Crop Insurance

By

Rahul Bahri
Chetan Shet
Narendra Shenoy

Jamnalal Bajaj Institute of Management Studies

 Crop Insurance

Agriculture is subject to vagaries of nature such as flood, drought and lightning. In a

country where nearly two-thirds of the population is dependent on agricultural sector,
crop insurance is of vital importance to the growth of the economy. In the wake of
uncertainty and risk faced by the farming community, various schemes have evolved over
time to protect farmers against risks such as minimum guaranteed prices, subsidized
credit and crop insurance. Crop insurance stabilizes the income of the farmers and
promotes progressive farming techniques among them. It contributes to self-reliance and
self-respect among farmers, since in cases of crop loss they can claim compensation as a
matter of right. Thus, crop insurance cushions the shock of crop loss by assuring farmers
protection against natural hazards beyond their control.

The basic principle underlying crop insurance is that the losses incurred in bad years are
compensated from resources accumulated in good years. Also the loss incurred by a few
farmers is shared by many farmers in different regions.

In India the only organization that provides crop insurance is the Agricultural Insurance
Company of India. It is promoted by the Central Government in collaboration with
various State Governments to cover the risks of the farmers. General insurance sector, in
India was opened up a few years ago but most of the private players have only recently
shown signs of emerging out from the period (7-8 years) of initial losses due to high
preliminary expenditure. This is largely the reason why the private sector is yet to enter
crop insurance although the opportunity that lies at ‘the bottom of the pyramid’ is
recognized by most players. Other reasons include huge risk in case of mass damage of
crop in any particular area and premium collection issues from the poor farmers.
Objective:
Provide a sustainable and feasible model for Private Insurance Companies to offer Crop
Insurance Schemes to the Rural Sector.

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.

The Insured Value of the Crop will be based on the following formula.

Insurance Value = Threshold yield X Minimum Support Price

Where:
Threshold yield: 50 to 70% of average yield of best 7 out of last 10 years.

Even though a single state is targeted, regions of diverse risks may exist within the same
state. For example Konkan and Vidarbha regions in Maharashtra. Hence it is essential to
divide each state into different risk profile regions.

The premium rates would depend upon the risk profile of the region and the inherent risk
of the crop. AICOI charges highly subsidized premium rates thus leading to high Claims
to Premium Ratios. Hence it is proposed to charge premium according to actuarial rates
which will in turn depend upon the risk profile of the targeted region.
Revenue Model:

It is a known fact that the average farmer may not be able to pay an annual premium in a
single installment. Hence the premium will be collected on a monthly basis unlike other
companies which charge on a yearly basis.
For farmers holding insufficient land, a group of farmers would be collectively offered a
Group Insurance scheme, wherein the premium will be collected from the group as a
whole, and not on individual basis. The Indemnity cover for each Policy would start 21
days after payment of the First Premium.
The whole idea is to link inflows from the harvest to the outflows for the premiums.

Establishing Credibility & Trust:

The first step in starting a long-term relationship with the farmers will be to gain their
trust and establish credibility of the company in their minds. This can be achieved by
adopting the following measures:-

Responsibilities of Coordinator:

The Coordinator would be the link between the Company and the farmers. His
responsibilities will include the following:
• Communicating benefits of insurance to farmers
• Identifying the potential farmers
• Meetings to spread awareness
• Premium collection
• Maintenance of kiosk and updating the farmers
• Coordination with Sales Executive
Identifying Coordinator in the village:
The ideal candidate to work as a Coordinator should possess the following qualities:
• Influential person in the village
• Progressive & willing to try something new
 • Literate & aspiring to earn additional income
• Median wealth & status
• Must be a part of an extended family
• Ability to comprehend the situation well
A suitable person could be the local postman since he is known to everyone in the village
and also enjoys a fair amount of trust among the villagers.

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 Insurer’s 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.