PROJECT REPORT ON CROP INSURANCE

BACHELOR OF BANKING & INSURANCE (B.B.I.) SEMESTER V In Partial Fulfillment of the requirement For the Award of Degree of Bachelor of Banking & insurance (BBI)

By PRAVIN M. KHARATE ROLL NO.1228026

SHRI SIDH THAKURNATH COLLEGE OF ARTS AND COMMERCE, ULHASNAGAR 421 004

UNIVERSITY OF MUMBAI

INDEX

SR.NO 1
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

TOPIC
INTRODUCTION INDIAN AGRICULTURE:DEPENDENCE ON RAINFALL RISK AND UNCERTAINITY IN AGRICULTURE EVOLUTION OF CROP INSURANCE IN INDIA RATIONALE OF CROP INSURANCE PAST EXPERIENCE IN CROP INSURANCE PRODUCT IN THE MARKET COMPARISON OF NAIS-WBGIS CROP INSURANCE IN BANGLADESH CROP INSURANCE IN TAMIL NADU PRIVATE PARTICIPATION THE FUTURE FOCUS RESULT AND DISCUSSION RECOMMENDATION CONCLUSION REFERENCE

PG.NO

History
The Crop Insurance in India was started with the introduction of the All Comprehensive Crop Insurance Scheme (CCIS) that covered the major crops. This scheme was introduced in 1985. In fact this period of introduction also coincided with the introduction of the Seventh-Fiveyear plan. This initial scheme was of course later substituted and National Agricultural Insurance Scheme (NAIS). This substitution came into effect from 1999.

These Schemes that have been introduced throughout the crop insurance history have been preceded by years of preparation, studies, planning, experiment and trails on a pilot basis. In the crop insurance history, the question of introducing a crop insurance scheme was taken up for examination soon after the Indian independence.

The first aspect that was examined related to the modalities of crop insurance. The issue under consideration was about whether the crop insurance should be offered under an individual approach or on Homogenous area approach . The Individual approach of the scheme indemnifies the farmer to the full extent of the losses. Also the premium that is to be paid by him is determined with reference to his own past yield and loss experience.

The Individual approach for these schemes necessitates reliable and accurate data of crop yields of individual farmers for a sufficiently long period, for fixation of premium on actuarially sound basis. The Homogenous area approach on the other hand was aimed at envisaging a homogeneous area from the point of view of crop production and similarity of annual variability of crop production. The homogenous area approach was found to be more favorable. This is because it would facilitate the provision of a single unit treatment to various agro-climatically homogenous areas and the individual farmers and allow them to pay the same rate of premium and individual fortunes. Receive the same benefits, irrespective of their individual fortunes.

Introduction
Agriculture has been a crucial sector in many developing countries across the world for its perceived ability to contribute significantly to achieve developmental objectives such as economic growth, employment generation, food security, poverty reduction, and environmental sustainability. Increasing the productive capacity of agriculture through higher productivity has been the main policy agenda in many developing economies. India is not an exception where agriculture provides employment to millions of people in the rural areas, and hence the growth and development of this sector assumes important among the policy makers. With almost little scope for further expansion in arable lands, there is a need to increase yields to technically maximum possible levels through appropriate investment in basic infrastructure, human development, and research and extension services (Chaves, 2006; Zepeda, 2006; Mathura et al, 2006).

There has been a consistent decline in growth of the agriculture sector since 1990 onwards as compared to 1980s. It was 4 per cent per annum during the 1980s on an average, which came down to 3.2 per cent during 1990s and 2 per cent in the last five years. Growth in real value of food grain production has been an abysmal -3 per cent during the 1990s and - 5 per cent during 1999-2000 to 2002-03, with minor improvements estimated during 2003-04 (Mathura et al, 2006). While there has been decline in overall agricultural growth, there are considerable interregional variations across the country. With regard to the period 1993 to 2003, the state-wise analysis shows wide variations in growth from 28 per cent to 19 per cent taking the first three years and last three years, viz, 1993-96 and 2000-03.

Over the years, many researchers have attempted to study variations in terms of agricultural production, productivity, and agricultural growth performance across regions in the

country (Sawant, 1997; Singh et al, 1997; Praveen et al, 1997; Rao and Gopalappa, 2004; Sidhu and Bhullar, 2005; Mathur et al 2006). These studies by and large found that there are considerable variations in yield, production, input use in agriculture and agricultural growth across regions. However, studies on regional differences in farm profitability are limited. Moreover, growing imbalances in agricultural growth and development led to disparity in status of farmers across regions. Significant proportion of farmer households has been trapped to indebtedness. Recent estimates show that nearly 49 per cent of farm households are indebted and the average amount per indebted household is Rs.12585. This issue made the academicians and policy makers to carefully analyze why this happens in the era of globalization, technological advancement, and economic growth.

Farmers face floods, drought, pests, disease, and a plethora of other natural disasters. Crop insurance as a risk management tool is being widely adopted both in developing and developed countries. Agricultural crop insurance has assumed much importance with large scale damage caused due to pest attacks, crop diseases and vagaries of weather. The objective here is to provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crop as a result of natural calamities, pests and diseases. The list of crops being covered for insurance differs from state to state. Generally quite a few Kharif and Rabi season crops are covered. These crops are insured at the community/block/gram panchayat levels. Agriculture insurance schemes are of immense help to farmers, providing them with financial security.

Developed countries have a variety of government-supported, agriculture-related insurance services. But, in India, farmers generally rely on informal arrangements like diversifying crops, favouring traditional practices over modern techniques, and entering into share-cropping carrangements. Such arrangements, however, are not totally gainful in mitigating the risks as efficiently as formal arrangements. Therefore, crop insurance as one of the means of reducing the agricultural risks, indemnifies the losses arising from natural calamities like drought, flood, storm and pests and diseases. Crop insurance brings in security and stability in farm income.

Crop insurance protects farmers investment in crop production and thus improves their risk bearing capacity. It facilitates adoption of improved technologies and encourages higher investment resulting in higher agricultural production. Further, it spreads the crop losses that occur due to uncontrollable natural factors, over space and time and helps farmers make more investments in agriculture. Realising the importance of potential contribution of crop insurance in agricultural sector, the present paper aimed at (i) critically review the various crop insurance schemes in Tamil Nadu state and (ii) work out the instability index for important crops.

Definition

Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others to protect themselves against either the loss of their crops due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural commodities.

The two general categories of crop insurance are called crop-yield insurance and croprevenue insurance.

Crop-yield insurance:

There are two main classes of crop-yield insurance

Crop-hail insurance

It is generally available from private insurers (in countries with private sectors) because hail is a narrow peril that occurs in a limited place and its accumulated losses tend not to overwhelm the capital reserves of private insurers. In early 1820s, crop-hail insurance were available to farmers in France an):d Germany. That is among the earliest forms of hail insurance from an actuarial perspective. It is possible to implement the hail risk into financial instruments since the risk is isolated.

Multi-peril crop insurance (MPCI

Coverage in this type of insurance is not limited to just one risk. Usually multi-peril crop insurance offers hail, excessive rain and drought in a combined package. Sometimes, additional

risks such as insect or bacteria-related diseases are also offered. The problem with the multi-peril crop insurance is the possibility of a large scale event. The Risk Management Agency (RMA) is active in calculating the premiums based on individual risk factors since 1996.

Crop-revenue insurance: Crop-yield times the crop price gives the crop-revenues. Based on farmer's revenues, crop-revenue insurance is based on deviation from the mean revenue. RMA uses the futures prices on harvest-times listed in the commodity exchange markets, to determined the prices. Combining the future price with farmer's average production gives the estimated revenue of the farmer. Accessing the futures market offers enables revenue protection even before the crop planted. There is a single guarantee for a certain number of dollars. The policy pays an indemnity if the combination of the actual yield and the cash settlement price in the futures market is less than the guarantee. In the United States, the program is called Crop Revenue Coverage. Crop-revenue insurance covers the decline in price that occurs during the crop's growing season. It does not cover declines that may occur from one growing season.

Objective:
Provide a sustainable and feasible model for Private Insurance Companies to offer Crop Insurance Schemes to the Rural Sector.

Importance of insurance for farmers:

Commercialization of agricultural products has increased in India. The fluctuation in the price of the products has affected the income of the farmers significantly. Insurance of crop production provides a relief to the farmers when the crop is damaged by attack of pests, flood, drought or any other mean.

Synthesis:
Initially, the need is to segregate risks into preventable and unpreventable ones. Only the unpreventable risks would be insured. For example, damage caused to crops due to floods, drought, lightning, etc. The initial target market would be states or regions with moderate or low risk of natural calamities. Insurance would be channeled through Farmers Co-operatives and Farming Clubs. Selection of a homogenous agro-climatic area is essential to have uniform premium rates for specific regions.

Features of Crop Insurance:

The sum insured generally equals the value of the threshold yield of the insured crop.

