to

operate. Since very few agencies would be involved in implementation,

the aggregate administrative cost would be far lower.

d. Weather insurance allows for speedy settlement of indemnities, as claims

can be settled even within a fortnight of the expiry of indemnity period.

1.4.3. Summary of products introduced upto Kharif 2004:

Till date three companies have introduced pilot projects on rainfall insurance. the

details are as follows:

ICICI-Lombard General Insurance Company:

ICICI-Lombard was the first general insurance company in India to introduce

rainfall insurance based on a ‘composite rainfall index’ in 2003. It implemented a

pilot project in Mahabubnagar district of Andhra Pradesh for groundnut and

castor. Though participation was limited, it held out valuable lessons for future

programs. The rainfall index insurance has been further extended to other areas

during Kharif 2004 season. ICICI-Lombard has also designed rainfall insurance

cover for Oranges in Jhalawar district of Rajasthan during 2004.

Agriculture Insurance Company of India Ltd. (AIC)

Agricultural Insurance Company of India (AIC) introduced rainfall insurance

known as ‘Varsha Bima’ during the 2004 South-West Monsoon period. Varsha

Bima provided for five different options suiting varied requirements of farming

community. These are – (i) seasonal rainfall insurance based on aggregate

rainfall from June to September, (ii) sowing failure insurance based on rainfall

between 15th June and 15th August, (iii) rainfall distribution insurance with weights

assigned to different weeks between June and September, (iv) agronomic index

constructed on the basis of water requirement of crops at different pheno-phases ______________________________________________________________________________________

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and (v) catastrophe option, covering extremely adverse deviations of 50 percent

& above in rainfall during the season. The Varsha Bima has been piloted in 20

rain gauge areas spread over Andhra Pradesh, Karnataka, Rajasthan and Uttar

Pradesh. AIC is also working on index based rainfall insurance for all major crops

in Western Rajasthan for future seasons.

IFFCO – Tokio General Insurance Company:

IFFCO-Tokio General Insurance Company (ITGI) piloted rainfall insurance by the

name – ‘Baarish Bima’ during 2004 in nine districts of Andhra Pradesh,

Karnataka, Gujarat & Maharashtra. The product is based on rainfall index

compensating farmers for deficit rainfall. The policy pays for deviations in actual

rainfall exceeding 30 percent. The claims are paid on graded scale, with 100

percent claims payable when adverse deviation in rainfall reaches 90 percent.

The premium rates vary from 4 - 5 percent and farmers are covered on group

basis.

The experience of rainfall insurance in the country is presented below in Table-7

Table-7

S.No Company Years States implemented

Farmers covered

Sum insured (Rs.)

Premium (Rs.)

Claims (Rs.)

1 ICICI-Lombard 2003 & 2004

A.P.;M.P.;U.P.; Rajasthan, Tamilnadu

2922 3,49,01,400 36,34,325 24,10,770

2 IFFCO-Tokio 2004 A.P.; Gujarat; Karnataka

3209 10,02,68,000 46,38,941 Awaiting IMD data

3 AIC 2004 A.P.; U.P. 1050 2,18,82,754 6,11,806 5,56,698

Note: Insurance works on the principle of spread of risk over time and space. Therefore, result of one season is no indicator for judging the insurance scheme

The Joint Group intended to compare benefits of rainfall insurance with National

Agricultural Insurance Scheme (NAIS) since its inception in 1999. It required ‘as

if’ analysis of rainfall insurance product for past four Kharif seasons for major

states and a comparison with benefits of NAIS to test the efficacy of rainfall

insurance product. Accordingly, IMD was requested to furnish rainfall data for the

years 2002 & 2003. The data, however, has not been received from IMD till date.

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In the absence of rainfall data, the Group could not undertake the above study.

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2. Remote Sensing Technology in Crop Insurance

2.1. Background:

Remote sensing is the science of acquiring information about the Earth's surface

without actually being in contact with it. This is done by sensing and recording

reflected or emitted energy and processing, analyzing, and applying that

information. Remote sensing deals with the detection and measurement of

phenomena with devices sensitive to electromagnetic energy such as - Light

(cameras and scanners); Heat (thermal scanners) and Radio Waves (radar).

Remote Sensing Technology (RST) is the emerging technology with potential to

offer plenty of supplementary, complimentary and value added functions for crop

insurance. The present technology not only provides the insurers with tools like

hazard mapping, crop health reports, acreage-sown confirmation, yield modeling

etc. which are not only important for verifying claims, but also strengthen the

position of insurers vis-à-vis re-insurance market.

The technology is already being tried out in agriculture insurance in countries like

United States of America (USA), Canada, Australia, etc. The major products in

which this technology is being used in these countries are Hail Insurance and

Multi-Peril Crop Insurance. These products are based on specified perils, and

hence claims become payable only if the losses are on account of these

specified perils. In other words, loss assessment in individual approach is very

complex and requires great deal of precision. Yet, insurance companies are able

to take help of remote sensing technology to – identify insured field, calculate

planted acreage, identifying boundaries of the field and finally assessing the loss.

USA with more than 25 satellites makes it possible for insurers, and at

competitive price.

Despite availability and competitive prices, insurance companies in these

countries are yet to adopt the technology in a significant way. The insurance

companies are still cautious in their approach. While majority of companies are

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Joint Group Report

still experimenting with this technology, a few companies like IGF Insurance and

Fireman’s Fund in USA have realized the potential of technology and adopted it

on a large scale with respect to identification of insured fields, crops, assessment

of damage due to hail, floods and a few diseases. Details of some of the

companies, which have used remote sensing applications, are given below:

Iowa Grain & Feed (IGF) Insurance Company:

IGF is a crop insurer in the US, with over $250 million business by way of

premium. Headquartered in Des Moines, Iowa, IGF specializes in writing

innovative crop insurance plans including Crop-Hail, the federal Multiple Peril

Crop Insurance, and other crop-related insurance plan named Perils. The

company has effectively demonstrated that commercially available imagery could

be used to detect and locate the relative level of hail damage in cropped areas.

Fireman’s Fund Insurance Company:

Fireman's Fund AgriBusiness, which several years ago adapted satellite

technology into an all-terrain vehicle (ATV) mobile mapping system uses the

geographic systems to mine data and show relationships, opportunities,

challenges and problems. The company is growing beyond what growth has

been in the crop insurance industry because it’s able to bring value addition to

the insurance company and the insured using remote sensing technology. The

agents are also equipped with remote sensing based capabilities.

Federal Crop Insurance Corporation:

In June 2001, an U.S. District judge in Arkansas ruled against several farmers

who were accused of filing false crop insurance claims totaling approximately

$244,000. Key evidence in the lawsuit—filed on behalf of the U.S. Department of

Agriculture and the agency that audits the federal crop insurance program—

came in the form of infrared satellite images demonstrating that crops alleged to

be destroyed by bad weather had in fact never existed.

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The details of some case studies are appended as Annexures - 3(a) to 3(g).

2.2. Remote Sensing Applications in Agriculture in India:

The Government of India in the early 1990s had started a number of projects for

use of remote sensing technology in Agriculture. These projects are coordinated

by Ministry of Agriculture and implemented by National Remote Sensing Agency

(NRSA) and Space Applications Centre (SAC) within Indian Space Research

Organization (ISRO). Some of these important projects are as follows:

(i) Crop Acreage and Production Estimation (CAPE) Project

Satellite-based remote sensing, because of synoptic view, repetitive coverage

and multi-spectral capabilities offers to provide timely and reliable crop

estimates and to monitor its condition regularly on near real time basis.

Studies on use of space borne Remote Sensing (RS) digital data for crop

acreage estimation were taken up at the SAC with various collaborating

agencies. CAPE project sponsored by the Ministry of Agriculture, covered

wheat, rice, groundnut, mustard, Rabi sorghum and cotton in selected

predominant crop growing districts of the country. The procedure developed

under CAPE used single-date high resolution RS data coinciding with

maximum vegetative growth stage of a crop, maximum likelihood (MXL)

supervised classification and stratified random sampling or district boundary

mask approach and provided estimates at district-level.

(ii) National Wheat Production Forecasting

The procedures developed under CAPE were extended to national-level

wheat production forecasting using multi-date WiFS data (coarse resolution

and high repetivity) since 1995-96. The procedure uses a national-level

sampling frame and sample segment grids of 15 X 15 km and multiple

forecasts.

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(iii) National Rice Production Forecasting

During Kharif season, the optical sensor in the presence of cloud cannot see

the land cover under it. Microwave sensors can see through the clouds. ERS

and RADARSAT satellites have provided useful data to assess the crops

during the cloud covered periods. Besides providing rice production

forecasts, it attempts to map the areas undergoing major increase/decrease in

rice due to natural hazards.

(iv) Yield Modeling Approaches

Crop yield is an important and dynamic component of crop production

forecasting which is affected by several factors such as genetic potential of

crop cultivator, soil, weather, cultivation practices (date of sowing, amount of

irrigation and fertilizer) and biotic stresses. Vegetation Indices (VIs) derived

from RS data acquired at maximum vegetative growth stage are indicative of

crop growth, vigour and potential grain yield.

There are several approaches for yield modeling using space-borne RS data

either independently or in combination with meteorological data. These are:

(a) Direct VI – Yield Empirical Models

The approach of relating Normalized Difference Vegetation Index (NDVI) and

average district yield is being adopted for developing district-level yield

forecast models based on multi-year average NDVI near peak vegetative

stage. This approach is adopted for regular in-season forecasting for study

districts under the CAPE Project.

(b) Combined Agromet-Spectral Yield Models

It was observed in one of the studies that wheat NDVI, after inter-sensor

normalization, path radiance correction and acquisition date normalization ______________________________________________________________________________________

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Joint Group Report

could explain about 50 per cent of the yield variations. However, when the

mean night temperature during first fortnight of March was used as an

additional predictor, 81 per cent of yield deviations from trend could be

explained. This indicates that spectral indices alone cannot explain the

maximum variability in the yield. It has been observed that indices derived

from temperature data bear good correlation with wheat yields.

(c) Multi-Date RS data based models

The spectral growth profile approach provides complete information on the

canopy development. This approach makes it conceptually sounder than

those involving single-date spectral indices. Time sequence of a typical

spectral index (NIR/Red, NDVI, greenness) for the entire growth cycle of a

crop suggests a continuous curve showing distinct rise and fall, much like a

bell-shaped curve. Multi-date acquisitions of WiFS data have been used for

wheat discrimination using a hierarchical decision rule based procedure and

for developing spectral crop growth profiles under the National wheat

production-forecasting project.

(d) Crop Growth Simulation Models

Crop growth simulation model is a useful tool, which mimic the response of

crop to its surrounding atmosphere and inputs. Crop simulation model

calculates dry matter production and its partitioning on daily basis. CERES-

Wheat model, which is a part of DSSAT – 3.5 simulation model, has been run

in an attempt to capture the variability in wheat yield under the National Wheat

Production Forecasting Project. The weather variables that have been taken

into account are maximum and minimum temperatures.

2.3. Remote Sensing Applications in Crop Insurance in India:

The Joint Group discussed applications of remote sensing technology in crop

insurance with SAC, ISRO. The discussions revealed certain constraints in

successfully using RST in some areas of crop insurance. These are:______________________________________________________________________________________

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Joint Group Report

i) Persistent cloud cover during Kharif makes it difficult to get proper satellite

images. Microwave Remote Sensing, which can pierce clouds, is available

only through a Canadian satellite – RADARSAT. However, the resolution

available is very coarse and consequently is not very accurate. Moreover

this technology is useful for crops grown with standing water, such as rice.

ii) The finer resolution satellite data is expensive.

iii) A lot of crops with less biomass are difficult to figure out through satellite

imagery.

The Group is of the view that despite these constraints, there are some useful

applications of remote sensing technology in crop insurance. These include

successful models for acreage and yields estimation for majority of Rabi crops,

and important Kharif crops, such as Rice, Cotton, Soybean, etc. Yield estimation

using meteorological data through regression models further improves accuracy.

The remote sensing technology applications could be of use in finalizing ‘on-

account’ settlement of crop insurance claims within the season.

The Joint Group considering ‘area approach’ nature of crop insurance and

availability of remote sensing capabilities in the country has come to conclusion

that use of remote sensing technology in crop health monitoring, crop acreage

and yield estimation could give the insurer a tool to simplify claim procedures and

claim monitoring. The benefits to the insurer on account of use of advanced

technologies explained above would be –

a) Greater credibility to insurer’s efforts towards securing re-insurance since

these technologies are being used in developed countries.

b) Unbiased, objective and independent data to crosscheck and supplement

other field information inputs. The independent information source will

help check inflated claims. Periodic independent ground investigations

based on satellite and Geographic Information System (GIS) derived

anomalous areas will further limit such claims.

c) The remote sensing data on crop area and relative productivity levels will

be available well before the cut-off date for receipt of crop yield data ______________________________________________________________________________________

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Joint Group Report

provided by the Department of Economics and Statistics (DES), facilitating

adequate ground validation. In-season monitoring will assist monitoring of

crop progress and provide advance warning of expected claims after the

season.

d) The geo-referenced GIS database provides the basis for reliable analysis

and risk mapping zones.

e) The use of advanced technologies will facilitate progress towards

individual based assessment and towards commercial premiums in future.

The benefits to the insured include accurate and unbiased yield and loss

estimation, early settlement of claims, use of remote sensing inputs as trigger for

deciding quantum of claim amount, etc.

The Joint Group, on the basis of various inputs examined, lists the following

application areas of remote sensing in crop insurance programme for future:

i. Estimating actual acreage-sown at insurance unit level to check the

discrepancy of ‘over-insurance’ (acreage insured higher than acreage

sown).

ii. Investigating anomalies / discrepancies in acreage-sown through ground

surveys using Global Positioning Systems (GPS).

iii. Monitoring crop health through the crop season, and investigation on

ground for advance intimation of yield losses.

iv. Investigating satellite derived poor crop areas and those from crop cutting

experiment, to check adequacy and reliability of data.

v. Developing satellite based crop productivity models for cereal and other

crops.

vi. Rapid and detailed damage assessment after disaster such as floods,

cyclone, drought and others.

vii. Developing Geographic Information System (GIS) of defined area of

insurance unit for user-friendly viewing, querying and analysis on

agricultural situation.

viii. Use RST applications as one of the triggers to facilitate early settlement of ______________________________________________________________________________________

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claims.

ix. Use RST applications (crop health) for designing ‘blended insurance

products’, such as agri-met & spectral based insurance product, etc.

x. GIS for office operations of crop insurance.

Considering the experience of other countries in using remote sensing

applications in crop insurance, and the fairly developed technology available in

the country, the Joint Group recommends that a pilot project on using remote

sensing technology in crop insurance should be taken up by AIC from Kharif

2005 season onwards. The areas for pilot project may include:

I. Acreage estimation

II. Crop health reports

III. Yield modeling

IV. Reduction of sample size of CCEs

V. Yield models based on combination of agri-meteorological data & spectral

data

VI. RS data as proxy indicators for finalizing quantum of ‘on-account’

indemnity and

VII. Deciding eligibility of claims for prevented sowing together with weather

data.

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3. CROP INSURANCE – A WAY FORWARD

3.1. National Agricultural Insurance Scheme (NAIS)

3.1.1. Fundamental Issues:

As pointed out in the earlier chapter, limited expansion in the scope and content

of crop insurance scheme in the form of NAIS did not measure upto the

expectations of the farming community. The key impending issues have been

identified and are listed below:

i. The insurance unit presently is large and not reflecting yield experience of

individual farmers.

ii. Guaranteed Yields are not reflecting reasonable aspirations of farmers

iii. The present indemnity levels are inadequate

iv. Inordinate delay in settlement of claims

v. Inadequate risk / loss coverage

vi. Individual assessment of losses in case of localized calamities

vii. The scheme be made voluntary for all farmers.

viii. Poor infrastructure facilities for coverage of non-loanee farmers

ix. Insurance coverage is not available for Fruits and Vegetables

x. Bodily injury of farmers in the course of agricultural activities not covered

in the scheme

3.1.2. Suggested Improvements:

(1) Reduction of insurance unit to the village panchayat level for major crops:

National Agricultural Insurance Scheme is implemented on the basis of

“homogeneous area” approach, and the area (insurance unit) at present is

Taluka / Block or equivalent unit in most instances. The approach would give

desired results provided the yield variability within the area (insurance unit) is the

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least. However considering that the present units are largely administrative, the

yields are hardly uniform within the unit. As a result the yield experience of

individual farmer is significantly different from that of the insurance unit. The

result of significant yield variability within the unit has serious implications in

claims – farmers with low yields have distinct advantage, as the area average is

higher than their own, while farmers with high yields for exactly opposite reason

are at a disadvantage. In insurance parlance this problem is referred to as ‘basis

risk’. It is, therefore, felt that the insurance unit should be as small as possible.

