Sunday, December 28, 2008

Is Crop Insurance = Life Insurance in Rural India?

Every farmer says agriculture is synonymous with risk and uncertainty. Every Indian thinks that there is need for reforms and Green revolution similar to 1960's and 1990's. Every economist would say, economic growth and agricultural growth are closely linked to each other in agrarian economy.
In India, agriculture contributes to 24% of the gross domestic product (GDP) and any change has a multiplier effect on the economy as a whole. In the past, Indian Government has been concerned about the risk and uncertainty prevalent in agriculture. The unfortunate deaths (suicide) of farmers in India who got caught in a debt trap are becoming common these days. The Government of India is still trying to find measures to stop these deaths from happening again.
Farmers face floods, drought, pests, disease, and a plethora of other natural disasters. The weather is their greatest adversary, something that can never be controlled by man. Weather can make or break a farmer’s fortune. It becomes the primary duty of Government to think of the welfare of farmers which would necessitate thinking of ways and means of reducing the risk in farming.
Crop insurance is a risk management tool that farmers can use in today's agricultural world. For a premium, farmers can pass their weather-related risk onto a third party. Farmers in India have been subjected to publicly administered insurance schemes since 1972.

The Comprehensive Crop Insurance Scheme (CCIS) had a positive and stabilizing influence on agricultural production and productivity in respect of crops insured and is a popular program particularly in those areas of certain States where the risk factor in agriculture is relatively higher. But, this "positive" and "stabilizing" influence came at a large cost. The loss between premiums paid and insurance claims amounted to 184,446 lakhs, exclusive of administrative costs (five to seven percent typically). Only four of the 22 participating states had insurance charges greater than claims. The claims percentage (percentage of claims to premiums) was 572%.
In 1999, AB Vajpayee launched a new crop insurance scheme called Rashtriya Krishi Bima Yojana (RKBY) under the National Agricultural Insurance Scheme(NAIS). This also met the same fate with claims being larger than premium collected. Claims paid Rs.7207 crore against premium income of Rs.2226 crore collected.
Every scheme has been flawed, yet the government of India is still attempting to strengthen agriculture by protecting its farmers from the weather. The effect of the opening of insurance markets to private players in India is still to be seen in the Crop insurance sector. Buying insurance from government players does not seem to be a workable solution, as the premium rates to cover these risks appear to be too high. Any reform in crop insurance will be most effective when accompanied by overall reform in the agricultural sector.

The reason behind the failure of the crop insurance in India is that Government does not treat crop insurance as risk management option. It should move beyond Crop Insurance towards a novel weather based insurance scheme. Weather-based insurance products will help the farmer in faster claim settlement. This could also mean lower premiums for farmers buying these insurance products. Differential rate of premium based on the variability in yield levels in the past should be encouraged. These are some of the areas that need to be focused on.
A good risk assessment tool needs to be developed so that both farmers and insurers benefit. This can happen if insurers work closely with institutions specialized in statistical research. Instead of one-size fits all approach, we can look at linking the risks with the type of crops. More importantly, the Government subsidy on insurance schemes has to reach the farmer who needs it the most.

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