A farmer can get an insurance for an amount greater than the value of the threshold yield by paying premiums at commercial rates

In case a farmer takes a loan for his crops, the sum insured is at least equal to the amount of crop loan advanced

Insurance charges for loanee farmers are in addition to the loan charges

While all loanee farmers are automatically covered under the scheme, non-loanee farmers need to approach the nearest banks within the stipulated time

Crop loans disbursed through Kisan Credit Cards are also eligible for this scheme

In case of damages caused by widespread calamities, claims are settled on area approach basis. Any insured crop in a notified area recording a yield which is lower than the guaranteed yield (calculated on the basis of crop estimation surveys by the state government) automatically becomes eligible for an insurance claim.

However, in case of areas notified for experimentation of individual loss assessment, the farmer needs to intimate the crop loss within 48 hours to the local revenue or agriculture department.

Need for Crop Insurance:

Crop insurance is one alternative to manage risk in yield loss by the farmers. It is the mechanism to reduce the impact of income loss on the farmer (family and farming). Crop insurance is a means of protecting farmers against the variations in yield resulting from uncertainty of practically all natural factors beyond their control such as rainfall (drought or excess rainfall), flood, hails, other weather variables (temperature, sunlight, wind), pest infestation, etc. Crop insurance is a financial mechanism to minimize the impact of loss in farm income by factoring in a large number of uncertainties which affect the crop yields. As such it is a risk management alternative where production risk is transferred to another party at a cost called premium. The weather based crop insurance uses weather parameters as proxy for crop yield in compensating the cultivators for deemed crop losses

It provides a good alternative both to farmers and government. Farmers get on actuarially fair insurance with swift payments at little administrative costs to the government. Rainfall insurance is a specific form of weather insurance. As such weather insurance is not yield insurance while crop insurance is. In both the cases cultivators pass risk in yield to another party for a premium. The insurance need for agriculture, therefore, can not be over emphasized as it is a highly risky economic activity because of its dependence on weather conditions. To design and implement an appropriate insurance programmer for agriculture is therefore very complex and challenging task. There are two approaches to crop insurance, namely, individual approach where yield loss

on individual farms forms the basis for indemnity payment, and homogeneous area approach where a homogeneous crop area is taken as a unit for assessment of yield and payment of indemnity. In both the cases reliable and dependable yield data for past 8-10 years are needed for fixing premium on actuarially sound basis. Homogeneous area approach has the advantage of availability of data on yield variations.

Data and Methodology:

This study is based on an analysis of data on Area, production and productivity of selected crops which was taken from publications of Seasonal Crop Report of Tamil Nadu. Risk revealed by instability index of area , production and productivity of selected crops is presented in Tables.

Further, the study used the data on area, yield and production for nine major crops viz. paddy, Sorghum, maize, groundnut, chills, banana, cotton and sugarcane, total pulses for the period 1980-81 to 2004-05. Instability index in area, production and yield for district level are calculated for five periods. The Districts have a diversified cropping pattern in different regions depending upon agro-climatic conditions and hence all the important crops were selected for the present study.

There were 15 original composite Districts in the year 1980-81 that have been later subdivided into as many as 29 Districts. For purpose of analysis, later data relating to subdivided newer administrative Districts were merged with the corresponding composite Districts to make the data comparable over years. Only five administrative Districts Erode, Coimbatore, Pudukkottai, Kanniyakumari and Nilgiris have remained without sub divisions. Erstwhile individual composite Districts were considered for the analysis.

Benefits:
Crop Insurance helps the farmer by reducing his income fluctuation. It enhances access to low cost organized credit. It also encourages farmers to adopt progressive farming practices and higher technology. From the Insurers point of view crop insurance is a huge opportunity in rural India. It will help insurance companies to shift from a mandatory business to a desired business Crop insurance can be a critical instrument of development in the field of crop production. It will have a multiplier effect on the economy.

The Road Ahead:

Crop insurance will offer a platform for linking Microfinance to Crop Insurance. It provides an opening for a sustainable Public-Private Partnership. Eventually insurance companies can encompass cross selling of other financial products. Non-Annualized and Group Insurance are innovative ways of providing insurance. If the Government permits we can link general insurance to life insurance and offer a hybrid product.

INDIAN AGRICULTURE: DEPENDENCE ON RAINFALL

Indian agriculture is heavily dependent on rainfall which largely occurs during monsoon season of about two and half months. The abnormal behavior of monsoon may cause natural disasters such as scarcity conditions or drought, floods, cyclones, etc. Nearly two thirds of the cropped acreage is vulnerable to drought in different degrees. On an average 12 million hectares of crop area is affected annually by these calamities severely impacting the yields and total agricultural production.

About two thirds of the cultivated area has no irrigation. Even large part of irrigated area does not get adequate water supply for intensive cropping (double cropping). In rained areas sowing of kharif crops commences with the onset of monsoons and the delay in the onset of monsoons delays sowing with its adverse impact on yield. Further the growth of crops and realization of output are determined by the quantum of rainfall and its distribution during the monsoon season. Even sowing of rabbi crops is determined by the soil moisture retained from the rains especially during the later part of the monsoon season. Rainfall pattern affects the irrigated crops also. Rainfall during flowering period washes the pollens adversely affecting the crop yield. Excess rainfall may adversely affect the yield realization. Heavy rains may submerge the growing crops in the early stages and may cause lodging in the later stages of crop growth. In the catchments heavy rains may cause floods in the plains. The floods disrupt the sowing schedule and damage the standing crops resulting in reduced yield or even total loss of crops and farm income in addition to loss of property. Other weather variables that affect yield include sunlight, temperature, wind, hails. In fact since time immemorial weather has been the major adversary that the farmers are not able to control. It has been established that 50 per cent of the variations in crop yield is due to variations in rainfall.

In any climatic zone crop yield among the farms varies with the soil, topography, tillage operations and use of four complementary inputs, namely, seed, fertilizer, pesticides and irrigation (soil moisture). Seed is the index of productivity which may be realized with the proper tillage practices, irrigation and fertilizer use. Pesticides use avoids the loss in yield because of pests and diseases. Not only quantum of these inputs but also their quality, and timings and method of use affect the yield realization. These four dimensions of complementary inputs vary for the individual farms in a year and for a farm over the years. In other words given the soil and topography two sets of factors that affect yield on farms are climatic and managerial. Managerial factors are in the control of farmers climatic factors are not.

The loss of crop yield affects the farmer and farming in more than one ways. Their inputs including labor get lost. The low yield of major crops means reduced income and difficulty in arranging the necessities of life as well as inputs for the next season. The repayment of outstanding loans becomes irregular sometimes resulting in default. Though conversion of loans or their rescheduling helps the farmers for eligibility for fresh loans from formal sources it may not solve their liquidity problems completely. In some cases the farmers are compelled to divest and dispose of some assets created over past years. Sometimes, they have to resort to costly borrowing from informal sources.

The capacity of agriculture to hedge itself from vagaries of nature is considered crucial for development and growth of the sector in particular and economy in general. The natural calamities can slow the pace and process of development by reducing the food supplies and raw materials in the short run. Successive failure of crops results in indebtedness of farmers with its adverse impact on farming and farm economy and consequently the Economy in general.

RISK AND UNCERTAINTY IN AGRICULTURE

Uncertainty refers to an event the outcome of which is not certain i.e. the outcome may be one of the many possible outcomes. As such it can not be measured. But certain probability may be attached to individual outcome. Risk on the other hand refers to the impact of the uncertain outcome on the quantity or value of some economic variable. The value of the economic variable may be on either side of the mean value. Repeated events would result different outcomes having a range of values. Thus risk refers to the variations in value of an economic variable resulting from the influence of an uncertain event. Since the variations in the value are measurable risk can be measured.

Agricultural production is an outcome of biological activity which is highly sensitive to changes in weather. Important weather variables such as temperature, humidity, rainfall, wind etc. influence the biological process directly or indirectly. For instance, low soil moisture due to poor precipitation in the pre-sowing period adversely affects seed germination resulting in reduced plant population. The poor precipitation during growth period results in stunted plant growth. Heavy rainfall during early growth period causes submersion of plants. Similarly hailstorms, wind and cyclones damage the standing crops by lodging and uprooting especially

the perennials (trees and shrubs). High humidity may cause outbreak of pests and diseases. All these result in partial loss in yield and sometimes complete crop failure and hence reduced income to farmers. In other words, deviations in the Weather variables from the normal adversely affect the crop yields and hence production and income on individual farms. As variations in weather are more a regular phenomenon crop yields are not stable. As if all this is not enough the sword of uncertain agricultural prices always hangs on the farmers fate. As a consequence farm incomes fluctuate violently from year to year. These variations in income are referred to as risk. The variations in income due to changes in yield are production risk and due to changes in price marketing risk. As such risk (variations) may be measured in terms of standard deviation or coefficient of variations for yield, prices and income.