Obviously, “Individual approach” would reflect crop losses on a realistic basis and

would be, most desirable, but, in Indian conditions, implementing a crop

insurance scheme at “individual farm unit level” is beset with problems, such as:

a) Non availability of past record of land surveys, ownership, tenancy and

yields at individual farm level

b) Large number of farm holdings (nearly 11.6 Crores) with small farm

holding size

c) Remoteness of villages and inaccessibility of farm-holdings

d) Large variety of crops, varied agro-climatic conditions and package of

practices

e) Simultaneous harvesting of crops all over the country

f) Effort required in collection of small amount of premium from large number

of farmers

g) Prohibitive cost of manpower and infrastructure

Practical approach, therefore, will be to have smaller insurance units such as

village panchayat, as it can reduce basis risk largely. The NAIS in existing form

also does provide for smaller insurance unit viz. village panchayat. However, the

states could not lower the insurance unit to the desired level because of huge

increase in number of CCEs and consequent manpower requirement and costs.

The Joint Group studied the manpower and cost implications and makes the

following recommendations:

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(i) Manpower: States should make use of existing manpower of concerned departments to the

extent possible. However, where existing manpower is inadequate, staff

identified by the state government as surplus may be trained and re-deployed.

Additional manpower can also be out-sourced in consultation with implementing

agency from agri-clinics, agri-prenuers, agricultural universities, KVKs, retired

department officials, unemployed agricultural graduates, etc.

(ii) Costs:Assuming that three major crops would be notified at village panchayat level (on

an average two during Kharif & one during Rabi), the number of CCEs required

for village panchayat is 24 based on sample size of 8 CCEs per unit per crop.

With nearly 2.2 lakh village panchayats likely to be notified for the major crops,

50 lakh additional CCEs would be required to lower the insurance unit to village

panchayat. The cost of conducting each CCE is estimated at Rs. 300, the details

of which are as follows:

(i) Remuneration of primary worker per CCE: Rs. 200

(visit to farmer, farm, travel, salary, etc.)

(ii) Cost of labour for performing CCE: Rs. 50

(iii) Cost of various forms & documentation and equipment: Rs. 50

At an estimated cost of Rs. 300 per CCE, the cost of total 55 lakh CCEs (existing

5 lakhs + additional 50 lakhs) could be of the order of Rs. 165 crores, of which

approx. 90% of the expenditure is recurring. The Joint Group, after considering

the importance of reduction of insurance unit and the costs involved in

conducting additional CCEs, recommends that the costs for CCEs may be

shared between the Government of India and States on 50:50 basis.

However, smaller unit and larger number of CCEs from insurance angle may

create more scope for possible interference and manipulation. To counter such

malpractices, appropriate checks and balances have to be put in place in

generating sound and accurate yield data. Some of these checks could be as

follows:______________________________________________________________________________________

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Joint Group Report

(i) Single series of yield data to be maintained for the Government of India

production estimates and crop insurance. All the CCEs, which are part of

crop insurance will also form part of the government estimates. Planning

and supervision for all CCEs will be of the same order as that of General

Crop Estimation Surveys (GCES)

(ii) The sample size of CCEs, which is presently eight (8) at village

panchayat level, will be reviewed in consultation with technical agencies

such as Indian Agricultural Statistical Research Institute (IASRI) and

National Sample Survey Organisation (NSSO). Inputs from remote

sensing technology will also be considered in arriving at the sample size.

(iii) As a long-term measure to enhance quality of yield assessment, Remote

Sensing Technology (RST) would be tried out for yield modeling on pilot

basis. The results of RST based yield estimates would be initially utilized

for smoothing CCEs based yield estimates generated at village

panchayat level.

(2) Threshold Yield (Guaranteed Yield):

Presently Guaranteed Yield, based on which the indemnities are calculated is

moving average yield of preceding three years for rice and wheat and five years

for other crops, multiplied by the Level of Indemnity. The concept does not

provide for adequate protection to farmers, especially in States / Areas where

there have been consecutive adverse seasonal conditions, pulling down the

average yield.

The Joint Group discussed various alternatives in providing reasonable

guarantee of average yield. These are:

i. One worst & one best year to be excluded from preceding seven years.

This is a balanced approach of smoothing the past yield and hence will be ______________________________________________________________________________________

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Joint Group Report

acceptable to reinsurer. But, in areas, which have experienced series of

consecutive bad years, it may actually reduce the guaranteed yield and,

therefore, may not be acceptable.

ii. Take long-term average of 10 / 15 / 20 years. It is as good as a normal

yield. However, it suffers from time-trend in yield wherever there is an

upward trend in the yield.

iii. Take the best three out of the preceding seven years. It will be attractive

to the farmers, but would significantly increase cost of indemnities. Further

it will not go well with reinsurers, and will substantially increase

reinsurance cost.

iv. Take the best three out of the preceding five years. It is an improvement

over the existing method, but the actual period for reckoning of

guaranteed yield is too short (3 years), and hence may not be stable.

v. Take the best five out of the preceding seven years. It has the advantage

of moderation over other methods considered and will be reasonably

attractive to the farmers since sufficiently long period (5 years) is

reckoned.

Bearing in mind the pros and cons of various alternatives discussed above, the

Joint Group recommends for Guaranteed Yield (Threshold Yield) based on

average of best five out of preceding seven years, as it is more appropriate and

balanced.

(3) Levels of Indemnity:

At present the levels of indemnity are 60%, 80% or 90% corresponding to high,

medium & low risk areas. The 60% indemnity level can not adequately cover the

risk, especially in case of small / medium intensity adversities, as the losses will

get covered only if and when the loss exceeds 40%. During Kharif 2004, 58

percent of all areas / crops were in 60% indemnity zone, 32 percent in 80% zone

and 10 percent in 90% zone.

The Joint Group considered if the indemnity level can be kept uniformly at 90%

for all crops and areas. However, considering that there are huge year-to-year

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Joint Group Report

variations across states (especially, Gujarat, Karnataka, Orissa, etc), the Joint

Group recommends two indemnity levels viz. 90% for low risk (stable) crops and

80% for other crops.

(4) Extending risk coverage to prevented sowing / planting due to adverse seasonal conditions

Existing scheme covers risk only from sowing to harvesting. Many a time

sowing / planting is prevented due to adverse seasonal conditions and farmer not

only loses his initial investment, but also loses the opportunity value of the crop.

The Joint Group feels that a situation where the farmer is prevented from even

sowing the field is a case of extreme hardship and this risk must be covered. It

was also felt by the Group that though the idea is laudable, but is administratively

very cumbersome in a scheme based on ‘Area approach’. There is an element of

moral hazard as well. However, to redress the extreme hardship to which the

farmer is subjected to in a situation of prevented sowing, the Joint Group

examined the following two possible modalities in covering pre-sowing / planting

risk:

(A) Based on Individual farmer: It is based on adverse deviation in rainfall

during June & July, affecting sowing operations. Once the deviation reaches

a point determined on scientific lines, all insured farmers who could not sow

the crop will forward applications for indemnity through concerned credit

agency. The credit agency shall pool in all such applications and

communicate to the implementing agency with details of original coverage.

The farmers who receive pre-sowing indemnity are not eligible for yield-based

indemnity.

pros & cons: It is more equitable and realistic. But, is cumbersome for all

involved, viz. farmers, credit agency and the implementing agency.

Considering the number of transactions (receiving applications, pooling in,

referencing to original coverage etc.) credit agencies may not be willing to

carry the workload.

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Joint Group Report

(B) Based on Area equity: It is a two-step procedure involving rainfall and

sowing details. An area will be eligible for pre-sowing indemnity only if rainfall

& sowing details meet the criteria set for the purpose. Firstly, the deviation in

rainfall during June & July should be so much that it would adversely affect

sowing operations. The parameters can be set using scientific data, including

remote sensing technology. Secondly, the area qualifies for the benefit, only if

the sowing is below 50 percent of normal area. Once the two-step

mechanism is qualified, all insured farmers in the area will automatically

receive indemnity. Having received indemnity based on pre-sowing, the

insured farmers in the area will not be eligible for yield-based indemnity.

pros & cons: it is easy and convenient to implementing agency and credit

agencies. However, the ‘sowing prevented’ farmers would be eligible for

indemnity only if the area sowing is below 50 percent of normal. Further,

once the area based on sowing qualifies for pre-sowing indemnity, even

those farmers who could sow the crop will also receive the benefit. However,

these farmers will not be eligible for indemnity based on yield data.

The Joint Group after going through both the alternatives recommends the

alternative of Area based equity, for its simplicity, with the following guidelines in

extending pre-sowing / planting risk coverage:

i. The cut off dates for both loanee & non-loanee farmers should be the

same. The cut-off dates could be between 15 th June – 15th July for Kharif

crops in different states; 31st December for Rabi and 31st January for

Summer crops. In case of Kharif crops, the cut-off dates are to be fixed in

such a way that these dates correspond to historical onset / covering by

SW Monsoon. An indicative seasonality for Kharif season is provided in

Table-8.

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Joint Group Report

Table –8: Historical onset and coverage by South West (SW) Monsoon and proposed cut-off dates for Kharif

S.No States SW Monsoon coverage by

Proposed cut-off dates

1 Kerala & Tamilnadu 1st week of

June

15th June

2

Andhra Pradesh, Karnataka,

Orissa, West Bengal, North-

Eastern States

15th June 30th June

3 Maharashtra, Chhattisgarh,

Jharkhand, Bihar

3rd week of

June 30th June

4 Gujarat, Madhya Pradesh,

Uttar Pradesh, Uttaranchal

Himachal Pradesh

4th week of

June

30th June

5 Rajasthan, Punjab,

Haryana, J&K 1st week of

July

15th July

ii. The indemnity payable for prevented sowing will be between 20 percent -

25 percent of original sum insured depending on cost of pre-sowing /

planting expenses likely to be incurred. The proportionate premium

component paid by farmer for balance period of risk not run can be added

(ranging from 1% - 5%) to the indemnity and paid, instead of premium

refund.

iii. The existing rain gauge stations of IMD and States need to be

strengthened and the network extended so that accurate rainfall data is

available at least at block level.

(5) Coverage of post harvest losses:

In some states crops like Rice are left in the field for drying after harvest. Quite

often, especially in the coastal areas, ‘cut & spread’ crop is damaged by

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Joint Group Report

cyclones, floods, etc. Since the existing scheme covers risk only upto harvesting,

these post-harvest risks are outside the purview of insurance.

The Joint Group after examining the genuineness of the cover and the difficulties

in assessing such losses at individual level, recommends that the insurance

cover may be made available to such post harvest losses also, but it should be

restricted only for those crops in coastal areas, which are allowed to dry in the

field after harvesting and should be against cyclonic rains only. Further the

coverage should be available only upto a maximum period of two weeks from

harvesting. The Group also recommends that in such cases the assessment of

damage would be on individual basis.

(6) Compulsory nature of Scheme:

The existing scheme is compulsory for farmers who avail loans for raising

insurable / notified crops in states where the scheme is implemented. On account

of premium rates, which are high for certain annual commercial / horticultural

crops, and certain areas and crops for which no claims have been received

largely due to good crop, there has been a suggestion to make the scheme

voluntary. The idea was to leave the decision of participation to farmers.

The Joint Group considered the above suggestions, and keeping in mind a

number of reasons, such as the low awareness levels and public interest

involved of large number of farmers; administered premium rates; premium being

financed by credit agency; requirement of collateral security for credit agency of

its loan portfolio etc., recommends that the scheme should continue to be

compulsory for loanee farmers.

(7) Uniform seasonality discipline for participation in the scheme:

The Joint Group took note of the experience of the last four years of NAIS, which

had seen extension of cut off date for participation of non-loanee farmers in many

states, and consequent adverse selection problems leading to high indemnities.

In order to control adverse selection problems, and to provide convenience to ______________________________________________________________________________________

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Joint Group Report

farmers in availing insurance facility, the Joint Group makes following

recommendations:

(i) The seasonality discipline (cut off dates) should be uniform for both

loanee and non-loanee farmers. It would range from 15 th June – 15th

July for Kharif crops for different states and 31st December for Rabi

crops. For the states with Summer crops, it would be 31st January.

(ii) Non-loanee farmers can avail insurance before sowing on the basis of

crop, which he intends to sow. In case of change in the crop or other

exigencies, the farmer should communicate to the Bank / institution

where the proposal was submitted originally accompanied by a

certificate of sowing of the alternate crop from village administration.

(iii) In case of loanee farmers the coverage is effected on the basis of the

loan amount sanctioned by the credit agency. The basis of sanction of

the loan is the total landholding, the nature of crops grown and the

scale of finance.

The Joint Group also recommends that the banks display the list of all insured

farmers at the village panchayat office. Further, the banks will also display the

list of benefited farmers together with claim amount soon after the claims are

received from implementing agency. In addition to ensuring transparency, the

proposed measure will help contain legal litigation to a large extent. This will also

empower village panchayat and will induce them to own up the responsibility of

proper implementation of the scheme.

(8) On-account settlement of claims: The claims processing in NAIS begins only after the harvest of the crop. Further

claim payments have to wait for results of CCEs and also for the release of

requisite funds from Centre and States. Consequently there is a time gap of 8-10

months between occurrence of loss and claim payment. Farmers have been

demanding for quick settlement of claims soon after occurrence of losses so that

the agriculture operations could go unhindered.

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Joint Group Report

To expedite settlement of claims in case of adverse seasonal conditions and to

ensure that at least part of the likely claims receivable are paid to the farmer

before the end of the season, the Joint Group recommends that ‘on-account’

settlement of claims be done without waiting for receipt of yield data. The Group

recommends that an amount upto 50 percent of likely claims should be released

in advance subject to adjustment against the claims assessed on yield basis.

The Joint Group further recommends that such an ‘on account’ payment will be

made only if the expected yield during the season is less than 50 percent of

normal yield. The criteria for deciding ‘on-account’ payment of claims shall be

based on agro-meteorological data / satellite imagery or such other indicators to

be decided by implementing agency, and will be implemented in those states and

crops for which such proxy indicators can be established. To Illustrate, if the

guaranteed yield in a particular case, is say 20 Qtls / ha. and the actual expected

yield during the season is 5 Qtls / ha. The likely claims are 75 percent of sum

insured. Based on this information, claims upto 37.5 percent (50 percent of likely

claims) of sum insured can be released as ‘on-account’ payment.

(9) Individual assessment of losses in case of localized risks

NAIS presently provides for individual assessment of losses in case of localized

risks, viz. hailstorm, landslide & flooding only in one taluka of a state. Farmers

feel the experiment is not adequate, and it should be implemented on full scale,

covering all areas. Further, they also feel the losses on account of wild animals

should be covered in the scheme and the losses be assessed on individual

basis.

It is a fact that crop depredation by wild herbivores is an important man-animal

conflict in the fringes of ‘Protected Areas and Wildlife Habitats’. This is a

recurring calamity, which cannot be resolved by a single time payment of

compensation to the affected party, who are usually depending on a single rain-

fed crop in a year. While some proactive measures like fencing, trenching and

the like are adopted, more often than not, these are not very effective.

Therefore, insurance coverage for crop damage caused by wild herbivores needs

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Joint Group Report

to be considered in the interest of eliciting public support for wildlife conservation.

Ministry of Environment & Forests has also recently requested Ministry of

Agriculture to extend insurance to crop damage caused by wild animals. The

justification is that there is no periodicity in most of such gregarious depredations

and, the element of uncertainty always exists due to which such damages are

non preventable in nature. More often than not, proactive measures like fencing

or trenching are not effective since the boundaries of Protected Areas are large

making the proposition impractical.

The Joint Group, therefore, feels that crop damage caused by wild animals is a

non-preventable risk, and hence should be considered for inclusion in crop

insurance scheme. Accordingly, it recommends that crop damage caused by

specified wild animals, viz. neelgai, spotted dear and elephant shall be covered

under crop insurance scheme.

As regards the larger issue of individual assessment of localized calamities, the

Joint Group feels that the demand is genuine and, therefore, recommends that

the losses arising out of crop damage caused by hailstorm and landslide should

be assessed on individual basis in all the insured areas. Further, the damage by

specified wild animals (neelgai, spotted dear and elephant) would also be added

to the list of localized risks and the losses be assessed on individual basis.

The insured farmers who suffer crop damage due to localized risks will be

required to submit claim intimation through credit agency within specified time.

(10) Service to Non-Loanee farmers

The NAIS being multi-agency approach, implementing agency presently has no

presence except in state capitals. The scheme is marketed to non-loanee

farmers through rural credit agencies. These farmers are not familiar and

comfortable going to credit agencies located at a distance. Dedicated rural

agents who could provide service at doorstep of farmer would be a preferred

option for these farmers.

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Joint Group Report

The Joint Group, therefore, recommends that implementing agency should have

presence at least at the taluka level, and if possible at the village level. Services

of rural agents, micro insurance agents could be utilised to facilitate insurance

marketing at village level. The Joint Group is also of the view that, a facilitating

agency could be instituted by implementing agency at District level to support

marketing facilities.

(11) Coverage of Perennial Horticultural / Fruit crops and Vegetables

Improving production and productivity of fruits & vegetables is a priority area and

the cultivated area under these crops is steadily increasing. These perennial

horticultural crops are presently not covered by NAIS and there is a demand for

inclusion of these crops under the scheme.

