Did Crop Insurance Programmes Change the Systematic Yield Risk

Abstract

Modeling crop yield, revenue, or loss cost ratio distributions of a farm, tehsil, district, region, or state involves estimation and identification of systematic and random component(s) of crop yields. What is systematic component of crop yield distribution? The systematic component is a known source of variation and commonly identified with high-yielding, genetically modified, disease-insect resistant varieties or other technological innovations, and changes in crop insurance programmes. The systematic component of crop yields is modeled as linear, quadratic or cubic time trend variables. What is random component of crop yield? The deviation of crop yields from the estimated systematic component is random hence the random component of crop yields. Here, the focus is on the systematic component of crop yields, specifically the average systematic component (ASC) of yield, spatial systematic risk (SSR), i.e., variation of crop yields across districts within a state in a year and temporal systematic risk (TSR), i.e., variation of crop yield over time for each district within a state. Identification of ASC, SSR and TSR is important, especially when dealing with implications of crop insurance policies and its changes. For example, are technology innovations and/or crop insurance programmes that are catering to major crop growing states in India driving differential changes in ASC, SSR and TSR component of yields across states? Agriculture policies including crop insurance programmes are not supposed to alter acreage allocations, production or distributions. However, given the core objective of the crop insurance programme, it is anticipated to reduce production variability of the producers during times of low yield due to natural disasters. With the turn of the century and specifically since the dawn of Independence in 1947, crop insurance is increasingly viewed as an important risk management tool and the first government-supported crop insurance programme was introduced in 1972. This led to the introduction of three more major crop insurance programmes since 1972. Given this history of crop insurance programmes in India, the study attempts to estimate and examine the changes in the ASC, SSR and TSR of rice and wheat yields with the