In business risk is treated as a cost. Once in the business one has to bear this cost. Since, risk is associated with the activity it cannot be eliminated so long the activity is carried out. It, however, can be managed i.e., can be reduced or minimized but at a certain cost. Risk management, therefore, implies minimization of income loss either by reducing variations in output or ensuring certain minimum price or guaranteeing certain level of income. It is a process of appraising and reducing risk. The ways devised to do so are referred to as risk management alternatives. These are discussed under the following heads.

a. Avoiding Risk: Some of the production risks can simply be avoided. For instance, eliminating more risky enterprises would minimize risk but at the cost of decreased total production (returns). Laggards always try to avoid risk. They opt for assured though low income enterprises.

b. Preventing Risk: Many a time some risks could be prevented by taking advance action. For instance, risk of loss in crop yield due to pest attack could be prevented by following preventive pest control. The cost of this risk management alternative is the cost of preventive pest control.

c. Sharing Risk:

This alternative of risk management is quite common in India. Important example of risk sharing is the share lease of land to tenants. The production risks are shared between the landlord and the tenant in the ratio they share some inputs and the output. The cost of this alternative to the landowner would be equal to the difference between the net income tenant earns less the cash rent he would have paid for rental lease.

d. Transferring Risk: Risk may be transferred from one entity to another. For instance, marketing risk could be transferred to buyers by way of forward contract. It guarantees to pay an agreed price for the produce to be realized in future. The cost of this alternative is the difference in value of output at post harvest/market price less the value realized at the agreed price. Crop insurance is another example of transferring production risk to another entity i.e., insurance company. In case the crop prospects are reduced below certain minimum, proportionate indemnity is paid for the expenditure incurred. The cost of this alternative is the premium paid by the farmer.

e. Spreading Risk: Risk may be spread over a number of enterprises with varying degree of risk and of course with varying level of net income. This is known as diversification. Diversification could be in terms of mixed farming, diversified farming or even mixed cropping. The idea is not to put all eggs in one basket. It would ensure some income realization from enterprises/crops even in the event of adverse weather conditions etc. As net returns from combination of different enterprises/crops would be less than the net returns from the most paying crop (pure) the difference between the two would be the cost of this alternative.

f. Taking Risk: Taking risk could be one of the alternatives to manage risk where the management cost is nil because no attempt is made to reduce risk. The idea is to plan for maximum returns even at high risk. Innovators and early adopters are the two categories of people who always are willing to take risk. They go for high return enterprises exposing themselves to high risk.

Typical Measures against Agriculture Risk Technical measures:

Dykes or embankment to protect from flood, assured irrigation from surface or groundwater sources, use of pesticides, fertilizer, judicious use of land, crop rotation/mixed cropping, choice of plant varieties and animal breeds, crop and animal husbandry practices, genetic modification of crop pattern to adjust to the calamities, etc. Other than these, economic measures like diversification of farm enterprises and by improvements in marketing and institutional set-up might also work there. In many countries the state provides aid or relief to the agricultural sector in the event of a natural catastrophe as a matter of Public Policy. In some countries this is done on an ad hoc basis while in others there are formal arrangements and even legislation for this purpose. It is true that globally agricultural production could be significantly improved adopting such measures but the residual risk from the natural hazards still affecting agricultural sector enormously. As already mentioned, in the changing climate it might aggravate further. Moreover, the technical measures sometimes found to be not effective like some of them might be counter-productive.

EVOLUTION OF CROP INSURANCE IN INDIA

The question of introduction of crop insurance in India was taken up for examination soon after independence in 1947. A special study to work out modalities of crop insurance was commissioned in 1947-48 following an assurance given by the Ministry of Food and Agriculture to introduce crop and cattle insurance in the country. The first aspect regarding the modalities of crop insurance considered was whether it should be on Individual Approach or Homogenous Area Approach. The individual approach seeks to indemnify the farmer to the full extent of the losses and the premium to be paid by him is determined with reference to his own past yield and loss experience. As such it necessitates reliable and accurate data of crop yields of individual farmers for a sufficiently long period for fixation of premium on actuarially sound basis. The homogenous area approach envisages that in the absence of reliable data of individual farmers and in view of the moral hazards involved in the individual Approach, a homogenous area would form the basic unit, instead of an individual farmer. The homogeneous area would comprise of villages that are homogenous from the point of view of crop production and whose annual variability of crop productivity would be similar. The study favored homogenous area approach. Various agro-climatically homogenous areas to be treated as units and the individual farmers in those area units would pay the same rate of premium and receive the same benefits, irrespective of differential loss in individual yields. The ministry circulated the scheme for adoption by the state governments but the states did not accept.

In 1965, the Central Government introduced a Crop Insurance Bill and circulated a model scheme of crop insurance on compulsory basis to constituent state governments for their views. The bill provided for the Central Government framing a reinsurance scheme to cover indemnity obligations of the states. However because of very high financial obligations none of the states accepted the scheme. On receiving the responses of state governments, the subject was considered in detail by an Expert Committee headed by the then Chairman Agricultural Price Commission set up in July 1970 for full examination of the economic, administrative, financial and actuarial implications of the subject. Different experiments on crop insurance on a limited, ad hoc and scattered scale started in 1972-73. By now we have the experience of a number of

products including some of weather insurance. In what follows is a brief on the past experience and availability of different products at present.

Though, agricultural insurance is largely in the public domain some private efforts especially in weather insurance have also been there for some time. Their experience is not all that discouraging. The real challenge is to scale up the distribution and ensure fast claim settlement. India, thus, has a publicly administered crop insurance scheme since 1972. All the variants of the scheme introduced from time to time had flaws. Nevertheless India is not alone where public crop insurance has not been successful. In both developed and developing countries such insurance schemes have incurred losses without offering an effective product.. Public crop insurance schemes are available to cultivators as means of reducing the cost associated with crop failure. The schemes, however, suffers from moral hazards and adverse selection and are very costly as payment eligibility is determined by crop damage assessment for each individual farmer. There is a feeling that it is not profitable proposition at all.

RATIONALE OF CROP INSURANCE

The modern insurance sector can play a major role to solve the problems mentioned there, and considerably strengthen the financial security of farmers. Agricultural Insurance is a more efficient instrument and an effective institutionalized mechanism for dealing with the problem. It helps to streamline the relief efforts and reduces the direct and indirect costs on the national economy. (Jain, 2004). For a number of reasons demand for crop insurance is increasing day by day, which can be grouped as;

Evidence is accumulating of connections between climate change, and the increasing incidence of crop damaging weather events of extreme severity.

Farming is becoming steadily more commercialized, with greater financial investment.

Farmer / investors and their banks frequently examine the feasibility of using a financial mechanism i.e. insurance, in order to address part of the risk.

The World Trade Organization (WTO) regulations generally forbid will increase subsidization of agricultural in governments from subsidizing agriculture directly; however, they permit the insurance premiums. In the case, demand for crop insurance those economies that wish to implement a policy of permitted subsidization of their farmers.

Insurance can also assist in managing the on-farm production risks consequent changes in past management practices. Such changes are increasingly required in order to address environmental protection and food safety concerns.

Problems associated with Crop Insurance Implementation:

There are some problems of implementing crop insurance at field level. The major ones are finding the right client, the provider and the product design.

Firstly, without the right group of farmers and approach this might look like a relief to farmers, which will hamper the objective of the programme.

Secondly, three different channels of providers can work:

1. Full service provision by an NGO/MFI,

2. Full service provision by a mainstream insurance company and

3. Collaboration between the two within a partner-agent model

Many issues influence the selection of the channel of provision for offering crop micro insurance. These issues include the motivation and goals of the provider, the costs of provision, human resources and information capabilities, access to clients, access to reinsurance and support by subsidies and donors.

Another problem is product design. Developing a viable insurance plan begins with the identification of the risks, deciding upon the method for estimating the loss of crops, setting the premiums etc. Without the right amount of premium the insurance will neither be viable nor sustainable for long.

Many countries, including the US, are doing crop insurance. In India, multi-peril crop insurance, by the name of National Agriculture Insurance Scheme (NAIS), is being implemented. This is implemented by Agriculture Insurance Company of India, an Indian

government-owned company. The scheme is compulsory for all the farmers who take agricultural loans from any financial institution. It is voluntary for all other farmers.

Obstacles to implement Crop Insurance in Developing countries:

o Lack of reliable long period data on crop yields and losses

o Wide variety of agricultural practices

o General ignorance and poverty of farmers

o Lack of trained personnel

o Limited financial resources of the countries

o Lack of insurance consciousness amongst farmers

PAST EXPERIENCE IN CROP INSURANCE

First Ever-Individual Approach Scheme:

In 1972-73, the General Insurance Department of Life Insurance Corporation of India introduced a Crop Insurance Scheme on H-4 cotton. Later in 1972, general insurance business was nationalized by an Act of Parliament, and the General Insurance Corporation of India (GIC) was set up. The new corporation took over the experimental scheme in respect ofH-4 cotton in Gujarat. The Scheme was based on "Individual Approach". Subsequently the scheme included groundnut, wheat, potato and gram and was implemented in the states of Gujarat, Maharashtra, Tamilnadu, Andhra Pradesh, Karnataka and West Bengal. The scheme continued till 1978-79. However, it covered only 3110 farmers for a premium of Rs.4.54 lakhs against claims of Rs.37.88 lakhs indicating its non-viability and non-popularity.