Perennial horticultural / fruit crops have two economic components viz. the tree

and the yield. Farmer needs insurance against loss of both the components and

hence yield based NAIS cannot provide required protection. For many of these

crops, past yield data is not available for fixing premium rates and threshold

yields. There are also problems like typical non-bearing period in the first three or

four years, cyclical nature of production and different age groups of orchards

within a unit with varied productivity level etc. In view of these peculiarities and

complexities involved in designing insurance scheme for perennial horticultural

crops and vegetables, the Joint Group recommends that a separate scheme for

providing insurance cover to perennial horticultural crops and vegetables should

be designed and implemented on a pilot basis during Kharif 2005 season.

A Road Map conceived by the Joint Group for launching of separate insurance

scheme for fruits and vegetables w.e.f. Kharif 2005 season is given below:

i) The major fruit crops which can be covered are Mango, Grape,

Orange, Cashew nut, Pomegranate, Apple, Pineapple & Banana; the

major plantation crops would be Coffee, Tea, Rubber, Pepper;

coconut and the major vegetable crops can be Tomato, Brinjal,

Bhindi, Cauliflower, Cabbage, etc.

ii) More fruit crops and vegetables can be considered if adequate ______________________________________________________________________________________

44

Joint Group Report

cropped area is available.

iii) A consultancy study may be given to an expert to suggest the nature

of scheme, the nature of data required, scheme design etc.

Agriculture Insurance Company of India Ltd. (AIC) will prepare terms

of reference for the study and will appoint the consultant. The

tentative schedule is as follows:

a) Release of advertisement – 20th December 2004

b) Last date for receipt of applications – 31st December 2004

c) Finalizing TORs & short-listing applicants – 10th January 2005

d) Inviting technical & financial bids – 20th January 2005

e) Appointment of consultants – 1st February 2005

f) Submission of Report by consultants – 15th March, 2005

g) AIC to submit draft scheme to the government – 31st March 2005

iv) Weather based insurance products should also be explored as part

of the study. ICICI-Lombard is presently working on apple, orange,

coffee, etc.

v) The nature of subsidy and support of the government will be finalised

on the basis of scheme design and crops expected to be covered.

(12) Personal Accident Insurance of Insured Farmer

Farmer is faced with continuous bodily peril while performing agricultural

operations; hence, there is a case to provide him with personal accident cover

along with crop insurance. The insurance cover can be provided as part of

package policy on compulsory / voluntary basis, along with crop insurance. All

insured farmers will be entitled for Personal Accident (PA) insurance cover of Rs.

50,000. It will be in addition to personal accident insurance cover available under

Kissan Credit Card (KCC). The cover, similar to other covers provided under

Package policy, will be on annual basis, commencing from the date the crop

insurance premium is debited.

(13) Actuarial Regime:

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Joint Group Report

The scheme is presently working on administered rate regime with the

government financing both premia subsidy and claims, leading to lack of financial

discipline and accountability in administering the scheme. It is, therefore,

suggested to place the scheme on actuarial regime in which insurance company

receives premium based on commercial rates and is responsible for all claims. It

has advantage for all concerned – the government would be able to budget its

expenditure accurately and at the beginning of the year, as it relates to only

premium subsidy; implementing agency has incentive to be accountable and

professional in administering the scheme; and farmers would be able to receive

claims early as these would be settled by implementing agency without having to

wait for receipt of funds from the government.

Under the proposed arrangement the government will decide the premium

payable by the farmer, and the difference between the actuarial rates and the

rates payable by the farmer will be borne by the government. The Joint Group

recommends that the premium subsidy may range from 40% to 75% for small /

marginal farmers (subject to a maximum net premium of 8%) and 25% to 60% for

other farmers (subject to a maximum net premium of 12%) at different slabs of

actuarial premium (refer chapter-7). Keeping in mind the collateral security

provided by insurance, the Joint Group also recommends that 1.00 percentage

point of premium be borne by the Banks in respect of loanee farmers. Further,

the Group recommends that the actuarial premium rates be applied at State

level. The table of risk premium rates worked out for existing scheme (NAIS) for

2004-05 is appended as Annexure-4 for reference.

For switching over to actuarial regime the insurance company would need on one

hand the support of appropriate reinsurance mechanism and on the other

required solvency margin as per regulations of IRDA. The availability and cost of

reinsurance could be an important consideration. The solvency margin

requirements worked out on the basis of expected sum insured of Rs. 14,000

crores for 2004-05 is presented in Table–9. As per the estimates, AIC would

require (assuming that worst-case loss cost will repeat during the year) an

amount of Rs. 1134 crores without reinsurance protection, and Rs. 756 crores

with reinsurance protection. Considering that AIC has only Rs. 200 crores of ______________________________________________________________________________________

46

Joint Group Report

paid-up capital, it would require additional Rs. 556 crores with reinsurance, and

Rs. 934 crores without it to meet the solvency requirements. The Joint Group,

therefore, recommends for providing required solvency margin to Agriculture

Insurance Company of India Ltd. (AIC) through the budget allocation (non-plan).

Table-9

Agriculture Insurance Company of India Ltd

Solvency Requirements under Actuarial Regime with and without Reinsurance

Basic Information on a Sum Insured of Rs. 14,000 crores (2004-05)

Sum Insured Rs. 14000 croresPremium Rate 12%Gross Premium Rs. 1680 croresClaims in worst case scenario Rs. 2520 crores (18% loss cost)

Reinsurance related information

Premium ceded Rs. 300 crores Net Premium Rs. 1380 crores

Claims Recovery from reinsurance between Rs, 1680 – Rs 2520 crores Net claims liability of AIC Rs. 1680 crores

Actuarial regime without Reinsurance

Actuarial regime with Reinsurance

20% of the amount which is higher of Gross Premium multiplied by 0.5 or Net Premium (RSM-1)

Rs. 336 Crores

[ 20% of GP * 0.5 = Rs. 168 crores20% of NP = Rs. 336 crores ]

Rs. 276 Crores

[ 20% of GP * 0.5 = Rs. 168 crores20% of NP = Rs. 276 crores]

30% of the amount which is higher of Gross Incurred Claims (GIC) multiplied by 0.5 or Net Incurred Claims (NIC) (RSM-2)

Rs. 756 Crores

[ 30% of GIC * 0.5 = Rs. 378 crores30% of NIC = Rs. 756 crores ]

Rs. 504 Crores

[ 30% of GIC * 0.5 = Rs. 378 crores30% of NIC = Rs. 504 crores ]

Higher of the Above(RSM)

Rs. 756 Crores Rs. 504 Crores

RSM for AIC being 150% of Solvency Ratio

Rs. 1134 Crores Rs. 756 Crores

ASM (paid up capital) Rs. 200 Crores Rs. 200 Crores______________________________________________________________________________________

47

Joint Group Report

Additional capital required towards solvency

Rs. 934 Crores Rs. 556 Crores

Available Solvency Ratio 0.18 0.26

As stated before, reinsurance protection is essential when the scheme is placed

on actuarial regime. However, some of the improvements suggested in NAIS,

particularly taking the yield of best five years out of preceding seven years in

calculating guaranteed yield, indemnity for prevented sowing etc. are subjective

and may increase the indemnity to such an extent, that the insurer may not have

full control over situation. To this extent, reinsurer may shy away from the

scheme. The reinsurer who is still willing to support the program may charge

higher premium. Considering these imponderables, the Joint Group feels that in

a situation if international reinsurance is not available at competitive prices, the

government may have to step-in to provide necessary support to AIC.

Tax Issues:

Income tax: AIC as insurance company has to pay income tax on surpluses as

applicable for corporates. Crop risks being systemic in nature, the frequency and

quantum of claims under crop insurance are highly volatile. The normal technical

reserves of the insurance company may not be able to cover such high

fluctuations. The income tax exemption, therefore, would help AIC to build up

adequate ‘catastrophic fund’ to be able to finance claims during adverse years.

The Joint Group, therefore, recommends that crop insurance operations be

exempted from income tax provisions. Similarly, other insurance companies may

also be exempted from income tax provisions for their crop insurance portfolio.

Service tax: Insured paying insurance premium, as per the service tax norms

will have to pay service tax @ 10.2% on the premium. Appreciating the largely

social welfare nature of crop insurance, National Agricultural Insurance Scheme

is already exempted from service tax. The Joint Group recommends that the new

scheme with proposed modifications including weather insurance be exempted

from service tax.

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Joint Group Report

A draft of modified NAIS after incorporating improvements discussed in this

chapter is given as Chapter – 5.

3.2. Farm Income Insurance Scheme (FIIS)

3.2.1. Key Issues:

The salient features and status of Farm Income Insurance Scheme (FIIS) has

already been discussed in section 3 of chapter 2. FIIS was introduced with

laudable objectives. This is an instrument supposed to achieve multiple

objectives – comprehensive income risk protection to farmer; dispensing with

MSP regime and thus save thousands of crores of rupees for the government.

The other objectives sought to be achieved are to encourage crop diversification

and give fillip to private trade, etc. It is also supposed to have addressed price

stability problems in states where procurement operations are not effective. It is

also envisaged that FIIS would provide income risk protection to the entire

produce as against marketable surplus under MSP regime.

Though conceptually FIIS is a good scheme, it suffers from several inherent

contradictions. First, it would be most unconceivable to substitute deep-rooted

MSP regime with income insurance, as MSP is available to all farmers while

income insurance is available to only the insured farmers. Secondly, MSP is

available to farmers at no additional cost while income insurance is available only

at a premium. Thirdly, income insurance linked to MSP is not an insurance

instrument as MSP is a theoretical price as against functional market price.

Although suspension of MSP operations was stipulated in areas for crops where

FIIS is available, due to pressure from states, MSP operations had to be

recommenced. The National Common Minimum Program (NCMP) of the

government also states that the MSP benefits will be extended to nook and

corner of the country. It appears, therefore, a futile and luxurious wastage of

government money if FIIS is to continue along with MSP. It is in this context, that

FIIS is perceived as neither practical nor viable.

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Joint Group Report

Agriculture Finance Corporation (AFC), which conducted concurrent evaluation

of the project during Kharif 2004 season, also stated that the scheme in the

present form is neither viable nor attractive.

3.2.2. Joint Group’s Recommendations:

Insurance of price risk pegged at MSP may not be sustainable as MSP is a

theoretical price fixed by Commission for Agricultural Costs & Prices (CACP)

based on production cost, while market price is determined by market forces

based on supply & demand function. Pitching a market price against a theoretical

MSP is simply not insurance. At the same time, as long as MSP regime

continues, FIIS (with or without MSP based guaranteed income) would only be a

parallel effort with additional expenditure. As far as risk protection for a farmer is

concerned, there exists NAIS against yield risk and MSP against price risk. The

Joint Group, therefore, finds no relevance for FIIS in the present form and

circumstances, and recommends that the pilot project on FIIS be wound up w.e.f.

Rabi 2004-05 season.

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Joint Group Report

3.3. Weather Insurance

3.3.1. Future of weather insurance:

Agriculture in India is often characterized as ‘a gamble with the monsoon’. 2/3 rd of

our agricultural land largely depends on the rains. Important crops like cereals,

millets, oilseeds in Karnataka, Andhra Pradesh, Maharashtra, Rajasthan,

Gujarat, Orissa, Madhya Pradesh, Uttar Pradesh, etc have crucial productivity –

rainfall relationship, in which rain failure means crop failure. This leaves the

majority of population engaged in agricultural operations in a miserable condition.

Weather insurance in the face of the aforesaid vagaries of nature may provide

financial security to the farming community. Rainfall insurance is viable, besides

being in the best interest of farmers, the credit agencies too which extend loans

to them, as also for the economic stability of the agricultural enterprise.

For Rabi season, we need to look at weather insurance, which in addition to

rainfall, include other parameters like soil moisture, sunlight, temperature,

humidity etc. For example, the impact of temperature was widely felt on wheat

yield during 2003-04 (Box-1).Box-1

Wednesday, September 8, 2004 (New Delhi)-PTI

India lost a mammoth 4 million tons of wheat output due to high temperature during a critical cultivation phase earlier this year, a comprehensive study by a premier farm research arm of the government has revealed.

“Having scrutinized the various reasons which can be assigned to such decline in production, the main and single factor which can be indicated more precisely is high temperature during the critical grain filling phase of wheat”, Project Director, Directorate of Wheat Research (DWR), Jag Shoran told reporters.

He said the study by Karnal based DWR took into account the temperatures in the best crop season of 1999-00 when the country produced a record 76.37 million tons against an estimated 72 million tons this year. The study reveals, on an average the maximum temperatures were higher by 3-6 degrees Celsius during March at various places in comparison to 1999-00, he said. Similarly, the minimum temperatures also recorded an average increase of 3-4 degrees Celsius in different wheat growing regions, he added. The maximum and minimum temperatures within 25-30 and 10-15 degrees Celsius range are usually considered favorable for grain growth. Prevalence of 3-6 degree higher temperature this season coinciding with grain growth phase was not favorable for

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realizing higher yield.

Weather insurance apparently has a bright future. The concept of weather

insurance and the progress made so far has already been discussed in section 4

of chapter 1. The pilot projects undertaken by AIC and other private insurers, viz.

ICICI-Lombard General Insurance Co. and IFFCO-Tokio General Insurance Co.

are a step in the right direction in fine-tuning and expanding weather insurance.

The market would witness in near future, more insurance companies and more

sophisticated products covering larger number of crops.

Joint Group’s Review

The Group examined and explored weather / rainfall insurance with a view to

identify the strengths and the weaknesses of the programme and the institutions

like India Meteorological Department (IMD) & Indian Space Research

Organization (ISRO), which generate the data. There is no doubt that weather /

rainfall insurance is a promising field. But its implementation is subjected to

many constraints and also calls for resolution of certain significant issues, some

of which are discussed below:

(i) Reliable & verifiable data and tamper-proof weather stations.

Designing a weather or rainfall insurance contract would require reliable and

accurate rainfall data on a daily basis and equally reliable yield data for at

least 20 to 30 years. Yield data is available for most of the crops for over 20

years, generated as part of crop insurance programme.

Regarding the status of rainfall data, the Group made a request to IMD to

provide the details of its network and availability of rainfall data. IMD has

provided a list of 6256 rain gauge stations across the country. Barring

about 500 stations, the others are maintained and reported by different

departments of states. Except those rain gauge stations, which are directly

maintained by IMD (about 500), the rest have data only for a few years.

Further, majority of stations have huge gaps in the rainfall data recorded.

For example, the Group studied the situation in the state of Andhra Pradesh ______________________________________________________________________________________

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as provided by IMD. Though the state has 1379 rain gauge stations, the

IMD maintains only 45. Except a handful (other than IMD maintained

stations), no station has data after 1994.

The existing network of IMD weather stations appears to be inadequate to

report rainfall data. Further the data recorded is also not reported on time in

many instances. It has also been noticed that there are huge gaps in

reporting daily rainfall data even for major stations located at District

Headquarters. This is borne out by the experience of implementation of the

pilot rainfall insurance schemes during Kharif 2004 season.

AIC has implemented Varsha Bima in 20 IMD rain gauge station areas

during Kharif 2004. As per the arrangement, IMD was to furnish daily

rainfall data for all the 20 stations. Accordingly, IMD was to furnish 2440

data points (20 stations * 122 days from 1st June – 30th September).

However, for as many as 533 data points, IMD failed to furnish the data on

time. Subsequently, it took more than a month for AIC to get the data for

these data points. If district locations face this sort of problems, one can

only imagine the problems expected with stations at sub-district level.

Similarly IFFCO-Tokio implemented ‘Barish Bima’ with indemnity period

June to September / October. As per the information gathered till date, the

complete rainfall data has not been received from IMD. Had the data been

given on time, these claims could have been processed and settled within

November.

From the above, it is very clear that the IMD is simply not geared to provide

accurate and timely rainfall data for large number of locations as required

under rainfall insurance. The Joint Group, therefore, feels that the present

network of weather stations should be expanded, strengthened and

automated to meet the requirements of not only weather insurance but also

to provide real time weather data to the government and agriculture

departments and the farming community. Since the weather data decides

the quantum of claim, if any, payable under weather insurance, the

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accuracy of the data and secured environment under which the data is

reported is very critical for its success.

In this connection, the Joint Group also examined the possibility of adopting

automated devices for recording, and the third party for reporting the data.

It was noted that devices for secure and accurate measurement of weather

parameters such as Optical Precipitation Sensors (OPS), Real-time

telemetric gauges, etc. are being used in countries where weather

insurance is successfully implemented. The equipment is mounted /

installed on electric / telephone poles to secure the data. Various types of

automated weather stations are also being used for research studies within

India. IIT, Kanpur has designed a mobile information centre mounted on a

rickshaw, which is being used to provide weather bulletins in a few areas.

There are instruments available from other countries, which are of palm size

and can be mounted on an electric or telephone pole (Boxes 2 and 3).

These will be particularly useful for experimental projects on weather

insurance, as it would involve shifting of experimental areas from year to

year.

With large-scale adoption of such instruments, the prices, which are now

somewhat high would become affordable. The Joint Group is also of the

view that with proper controls and regulations, the recording and reporting

of weather data could be entrusted to third party administrators or

alternatively could be out-sourced.

