Index based Crop Insurance

Abstract

Agriculture sector is subject to a great many uncertainties. Yet, more people in developing countries like India earn their livelihood from this sector than from all other economic sectors combined. Agriculture, particularly prone to systemic and co-variant risk, doesn’t easily lend itself to insurance. Lack of historical yield data, small sized farm holdings, low value crops and the relatively high cost of insurance, have further made it more difficult to design, a workable crop insurance scheme (Rao K N). Despite these constraints, India debated the feasibility of crop insurance schemes, since late nineteen forties, and could settle for ‘yield index’ based crop insurance on a country-wide basis since 1985. The yield index based crop insurance in India, presently under the name National Agricultural Insurance Scheme (NAIS) is the flagship crop insurance programme, annually insuring about 25 million farmers with an area of over 35 million hectares (AIC's provisional figures as of 31st March 2010), and available for almost all seasonal and annual crops for which there exists historical yield data of 10 years at sub-district level. NAIS despite well suited for Indian conditions, suffers from some key problems. These include basis risk (insurance unit being too large), delay in receiving yield estimates leading to delay in settlement of indemnities, non-coverage of pre-sowing & post-harvest losses, huge infrastructure and manpower required to estimate yields (irrespective of yield loss), etc. Keeping in mind the challenges with yield index insurance, India started piloting ‘rainfall (weather) index’ based insurance since 2003. The government from 2007 started providing subsidies in premium, and is being tested as a substitute for NAIS. At present Agriculture Insurance Company of India (AIC), an entity created at the behest of the Government in 2003 and the largest market player in India, has insured 1.98 million farmers during 2009-10 (April to March) covering more than 2.68 million hectares of cropped area for a sum insured of approx. US $ 870 million for a premium income of US $ 80 million (AIC's Provisional figures as of 31st March 2010). India started experimenting the Biomass Index for crops like wheat, mustard, chickpea since 2005. The index has so far met limited success, but could play important role in near future, as remote sensing technology experiencing quantum jump in terms of all-weather satellites, high resolution data and higher frequency of fly-overs. Index based insurance is here to stay, and is the way forward in many developing nations. Best results could be obtained by careful deign of index and use of a combination of indices (multiple triggers) to capture the key production risks in agriculture.