Pilot Crop Insurance Scheme (PCIS) 1979:

The background and experience of the aforesaid experimental schemes for crop insurance, a study was commissioned by GIC and entrusted to eminent agricultural economist, Prof. V.M. Dandekar. Based on the recommendations of Prof. Dandekar, a Pilot Crop Insurance Scheme was introduced by GIC in 1979.

The important features of the scheme were:

The scheme was based on "Area Approach".

1) The scheme covered cereals, millets, oilseeds, cotton, potato and gram.

2) The scheme was available to loanee farmers only and on voluntary basis.

3) The risk was shared between General Insurance Corporation of India and State Governments in the ratio of 2:1.

4) The maximum sum insured was 100 per cent of the crop loan, which was later increased to 150 per cent.

5) A 50 per cent subsidy was provided for insurance charges payable by small andmarginal farmers by the State Government and the Government of India on 50:50basis. The PCIS launched in 1979 continued till 1984-85 and was implemented in 13 states. During this period it covered 6.27 lakh farmers for total premium of Rs.196.95 lakhs against claims of Rs.157.05 lakhs.

Comprehensive Crop Insurance Scheme (CCIS):

On the basis of experience gained from implementation of PCIS a Comprehensive Crop Insurance Scheme (CCIS) was introduced with effect from 1st April 1985 by the Government of India with the active participation of State Governments. The Scheme was linked to short term crop credit and implemented on homogeneous area basis. Though the scheme was available to all states it was not mandatory. In all 15 states and 2 union territories implemented the Scheme until Kharif 1999. These were Andhra Pradesh, Assam, Bihar, Goa, Gujarat, Himachal Pradesh,

Karnataka, Kerala, Madhya Pradesh, Maharashtra, .Meghalaya, Orissa, Tamilnadu, Tripura and West Bengal among the states and Andaman & Nicobar Islands and Pondicherry among union territories. The states of Rajasthan, Uttar Pradesh, Jammu & Kashmir, Manipur and Delhi had initially joined the scheme but subsequently opted out after few years.

The main features of the scheme were:

1) It covered farmers availing crop loans from financial institutions for growing food crops and oilseeds on compulsory basis. The coverage was restricted to 100 per cent of crop loan subject to a maximum of Rs.10 thousand per farmer.

2) The premium rates were 2 per cent for cereals and millets and 1 per cent for pulses and oil seeds. Small and marginal farmers were given a subsidy of 50 per cent of the premium payable shared equally by the central and state governments.

3) The central and state governments shared the premium and claims in the ratio of 2:1.

4) The scheme was optional to state governments.

5) The scheme was a multi-agency effort, involving Government of India, State Governments, Banking Institutions and General Insurance Corporation of India.

The summary of coverage particulars until Kharif 1999 since inception is given in Table 1. The data clearly reflects on the non-viability of the scheme though it was becoming popular. A majority of claims were paid in the states of Gujarat Rs.1086 crores (47%), Andhra Pradesh Rs.482 crores (21%), Maharashtra Rs.213 crores (9%) and Orissa Rs.181 crores (8%).

Table 1: Summary of Coverage till 1984-85 Total number of farmers covered Total area covered (Hectares) Total sum-insured (Rs. Crores) 7,62,65,438 12,75,70,282 24,949

Total insurance charges (Rs. 404 Crores) Total claim (Rs. Crores) 2303

Experimental Crop Insurance Scheme (ECIS):

While in operation attempts were made from time to time to modify the CCIS as demanded by the states. During 1997 a scheme viz. Experimental Crop Insurance scheme was introduced from Rabi 1997-98 which was implemented in 14 districts of five states. The scheme was similar to CCIS except that it was meant for all small and marginal farmers with 100 per cent subsidy in premium. The central and state governments shared the premium, subsidy and claims in 4:1 ratio. The scheme was discontinued after one season due to administrative and financial difficulties. The scheme covered 454555 farmers. The sum insured was Rs.168.11 crores and claims paid Rs.37.80 crores against premium of Rs.2.84 crores.

Pilot Project on Farm Income Insurance Scheme:

Under the project comprehensive risk insurance was provided against loss in actual farm income against the guaranteed income in a notified area arising out of adverse fluctuations in yield due to one or more non-preventable perils and adverse fluctuations of market prices as measured against minimum support price (MSP) for the crops covered. The project covered paddy and wheat crops and all farmers (loanee on compulsory and others on voluntary basis) in selected states and districts which gave their consent for inclusion. The sum insured was guaranteed income per unit area arrived at using average yield of past 7 years, current MSP and indemnity level. The premium rates were actuarial for states and crops (irrigated and un-irrigated

separately) at 75 per cent subsidy for small and marginal farmers and 50 per cent subsidy for others. Area approach was followed. Capping and cupping of 20 per cent of MSP was applied. Claims exceeding 100 per cent of premium less components of loading towards administration and marketing expenses were borne by the Government of India. A commission of 5 per cent of gross premium in case of non-loanee farmers was payable to the Rural Agents and 2.5 per cent of gross premium for all farmers was payable to banks as service charges. In all 18 districts from 10 states for wheat and three districts from 3 states for paddy were selected in 2003-04.

Sookha Suraksha Kavack (Drought Risk Insurance):

Sookha Suraksha Kavach was specially designed for Rajasthan to cover 23 districts and popular and widely grown crops like guar, bajra, maize, jowar, soybean and groundnut. There is high spatial and temporal variation in rainfall across West Rajasthan. The average rainfall ranges from 10mm in northwest part of Jaisalmer to 40mm along the western fringes of the Aravalli range. Variation in rainfall is as high as 39 per cent. The sum insured per hectare ranged from cost of cultivation to value of produce given in the Benefit Table showing claims at different levels of deficiency in weighted and actual rainfall indices. The premium ranged from 5 to 8 per cent. Claims assessment was based on rainfall indices for June to October using appropriate weights and caps. The weighted actual rainfall index was compared with weighted normal rainfall index to compute deficiency in rainfall index. A claim trigger is basically a threshold deficiency percentage of the weighted actual rainfall index as compared to normal rainfall index. The deficiency greater than or equal to claim trigger makes the participating farmers eligible for claims as per the Benefit Table. Rainfall indices are prepared on the basis of data from specified rain gauge station. Claims are automated and directly credited to bank account.

PRODUCT IN THE MARKET

A number of crop insurance products are available to farmers in different geographical areas and for different purposes. These include National Agricultural Insurance Scheme, Weather Based Crop Insurance Scheme, Wheat Insurance (Weather & Biomass), Rabi Weather Insurance, Potato Insurance, Poppy Insurance, Varsha Bima (Rainfall Insurance) for seasonaland annual crops. Insurance products are also available for plantation crops in specific geographical areas such as Uttarakhand Seb Bima Yojana (Apple Insurance), Grapes Insurance, Rainfall Insurance Scheme for Coffee Growers (Coffee Insurance), Bio-Fuel Tree / Plant Insurance, Pulpwood Tree Insurance, Coconut Insurance, Rubber Insurance and Mango Insurance for plantation crops in specific geographic area. We present here a brief description of selected field crop related insurance products, namely, National Agricultural Insurance Scheme (NAIS), Weather Based Crop Insurance Scheme (WBCIS), Varsha Bima 2005, Wheat Insurance.

National Agricultural Insurance Scheme:

Keeping in view the demands of States for improving scope and contents of CCIS, a broadbased National Agricultural Insurance Scheme (NAIS) has been introduced in the country from Rabi 1999-2000 with the following objectives.

To provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crop as a result of natural calamities, pests and diseases.

1) To encourage the farmers to adopt progressive farming practices, high value inputs and higher technology in Agriculture.

2) To help stabilize farm incomes, particularly in disaster years.

3) Some of the improvements incorporated in the new scheme are visible from the following

A) Scope of the Scheme

I) Area Coverage:

The scheme was available to all states and union territories on optional basis. However the states opting for the scheme were required to take up all the crops identified for coverage in a given year and shall have to continue for a minimum period of three years before it may quit. For Rabi 1999 only eight states (Assam, Goa, Gujarat, Himachal Pradesh, Kerala, Madhya Pradesh, Maharashtra and Orissa) and union territory of Pondicherry opted for the scheme. This number was increased to 17 in Kharif 2000 and to 21 in Kharif 2002. Currently the scheme has been implemented in 23 states and two union territories. Punjab, Manipur, Nagaland, and Arunachal Pradesh among states and Chandigarh, Daman & Diu, Dadra & Nagar Haveli and Lakshadeep among union territories have not yet opted for the scheme.

II) Farmers covered:

All farmers including sharecroppers and tenant farmers growing notified crops in notified areas are eligible for coverage under the scheme. However, it is compulsory for loanee farmers availing crop loans from financial institutions (PACS, RRBs, and commercial banks). While all loanee farmers would automatically get compulsorily coverage under NAIS through PACS / bank branches extending crop loan for insured crops all non-loanee farmers desirous of availing insurance coverage should contact the nearest bank branch before the stipulated time frame with a proposal for insurance. They must have a bank account and pay the requisite premium to get insurance coverage.