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Box-2: Transportable Automated Meteorological Station

The Automated Meteorological Station (TAMS) from AWI is a compact, rugged, self-contained meteorological station designed for rapid setup and operation in the field. Composed of a portable Transmitter/Sensor unit and a hand-held Control Display, the entire system fits into a 18" x 14" x 7" (457mm x 356mm x 178mm) light-weight carrying case. The case and system components are built to withstand rough handling and severe weather conditions. TAMS is uniquely suited to ground and military operations support, civil emergency response, weather disaster damage control and use in remote areas, such as isolated airstrips lacking access to weather stations.

Using optional adapters, the TAMS Transmitters/Sensor unit mounts to a standard tripod or to any 1" diameter pipe. The built-in sensors collect weather data for a wide array of parameters, and transmit the collected data to the handheld Control Display. The Control Display is equipped with an RS-232 serial port for connection to a computer or printer. With appropriate communications software installed on the computer, data can be stored as it is received from the TAMS.

The TAMS system has enough on-board memory to store up to 1,000 records of data, each containing all measured and calculated parameters. These records are available for downloading at a future time. That is, the TAMS can be set up in the field and retrieved at a later date along with the stored data. Downloading of the data is achieved by using a computer that runs available software. Telemetry Options: The TAMS has two signal outputs, an RS-232 connection for short distances (up to 30 meters), and an RS-485 output for longer runs (up to 1200 meters). The TAMS also has an optional UHF radio telemetry system which can transmit data over distances of up to 5-7 miles (line of sight). The radio transmitter is housed with a long life rechargeable battery in the transmitter carrying case. At the receiver end there are two options - a handheld display with an integral radio receiver, or a receiver housed in a small weatherproof carrying case. Both options have an RS-232 serial output that can be connected directly to a computer running the MetView or other software packages.

Applications: General Meteorology, Fire Management, Aviation, Military etc.

Specifications:

Weight - 2 lbs ; Size – 8.5 X 6.75 X 2 inches

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Box-3: Wireless Rain Gauge

WS7038UF Wireless Rain Gauge from LaCrosse Technology

WS7038UF Wireless Rain GaugeModel Number: WS7038UF: Dimensions: 3.5" x 0.75" x 4.25"

Unit Weight: 1.75 lbs. : Price: $69.95 This Wireless Rain Gauge stores the history of rainfall so one knows exactly how much rain fell and when. It allows us to view accumulation for the past hour, last rain period, or until you press the reset button. It also graphs the last seven days, weeks, or months in an easy to read format. Rainfall transmitter self-empties via tipping bucket.

Benefits:

Receives rain data from remote rain gauge Includes TX5U remote rain gauge Stores history of rainfall Accumulated rainfall until manual reset Rainfall for past 24 hours Rainfall for past 1 hour Rainfall for last rain period Graph of historical rainfall View last seven days, weeks, or months on graph Scroll through period by period on graph Rain alarm function (notifies of rain) Rainfall transmitter self-empties via tipping

bucket Measures 1/100th of an inch per tip Wall Hanging or Free-standing (removable

stand) Manual set time and date; 12 or 24 hour time

mode

Features:

Rainfall measuring: Tipping bucket, 0.0105”/tip

Rainfall accuracy: +/- 0.02” (+/-3%)

Rainfall range: 0.01 to 999.99” (total)

Power requirements (receiver): 2 “AAA” Alkaline batteries

Power requirements (remote sensor): 2 “AA” Alkaline batteries

Transmission Frequency: 433.92 MHz

Transmission Range: Up to 80 feet open air

(ii) Weather Data Cleaning – Weather insurance products are based on

indices derived from daily data. The indices are sensitive to the quality of

weather data. The ‘raw’ historical weather data supplied by IMD often

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contain missing and erroneous values. Along with this, there can be

discontinuities due to non-climatic factors such as relocation of station,

changes in surroundings, etc. The raw data, therefore, is required to be

‘cleaned’.

The cleaning process involves filling missing values and replacing

erroneous values. A series of quality control checks need to be performed

on the data to identify missing values and flag suspect values. These

values are required to be replaced by spatial & temporal interpolation

techniques. Multiple regression method can be applied for interpolating

missing values wherever more than one parameter like distance, location

and elevation determining the shape of the data is available. The process

also involves adjustment for non-climatic trends. The discontinuity in data

will have to be computed from the station time series or from multiple station

data. The time series data is then to be adjusted by removing the shift

caused by the discontinuity.

(iii) Basis risk – On the basis of present network of IMD, rainfall insurance can

be implemented only on the basis of District level rainfall data. Since the

district is a very large geographical unit, and the rainfall being discontinuous

in nature, the areas away from the weather stations may face the problem

of basis risk because of spatial variations. Basis risk arises if the experience

of individual farmer is vastly different from the area average. Basis risk can

be minimized only if claim structures for rainfall insurance is worked out at

smaller units such as block/village panchayat etc. However, considering that

presently the core network is limited only to district centres, it would require

huge effort, time and investment to realistically prepare rainfall insurance

models.

(iv) Correct correlation – The success and efficiency of weather insurance

depends on establishing accurate correlation between productivity levels

and weather variations. However, there are a large no. of crops, such as

soybean, cotton, etc. where it is difficult to establish significant correlation.

Rainfall though has overriding importance over other agricultural inputs, yet

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it is too complex to estimate the correlation arising out of interactive nature

of various agricultural inputs. During Rabi, weather insurance gets further

complicated because of the complexity of variables such as temperature,

relative humidity, chill factor, fog density etc. Establishing correct correlation

with fine-tuning the model to account for daily variations would require not

only sophisticated analytical techniques but also a good network of weather

stations to report weather data accurately on a regular basis. At present

weather data other than rainfall is reported by IMD only for selective major

stations. The Joint Group, therefore, feels that for the weather insurance to

really take off, it is essential that the network of weather stations is

strengthened and the quality of the data is substantially improved.

(v) Premium Rates – It would be unrealistic to assume that the premium rates

under weather insurance will be lower than crop insurance. The insurance

contracts worked out by AIC, ICICI-Lombard & IFFCO-Tokio have shown

that the premium rates would be pretty high for a good payout. The

premium rate was as high as 15 percent of sum insured for rainfall

insurance implemented by ICICI-Lombard for oranges in Rajasthan. The

premium rate proposed for winter precipitation of apple by ICICI-Lombard is

close to 40 percent of sum insured. Though, the weather insurance

contracts can be worked out keeping premium rates low and affordable, the

payouts are most unlikely for contracts designed for low premium rates.

For example, AIC offered catastrophic options under Varsha Bima at a

premium as low as 2-3 percent. But despite adverse southwest monsoon

during 2004, none of the insured farmers under this option could get the

claim because of very high deductible, which was as much as 60 percent.

As a matter of fact AIC provided five different options to farmers (as outlined

in section 4 of chapter 1), and the premium was lowest for ‘catastrophe

option’. A comparative chart of premium for a sum insured for Rs. 15000 for

different options of rice in Warangal (AP) is given below for information:

S. No Option Premium (Rs.)1 Sowing Failure 9132. Rainfall Distribution Index 3549

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3. Seasonal Rainfall Insurance 19504. Agronomic Optimum Rainfall 13855. Catastrophe cover 432

Out of the five options made available by AIC, the farmers opted for

‘catastrophe option’ because the premium was low and affordable. The

farmers could not appreciate that the claim under ‘catastrophe option’ will

be very rare. For options where payout is commensurate with losses, the

Joint Group strongly feels that reduction of premium rates is a must. For this

to be achieved, accurate rainfall and yield data is required for 20-30 years.

Otherwise, premium rates continue to be loaded for these data

inaccuracies.

Boxes-4 to 6 illustrates different models of payment of products

implemented by AIC, ICICI-Lombard & IFFCO-Tokio and highlights the

relationship between the premium and the claim payout.

From the details given in boxes, it could be seen that all the three insurance

companies, which introduced pilot projects on rainfall insurance, made sure

that, the claims if are paid only when the deviation in the rainfall is

substantial. In case of IFFCO-Tokio, the claim starts only when the

deficiency in the rainfall is 30 percent from the normal, which is almost a

semi-drought situation. In case of AIC the claim trigger starts at 20 percent

deficiency of rainfall. ICICI Lombard though kept the trigger at 5 percent

deficiency, but the initial payouts were meager so much so that the claims

are equal to the premium paid only at a level of 30 percent of rainfall

deficiency.

(vi) Insurable Interest - Insurance contracts usually require an ‘insurable

interest’ by the insured which may be viewed as incompatible with a

weather contract settled on the basis of third party data as opposed to

losses suffered by the insured. Since weather insurance is a derivative

contract, persons unconnected with agricultural activity may also buy

insurance unless appropriate checks & balances are put in place. In other

words, existence of insurable interest is essential to extend weather

insurance.

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Given that Securities Exchange Board of India (SEBI) has also issued

guidelines for physical delivery of capital market derivatives, it would be

imperative for weather insurance to insist on insurable interest. In other

words weather insurance should discourage participation of those people

who are not engaged in agricultural activity.

Box-4: ICICI-Lombard – Rainfall Index insurance

Mahbubnagar weather insurance - small farmer payout structure

Maboobnagar weather insurance -small farmer payout structure

0

100

200

300

400

500

600

700

-15%

-25%

-30%

-35%

-40%

-45%

-50%

-55%

-60%

-65%

-70%

-75%

-80%

-85%

-90%

-95%

-100

%

rainfall deviation from mean

rain

fall

inde

x (m

m)

0

2000

4000

6000

8000

10000

12000

14000

16000

payo

ut (

Rs

)

Actual rainfall index (in mm)Payout

Explanation:

As per the above graphic, the insured farmer is likely to recover claims equivalent

to the amount of premium paid, if the deviation in rainfall is between 25 – 30

percent. The farmer would receive approximately 15 percent of the sum insured

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if the deviation of rainfall were 50 percent and 25 percent if the deviation of

rainfall were 65 percent.

Box – 5: IFFCO – Tokio Rainfall Index Insurance model

Mahbubnagar / Andhra Pradesh Bijapur / KarnatakaMonth Weight Normal

Rainfall (mm)

Weighted Normal Rainfall (mm)

Month Weight Normal Rainfall

Weighted Normal Rainfall (mm)

June 1.25 114.7 143.4 June 1.00 91.3 91.3July 1.50 205.1 307.7 July 1.75 84.3 147.5August 1.25 178.4 223.0 August 1.00 82.7 82.7September 0.50 186.3 93.2 September 0.50 165.5 82.8Total - 569.8 767.2 Total - 423.8 404.3

Claim Payout Table

% Deficiency

Claim Payout

(% of SI)

Claim Payout Table

% Deficiency

Claim Payout

(% of SI)0% 0% 0% 0%

10% 0% 10% 0%30% 10% 30% 0%40% 13% 40% 10%50% 18% 50% 13%60% 25% 60% 18%70% 40% 70% 25%80% 70% 80% 40%90% 100% 90% 70%

100% 100%Premium (%) 4.38 Premium (%) 4.95

Explanation:

As per the above structure for Mahbubnagar (Andhra Pradesh), the claim pay out

starts only when the adverse deviation in rainfall index touches 30 percent. At 30

percent deviation, the insured farmer would receive 10 percent of sum insured as

claim, and it is roughly equivalent to twice the amount of premium paid. The

farmer would receive 18 percent of the sum insured if the deviation of rainfall

index were 50 percent and 25 percent if the deviation of rainfall were 60 percent.

The farmer would receive 50 percent of sum insured only if the deviation in

rainfall index touches 80 percent.

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Box-6: Agriculture Insurance Company of India Ltd. – Aggregate rainfall model

Illustration of Varsha Bima – ‘Seasonal Rainfall’ Option for Lucknow (Paddy)

1. Season span / Period of insurance :1st June to 30th September 20042. Risk Acceptance Period : Upto 30th June 20043. Reference IMD Rain-gauge Station : Lucknow (UP)4. Rain-gauge Station’s jurisdiction for Insurance: Badagaon and Babina Blocks 5. Normal Rainfall : 853 MM; 6. Crop : Paddy7. Maximum Pay-out : Rs. 18,000/- 8. Premium (per hectare): Rs. 1296/9. Pay-out structure (Per hectare compensation structure at various levels of deviations): Rainfall Range Payment Rainfall Range Payment MM Rs / MM MM Rs / MM

640-682 10.77 597-640 11.99 554-597 13.32 512-554 14.80 469-512 16.47 426-469 18.30 384-426 20.35 341-384 20.40 298-341 20.45 256-298 20.56 213-256 20.65 170-213 20.78 128-170 20.87 85-128 20.93 42-85 21.00 0-42 21.10

How to use the table:

Payout starts once the negative deviation in rainfall touches 20%. In case of Lucknow, the strike point is 682 MM. If, say actual rainfall is 650 MM, the payout per hectare of paddy is – ‘deviation in rainfall’ (as against normal), multiplied by ‘payment per MM deviation’ at a given range. In this case, it is 203 MM X Rs. 10.77 = Rs. 2186. If the actual rainfall is, say 426 MM (50% of normal), the payout is Rs. 8690. At 100% deviation, the payout is full sum insured, i.e. Rs. 18000.

Explanation:

As per the above table for Lucknow (Uttar Pradesh), the claim pay out starts

once the adverse deviation in rainfall touches 20 percent. At this deviation, the

insured farmer would receive approx. 20 percent of sum insured as claim, and it

is roughly equivalent to 1½ times the amount of premium paid. The farmer would

receive 50 percent of the sum insured if the deviation of rainfall were 50 percent

and 65 percent if the deviation of rainfall is 70 percent.

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(vii) Weather Insurance integration with other risk management tools –

Various studies have proved that no single strategy is effective in reducing

risk in the farm sector. Integration of various programmes, which can blend

and compliment, can do wonders in risk management. In case of weather

insurance, the Joint Group feels that it could play an effective role in areas

where farmers are already using water-harvesting techniques. The water

harvesting techniques including watershed development programmes

provide 1st layer of risk management, followed by financial arrangements

like savings programme and weather insurance. The Joint Group is,

therefore, of the view that the weather insurance be considered by the

government as part of integrated strategy along with such strategies as

water harvesting techniques, watershed development, resistant varieties of

crops, cloud seeding for rain enhancement, savings account, etc.

(viii) Insurance Regulations - Insurance regulations for establishing an

appropriate legal and regulatory framework for weather insurance, which is

presently absent, will have to be set up. The Insurance Regulatory &

Development Authority (IRDA) will have to put in place appropriate

regulatory mechanism for index based insurance contracts.

As discussed in the earlier paragraphs, there are a number of issues, which need

immediate attention before weather insurance is set for take off. The first and

foremost issue is real time, accurate and secure weather data at block level to

effectively operationalize weather insurance. It would require substantial

investment in up-gradation and expansion of weather stations.

Agriculture Ministry’s Initiative:

Agriculture Ministry (GoI) requested almost all the insurance companies including

those from private sector to submit proposals on rural insurance, particularly

agricultural insurance. Among these companies, ICICI-Lombard and IFFCO -

Tokio General Insurance (ITGI) have submitted proposals on rainfall / weather

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insurance. These two companies have subsequently made presentations on their

initiatives and proposals for future. The Company wise details are as follows:

IFFCO-Tokio General Insurance:

The Company implemented “Barish Bima”, a rainfall index insurance product

covering major crops in nine districts of four states during Kharif 2004 season.

The policy pays for deviations in actual rainfall exceeding 30 percent. The claims

are paid on graded scale, with 100 percent claims payable when adverse

deviation in rainfall reaches 90 percent. The premium rates vary from 4 - 5

percent and farmers are covered on group basis. The Company has plans to

expand the product to more districts and states in future, particularly Kharif

seasons.

ICICI-Lombard:

The Company is currently working on weather risk insurance for Wheat (North

India), Apples (Himachal Pradesh), Grapes (Maharashtra), Coffee (Kerala),

Mustard (Rajasthan) etc. The Company is also working on farm credit and

weather based loan portfolio insurance for Banks, etc.

The company submitted specific proposals for implementing weather insurance

during Rabi 2004-05 season for Wheat in parts of Haryana and Punjab; Coffee in

Wynad district in Kerala; Coriander in Jhalawar, Boondi & Kota districts of

Rajasthan; Apple in Shimla district of Himachal Pradesh and Mustard in

Ganganagar & Hanumangarh districts of Rajasthan. The risks covered are high

temperature for wheat; chilling hours requirement, winter precipitation

requirement, temperature fluctuations during flowering and deficit rainfall from

April to August for apple; frost injury due to sudden drop in temperature,

sustained low temperature and temperature induced early maturity for mustard;

frost injury due to drop in minimum temperature and loss of quality due to rainfall

for coriander; and blossom showers, backing showers and deficit rainfall cover

during berry swelling stage for coffee.

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The Company has subsequently submitted financial proposals, and made

presentation on 6th November’ 04 before the Joint Group. As per proposals, the

premium rates are significantly high. Rates for apple ranges from 8 to 38 percent;

Mustard 12 percent; Coriander 14 percent and wheat in Haryana range from 2.3

percent to 11.3 percent for normal sowing; 4.3 to 14.8 percent for late sowing

and 7.7 to 15.5 percent for very late sowing. The comparative rates for wheat in

Punjab are lower for late and very late sowings and higher for normal sowing.

No rates have been given for coffee.

In view of the complexity of proposed weather parameters for coverage, and high

premium rates quoted, the Joint Group requested for assistance of experts from

ICAR. The experts felt that the concept is novel and interesting, but product

design particularly for wheat needs refinement to account for effect of the day-to-

day variations in temperatures. Experts also felt that more time is required to

study the proposed coverage vis-à-vis agronomic and meteorological

requirements of proposed crops. The Joint Group particularly felt that the

premium rates are very high, and asked ICICI-Lombard if it would be possible to

re-workout the structures based on weekly or daily temperature data. ICICI-

Lombard promised to submit the proposal shortly. In view of time constraint, the

Joint Group could not wait for the revised proposals.

Joint Group’s Recommendations:

The Joint Group considered rainfall and weather insurance proposals received

from ICICI Lombard, ITGI and AIC. ICICI Lombard is the only company to submit

its interest for implementing weather insurance products during the ensuing Rabi

2004-05 season. The Joint Group feels that the revised proposal for Weather

Insurance when submitted by ICICI-Lombard requires further evaluation.

However, considering limited time available, and that NAIS is already

implemented for some of these crops / areas during the season, the Group

recommends that any subsidy in premium could be considered only after the

company runs a pilot project, and submits a concrete proposal based on its

experience.

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However, for Kharif season the Joint Group noted that the rainfall insurance

products submitted by AIC, ICICI-Lombard and ITGI have difference in product

design and indemnity formula. As an illustration, the one submitted by AIC is

more elaborate and has five different options meeting different requirement of

farmers. The product has been designed in such a way that the indemnities are

significantly better, and consequently the premium rates are slightly higher. The

ones submitted by ICICI Lombard and ITGI are based on rainfall index with low

indemnity and low premium rates. The Joint Group, in view of differences in

products, feels that it would not be possible to compare them and that the farmer

should be given only one product to avoid confusion and moral hazard. The Joint

Group, therefore, recommends that a consultant be hired to examine different

products and suggest a farmer friendly product, acceptable to the insurance

companies. The product can be fine-tuned by the Ministry of Agriculture and be

offered to insurance companies for quoting financial proposals. The scheme can

then be offered to the company quoting the most competitive rate, with provision

for premium subsidy and support as are being offered to AIC.

Weather Insurance is a promising field. However, the success and efficiency

depends upon quality of weather data, proper correlation studies and affordable

premium rates for farmers, among others. Rainfall during Kharif and other

weather parameters (temperature, humidity, light, dew, chill etc.) during Rabi are

the important meteorological parameters based on which insurance will be

designed. Considering the above, the Joint Group outlined an ‘Action Plan” for

implementation of weather insurance in the country, the details of which are

provided in Box-7.

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Box - 7: Weather Insurance – Action Plan

a. Perennial horticultural crops (where area based yield insurance is unlikely to work) will be the special focus for weather insurance. The Group recommends for appointing consultants with following time schedule:

(i) Release of advertisement – 20th December 2004 (ii) Last date for receipt of applications – 31st December 2004 (iii) Finalizing TORs & short-listing applicants – 10th January 2005 (iv) Inviting technical & financial bids – 20th January 2005 (v) Appointment of consultants – 1st February 2005 (Consultants to be chosen for horticultural crops and setting common parameters for designing weather insurance)b. Since availability of the data (both yield and rainfall) is a constraint, in the

first phase, 50-100 districts and two or three important crops will be identified for experimenting weather insurance.

c. Common design parameters will be circulated to all insurers for getting financial quotes from prospective insurers. Crops and territories will be assigned on the basis of premium rates, service criteria & network.

d. Private insurers will be extended support by the government at par with AIC.

e. A review will be made after completion of two years as to the efficiency of weather insurance, particularly its supplementary and complimentary role vis-à-vis area based yield insurance.

f. The existing network of weather stations will need to be expanded, strengthened and automated to provide real time and accurate weather data to develop weather insurance. For this purpose the government and the insurers will join hands. The possibilities for permitting third party weather data providers will also be explored.

3.3.2. Agro - Meteorological & Blended products

The Joint Group learnt that considerable research is conducted in agro-

meteorological yield models at ISRO and other centres and it is possible to blend

these parameters with spectral (satellite imagery) models in designing accurate

yield models. The Joint Group, therefore, recommends that an experimental

project could be commissioned by AIC.

3.3.3. New Initiatives under Macro Management in Agriculture

The Joint Group recommends that the State Governments should be permitted to

take up small experimental and innovative crop insurance products including

weather insurance and insurance for horticulture and plantation crops in

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collaboration with the AIC and other insurance companies as “new initiative”

under the scheme of Macro Management in Agriculture.

4. Modified National Agricultural Insurance Scheme

(The improvements suggested in NAIS in the earlier chapter are incorporated in the modified scheme presented below)

OBJECTIVES:

The objectives of the Scheme are as under: -

i. To provide insurance coverage and financial support to the farmers in the

event of prevented sowing & failure of any of the notified crop as a result

of natural calamities, pests & diseases.

ii. To encourage the farmers to adopt progressive farming practices, high

value in-puts and higher technology in Agriculture.

iii. To help stabilize farm incomes, particularly in disaster years.

SALIENT FEATURES OF THE SCHEME:

1. Agriculture Insurance Company of India Ltd. (AIC), which is exclusively formed

for administering agriculture and allied insurance schemes, shall underwrite

the scheme for the time being.

2. CROPS COVERED:

i. Food crops (Cereals, Millets & Pulses)

ii. Oilseeds

iii. Annual Commercial / Horticultural crops

The Crops are covered subject to availability of i) the past yield data based on

Crop Cutting Experiments (CCEs) for adequate number of years, and ii)

requisite number of CCEs is conducted for estimating the yield during the

proposed season.

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Ten years historical data is adequate for setting premium rates, fixing

indemnity limit and threshold yield, etc. Wherever such historical yield data at

insurance unit is not available for some years, the data of nearest

neighbouring unit / weighted average of contiguous units / next higher unit can

be adopted, subject to appropriate loading in the premium rate, if necessary.

3. STATES AND AREAS TO BE COVERED:

The Scheme extends to all States and Union Territories (UTs). The States /

UTs opting for the Scheme, would be required to take up all the crops

identified for coverage in a given year. The States / UTs having opted for the

Scheme once, will have to continue for a minimum period of three years.

4. FARMERS TO BE COVERED:

All farmers including sharecroppers, tenant farmers growing the notified crops

in the notified areas are eligible for coverage.

The Scheme covers following groups of farmers:

a) On a compulsory basis :All farmers growing notified crops and availing

Seasonal Agricultural Operations (SAO) loans from Financial Institutions

i.e. Loanee Farmers.

b) On a voluntary basis : All other farmers growing notified crops (i.e., Non-

Loanee farmers) who opt for the Scheme. These farmers could be:

(i) Individual owner-cultivator farmers

(ii) Farmers enrolled under contract farming, directly or through

promoters / organisers

(iii) Groups of farmers / societies serviced by Fertiliser Companies,

Pesticide firms, Crop Growers associations, Self Help Groups

(SHGs), Non-Governmental Organisations (NGOs), and Others

(iv) Corporate farms

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5. RISKS COVERED & EXCLUSIONS:

(A). STANDING CROP (Sowing to Harvesting): Comprehensive risk insurance is

provided to cover yield losses due to non-preventable risks, viz.:

(i) Natural Fire and Lightning

(ii) Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane, Tornado etc.

(iii) Flood, Inundation and Landslide

(iv) Drought, Dry spells

(v) Pests/ Diseases etc.

(B) PREVENTED SOWING / PLANTING RISK: In case farmer of an area is

prevented from sowing / planting due to deficit rainfall or adverse seasonal

conditions, such insured farmer who failed to sow / plant (but otherwise has

every intention to sow / plant and incurred expenditure for the purpose), shall

be eligible for indemnity. The indemnity payable would be a maximum of

25% of the sum-insured. The scale of payment for different crops will be

worked out by implementing agency in consultation with experts.

(C) POST HARVEST LOSSES: Coverage is available only for those crops, which

are allowed to dry in the field after harvesting against specified perils of

cyclone in coastal areas, resulting in damage to harvested crop. Further, the

coverage is available only upto a maximum period of two weeks from

harvesting. Assessment of damage will be on individual basis.

GENERAL EXCLUSIONS: Losses arising out of war & nuclear risks, malicious

damage and other preventable risks shall be excluded.

6. SUM INSURED / LIMIT OF COVERAGE:

In case of Loanee farmers the Sum Insured would be at least equal to the

amount of crop loan sanctioned / advanced, which may extend upto the value

of the threshold yield of the insured crop at the option of insured farmer.

Where value of threshold yield is lower than the loan amount per unit area, the

higher of the two is the Sum Insured. Multiplying the Notional Threshold Yield ______________________________________________________________________________________

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(district/region/state level) with the Minimum Support Price (MSP) of the

current year arrives at the value of Threshold Yield. Wherever Current year’s

MSP is unavailable, MSP of previous year shall be adopted. The crops for

which, MSP is not declared, farm gate price established by the marketing

department / board shall be adopted.

Further, in case of Loanee farmers, the Insurance Charges payable by the

farmer shall be financed by loan disbursing office of the Bank, and will be

treated as additional component to the Scale of Finance for the purpose of

obtaining loan.

For non-loanee farmers, the sum-insured is upto the value of Threshold Yield

of the insured crop.

7. PREMIUM RATES & SUBSIDY:

Premium rates are to be worked out on actuarial basis. However, the

premium paid by the farmer can be subsidized on the following lines:

S. No

Premium slab

Subsidy to Small / Marginal farmers

Subsidy to Other farmers

1 Upto 2% 25% Nil2 >2 - 5% 40% subject to minimum net

premium of 1.5%25% subject to minimum net premium of 2%

3 >5 – 10% 50% subject to minimum net premium of 3%

40% subject to minimum net premium of 4%

4 >10 –15% 60% subject to minimum net premium of 5%

50% subject to minimum net premium of 6%

5 >15% 75% subject to minimum net premium of 6% and maximum net premium of 8%

60% subject to minimum net premium of 7.5% and maximum net premium of 12%

The definition of Small and Marginal farmer would be as follows:

Small Farmer: A farmer with a land holding of two hectares (5 acres) or less.

Marginal Farmer: A farmer with a land holding of one hectare or less (2.5

acres).

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Financing Banks shall bear 25 percent of premium payable by loanee farmers

subject to a maximum of 1.00 percentage point of premium.

9. SHARING OF RISK:

All claims will be borne by the Agriculture Insurance Company of India Ltd.

10. SCHEME APPROACH AND UNIT OF INSURANCE:

(A) WIDESPREAD CALAMITIES:

The Scheme would operate on the basis of ‘Area Approach’ i.e., Defined

Areas for each notified crop for widespread calamities. The Defined Area (i.e.,

unit area of insurance) is Village Panchayat for major crops and for other crops

it may be a unit of size in between Village Panchayat to Taluka to be decided

by the State/UT Govt.

(B) LOCALIZED RISKS:

In case of localized risks, viz. hailstorm, landslide and specified wild animals

(neelgai, spotted dear and elephant), the claims will be assessed on individual

basis. For other calamities the assessment will be on the basis of ‘area

approach’.

11. SEASONALITY DISCIPLINE:

(a) The broad seasonality discipline for Loanee and Non-Loanee farmers can be as

under:

Activity Kharif RabiLoaning period (loan sanctioned) for Loanee farmers

April to June / July

October to December

Cut-off date for receipt of Proposals of Non-Loanee farmers

15th June / 15th July

31st December

Cut-off date for receipt of Declarations of Loanee farmers from Banks

31st July 31st January

Cut-off date for receipt of Declarations of Non-Loanee farmers from Banks

31st July 31st January

Cut-off date for receipt of yield data Within a month from final harvest

Within a month from final harvest

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In case of Kharif crops, the cut off dates are fixed in such a way that these

dates correspond to historical onset / coverage by the South-West Monsoon.

Further, in case of three crop / season pattern, a modified discipline keeping

in mind the overall seasonality discipline prescribed above, will be adopted by

the State Level Co-ordination Committee on Crop Insurance (SLCCCI).

Non-Loanee farmers can buy insurance before actual sowing / planting based

on advance crop planning for the season. For any reason, if farmer changes

the crop planned earlier at the time of buying insurance, such changes should

be intimated to financial institution at which insurance proposal was

submitted, within 30 days from the cut-off date for buying insurance,

accompanied by sowing certificate issued by concerned official of the State at

village level. Where required, the farmer will pay the difference in premium or

implementing agency will refund difference in premium, as per the premium

structure.

12. ESTIMATION OF CROP YIELD:

The State govt./UT will plan and conduct the requisite number of Crop Cutting

Experiments (CCEs) for all notified crops in the notified insurance units in

order to assess the crop yield. The State govt./ UT will maintain single series

of Crop Cutting Experiments (CCEs) and resultant yield estimates, both for

Crop Production estimates and Crop Insurance. Planning and supervision for

all CCEs will be of the same order as that of General Crop Estimation

Surveys (GCES).

CCEs shall be undertaken per unit area /per crop, on a sliding scale, as

indicated below:

S. No Insurance Unit Minimum sample size of CCEs1. District 242. Taluka / Tehsil / Block 163. Mandal / Phirka / Revenue Circle /

Hobli or any other equivalent unit10

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4. Village Panchayat 08

A Technical Advisory Committee (TAC) comprising representatives from

Indian Agricultural Statistical Research Institute (IASRI), National Sample

Survey Organisation (NSSO), Ministry of Agriculture (GoI) and implementing

agency shall be constituted to decide the sample size of CCEs and all other

technical matters. Inputs from satellite imagery could also be utilized in

deciding sample size.

In instances where required number of CCEs could not be conducted due to

non-availability of adequate cropped area, the yield data for such units can be

generated by Insurer by proxy indicators, such as clubbing with

neighbouring / contagious units, adopting yield of next higher unit, yield data

generated by correction / correlation factor with next higher unit, etc.

Alternative yield assessment techniques, such as satellite imagery, agro-

meteorological and bio-metric and a combination of such techniques, etc. can

be explored and adopted after establishing reasonable level of

standardization.

13. LEVELS OF INDEMNITY & THRESHOLD YIELD:

Two levels of Indemnity, viz., 90% & 80% corresponding to Low Risk & High

Risk areas shall be available for all crops. The criteria for deciding low and

high risk will be determined by implementing agency.

The Threshold yield (TY) or Guaranteed yield for a crop in a Insurance Unit

shall be the average of best five years out of preceding seven years,

multiplied by the level of indemnity.

14. NATURE OF COVERAGE AND INDEMNITY:

(A) WIDE SPREAD CALAMITIES:

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If the ‘Actual Yield’ (AY) per hectare of the insured crop for the defined area

[on the basis of requisite number of Crop Cutting Experiments (CCEs)] in the

insured season, falls short of the specified ‘Threshold Yield’ (TY), all the

insured farmers growing that crop in the defined area are deemed to have

suffered shortfall in their yield. The Scheme seeks to provide coverage

against such contingency.

‘Indemnity’ shall be calculated as per the following formula:

Shortfall in Yield X Sum Insured for the farmer Threshold yield

[Shortfall = ‘Threshold Yield - Actual Yield’ for the Defined Area]

(i) ON ACCOUNT PAYMENT OF CLAIMS:

In case of adverse seasonal conditions during crop season, claim amount

upto 50 percent of likely claims would be released in advance subject to

adjustment against the claims assessed on yield basis. The on account

payment will be considered only if the expected yield during the season is

less than 50 percent of normal yield. The criteria for deciding on-account

payment of claims shall be based on agro-meteorological data / satellite

imagery or such other indicators to be decided by the Insurer, and will be

implemented in States and for crops for which such proxy indicators can be

established.

(ii) PREVENTED SOWING / PLANTING CLAIMS:

The extent of claims payable will be decided on the basis of rainfall position

issued by the concerned India Meteorological Department (IMD) for the area

during the sowing season and acreage-sown particulars issued by the State

government. Other authentic rain gauge stations which the government shall

install for the purpose / Insurer/ Insurer nominated agencies can also be

considered for the purpose of measuring rainfall. The maximum claims

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payable will be 25 percent of the sum-insured. Having received indemnity

based on prevented sowing / planting, the insurance cover is automatically

terminated.

(iii) POST HARVEST LOSSES:

Coverage is available only for those crops, which are allowed to dry in the

field after harvesting against specified perils of cyclone in coastal areas,

resulting in damage to harvested crop lying in the field in ‘cut & spread’

condition. In other words, the crop, which after harvest is left in the field for

drying, is only covered against the peril specified above. The harvested crop

bundled and heaped at a place before threshing is beyond coverage under

post harvest losses. Further, the coverage is available only upto a maximum

period of two weeks (14 days) from harvesting. Assessment of damage will

be on individual basis.

(B) LOCALIZED RISKS:

The losses would be assessed on individual basis in case of loss / damage

resulting from occurrence of identified localized risks viz., hailstorm, landslide

and specified wild animals (neelgai, spotted dear & elephant). The cost of

inputs incurred until the time of occurrence of peril, and the expected loss in

final yield due to the peril, would form the basis for loss assessment.

In case of localized risks, implementing agency may utilise the services of

concerned departments of the State government, such as Agriculture,

Revenue etc.