III) Risks Covered:

The scheme provides comprehensive risk insurance against yield losses due to no preventable risks, i.e.

(a) natural fire and lightening,

(b) storm, hailstorm, cyclone, typhoon,\ tempest, hurricane, tornado etc.,

(c) flood, inundation and landslide,

(d) drought, dry spells, and

(e) pests / diseases etc.

However losses arising out of war and nuclear risks, malicious damage and other preventable risks shall be excluded.

IV) Crops Covered:

The scheme besides food and oilseed crops also covered annual commercial and Horticultural Crops. The crops in respect of which the past yield data based on Crop Cutting Experiments (CCEs) are available for past 10 years and the state government agreed to conduct requisite number of CCEs for estimating the average yield during the proposed season are covered. The crops to be covered next year will have to be spelt before the close of preceding year. At present 35 different Kharif and 30 different Rabi season crops are being insured under NAIS in the country. The crops covered in various states fall under the following groups.

a) Food crops (cereals, millets and pulses): Wheat, paddy, Jowar, Bajra, Maize, Ragi, Korra, Kodokutki, Green gram, Black gram, Red gram, Horse gram, Moth etc.

b) Oilseeds: Groundnut, Sunflower, Soya bean, Safflower, Sesame, Niger, Caster etc.

c) Annual commercial/horticultural crops: Sugarcane, Cotton, Potato, Onion, Chilly, Turmeric, Ginger, Coriander, Cumin, Fennel, Fenugreek, Isabgol, Jute, Tapioca, Banana, Pineapple, etc. However mangoes, apples, grapes and oranges are not yet covered.

V) Unit of Insurance:

The scheme operates on the basis of area approach i.e., defined areas (unit of insurance) for each notified crop for widespread calamities. The unit area of insurance may be a Gram Panchayat, Mandal, Hobli, Circle, Phirka, Block, Taluka etc. as decided by the state government. However, each participating state was required to reach the level of Gra Panchayat as the unit in a maximum period of three years. The assessment of loss is estimated through CCEs conducted by the state administration. In case of localized calamities such as hailstorm, landslide, cyclone and flood the scheme operates on the basis of individual approach. To begin with, NAIS was to b implemented in limited areas on experimental basis initially and extended in the light of operational experience gained. The individual farmers would intimate the crop loss within 48 hours to local revenue or agricultural department. The District Revenue administration would assist implementing agency in assessing the extent of loss.

B) Sum Insured and Premium:

In case of loanee farmers the sum insured would be at least equal to the amount of crop loan advanced (scale of finance plus insurance charges). The sum insured may extend to the value of the threshold yield of the insured crop at the option of the insured farmer. For nonloanee farmers the coverage at normal rates of premium is available up to the value of threshold yield (at MSP or market price). Both loaned and non-loaner farmers can obtain additional coverage up

to 150 per cent of value of average yield of the notified area by payment of premium at actuarial rates. A non-loanee farmer would produce a proof of ownership of land. In case of sharecropper / tenant farmer a proof showing crop sharing/tenancy arrangements would be needed to obtain the insurance cover.

The threshold yield (TY) or guaranteed yield for a crop in an insurance unit is the moving average based on past three years average yield in case of Rice and Wheat and five years average yield in case of other crops, multiplied by the level of indemnity. Three levels of indemnity, viz., 90, 80 and 60 per cent corresponding to low risk, medium risk and high risk areas would be available for all crops (cereals, millets, pulses and oilseeds and annual commercial and horticultural crops) based on coefficient of variation (C.V.) in yield of past 10 years' data. However, the insured farmers of unit area may opt for higher level of indemnity on payment of additional premium based on actuarial rates.

The premium payable is fixed for groups of crops on the basis of the nature of yield variations observed historically. Over time these would be replaced by actuarial rates. The actuarial rate may include pure risk premium, administrative costs, reserve for unexpected losses, and allowance for enhanced scale of finance, adverse selection and moral hazards, and profit margin. Pure risk component would be higher for basic crops than for commercial and horticultural crops. Transition to the actuarial regime in case of cereals, millets, pulses and oilseeds would be made in a period of five years. The actuarial rates would be applied at District / Region / State level at the option of the state / union territory. fixed are given in Table.

SEASONS Kharif

CROPS

PREMIUM RATE

Bajra and oilseeds othercrop 3.5% of SI or Actuarial rate (cereals pulses). other millets and Whichever is less 2.5% of SI or Actuarial rate Whichever is less

Rabi

Wheat

othercrop (cereals 1.5% of SI or Actuarial rate Whichever is less 2.0% of SI or Actuarial rate Whichever is less

other millets and pulses).

Kharif & Rabi

Annual Horticultural crop

Commercial/ Actuarial rate

A subsidy of 50 per cent in premium is allowed in respect of small and marginal farmers, to be shared equally by the Centre and State/Union Territory. The premium subsidy will be phased out on a sunset basis in a period of three to five years, subject to review of the financial results and the response of the farmers at the end of the first year of the implementation of the scheme. The definition of small and marginal farmer would be as defined in the land ceiling legislation of the concerned state. Normally a cultivator with a land holding of up to 1 hectare (2.5 acres) is marginal farmer and 1-2 hectares (5 acres) is small.

C) Estimation of Crop Yield, Indemnity and Claim Settlement

The state government or union territory administration would plan and conduct therequisite number of Crop Cutting Experiments (CCEs) for all notified crops in the notified insurance units in order to assess the crop yield and maintain a single series of CCEs and resultant yield estimates, both for crop production estimates and crop insurance. CCEs would be undertaken per unit area for each crop on a sliding scale as indicated in Table 3. A Technical Advisory Committee (TAC) comprising of representatives from NSSO, Ministry of Agriculture

(GOI) and Implementing Agency would be constituted to decide the sample size of CCEs and all other technical matters.

Minimum Number of CCEs for Unit Areas

If the Actual Yield (AY) per hectare of the insured crop for the defined area on the basis of requisite number of CCEs in the insured season falls short of the specified TY, all the insured farmers growing that crop in the defined area are deemed to have suffered shortfall in yield (SY). The scheme seeks to provide coverage against such contingency. Indemnity shall be calculated as per the following formula:

Indemnity = (SY / TY)*[Sum Insured for the Farmer]

where, SY = TY AY for the defined area

In case of occurrence of localized perils such as hailstorm, landslide, cyclone and flood where settlement of claims would be on individual basis, loss assessment and modified indemnity procedures would be formulated by the implementing agency in coordination with state / UT. The broad seasonality discipline to be followed is given in Tale 4. It may be modified, if and where necessary, in consultation with state / UT and the Government of India.

Management of the Scheme:

In respect of loanee farmers, the banks play the same role as under CCIS. In respect of nonloanee farmers, banks collect the premium along with the declarations and send it to IA within the prescribed time limits. However, in areas where IA has requisite infrastructure, a nonloan farmer has the option to pay premium along with declaration directly to IA within the time

limits. The selection of the banks would be on the basis of Service Area Approach of the RBI or at the option of the Banks (where Co-operative Banks have good network). The Department of Agriculture, Directorate of Economics and Statistics, Department of Cooperation, Revenue Department of the state governments would be actively involved in smooth implementation of the scheme. The scheme is be implemented in accordance with the operational modalities as worked out by IA, in consultation with Department of Agriculture and Cooperation. During each crop season, the agricultural situation is closely monitored in the implementing state / UT. Department of Agriculture and district administration set up a District Level Monitoring Committee (DLMC), who would provide fortnightly reports of agricultural situation with details of area sown, seasonal weather conditions, pest incidence, stage of crop failure (if any) etc. The operation of the scheme would be reviewed annually, and modifications as may be required would be introduced. Periodic Appraisal Reports on the Scheme would be prepared by Ministry of Agriculture, the Government of India or Implementing Agency. Efforts would be made by IA to obtain appropriate reinsurance cover for the proposed NAIS in the international Reinsurance market.

Weather Based Crop Insurance Scheme:

Weather Based Crop Insurance Scheme (WBCIS) is a unique weather based insurance product designed to provide insurance protection against losses in crop yield resulting from adverse weather incidences. In provides payout against adverse rainfall incidence (both deficit and excess) during Kharif and adverse incidence in weather parameters like frost, heat, relative humidity, un-seasonal rains etc. during rabi season. As such it is not yield guarantee insurance. WBCIS has been piloted in the country since Kharif 2003 season. Some of the states where the scheme is piloted over the years are Andhra Pradesh, Bihar, Chattisgarh, Gujarat , Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Uttar Pradesh etc.

I. Reference Unit Area:

Weather Based Crop Insurance Scheme (WBCIS) operates on the concept of area approach. That is, for the purposes of compensation, a Reference Unit Area (RUA) is deemed to be a homogeneous unit of Insurance. The RUA is notified before the commencement of Kharif season by the State Government and all the insured cultivators of a particular insured crop in that area are deemed at on par in the assessment of claims. Each RUA is linked to a Reference Weather Station (RWS), on the basis of which current weather data and the claims would be processed. Adverse weather incidences during the season entitle the insured a payout, subject to the weather triggers defined in the Payout Structure and the terms and conditions of the scheme.