15. COMMISSION & BANK SERVICE CHARGES:

Rural agents and Others who are engaged for procuring and servicing

business of Non-Loanee farmers may be paid appropriate commission as

decided by implementing agency. The servicing banks of Non-Loanee farmers ______________________________________________________________________________________

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will receive 2.5% of gross premium as service charges.

16. REINSURANCE COVER:

Efforts will be made by the implementing agency to obtain appropriate

reinsurance cover for the Scheme in the national / international reinsurance

market. In the event of failure to procure such cover at competitive rates, the

Government of India should provide necessary protection in terms of interest-

free loan.

17. REVIEW OF THE SCHEME:

The Scheme will be reviewed after two years and necessary modifications will

be incorporated based on the review.

18. IMPORTANT CONDITIONS/CLAUSES APPLICABLE FOR COVERAGE OF RISK:

(a) The Joint Group also recommends that the banks display the list of all insured

farmers at the village panchayat office. Further, the banks will also display

the list of benefited farmers together with claim amount soon after the claims

are received from implementing agency.

(b) Implementing agency possesses the discretion to accept or reject any risk of

defined area(s) for any crop(s) considering the prevailing agricultural

situation. Mere sanctioning / disbursement of crop loans and submission of

proposals/ declarations and remittance of premium by the farmer / bank

without explicit intent to raise the crop, does not constitute acceptance of risk

by implementing agency.

(c) In the event of near total crop failure during early or mid season affecting the

entire defined area, implementing agency shall adopt a graded scale

indemnity settlement restricting the indemnity to the proportion of input cost ______________________________________________________________________________________

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upto that stage. The graded scale shall be worked out by implementing

agency.

(d) Implementing agency, if deemed necessary, shall investigate the coverage on

its own or by an agency appointed for the purpose and shall for this purpose

utilize satellite imagery data for identification of anomalies in crop insurance

coverage vis-à-vis actual field conditions. Upon identification of adverse

phenomenon based on such investigations, implementing agency may resort

to scaling down of sum insured.

19. BENEFITS EXPECTED FROM SCHEME:

The Scheme is expected to:

Be a critical instrument of development in the field of crop production,

providing financial support to the farmers in the event of crop failure.

Encourage farmers to adopt progressive farming practices and higher

technology in Agriculture.

Help in maintaining flow of agricultural credit.

Provide significant benefits not merely to the insured farmers, but to the

entire community directly and indirectly through spillover and multiplier

effects in terms of maintaining production & employment, generation of

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

Streamline loss assessment and enable expeditious settlement of claims.

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5. SCOPE FOR PACKAGE INSURANCE POLICY

The loss or damage to crops is no doubt the major cause of concern for the

farmer. However, there are other assets of the farmer, such as livestock,

agricultural implements, bullock cart, agricultural pump set, stored grain, health,

etc. the loss of which is also an additional source of worry for him. In fact,

maintenance of these assets is absolutely important for him to ensure good

agricultural productivity.

A composite package insurance covering all assets of the farmer besides crops

is ideal for farmers as such policy / scheme could meet all insurance

requirements of a farmer under one contract. Ideally, therefore, farmer would

prefer to have single insurance policy covering all his assets, including crops.

Reasonable premium rates and providing composite insurance cover for all his

needs at his doorstep would go a long way in ameliorating the situation.

It may look seemingly convenient to cover such varied assets / items along with

crops under scheme like NAIS. However, there are practical difficulties, such as:

1. Crop Insurance is of seasonal nature (about 4-6 months), while all other

items / assets listed under package insurance need annual policies. Short

period policies could be issued for items other than crop, but the premium

rates would be high, and renewal would be cumbersome.

2. NAIS is based on ‘Area Approach’ treating all insured farmers growing a

particular crop as single entity, while other items would not be pliable to such

broad approach, as such items owned by different farmers would need

different treatment.

3. Agriculture Risks are co-variate (systemic) in nature. Thus it is deemed that

risks affecting all farmers in an area could be fairly dealt under ‘Area

Approach’. The other risks affecting items other than crops are

‘independent’ in nature and hence, it will be difficult to connect loss / damage

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of other assets to operation of co-variate risks. In other words, the assets

other than crops can be correctly indemnified in the event of loss only under

‘individual assessment’.

4. Crops can be categorized broadly under a generic name, while it would be

totally different in case of other assets. For example, there would be

different age groups of livestock, different sexes, breeds, etc. all attracting

different premium rates etc.

5. Tractors, trucks etc. are covered under Motor Insurance as per MV Act, and

premium varies from vehicle to vehicle based on make, model, horsepower,

insured estimated value, accessories, electrical fittings, third party liability

etc. Combining tractors & trucks with crop insurance, therefore, will be

difficult. Further, as per MV Act third party liability is compulsory, while own

damage / comprehensive insurance is optional.

The Joint Group, therefore, feels that a composite policy covering all important

assets of farmers cannot be combined with area based crop insurance

programme. The practicable approach would be to differentiate crops and other

assets. Crops to be covered under area approach and other assets to be

covered at individual farmer level.

The public sector general insurance companies are marketing ‘Kisan Package Policy’, covering as many as 15 different items. However, standing crops are

not covered under the policy. These policies are sold to individual farmers, and

losses are assessed on individual basis. Therefore, the farmers who need

package insurance can buy Kissan Package Policy available in the market. A

copy of Kissan Package Policy is enclosed, as Annexure-5.

The Joint Group also explored availability of such package covers from private

insurers. One such package offered by ICICI-Lombard has the following features:

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a) Personal Accident Insurance: The Policy covers accidental death and only

few instances of Permanent Total Disability (PTD) at a premium of Rs. 7 for a

sum insured of Rs. 50,000.

b) Package health insurance cover: It provides for (a) critical illness, (b)

convalescence benefit, (c) accidental hospitalization. Part (c) is nothing but

personal accident insurance, while (b) follows (a) when the hospitalization

continues beyond 15 consecutive days.

c) Home Insurance: Since the All India Fire Tariff governs the insurance; the

premium and benefits are similar to public sector companies.

d) Cattle Insurance: While the scope of cover is same as Public Sector

Insurance Companies (PSICs), but the premium rate is high at 5% compared

to 4% of PSICs.

e) Tractor Insurance: Governed by All India Motor Tariff, so the premium and

benefits are similar to PSICs.

A composite policy covering all important assets of farmers, cannot be combined

with area based crop insurance programme. The Joint Group, therefore,

recommends single window approach in which crops can be covered under

area approach and “Other Assets” (dwelling & contents, personal accident,

hospitalisation, livestock, pedal cycle, agrl. pump-set, etc.) at individual farmer

level. However, farmer will have the advantage and convenience of having both

these covers available from single source.

Other Assets (Package): This Category contains insurance covers generally required by farmers. Further,

the premium for many of these covers is nominal. The details of the covers is as

follows:

i) Building and Household contents (excluding jewelry & valuables) against

fire, lightning, explosion, flood, inundation, storm, tempest, typhoon,

hurricane, cyclone, impact damage, and earthquake for a sum of Rs.

30000 and Rs. 10000, respectively. The premium for this purpose will be

approx. Rs. 20. In case of hut the sum insured will be Rs. 8000 for ______________________________________________________________________________________

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dwelling and Rs. 2000 for contents and the expected premium works out

to approx. Rs. 30.

ii) Personal accident against accidental death, permanent total disability and

permanent partial disability. The sum insured will be Rs. 50000 at a

premium of Rs. 15. The coverage is for head of the family. In case the

farmer is older than 70 years, the person next in the family can be

covered. Refer to Table-10 for benefits.

iii) Medical insurance for a sum insured of Rs. 20,000 covering hospitalization

expenses of all diseases including pre-existing diseases, irrespective of

age. Earning member / head of the family / farmer covered under crop

insurance can get this cover. The expected premium is approximately Rs.

200.

iv) Livestock insurance against death by disease or accident.

v) Agriculture pump-set against fire, theft, burglary, mechanical or electrical

breakdown, etc.

vi) Animal driven cart - damage to cart by accidental means, fire, explosion,

malicious act, while in transit etc.; damage to animal by accidental injury

or death and injury / damage to third party.

vii) Stock of agricultural produces (grain and / or seeds of all kinds) against

fire, allied perils and earthquake.

viii) Biogas plant against fire, earthquake, flood, inundation, impact

damage, bursting and overflowing of water tanks/pipes, etc.

ix) Television Set against fire, burglary, housebreaking, theft, accidental

external means, mechanical or electrical breakdown.

x) Pedal cycle against fire & allied perils, burglary, housebreaking, theft,

flood, cyclone, earthquake, accidental external means, etc______________________________________________________________________________________

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xi) Agricultural tractors against third party; own damage

xii) Poultry insurance as per market agreement.

xiii) Honey Bee Insurance

[The premium rates quoted for covers (i) to (iii) above are only indicative. The

most competitive quotes will be obtained from the general insurance companies

when the package policy is approved for implementation]

The details of benefits under Personal Accident insurance proposed (Table 10)

are as follows:

Table - 10

S. No. Condition Payment

Injury resulting in loss of:1. Both hands or Feet or sight 100%

2. One Hand and One Foot 100%

3. Either hand or foot and sight of one eye 100%

4. Hearing of both Ears 100%

5. Speech 100%

6. Either Hand or Foot (loss or Loss of

Function)

50%

7. Sight of One Eye 50%

8. Loss of function of one hand and one foot

without separation

50%

Permanent and Total Loss of use resulting in :

9. Quadriplegia (All four limbs paralysed) 100%

10. Paraplegia (Both legs paralysed) 100%

Of the package insurance covers listed above, personal accident, dwelling &

contents, medical (health) and livestock insurance covers are most important for

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the farmer, impacting his livelihood. The insurance premium for personal

accident and dwelling & contents is very meager, which can be entirely paid by

the government. The Joint Group examined medical and livestock insurance with

particular interest, and feels that both need to be covered. Under livestock

insurance, it is felt that one pair of cattle can be covered for each farmer who has

taken crop insurance by giving 50 percent subsidy in premium. Assuming that the

public sector general insurance companies would offer net premium rates

applicable to ‘scheme animals’ (cattle financed under government schemes), the

premium for a pair of cattle may work out to Rs. 500 on an estimated insured

sum of Rs. 20,000 at a premium of 2.5%. The premium subsidy for the

government works out to Rs. 250 per pair of cattle @ 50 percent subsidy.

Joint Group’s Recommendations:

The Joint Group is of the view that personal accident, medical (health) and

insurance for ‘dwelling & contents’ be made compulsory along with crop

insurance, while other covers in the package on optional basis. However, in view

of the fact that another Joint Group has been set up on ‘Health Insurance’ in the

Ministry of Finance under the chairmanship of Secretary (Financial Sector), it

recommends that only personal accident and ‘dwelling & contents’ be made

compulsory along with crop insurance. Further, the Group recommends that the

entire premium on personal accident and ‘dwellings & contents’ be borne by the

government. The Group while appreciating the importance of livestock in

agriculture also recommends that a pair of cattle should be covered under

insurance for every crop insured farmer with 50 percent subsidy in premium

payable by the government. The premium subsidy for the government to cover a

pair of cattle works out to Rs. 250 crores per one crore farmers. Since the

livestock cover is optional, assuming that only 25 percent of those crop insured

farmers go for cattle insurance, the subsidy liability for the government would be

Rs. 62.5 crores for every one crore crop insured farmers.

In order to simplify insurance procedures and to avoid hassles to insured, the

claims of personal accident and ‘dwelling & contents’ can be settled on the basis

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of verification and certification by village panchayat administration. Such system

will also empower grass root level democratic institutions.

6. PRIVATE SECTOR PARTICIPATION IN CROP INSURANCE

The first license for a private insurer was issued in October 2000. As of today,

eight private insurers have started general insurance business: Reliance, Tata-

AIG, Royal Sundaram, IFFCO-Tokio, Bajaj-Allianze, ICICI-Lombard, HDFC –

Chubb, and Cholamandalam. 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 agriculture insurance, albeit on a small scale.

ICICI-Lombard was the first company to experiment rainfall insurance. The

concept is also being extended to weather insurance during 2004. IFFCO-Tokio

General Insurance (ITGI), the second company in private sector, piloted rainfall

insurance during 2004.

It is likely that these efforts especially in weather insurance by the two companies

will gain momentum. There are no indications of other private insurers joining the

efforts. During June 2004, Maharashtra government convened a meeting of all

public and private sector insurers to find out their interest in implementing an

improved agricultural insurance scheme covering all cultivators. As per

information, no private sector insurer has shown interest in traditional yield based

crop insurance. Their interest was limited to personal accident insurance of the

cultivators and limited pilot in weather insurance.

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

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targets are getting away by paying penalties of nominal amounts. If private

insurers are to be spurred to enter 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 10 percent 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 agriculture insurance can be run

in a more professional manner with clear objectives.

Three different models of private partnership could be visualized: (1) The first is

Implementing Agency (IA) model, where IA bears no risk, earns no return and is

merely reimbursed its administrative expenses. Such a model provides poor

incentives for extending coverage and monitoring and controlling moral hazard

and adverse selection. (2) The second is a model where the private insurer bears

all the risk. Given the significant component of systemic risk in agriculture such a

model will require international reinsurance to be sustainable. The premium for

such insurance is likely to be high, requiring subsidy from the government. Under

this model, the government through a technical body works out commercial

premium rates and offers up-front subsidy in premium to all insurers, who would

be required to write policies. The farmer pays premium less the subsidy. There is

level playing field for all insurers. Another modification could be allocating

territories to insurers who would be exclusively writing policies in specified

territories. (3) The third is in between the two models discussed above with

possibility of public-private sharing of risks. In this case the government is likely

to be at informational disadvantage vis-à-vis the insurance companies which

generate the policies. Hence, the risk sharing agreement will have to be

appropriately designed to reduce problems of moral hazard and adverse ______________________________________________________________________________________

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selection. The agreement will also have to provide adequate measures to

counteract the natural incentive of private insurers to target larger farmers and

pay less attention to small and marginal farmers.

Agriculture Ministry & Joint Group’s Initiative:

As mentioned under section 3 of chapter-3, the Department of Agriculture &

Cooperation (DAC) has written to all general insurance companies, both public

and private, inviting them to submit proposals on rural insurance, particularly

agricultural insurance. Among public sector companies, National Insurance Co

and New India Assurance Co. have responded by giving a list of rural insurance

covers. National Insurance Co. informed that it had not yet ventured into field

crops. New India Assurance Co. provided details of farmers package policy and

horticulture / plantation insurance. But, the package policy does not include

insurance for crops.

Among private insurers, ICICI-Lombard, IFFCO -Tokio General Insurance (ITGI),

Cholamandalam, HDFC Chubb, Royal Sundaram, ECGC, Bharatiya Co-

operative General Insurance (BCGI) have responded. Majority of the private

insurers apparently have taken initiatives in rural insurance and health insurance,

but its only ICICI-Lombard and ITGI who have products for crop insurance based

on weather / rainfall parameters.

These companies in the private sector were invited to make presentation on the

schemes available in the rural sector, particularly in agriculture. However, only

ICICI Lombard, ITGI, Cholamandalam General Insurance, BCGI and Rabo Bank

turned up for the presentations. BCGI is in the process of registering with IRDA

and Rabo Bank is playing advisory role.

The Company wise details are as follows:

ICICI-Lombard:

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The company has weather insurance, package insurance, which are already

dealt under weather insurance (chapter-3) and package insurance (chapter-5).

The other insurance products in the rural area include personal accident and

package health insurance, home insurance, tractor insurance and pump set

insurance of farmers; farm credit and weather based loan portfolio insurance for

Banks, etc.

The Company urged the government to facilitate interaction with AIC for

collaboration, and support in premium to make the insurance covers affordable to

the farmers.

IFFCO -Tokio General Insurance:

The Company has rainfall index insurance for crops and personal accident

insurance for farmers purchasing fertilizer from IFFCO and its associate

companies. The details of rainfall insurance have been covered in chapter-3.

Other products in rural areas include Tractor insurance, Health & Home

insurance.

Cholamandalam General Insurance:

The Company has only livestock insurance for rural areas. The policy is almost

same as the one sold by Public Sector General Insurance Companies.

Bhartiya Cooperative General Insurance Ltd.

The Company is interested in providing package covering health insurance,

dwelling & contents, grain in godown, pedal cycle, Television, etc. through other

insurance companies. For crop insurance, it would like to work with AIC in

providing composite insurance.

Rabo India:

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Rabo India is a subsidiary of Rabobank, Netherlands. Interpolis Insurance, the

insurance company in the Rabo group is one of the largest insurance companies

in the Netherlands with a premium income of 4.5 billion in 2001. Moreover

Interpolis is the largest insurer of Agribusiness in Netherlands with 55% market

share.

Rabo India has strong knowledge and relationships in the Agri Insurance

business, and, therefore, in an ideal position to provide business consultancy

service to AIC and the government on agriculture insurance. Rabo India can

leverage on the advisory and insurance experience of Rabobank group

companies. The Company plays advisory role in terms of providing advisory

solutions to insurance companies for product design, marketing and distribution

etc.

Joint Group’s Recommendations:

The Group recommends involving private insurers to join hands with AIC in

providing meaningful risk mitigation support to the farming community. The

Group’s recommendations with respect to rainfall and weather insurance has

been dealt in chapter-3 under ‘weather insurance’. The Group has therefore,

dealt in this chapter only other insurances.