For Rabi season the weather triggers are broadly fixed to capture the adverse incidence of weather parameters on yield. Claims arise when there is a certain adverse deviation in actual weather parameter incidence in RUA as per the weather data measured at RWS. The actual may be more or less than compared to what has been specified in the Benefit Table leading to crop losses. In such case all the insured cultivators under a particular crop are deemed to have suffered the same adverse deviation and become eligible for claim subject to terms and conditions of the scheme. The claim settlement is automatic process based on weather readings at the RWS. Insured cultivators are not required to make a claim. In a given RUA the payout given per unit area is the same for all cultivators under the same RWS. Weather insurance payouts are assured with in 45 days from the end of insurance period. For traditional crops where payout is linked to yield estimates claim processing may take more time.

II. Sum Insured:

The amount of insurance protection is broadly the cost of inputs expected to be incurred by the insured in raising the crop. Sum insured is pre-declared per unit area by AIC at the beginning of each crop season in consultation with the experts in state government, and it may be different for different crops in different RUA. Sum insured is further distributed under key weather parameters used in the insurance in proportion to the relative importance of the weather parameters. For a loanee the sum insured per crop is calculated by multiplying per unit area value of inputs with crop specific acreage declared in the loan application form by the loanee cultivator for the purpose of maximum borrowing limit fixed for him by the lending bank. For the non-loanee the acreage figure is the expected area sown / planted under the particular crop as declared in the insurance proposal form.

III. Premium Payable

a. Food Crops and Oil Seeds SR.NO. CROPS PREMIUM PAYABLE BY THE

INSURED CULTIVATOR 1 Wheat 1.5% of SI or Actuarial rate Whichever is less 2 Othercrop other pulses). (cereals 2.0% of SI or Actuarial rate Whichever and is less

millets

b. Annual Commercial or Horticultural Crops SR.NO. Premium Slab 1 2 Up to 2% 2-5% No Subsidy 25%, subject to minimum net premium of 2% payable by farmer Subsidy & Premium

5-8%

40%, subject to minimum net premium of 3.75% payable by farmer

8%

50%, subject to minimum net premium of 4.8% & max 6% payable by farmer

IV. Advantages of WBCIS

Weather based crop insurance scheme has many advantages which make it beneficial for cultivators in their production risk management such as the following.

a) Trigger events like adverse weather can be independently verified and measured.

b) It allows speedy settlement of claims.

c) All farmers can buy WBCIS.

d) Government provides subsidy in premium and hence premium payable is affordable.

e) It provides transparent, fully objective, efficient and direct payouts for adverse weather incidences.
f) Insured is not required to submit claim form or other documents as proof for loss.

g) Since the weather data decides the compensation the insured is willing to put extra effort for getting better yield of crop.

Rabi Weather Insurance:

Weather Insurance (Rabi) is a mechanism for providing effective risk management aid to those individuals and institutions likely to be impacted by adverse weather incidences.

The most important benefits of Weather Index Insurance are:

1) Trigger events like adverse weather events can be independently verified and measured.

2) It allows for speedy settlement of indemnities, as early as a fortnight after the indemnity period.

3) All growers, be it Small /Marginal; Owners or tenants/Sharecroppers can buy the weather insurance.

Wheat, Mustard, Gram, Potato, Masoor, Barley and Coriander are the major Rabiseason crops mostly in the states of UP, MP, Maharashtra and Rajasthan. These crops are extremely vulnerable to weather factors, such as excess rainfall, frost, and fluctuation in temperature etc. Agriculture Insurance Company of India would compensate the insured, against the Likelihood of diminished crop output/ yield resulting from: Maximum Temperature ( C) above the trigger level and / or Deviation in Temperature Range from the normal above the Trigger value and / or Minimum Temperature ( C) below the trigger level and / or Minimum Temperature below 4 C resulting frost and / or Rainfall in excess of the trigger levels (calculated on daily/ weekly/ monthly basis) and / or Bright Sunshine Hour below the trigger level. The insurance operates during the months of December to April. However the period is Different for different parameters and crops.

Claims are automated; and settled on the basis of actual maximum temperature, Minimum temperature, rainfall and BSH received from the concerned agencies/ institutions as Applicable to each crop separately. Claims when become payable, are paid at a uniform rate to all the insured growers in the area (jurisdiction of reference weather station) growing the Insured crop

with in 4-6 weeks after insurance period. Maximum liability is linked to cost of cultivation and varies from crop to crop.

Wheat Insurance Policy:

Wheat insurance policy is a unique technology based insurance product combining crop vigor / biomass (Normalized Difference Vegetative Index - NDVI) and weather (temperature / rainfall) parameters. The NDVI component of cover measured at peak vigor stage provides effective risk management aid to those wheat growers who are likely to be impacted by poor growth of the crop arising out of non-preventable natural factors. It is insurance against the likelihood of diminished wheat yield resulting from lower NDVI within the specified taluk preferably during February and/or high temperature consecutively for specified number of days above specified levels in 1st and / or 2nd fortnight of March as measured at RWS.

The insurance is linked to biomass triggers. Trigger events could be measured using high technology standards based in satellite imagery from remote sensing technology which could be independently verified and measured, and accurate and allows for speedy settlement of indemnities even before the crop is ready for harvesting.

When the current NDVI falls short of the specified trigger level, the benefits payable to the insured will be the sum specified corresponding to trigger level and or the maximum temperature of specified number of days as recorded at RWS is higher than the specified trigger level during 1st and / or 2nd fortnight of March the benefit payable to insured shall be the sum specified corresponding to trigger level. The premium chargeable is statistically / actuarially calculated based on the geographical area, the triggers specified and biomass and temperature patterns of the specified area in the historical periods. Benefits expected from scheme:

The scheme is expected to

1. Be a critical instrument of development in the field of crop production, providing

financial support to the farmers in the event of crop failure.

2. Encourage farmers to adopt progressive farming practices and higher technology in Agriculture.

3. Help in maintaining flow of agricultural credit.

4. 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 and employment, generation or market fees, taxes etc. And net accretion to economic growth.

5. Streamline loss assessment procedures and help in building up huge and accurate statistical base for crop production.

Comparison of NAIS and WBGIS

SR.NO. National Agricultural Insurance Scheme (NAIS) 1 Practically all risks covered (drought, excess rainfall, flood, hail, pest infestation, etc.) Weather Based Crop Insurance Scheme (WBCIS) Parametric weather related risks like rainfall, frost, heat (temperature), humidity etc. are covered. However, these parametric weather Parameters appear to account for majority of crop losses 2 Easy-to-design if historical Technical challenges in designing weather

yield data up to 10 years is Indices and also correlating weather indices available. with yield losses. Needs up to 25 years

historical weather data 3 High basis risk {difference between the yield of the Area (Block / Tehsil) and the individual farmers}. 4 Objectivity and transparency is relatively less. 5 Quality losses are beyond Consideration. 6 7 High loss assessment costs. Delays in claims settlement. Quality losses to some extent gets reflected through weather index. No loss assessment costs. Faster claims settlement. Objectivity and transparency is relatively high. Basis risk with regard to weather could be high for rainfall and moderate for others like frost, heat, humidity etc

CROP INSURANCE IN BANGLADESH

Crop Insurance offering Institutions in Bangladesh :

Though there are currently no crop insurance schemes in Bangladesh, a crop insurance programmer was introduced in Bangladesh by the Sadharan Bima Corporation (SBC) in 1977. Insurance coverage was extended to the crops of Aus, Amman and Boor rice, wheat, jute and sugarcane. Premiums were based on the market values of the insured crops and ranged 3-5% of the value. The insurance scheme covered losses from multiple perils including natural disasters. Under this scheme, a total of 15,420 farmers were covered by crop insurance. The plan was not successful as claims consistently exceeded premiums by a significant amount. Recently, BRAC has been proactive in its efforts to reintroduce insurance for farmers, and the government is also planning to restart the program. Green Delta Insurance Company Limited and Bangladesh Institute of ICT in Development (BIID) have signed a Memorandum of Understanding (MoU) recently to reduce the risk of the farmers vulnerability and cover their financial fatalities. This MoU will eventually lead to introduce crop insurance in Bangladesh, says a press release. Farzana Chowdhury, additional managing director and group chief financial officer, Green Delta Insurance, and Shahid Uddin Akbar, chief executive officer, BIID, has signed the MoU.

Traditionally, governments effort to manage the natural disaster revolved infrastructural measures such as embankments, shelters and post disaster relief measures etc.

Why Crop insurance is so important for Bangladesh:

Bangladesh is a developing country, prone to flooding because of its unique geographical location. Bangladesh is surrounded by India, Myanmar (Burma) and the Bay of Bengal and has a relatively low topography. That is why, about 68% of the country is prone to flooding. Three major river systems, Ganges, Brahmaputra and Meghna, carry a huge flow of water from a wider catchment area lying in India, Nepal, Bhutan and China through Bangladesh towards the sea. And as the melting rate of glaciers in Himalaya is increasing because of changing climate, the scale and frequency of flood is also increasing. In essence, this makes the country the biggest river delta of the world. During normal monsoon, 25-30% of the land area is flooded and in extreme case the area affected is nearly 70%. This is why Bangladesh, seen as the hardest hit by the climate change, will suffer most in the agriculture sector. Agriculture accounts for one quarter of Bangladesh's GDP and is the source of employment for more than 80 per cent of the rural population, 65% of them are directly related to agriculture. Another 15 to 20 % are indirectly related to it. Rural people's 60 to 70 % income is generated from agriculture; so, the food security and income of these farmers' good harvest and production has to be ensured.

Marginal farmers have insufficient means to cope with floods and disasters. Along with it, the poverty rate among the rural population is high; about 20 per cent of the rural households live in extreme poverty and 30 per cent are considered moderately poor. In Bangladesh, most farmers lack financial capability to reinvest in production of next crop after losing one to flooding.

More than half of agricultural production in Bangladesh is contributed by the crop subsector. The inherent risk associated with agricultural crop production is the key challenge in the development and poverty reduction program of Bangladesh. Traditionally, government efforts to manage natural hazards have revolved round infrastructural measures such as building embankments, shelters and post-disaster relief measures etc. But in recent years, the concept of

'pro-active adaptation' has gained foothold in poverty alleviation programmes to deal with natural disaster risks. The National Adaptation Programme of Action (NAPA), prepared by the Ministry of Environment and Forest (MOEF), suggests crop insurance so that marginal farmers can be better prepared to cope with the increased risk of crop damage. Although crop insurance cannot increase the yield directly, it ensures that the farmer can cultivate in the next season after a disaster. Moreover, if crop insurance companies and banks or financial institutions work together, then on the basis of crop insurance as collateral, financial institutes can give loan to the farmers. This loan can substantially increase the yield by giving the farmer the access to the best quality seeds and required.

Current scenario of Crop insurance in Bangladesh:

Agriculture comprises nearly 15 percent of Bangladeshs GDP. Considering the importance of this sector in providing for over 145 million people, it is surprising that there is no comprehensive crop insurance system in place for farmers. Crop insurance is a valuable tool to protect against financial risks stemming from crop damage due to unforeseeable hazards droughts, floods, pests, and so on. The mechanics are quite simple a farmer can take out an insurance policy on his expected yield of crops, and pay a fixed premium every month to the insurance company. If bad weather results in under production, or destroys the farmers crops, the insurance policy pays out, ensuring that the farmer is protected financially and is not left with very little income for the year.

Many types of sophisticated mechanisms of insurance exist to protect against a variety of risks. For instance, in developed markets, futures contracts are available that lock in prices for future delivery of a certain volume of crops. With these contracts, farmers are protected against losses due to fall in prices of agricultural produce in the event of bumper production. In theory, crop insurance offers additional benefits besides financial protection. It encourages innovation in production methods by encouraging risk taking. For instance, insurance limits the downside risk to farmers who may be interested in using newer varieties of seeds and fertilizers in their fields,

but are unable to do so because of the uncertainty surrounding the production yields of these new varieties.

Insurance also protects financial institutions that lend to farmers. Thus in the event of crop failure and subsequent loan defaults, lenders are protected and are able to continue their operations. The strength and health of these financial institutions is critical for the success of the agriculture sector without access to lines of credit, poor farmers would be unable to invest in fertilizer or irrigation technology.

Given Bangladeshs reliance on its agricultural sector, and its propensity for natural disasters, crop insurance schemes can play a crucial role in stabilizing and promoting food production while reducing the likelihood of sudden spikes in rural poverty. Although the concept of crop insurance has been around for decades, its applications in most developing countries fail due to lack of planning and implantation. Crop insurance was implemented in Bangladesh in 1989 as a government program, but was shut down in 1995 after massive losses. Recently, BRAC has been proactive in its efforts to reintroduce insurance for farmers, and the government is also planning to restart the program.

There are many potential missteps to the success of such programs. Insurance works by spreading individual risks across a large pool of buyers. Because of Bangladeshs numerous rivers and flat geography, it becomes harder to spread these risks when flooding occurs, a large segment of the cultivated land would likely be affected, triggering payouts that may cripple the insurance providers. Raising the premiums can prevent this problem, but finding a rate that is not cost-prohibitive to farmers is a matter of detailed analysis and research.

Setting the comprehensiveness of insurance policies is another matter. What types of risks should crop insurance cover? Studies in India have shown that providing a wide range of coverage can be inefficient. Leaving private sector players to decide which types of risks to cover will inevitably lead to a market with the most profitable schemes; on the other hand, governments are notoriously inefficient in deciding what types of coverage to provide, and may also be influenced by political factors. Striking a balance is difficult, yet critical.

Finally, the schemes must be implemented so as to reduce the common problems of insurance moral hazard (when a farmer deliberately neglects his crops and then collects on payments) and adverse selection (when only the people who need insurance the most tend to buy it, thus the insurance provider is left with a pool of the riskiest buyers).

Causes of failure of the Crop Insurance project in Bangladesh (1977 96):

1. The program was introduced hastily without adequate preparation like a clear policy and well defined structure and proper training of the SadharanBima Corporationstaffs and other relevant people. Including Sadharan Bima Corporation officials, the other people involved in the processes were seriously lacking adequate understanding on CI process.

2. The CI project was not integrated with the mainstream agriculture development policy, rather a discrete effort by SBC simply as an insurance scheme. It could be integrated with the other agri-credit systems like those of Krishi Bank and BRDB as a package program. Later it could be integrated with micro-credit programs as well. There was no appreciation and support from Central Bank regarding as well. Actually, instead of a simple insurance scheme, it should be introduced as a means of supporting farmers to recover from disaster, which required integrating different agencies involved together.

3. Later the program was also expanded abruptly without evolving any workable models and fine tuning of the programmer packages and delivery mechanism. At the beginning two Thanes were selected as pilot project sites to experiment, and later its expansion should be based on the experience gathered at two sites with proper research and evaluation. However, the expansion was made as usual with the same structure adopted from the very beginning.

4.There was no grassroots level monitoring of the programmer at all, which is a must for either microfinance or micro insurance. Rather, the SBC head office controlled the programmer, which was totally irrational.

5. The program was made voluntary and based on individual approach. This leads to adverse selection, i.e. only the more risky lands were preferred for insurance. Uniform premium rate for all types of land farther aggravated the problem. The approach was totally contrary to the principle of risk pooling, where the farmers should be selected from diverse agro-ecological zones so that not all the insured suffer from disaster at once.

6. It became a culture in Bangladesh to exempt Agri-loan to farmers, especially after a disaster. Political parties take it as a cheap means of popularity and sometimes use it for their own vested interest like giving loan to own people, etc. The sum insured as 80% of the average yield was too.

CROP INSURANCE IN TAMIL NADU

Implementation of weather insurance plan in Tamil Nadu:

Tamil Nadu has joined 13 other states to run a weather insurance plan on a pilot basis. The plan is expected to cover around 1 million farmers by the end of the current rabi season. The pilot, which is being run by AIC in 13 states including Andhra Pradesh, Karnataka, Bihar, Chhattisgarh, Madhya Pradesh and Rajasthan, offers farmers a substitute to the National Agriculture Insurance Scheme (NAIS).

Initially, five districts - Dharmapuri, Salem, Virudunagar, Ariyalur and Perambalur- will be covered in Tamil Nadu. The pilot project will run for 2 or 3 seasons for which central and state governments have provided Rs 2 crore each as subsidy. The premium for Rs 10,000 sum assured would be Rs 1,095, of which Rs 870 will be contributed by both central and state governments while farmers will contribute the remaining Rs 225.

The Agriculture Insurance Company of India Limited would implement weather-based crop insurance during the kharif seasonin virudhunagar and the insurance would be implemented for food grains, cotton and horticulture crops. All farmers immaterial of whether they avail

themselves of crop loan or not could benefit from the insurance scheme. They should pay the premiums at nationalised banks, primary agriculture cooperative banks. The compensation for every acre of paddy, maize and ground nut is Rs. 10,000. While the premium for paddy and maize is Rs. 276, it is Rs. 386 for ground nut. The compensation for various crops is in the range of Rs. 5,000 an acre to Rs. 40,000. The premium is in the range of Rs. 138 to Rs. 2,647.

Current issues on crop insurance in Tamil Nadu:

For Dindigul District government has sanctioned Rs.25 lakh to assist farmers in insuring their crops for 2009-10. Paddy, maize, cotton, millet, groundnut, sugarcane, banana, onion and all kharif crops, will be insured during this season. Those who wanted to insure their crops could contact the Primary Agriculture Cooperative Banks and nationalised banks for details. Even leased farmers can avail the benefits. The State government would pay 50 per cent of the total premium. Compensation would be given for crop damage owing to flood, cyclone, drought, fire and lightening and pest attacks.