In case of package insurance to be made available through ‘single window’ along

with area based yield (crop) insurance, the Group recommends that AIC should

consider scope of cover and premium rates of all the general insurance

companies in deciding the partner for insurances other than crop. In case of area

based yield insurance, the Group recommends that AIC will continue to

spearhead the insurance programme. However, private insurers be explored if

they could submit premium quotes for area based yield insurance for a few areas

and crops. If private insurers are willing and premium rates are competitive, the

government may consider allocating a few territories on experimental basis.

Alternatively, private insurers can also share co-insurance arrangement with AIC.

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The Joint Group further explored various alternatives of involving private insurers

in area based yield insurance. Some of the alternatives explored are discussed

below:

1. AIC rated method: The indicative premium rates worked out by AIC for

the proposed scheme would be circulated to all private insurers to enable

individual insurers to quote premium rates for various crops and areas.

The rates quoted by private insurers would be discussed with AIC, and a

final lowest rate would be arrived for different crops and areas. The

government can then allocate the areas and crops to insurers on the

basis of the lowest and competitive premium rate. Before allocating areas

and crops to private insurers, the government should make sure that

these insurers have adequate solvency and have signed a MoU w.r.t. the

terms of implementation of the programme.

2. Lowest Rate Method: In the second alternative, the government would

finalize and circulate the scheme to all insurers for expression of interest

in implementation of the scheme and quoting premium rates. The

insurers are required to quote premium rates for each crop at state level.

The government shall allocate the states & crops to insurers on the basis

of lowest and competitive premium rate.

3. Modified USA model: In USA the government supported crop insurance

programme is implemented by about 15 private insurers, besides Federal

Crop Insurance Corporation (FCIC), a government company. The

programme is administered by Risk Management Agency (RMA) on

behalf of US Department of Agriculture (USDA). Once a crop insurance

programme is approved by the government, the RMA gets the premium

rates calculated for different crops / states / counties by utilising services

of National Crop Insurance Services (NCIS). Any approved insurer can

sell these insurance products at the rates certified by the RMA. All

insurers implementing the programme are eligible for same level of

premium subsidy, and further the administrative and operating expenses

of the insurer towards implementing crop insurance programme are ______________________________________________________________________________________

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entirely reimbursed by the government. Since the insurance companies

are implementing the crop insurance programme at a premium rate set

by RMA, the government also provides reasonable level of reinsurance

support. The reinsurance support would be highest for developmental

lines (new and unstable crops) and lowest for commercial lines

(established and stable crops).

On the lines of USA model, the government through an exclusive

technical agency may get the premium rates worked out and offer the

product to all insurers. The insurers can implement the product enjoying

same level of support and subsidy. As a variation from 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

particular insurer.

The Joint Group is of the view that entry of private insurers and healthy

competition / partnership with AIC should be encouraged so as to make

insurance available to as many farmers and at competitive rates backed

by efficient service. The Group considered various alternatives

discussed above and noted pros & cons of each method. First two

methods (AIC Rated Method & Lowest Rate Method) are not workable

because the rating techniques and risk perceptions employed by each of

the insurer could be different. Further, except AIC no other insurer has

access to yield database of all crops and areas, the main component for

rating. The Group, therefore, would like to recommend ‘Modified USA

Method’ for area based yield insurance in the Country. For this purpose,

the government may create an exclusive technical agency or strengthen

CACP with actuarial experts to generate premium rates. To begin with,

the private sector participation may be limited to certain crops/areas,

leaving major crops / states with AIC. With experience and maturity in

the market, the entire programme will be thrown open to all players.

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7. FINANCING CROP INSURANCE

7.1. Penetration Targets

As discussed in the previous chapters, National Agricultural Insurance Scheme

(NAIS) has certain shortcomings, leading to poor penetration. The scheme,

which is compulsory for loanee farmers, could cover about only 1/3rd of potential

crop loans eligible for coverage. In all, the scheme could cover only about 10

percent of farmers / cropped area in the country. It is a paradox that the scheme

with nearly 75 percent subsidies could hardly attract 1/10th of the farmers. If

crop insurance programme is to be sold as an important tool in crop risk

management, the level of penetration will have to be close to 50 percent. In

other words, the present level of consumption of crop insurance will have to grow

five-fold. This kind of growth can only come with improvements in the scheme,

which are suggested in the earlier chapters.

The State-wise comparison of farmers covered and acreage insured under NAIS

(2003-04) with total farmers and acreage (1995-96) is presented in Table-11 to

understand level of penetration in various states.

The scheme during 2003-04 despite being largely comprehensive could cover

only 10.69 percent of all cultivators and only 11.77 percent of area (Table-11).

Karnataka spurred by drought, had highest participation levels both in terms of

farmers & acreage (29.88 percent & 28.44 percent, respectively). Other major

States include Gujarat, Maharashtra, Orissa, Madhya Pradesh & Andhra

Pradesh. Among bigger States, Bihar, Rajasthan, Tamilnadu & Uttar Pradesh

had lowest participation levels. A good effort and appropriate marketing can

significantly improve the penetration levels in these states. Rajasthan during

Kharif 2004 has already reported good coverage. Based on improved

performance during 2004-05, the penetration level is expected to be between 12

to 15 percent.

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Table - 11Comparison of Total Farmers & Acreage cultivated (1995-96) and Farmers & Acreage covered

under National Agriculture Insurance Scheme (2003-04)

States/UTs TotalFarmers

FarmersCovered

under NAIS

NAIS covered farmers

as percent of total

TotalAcreage (Hect)

Acreage under NAIS

(Hect)

NAIS covered acreage

as % of total

Andhra Pradesh 10603000 1737117 16.38% 14374000 2621026 18.23%Arunachal Pradesh 104000 * * 344000 * *Assam 2683000 12358 0.46% 3138000 9050 0.29%Bihar 14155000 175199 1.24% 10682000 179675 1.68%Goa 70000 793 1.13% 59000 676 1.15%Gujarat 3781000 1029931 27.24% 9904000 2203685 22.25%Haryana 1728000 * * 3676000 * *Himachal Pradesh 863000 3871 0.45% 1000000 3926 0.39%Jammu & Kashmir 1336000 * * 1013000 * *Karnataka 6221000 1858771 29.88% 12109000 3443351 28.44%Kerala 6299000 40213 0.64% 1712000 32429 1.89%Madhya Pradesh 9603000 2017528 21.01% 21890000 4880325 22.29%Maharashtra 10653000 2761657 25.92% 19880000 3040009 15.29%Manipur 143000 * * 174000 * *Meghalaya 160000 1381 0.86% 85000 1718 2.02%Mizoram 66000 * * 213000 * *Nagaland 149000 * * 720000 * *Orissa 3966000 841002 21.21% 5144000 812158 15.79%Punjab 1093000 * * 4147000 * *Rajasthan 5364000 58634 1.09% 21250000 67208 0.32%Sikkim 44000 316 0.72% 73000 174 0.24%Tamil Nadu 8012000 65964 0.82% 7303000 102812 1.41%Tripura 301000 1005 0.33% 181000 490 0.27%Uttar Pradesh 21529000 1002257 4.66% 18570000 1448986 7.80%West Bengal 6547000 748173 11.43% 5588000 382122 6.84%All UTs 107000 3013 2.82% 130000 4456 3.43%All India 115580000 12359183 10.69% 163359000 19234276 11.77% Marketing Effort:

The non-loanee farmers for whom the scheme is voluntary continued to show patchy participation, often exhibiting extreme symptoms of adverse selection and moral hazard. Presently their participation in NAIS is around 2 percent, which again is contributed by a few states, viz. Karnataka, Maharashtra & Orissa. The single most important reason quoted for low participation is the effort required by the farmer to go to a bank to submit insurance proposal. Quite often these farmers are turned away by Banks because of their pre-occupation with routine activities. Therefore, making available insurance at the doorstep of farmer / village through rural agents will be the key to improve participation of non-loanee farmers.

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The implementing agency will have to put in place immediately proper insurance

delivery mechanism, such as rural agents, micro insurance agents, bima seva

sansthans etc. to reach out to non-loanee farmers.

Assuming that there will be improvements in yield guarantee insurance, which will be patronized by large number of farmers; more farmer friendly weather insurance products; improvement in insurance delivery mechanism and participation of private insurers, the Joint Group proposes the following penetration targets in terms of farmers / acreage covered under insurance:

By the end of Xth Plan Period (2006-07) 3 crore farmers (25% of all farmers)By the end of XIth Plan Period (2011-12) 6 crore farmers (50% of all farmers)

7.2. Financing Mechanism

Considering the very nature of the agriculture sector, it may not be appropriate to

view the viability of crop insurance merely from financial statistics, as it may not

be viable in such sense. This is very relevant, as the crop insurance schemes

both in developed and developing nations are greatly dependent on the support

of the government. A developing nation like India is not just dependent on

weather conditions, but also suffers the brunt of natural disasters, as it is ill

equipped to deal with such events. With nearly 2/3rd of the population dependent

on agriculture, considerations, which have direct bearing on the policy for

agriculture in India, include the effects of socio, economic and financial disarray

as a result of agricultural risks. Further agricultural risks are systemic in nature

wherein a single event may lead to multiple losses. It is with such considerations

that crop insurance has been receiving governmental subsidies in most of the

countries where it is successfully implemented.

It will be quite in order for crop insurance to be regarded as a support measure in

which government plays an important role, because of the benefit it provides not

merely to the insured farmers, but to the entire national economy due to the

forward and backward linkages with the rest of the economy. Society can

significantly gain from more efficient sharing of crop and natural disaster risks.

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The principle behind the evaluation of crop insurance schemes all over the world

are along these lines for receiving the active support and finance of the

government. Integrating the various risk mitigation methods and streamlining the

funds not only injects accountability and professionalism into the system, but also

increase economic efficiency.

7.2.1. Subsidy levels in other countries: The crop insurance support mechanism of some of the major countries is given

in Table-12:

Table-12Government Crop Insurance Support Mechanism In Major Countries

S.No Country Nature of Support1. USA

(covered nearly 2 million out of total 8 million farmers and about 78% of cropped area during 2003)

- Subsidy in premium (ranges from 38 percent to 67 percent; average for 2003 is 60 percent)

- Reimbursement of administrative expenses of insurance companies (these were about 22 percent of total cost of the program during 2003-4)

- Reinsurance support for risky crop lines - Technical services in premium, policy guidelines - free insurance of catastrophic cover for resource poor

farmers - non insured assistance to farmers for crops no insurance is

available

Over all subsidy is about 70-75 percent2. Canada - subsidy in premiums (80-100 percent for lower levels of

coverage and 50-60 percent for higher levels of coverage)- significant contribution towards provincial administrative

costs - provides deficit financing to provincial governments - technical services by setting premium rates

Over all subsidy is about 70 percent3. Philippines - subsidy in premium (ranges from 50 percent -60 percent)

- Banks share premium of loanee farmers (15-20 percent of total premium cost)

- Financial support to Philippines Crop Insurance Corporation (PCIC) in extreme adversities

Over all subsidy is about 70 percent for loanee farmers & about 50 percent for non-loanee farmers

4. Spain - Subsidy in premium (average 58 percent during 2003)- Reinsurance support (50 percent of reinsurance cost is paid

by the government)

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- Technical guidance Over all subsidy between 50-60 percent

7.2. Farmers capacity to pay premium:

In terms of Agricultural Census 1995-96, marginal farmers having upto 1 hectare

of land, comprised 61.6 percent of the farm holding population owning only 17.2 percent of the area. Similarly small farmers (1-2 hectares) comprise 18.7 percent

of the farm holding population and own 18.8 percent area. Only 19.7 percent of

farmers have landholdings of more than 2 hectares. The Table –13 given below

amply demonstrates the small landholding size, particularly of marginal and small

farmers:

Table-13State-wise Average Size of Operational Holdings by Major Size-Groups, 1995-96 (Hectares)

States/UTs Marginal Small Semi-Medium

Medium Large All Holdings

Andhra Pradesh 0.46 1.43 2.68 5.74 15.34 1.36Arunachal Pradesh 0.48 1.30 2.66 5.50 12.83 3.31Assam 0.37 1.37 2.63 5.16 65.60 1.17Bihar 0.34 1.32 2.73 5.57 16.52 0.75Goa 0.35 1.38 3.00 8.00 - 0.84Gujarat 0.54 1.47 2.80 5.90 14.79 2.62Haryana 0.50 1.40 2.79 5.90 16.53 2.13Himachal Pradesh 0.41 1.39 2.69 5.71 15.60 1.16Jammu & Kashmir 0.39 1.38 2.66 5.39 - 0.76Karnataka 0.48 1.45 2.74 5.87 15.03 1.95Kerala 0.15 1.34 2.54 5.20 34.00 0.27Madhya Pradesh 0.46 1.44 2.76 5.94 16.11 2.28Maharashtra 0.49 1.45 2.73 5.76 16.20 1.87Manipur 0.57 1.37 2.57 4.67 - 1.22Meghalaya 0.49 1.25 2.41 4.50 - 1.33Mizoram 0.61 1.38 2.33 - - 1.29Nagaland 0.56 1.10 2.60 5.95 14.71 4.83Orissa 0.50 1.38 2.67 5.54 16.20 1.30Punjab 0.60 1.31 2.60 5.73 14.98 3.79Rajasthan 0.48 1.44 2.85 6.22 18.69 3.96Sikkim 0.42 1.40 3.00 6.00 - 1.66Tamil Nadu 0.37 1.39 2.70 5.68 23.62 0.91Tripura 0.33 1.40 2.50 6.00 - 0.60Uttar Pradesh 0.39 1.41 2.73 5.54 15.54 0.86West Bengal 0.48 1.48 2.74 5.27 203.00 0.85All India 0.40 1.42 2.73 5.84 17.21 1.41Source: Agricultural Census Division, Ministry of Agriculture, New Delhi.

Given that great majority of farmers have very small landholdings, the success of

crop insurance significantly depends on the scope and extent to which these

farmers, who are poor, can be covered at affordable premium rates. Being ______________________________________________________________________________________

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characteristically impoverished, these poor farmers have recourse mainly to

informal sources of finance and do not have access to latest technologies and

organized techniques and forms of marketing. The financial institutions have

been making efforts to reach this segment though with varied levels of success.

The nature of crop insurance business being highly dependent on the vagaries of

climatic factors, the premium rates are very high and in most cases beyond the

paying capacity of farmers.

Considering the above, the Joint Group recommends that the actuarial premium

rates have to be adequately subsidized to make the scheme affordable to

farmers. The various methods of providing subsidy are discussed below:

1. Rupee subsidy: This is very simple method, in which the subsidy is fixed

in terms of rupees per hectare or rupees per farmer. For example, it could

be Rs. 250 and Rs. 500 per hectare for small / marginal and others,

respectively. The subsidy could be further limited to specified number of

hectares, say 5 hectares. Possibly, the rupee subsidy could be variable for

different crops. It is a simple method and the government on the basis of

insured acreage can easily estimate its financial liabilities. However,

extreme premium rates (Table -14) in the Indian context may render the

method ineffectual.

Table- 14: Sample Actuarial Premium Rates showing Extremes

S.No

State Crop Sum insured / Hectare(Rs.)

Expected Actuarial Premium / Hectare (Rs.)

1 Andhra Pradesh Groundnut 12,000 3000Chilly 25,000 1250Rice 15,000 1268

2 Gujarat Groundnut 15,000 5250Bajra 10,000 1675

3 Madhya Pradesh Cotton 20,000 8004 Uttar Pradesh Rice 15,000 450

Mustard 10,000 200

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2. Percent basis: This is yet another simple method, wherein the premium

rates are subsidized in terms of particular percentage of actuarial

premium. The percentage could be different for various categories of

farmers. For example, it could be 75 percent subsidy for small / marginal

farmers and 50 percent for other farmers. If the actuarial premium rate is

10 percent; small / marginal farmer will pay a net 2.5 percent premium

(after 75 percent subsidy) and other farmer 5 percent premium (after 50

percent subsidy). An illustrative and indicative premium chart is given

below for major states and crops for Kharif (Table – 15) & Rabi (Table-16)

seasons:

Kharif seasons: Table-15

State Crop Loss cost(%)

Expected premium rate based on suggested improvements

Andhra Pradesh Paddy 4.45 7.80%Maize 4.24 7.40%Groundnut 18.47 25.00%Cotton 4.71 8.25%Chilly 2.63 5.00%Sugarcane 2.20 3.50%

Gujarat Paddy 9.99 17.50%Groundnut 23.94 35.00%Castor 12.35 21.60%Bajra 9.57 16.75%Cotton 16.59 29.00%

Karnataka Paddy 21.75 25.00%Jowar 36.78 30.00%Groundnut 21.45 30.00%Sugarcane 5.10 7.00%Potato 60.01 30.00%Onion 44.43 30.00%

Madhya Pradesh Paddy 7.14 12.50%Maize 3.34 5.85%Groundnut 9.14 16.00%Soybean 13.79 20.00%Cotton(I) 2.03 4.00%

Maharashtra Paddy 14.68 20.00%Groundnut 5.90 10.30%Soybean 8.35 14.00%Jowar 5.35 9.35%Cotton 3.18 6.00%

Orissa Paddy 15.12 25.00%

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Maize 3.54 6.20%Groundnut 4.66 8.20%

Uttar Pradesh Paddy 1.11 3.00%Maize 12.67 20.00%Groundnut 11.12 18.00%

Rabi seasons: Table-16

State Crop Loss cost(%)

Expected premium rate based on suggested improvements

Andhra Pradesh Paddy 2.96 5.20%Groundnut 2.19 4.00%Sunflower 11.52 20.00%Chilly 3.66 6.40%

Gujarat Wheat 17.65 25.00%Groundnut 1.07 2.00%Mustard 2.59 5.00%

Karnataka Paddy 7.83 13.70%Jowar 6.18 10.80%Wheat 8.47 14.80%Gram 7.59 13.30%Potato 8.49 14.85%

Madhya Pradesh Wheat 5.91 10.35%Gram 5.17 9.00%Mustard 4.20 7.35%Potato 4.55 7.95%

Maharashtra Wheat 23.05 30.00%Jowar 54.84 35.00%Gram 47.67 35.00%Onion 20.54 30.00%Sugarcane 3.15 5.00%

Orissa Paddy 1.00 2.00%Potato 1.35 2.50%

Uttar Pradesh Wheat 2.94 5.20%Mustard 1.00 2.00%Potato 4.93 8.60%

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The disadvantage of this method as could be noticed from the above

tables is that it provides subsidy at the same rate irrespective of whether

or not the actuarial premium rates are high or low. For example, the

actuarial premium rate is 2 percent (wheat), and affordable by farmer. Yet

as per subsidy formula, small / marginal farmer would be required to pay

only 0.5 percent and other farmer only 1 percent. On the other extreme, if

the actuarial rate is 30 percent (groundnut), despite subsidy, small /

marginal farmer is required to pay 7.5 percent and other farmer 15 percent

premium, which is still beyond farmer’s affordability.