In case of Nagapattinam District Farmers in the Cauvery delta region have urged the Government to extend the time limit for paying crop insurance premium to November 30 to those farmers, who had not secured loans from cooperatives and commercial banks. Thanjavur District Farmers Association said farmers were entitled to have their crops insured by paying a premium of two per cent of the total cost of cultivation. As per the national agricultural insurance scheme, the premium would be deducted from loans of farmers, who got loans from primary agricultural cooperative banks and commercial banks on or before November 30 every year. But farmers, who could not get loans or avail themselves of loans from commercial banks or cooperatives, should have paid the premium before September 30 directly through the respective PACBs with all particulars including the total extent of the land and expenses incurred towards

cost of cultivation and also large number of farmers did not pay the premium before September 30 since they anticipated that they would get crop loan in time.

The Cauvery Delta farmers, in an appeal to the State Government, have sought extension of time limit in paying crop insurance premium to November 30. Thanjavur District Farmers Association, farmers are entitled to avail themselves of crop insurance by paying a premium of 2 per cent of the total cost of cultivation. As per the scheme in vogue, the premium could be deducted from the loans obtained from primary agricultural cooperative banks and the commercial banks on or before November 30 every year.

Crop insurance scheme is gaining popularity among farmers in the State. There had been a gradual increase in the number of farmers covered under the scheme. About 5.5 lakh farmers had been covered in the last financial year compared to one lakh farmers in 2005, and about three lakh farmers in 2006. Premium rates for different crops per hectare has been fixed by the Agricultural Insurance Company of India and paddy, dhal, groundnut, cotton, sugarcane, turmeric and oilseeds are some of the crops covered. The State Government is meeting 50 per cent subsidy on premium and for this the State has allocated Rs. 3 crore in 2006-07, Rs. 15 crore in 2007-08 and Rs. 40 crore in the current financial year.

Apart from this certain diseases associated with the intensity of monsoon showers were also identified. Possibility of insurance coverage for flowers would also be explored after a discussion with the higher authorities of State and Central Government.

Instability in Tamil Nadu Agriculture :

Instability in farm production is causing serious shocks to supply and farm income and there is a growing concern about increased volatility in farm production, prices and farm income. The study has estimated instability in nine major crops in the state of Tamil Nadu. The increase in instability in agricultural production is considered adverse for several 27reasons. It raises the risk

involved in farm production and affect farmers income and also the decisions to adopt high paying technologies and make investments in farming. Instability in production affects price stability and the consumers, and it increases vulnerability of low income households to the market. Instability in agricultural and food production is also important for food management and macroeconomic stability.

This state of Tamil Nadu has a diverse set of crops covered under insurance scheme. Risk associated with agriculture and various crops was estimated by using instability index as an indicator of risk as below:

Instability index = Standard deviation of natural logarithm (Yt+1/Yt)

Where, Yt is the crop area / production / yield / farm harvest prices / gross returns in thecurrent year and, Y t+1 represent the same in the next year. This index is unit free and very robust and it measures deviations from the underlying trend (log linear in this case). When there are no deviations from trend, the ratio Yt+1/Yt is constant, and thus standard deviation.

PRIVATE PARTICIPATION

ICICI Lombard, a national Indian insurance company piloted in 2003 a formal rainfall insurance scheme for groundnut and castor in semi-arid tropical areas of India. The insurance policy was developed with the technical assistance of Agricultural and Rural Development Department of the World Bank and was designed as insurance against deficit rainfall. Similar products adapted to the specifics of the local environment were also developed and sold in northern India. Two insurance policies were designed for the two crops. The coverage of both the policies was for the prime crop season, the Kharif. The policy triggers, phases and payouts try to maximize the correlation between economic loss and rainfall events. The triggers are set in mm of accumulated rainfall as measured in local weather stations. If it rainless than 1st trigger level with in a given period there is a payout per mm of deficient accumulated rain per acre insured. If the accumulated rainfall is below the 2nd trigger level then there is a maximum lump sum payout of the insurance. In order to maximize the correlation between rainfall and crop production Kharif season is divided in to three different phases each with its own trigger and payout: sowing, flowering and harvest. In addition to deficit rainfall in some areas there is also a risk of excess rainfall towards the end of Kharif.The policy has additional payout for excess rain for those areas. The amount of the payout is calibrated to the expected economic loss for the area (mandal).

THE FUTURE FOCUS

There are about 100 million farmers in India who work the hardest and yet seem to suffer the most. Their occupation is fraught with the highest risk as it is totally at the mercy of nature. 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. Despite various schemes launched from time to time in the country agriculture insurance has served very limited purpose. The coverage in terms of area, number of farmers and value of agricultural output is very small, payment of indemnity based on area approach miss affected farmers outside the compensated area, and most of the schemes are not viable. Expanding the coverage of crop insurance would there for increase government costs considerably. Unless the programme is restructured carefully to make it viable, the prospects of its future expansion to include and impact more farmers is remote. Insurance products for the rural areas should be simple in design and presentation so that they are easily understood.

RESULT AND DISCUSSION

The main focus of this paper is to examine how far the year to year fluctuations in crop output changed from one period to another period. Accordingly instability in area, production and yield of important crops has been computed at district level in Tamil Nadu state during different periods. Instability in crop production is expected to vary over districts. There is lot of variation in climatic conditions natural resource endowments, the pattern of agricultural growth and development. The paper has estimated the instability at state level and then has compared it with district level estimates to find dispersion and compare the change in instability over time, based on the state level data representing aggregates and district level data representing disaggregates. The instability index reveals that higher the value higher is the instability in the particular variable. In the case of occurrence of risk, higher the instability index, higher is the risk. This index is unit free and very robust and it measures deviations from the underlying trend (log linear in this case). Instability at State Level Variability in agricultural production consists of variability in area and yield and their interactions.

Variation in area under a crop occurs mainly in response to distribution, timeliness and variations in rainfall and other climatic factors, expected prices and availability of crop specific inputs. All these factors also affect the variations in yield. Further, yield is also affected by outbreak of diseases, pests, and other natural or man-made hazards like floods, droughts and fire and many other factors. Different events may affect area and yield in the same, opposite or different way.

Instability in area, production and yield of Paddy, Sorghum, Maize, Sugarcane, Cotton, Groundnut, Chillies, Banana and total pulses experienced at the state level in Tamil Nadu during 1980-2005 has been presented in Table 12. Instability index for area under paddy has shown an increase during 1990-05 whereas Sorghum showed a stable in area under Cultivation. For instance, the instability index for paddy is worked out to 0.138, 0.237 and 0.150 respectively for area, production and yield during the period 1980-2005.

RECOMMENDATION

Insurance must be provided to farmers as a mandatory social security measure in order to secure their livelihoods. Insurance schemes could therefore be extended to not just perennial, but also biennial and seasonal crops. The schemes could cover organic farmers in addition to those adopting modern farming techniques and practices. Offering insurance schemes based on other factors, such as weather or rainfall. An example cited, revealed that weather based index insurance products could be successful in India, among farmers as well as State Government. Payout from insurance based on a weather index could effectively reduce the farmers value atrisk (VAR) rather than compensating for a single crop loss only. The farmer's VAR would therefore be an effective measure of his overall vulnerability, covering his exposure to income shocks such as a wedding, a disease, or a big drought. A member however cautioned that such models may suffer from aggregation, as rainfall details for instance, may not available in a disaggregated format.

Some other suggestions offered were as follows:

Promote gro

up insurance mechanism, linking premium with bank loans, and proper monitoring to improve effective operation of insurance schemes.

Ensure effective network amongst bank and other credit institutions in farm insurance for maximum coverage and reach.

Introduce broad based schemes that cover varied sectors such as crops, livestock and cover other risks specific to rural localities in an integrated manner.

Strengthen rural insurance development funds, scientific actuarial techniques, and insurance regulatory mechanisms.

Introduce the concept of price support to cover all primary production including agriculture crops, fruits, non-timber production etc. which are all subject to annual variation of prices and yield.

CONCLUSION

The study found that the instability in area, production and productivity of crops over the period in the state. The instability in area, production and yield of major crops varies across regions and periods. The instability is much higher in crops like sugarcane and cotton when compared to food grains and other crops. The lower instability in food grains might be due to the technological breakthrough in agricultural production. Development of varieties resistant to pest and disease, development of watersheds in rain fed areas, expanding the area under irrigation are the major factors to be considered for reducing the instability in production and yield. There is also an urgent need for large scale promotion of stabilization measures like crop insurance to face the consequences of yield and production variability. Crop insurance in future though is likely to be largely demand driven, the efforts of the government to support and finance insurance products and/or facilitate congenial environment as meaningful risk management tool would further enhance the potential and credibility of crop insurance. Comprehensive insurance schemes should be based on farmers needs. These schemes must then be promoted among farmers and steps taken to ensure that farmers were acquainted with the benefits of insurance as well as the features of different schemes, so that they could chose an option most suited to them.

REFERENCE
WEBLIOGRAPHY:

www.nabrd.in www.indg.in/agriculture
www.indiaagronet.com

BIBLIOGRAPHY:
Economic Times Times of India