3. Premium Capping: This is a method, wherein actuarial rates are capped

for farmers, and the rate beyond the cap is subsidized. The rates are

capped in such a way that the net rates are affordable to farmers. The

indicative capping for proposed crop insurance program is give below in

Table – 17:

Table - 17

S.No Crop Groups Premium cap for Small / Marginal farmers

Premium cap for Other farmers

Kharif Rabi Kharif Rabi1 Cereal & Millets –

Rice and Wheat 3% 1.5% 5% 2.5%2 Other Cereals &

Millets4% 3% 6% 5%

3 Pulses 4% 2% 6% 4%4 Oilseeds 4% 2% 6% 4%5 Sugarcane 1% 1% 2% 2%6 Annual commercial

/ horticultural crops 4% 4% 6% 6%

The disadvantage of this method is that the risk is not adequately

discriminated. Irrespective of difference in rates across states, farmers will

pay the same rate. Rice actuarial premium rate during Kharif is 6.5

percent in Orissa and 9.4 percent in Gujarat. However, in both the cases,

the ‘other category’ farmer would be required to pay 5 percent. Similarly

groundnut actuarial premium in Gujarat is about 35 percent and in

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Maharashtra about 5 percent. As per the model suggested above,

Maharashtra farmer pays full groundnut premium (as the premium rate is

within the cap) and Gujarat farmer, only 6 percent, leaving balance 29

percentage points to be borne by the government.

4. Graded Percent basis: This is a method, evolved by fine-tuning ‘percent

method’, and takes care of extreme variations in actuarial premium rates.

In other words, the subsidy rate is lower for lower premium rates,

gradually increasing the subsidy rate with increase in premium rate. It

combines advantage of both ‘percent method’ and ‘premium capping

method’. The effectiveness of the method can be further improved by

fixing minimum and maximum premium rate for farmers.

Joint Group’ Recommendations:

The Joint Group keeping in mind huge differences in actuarial premium

rates across crops and states and considering the pros and cons of

various methods suggested above would like to recommend ‘graded percent method’. The indicative subsidy levels recommended by the

Joint Group are given in Table-18 below:

Table-18

S.No Premium slab

Subsidy to Small / Marginal farmers

Subsidy to Other farmers

1 Upto 2% 25% Nil2 >2 - 5% 40% subject to minimum

net premium of 1.5%25% subject to minimum net premium of 2%

3 >5 – 10% 50% subject to minimum net premium of 3%

40% subject to minimum net premium of 4%

4 >10 –15% 60% subject to minimum net premium of 5%

50% subject to minimum net premium of 6%

5 >15% 75% subject to minimum net premium of 6% and maximum net premium of 8%

60% subject to minimum net premium of 7.5% and maximum net premium of 12%

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7.2.3. Government’s support

The government’s support in actuarial regime would be in terms of premium

subsidy, leaving all claims to the insurers. The average actuarial premium rate in

the country with proposed improvements would be in the range of 15 -18% of

sum insured. Considering that the premium for farmers is capped between 1.5%

- 6% (for premium rate upto 15%), the balance of the premium will have to come

from the government. The sharing between centre and states can be decided

keeping in mind the premium rates and the financial outlay.

7.3. Financial Outlay of the Government

As per the risk sharing arrangement of NAIS, the claims beyond 100 percent of

premium in case of food crops and oil seeds and 150 percent of premium for

annual commercial and horticultural crops are borne by the government (50:50

basis between the Government of India and States). Besides, the premium

subsidy payable for small / marginal farmers is also borne by the government.

On the basis of the coverage and the claims experience of past four years, the

government is annually spending Rs. 1000 crores on NAIS for covering about 1.2

crore farmers.

The proposed improvements in NAIS are expected to significantly increase the

financial implications of the government. An indicative financial implications for

the government for various improvements are given in Table – 19.

The Notes governing the financial implications for the government are as follows:

1) Lowering insurance unit to village panchayat level: A sample exercise

was conducted a few years ago under CCIS which broadly indicated an

increase of about 35% for every one level of reduction, i.e. from block /

taluka to village panchayat. Therefore, increase in liabilities by 35% is

estimated resulting from reducing the unit to village panchayat.

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2) Threshold Yield to be based on best 5 out of 7 years: A random exercise

of Andhra Pradesh & Orissa on Kharif seasons for paddy under NAIS have

shown an increase in claims by approx. 20% if the best five years are

adopted from out of preceding seven years.

3) Minimum indemnity limit of 80%: As a result of this, all areas presently

eligible for 60% limit will now be eligible for 80%. Presently there are 58%

areas during Kharif eligible for 60% limit. Raising the level to 80% has two

implications – (i) increase in frequency of claims, and (ii) increase in

quantum of claim. It is estimated that the financial liability will be increased

by about 15%.

4) Prevented sowing / planting: It has implications mainly in Kharif season

due to its overwhelming dependence on southwest monsoon. Sowing

operations will be affected, if the actual rainfall during June and July is less

beyond a certain point. This problem was faced during Kharif 2002 and to

some extent during on-going Kharif 2004 season. This problem is not

encountered during normal monsoon, particularly in the early months. It is

estimated that the increase in financial liabilities could be to the extent of

5%.

5) Post harvest losses: It is intended to cover only the crop in ‘cut & spread’

condition lying in the field after harvest, against damage due to cyclone. The

main crops benefitted will be paddy in east coast region. The financial

liabilities may increase by a nominal 2%.

6) Individual assessment in case of localized calamities: The cover

available is against hailstorm, landslide & wild animals. Hailstorm is mainly

seen during Rabi seasons, especially in the north. Landslide is an issue

only in hilly regions. Wild animals cause damage mostly in areas close to

forest. Considering these, a nominal 0.5% increase in financial liabilities is

estimated.

7) Package Insurance - compulsory personal accident and cover for dwelling & contents and optional insurance for cattle: At a premium of

Rs. 37.5 per head, the cost for covering one crore farmers for personal

accident and dwelling and contents is Rs. 37.5 crores. The subsidy in

livestock premium for a pair of cattle for one crore crop insured farmers

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assuming 25% coverage works out to Rs. 62.5 crores. The total cost to the

government is Rs. 100 crores for covering one crore farmers.

8) The financial liabilities for covering fruits and vegetables crops can be

accurately worked out only after finalizing the scheme design and crops to

be covered. Tentatively, a subsidy of Rs. 100 crores has been included in

the financial liabilities.

9) Administrative cost of CCEs: The additional CCEs required could be to

the tune of 55 lakhs @ 8 CCEs per Crop per GP (maximum of 3 crops). The

administrative cost @ Rs. 300 per CCE will be Rs. 165 crores.

Table – 19

The broad financial implications of modified NAIS

S.No Improved Features Likely liability1 Government’s revised liability for 1.2 crore farmers Rs. 750 crores2 Government’s liability of actuarial regime with

insurance unit reduced to Village Panchayat for major crops (on an average 35% increase in claims pay-out). Rs. 1015 crores

3 Above (2) + Average yield calculated by taking best 5 years from preceding 7 years (on an average 20% increase in claims pay-out) Rs. 1215 crores

4 Above (3) + Indemnity Limit of 90% & 80% in place of 90%, 80% & 60% (on an average 10% increase in claims pay-out) Rs. 1340 crores

5 Above (4) + Coverage of prevented sowing risk (on an average 5% increase in claims pay-out) Rs.1410 crores

6 Above (5) + Coverage of post harvest losses on account specified perils (on an average 2% increase in pay-out) Rs. 1440 crores

7 Above (6) + on account payment based on rainfall parameter. Theoretically, no increase is expected in pay-out

Rs. 1440 crores

8 Above (7) + Individual assessment in case of localised calamities (on an average 0.5% increase in pay-out) Rs. 1450 crores

9 Above (8) + cover for personal accident; dwelling & contents and subsidy on livestock insurance (Rs. 100

Rs. 1550 crores

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crores)10 Above (9) + cover of fruit crops and vegetables under

separate scheme (estimated liability of Rs. 100 crores) Rs. 1650 crores

11 Above (10) + Administrative liability of Rs. 165 crores towards cost of additional CCEs. Rs. 1815 crores(Financial implications for medical insurance have not been included)

Note: Originally the government’s annual liability on NAIS is Rs. 1000 crores.

Considering increase in proposed premium rates payable by the farmer in the

new scheme, the reduction in government’s liability is estimated at 25 per cent

i.e., Rs. 250 crores on Rs 1000 crores. The revised liabilities, therefore, are taken

at Rs. 750 crores as the base.

Assuming that the financial implication of the government is Rs. 1815 crores per

annum at 10% penetration (1.2 crore farmers), these financial implications have

been extrapolated for different levels of penetration. The details are as follows:

20% penetration - Rs. 3135 crores

25% penetration - Rs. 3861 crores

30% penetration - Rs. 4563 crores

35% penetration - Rs. 5248 crores

40% penetration - Rs. 5908 crores

45% penetration - Rs. 6552 crores

50% penetration - Rs. 7171 crores

Note: Higher level of participation is expected to achieve good spread of risk.

Therefore, the liabilities as proportion may be somewhat lower at higher level of

participation.

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8. SUMMARY OF RECOMMENDATIONS

National Agricultural Insurance Scheme (NAIS)

1. Insurance unit should be reduced to the level of village panchayat for

major crops. To counter scope for possible interference and manipulation

in the conduct of CCEs, certain checks and balances have been

suggested. The costs of CCEs are shared by the Government of India and

States on 50:50 basis. States can use existing manpower / re-deploy

surplus manpower of other departments or out-source manpower for

additional CCEs in consultation with Implementing Agency.

2. Guaranteed Yield should be based on average of the best five out of the

preceding seven years, as it is more appropriate and balanced.

3. Indemnity levels should be 90% for low risk areas / crops and 80% for

others.

4. Pre-sowing / planting risks (prevented sowing on account of adverse

seasonal conditions) should be covered, with indemnity payment ranging

from 20% - 25% of the sum insured depending on cost of pre-sowing /

planting expenses likely to incurred. It should be implemented on ‘area

equity’ basis. The parameters for eligibility shall be set up using weather

and scientific data, including remote sensing technology. The insured

farmers having received indemnity based on pre-sowing / planting will not

be eligible for yield based indemnity.

5. Post harvest losses on account of cyclone in coastal areas should be

covered for a period of two weeks from harvesting, provided the crop is

left in the field in ‘cut & spread’ condition.

6. Uniform seasonality discipline should be followed for loanee and non-

loanee farmers. The dates for Kharif crops can be 15 th June to 15th July for

different states on the basis of onset of the South-West monsoon. For ______________________________________________________________________________________

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Rabi crops it may be 31st December and Summer crops 31st January.

Loanee farmers are covered based on loan-sanctioned, while non-loanee

farmers should be allowed to avail insurance before sowing. Maximum

sum insured per hectare is higher of quantum of loan sanctioned or value

of the guaranteed yield.

7. An amount upto 50 percent of likely claims should be released in advance

subject to adjustment against the claims assessed on yield basis.

However such an ‘on account’ payment will be made only if the expected

yield during the season is less than 50 percent of normal yield. The criteria

for deciding ‘on-account’ payment of claims shall be based on agro-

meteorological data / satellite imagery or such other indicators to be

decided by implementing agency, and will be implemented in those states

and crops for which such proxy indicators can be established.

8. In addition to the risks of hailstorm and landslide, the scheme should also

cover damage caused by wild animals (neelgai, spotted dear & elephant).

For all such localised risks, the claims will be settled on the basis of

individual assessment.

9. Implementing Agency should expand its network in order to provide better

service to farmers, particularly non-loanees. The agency should have

presence at least at the taluka level, and if possible at the village level.

Services of rural agents, micro insurance agents could be utilised to

facilitate insurance marketing at village level. A facilitating agency could

be instituted by implementing agency at district level to support marketing

facilities.

10. Insurance coverage should be provided to perennial horticultural crops

and vegetables. A road map is suggested for designing and launching a

pilot insurance scheme w.e.f Kharif 2005 season.

11.The crop insurance scheme should be placed on actuarial regime w.e.f.

Kharif 2005 season. The premium subsidy may range from 40 percent to ______________________________________________________________________________________

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75 percent for small / marginal farmers (subject to a maximum net

premium of 8 percent) and 25 percent to 60 percent for other farmers

(subject to a maximum net premium of 12 percent) at different slabs of

actuarial premium. All the claims in the actuarial regime will be borne by

the implementing agency.

12.The government should provide necessary solvency margin to AIC (as

required under actuarial regime as per IRDA regulations) through budget

allocation (non-plan).

13.Banks will bear 25 percent of net premium payable by loanee farmers

subject to a maximum of 1.00 percentage point of premium.

14.The government should allow private insurers in area based yield

insurance on experimental basis. The method suggested would entail all

insurers to enjoy premium subsidy at uniform rate.

15.AIC should take up a pilot project on use of remote sensing applications in

crop insurance, covering – crop health, crop acreage, yield estimation &

reduction of sample size of CCEs, etc.

16.Proposed Crop insurance scheme (in place of NAIS) will continue to be

compulsory for loanee farmers.

17.The banks should display the list of all insured farmers at the village

panchayat office. Further, the banks should also display the list of

benefited farmers together with claim amount soon after the claims are

received from implementing agency. In addition to ensuring transparency,

the proposed measure will help contain legal litigation to a large extent.

This will also empower village panchayat and will induce them to own up

the responsibility of proper implementation of the scheme.

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Package Insurance Policy

1. A single window approach is suggested for providing comprehensive

package insurance to farmers. In this approach, crops will be covered

under area approach and “Other Assets” (dwelling & contents, personal

accident, hospitalisation, livestock, pedal cycle, agrl. pump-set, etc.) under

individual approach.

2. Personal accident insurance and ‘dwelling & contents’ insurance should

be made compulsory, along with crop insurance. The government may

pay the entire premium for insurance of personal accident and dwelling &

contents.

3. Other insurance covers in the package should be made optional to

farmers. Of these other covers, livestock being most important to farmers,

a pair of cattle can be covered with the government paying 50 percent of

the premium.

Weather insurance

1. Private sector should be encouraged to provide competitive environment

and better service to farmers.

2. States should be permitted to take up small experimental and innovative

crop insurance products including weather insurance and insurance for

horticulture and plantation crops in collaboration with AIC and other

insurance companies as “new initiative” under the scheme of Macro

Management in Agriculture.

3. A Weather insurance scheme based on common denominators /

parameters should be finalised with the help of a consultant and circulated

to prospective insurance companies to submit financial proposals for

Kharif 2005 season. The scheme can be offered to the company quoting

the most competitive rates. ______________________________________________________________________________________

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4. The existing infrastructure of IMD w.r.t. weather stations needs up-

gradation and automation to effectively feed data for weather insurance.

Using the services of third party weather data providers should also be

explored.

Farm Income Insurance Scheme (FIIS)

There is already National Agricultural Insurance Scheme (NAIS) for covering

yield risks and Minimum Support Price (MSP) regime for covering price risks.

In these circumstances there is no relevance for FIIS in the present form.

The pilot project on FIIS, therefore, should be wound up w.e.f. Rabi 2004-05

season.

Others

1. Crop Insurance income should be exempted from income tax provisions to

enable the insurer, particularly AIC to build adequate catastrophic reserve.

2. Crop insurance schemes should be exempted from service tax provisions.

3. The government may advise IRDA to raise targets for general insurance

companies in agriculture insurance area.

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