 Introduction

Rural production and farm incomes in India are frequently affected by

natural disasters such as droughts, floods, cyclones, storms, landslides
and earthquakes. Susceptibility of rural to these disasters is
compounded by the outbreak of epidemics and man-made disasters
such as fire, sale of spurious seeds, fertilizers and pesticides, price
crashes etc. All these events severely affect farmers through loss in
production and farm income, and they are beyond the control of the
farmers. With the growing commercialization of rural, the magnitude of
loss due to unfavorable eventualities is increasing. The question is how
to protect farmers by minimizing such losses. For a section of farming
community, the minimum support prices for certain crops provide a
measure of income stability. But most of the crops and in most of the
state’s MSP is not implemented. In recent times, mechanisms like
contract farming and future’s trading have been established which are
expected to provide some insurance against price fluctuations directly or
indirectly. But, Rural insurance is considered an important mechanism to
effectively address the risk to output and income resulting from various
natural and manmade events. Rural Insurance is a means of protecting
the agriculturist against financial losses due to uncertainties that may
arise Rural losses arising from named or all unforeseen perils beyond
their control (AIC, 2008). Unfortunately, rural insurance in the country
has not made much headway even though the need to protect Indian

1
farmers from rural variability has been a continuing concern of rural
policy. According to the National Rural Policy 2000, “Despite
technological and economic advancements, the condition of farmers
continues to be unstable due to natural calamities and price
fluctuations”. In some extreme cases, these unfavourable events
become one of the factors leading to farmers‟ suicides which are now
assuming serious proportions (Raju and Chand, 2007). Rural insurance
is one method by which farmers can stabilize farm income and
investment and guard against disastrous effect of losses due to natural
hazards or low market prices. Crop insurance not only stabilizes the farm
income but also helps the farmers to initiate production activity after a
bad rural year. It cushions the shock of crop losses by providing farmers
with a minimum amount of protection. It spreads the crop losses over
space and time and helps farmers make more investments in rural. It
forms an important component of safety-net programmes as is being
experienced in many developed countries like USA and Canada as well
as in the European Union. However, one need to keep in mind that crop
insurance should be part of overall risk management strategy. Insurance
comes towards the end of risk management process. Insurance is
redistribution of cost of losses of few among many, and cannot prevent
economic loss.

There are two major categories of Rural insurance: single and multi-peril
coverage. Single peril coverage offers protection from single hazard
while multiple

2
  OBJECTIVES OF THE STUDY

 To estimate price / yield risk involved in different crops at

national level and at disaggregate level
 To examine the performance of the existing and earlier national
Rural insurance schemes implemented in India
 To discuss and explore the problems and prospects of rural
insurance in the country
 To look into the role of government in implementing various
Rural insurance schemes
 To suggest effective rural insurance programme in India

The report is organized as follows. Literature on rural insurance is

reviewed in Chapter 2 and sources of data and method used in the study
are described in Chapter 3. Risk involved in rural production is discussed
in Chapter 4. Fifth chapter presents progress and performance of
various rural insurance schemes launched from time to time. It also
includes discussion on private sector participation in rural insurance.
Sixth Chapter discusses various issues related to Rural insurance in
India and also suggests changes in working of various schemes to make
them more effective and to increase their scope and coverage. Ground
level experience of rural insurance based on micro level investigations in
Andhra Pradesh is presented in Chapter 7. Global picture of rural
insurance is discussed in Chapter 8. Conclusions and policy suggestions
are presented in the last Chapter

3
 Obligation –Rural Sector

• Every insurer, who begins to carry on insurance business after the

commencement of the Insurance Regulatory and Development
Authority Act, 1999 (41 of 1999), shall, for the purposes of sections
32B and 32C of the Act, ensure that he undertakes the following
obligations, during the first five financial years, pertaining to the
persons in rural sector,

(i) in respect of a life insurer, --

– seven per cent in the first financial year;

– nine per cent in the second financial year;

– Twelve per cent in the third financial year;

– Fourteen per cent in the fourth financial year;

– Sixteen per cent in the fifth year;

of total policies written direct in that year;

(ii) in respect of a general insurer,--

– two per cent in the first financial year;

– three per cent in the second financial year;

– five per cent there after,

• of total gross premium income written direct in that year.

4
  Definition

• “Rural sector shall mean any place as per the latest census which
meets the following criteria--

– a population of less than five thousand;

– a density of population of less than four hundred per square

kilometer; and

– more than twenty five per cent of the male working population
is engaged in Rural pursuits

• Rural Insurance is an underwriting company dedicated to providing

insurance solutions to meet the needs of Rural and rurally based
businesses.
• The core business principles that guide Rural Insurance are
exclusivity, access to informed and empowered decision makers,
service and quality. Rural Insurance believes that by combining
these core values and adhering to the business ethos of ‘Putting
You First’, we create a fundamentally better option for your
business.
• Whilst Rural Insurance has a wealth of expertise and industry
experience, we maintain an innovative approach to rural and Rural
insurance and risk management

5
  RURAL INSURANCE | | BENEFITS | ADVANTAGES |
FEATURES & ELIGIBILITY

India is predominantly an Rural country so it becomes important to

insure its Rural heritage. Farmers are the cultivators of healthy India.
Rural Insurance is the answer to all the needs of Rural and rurally based
Businesses.

None of us can be sure what tomorrow will bring. Shield your families
against the unknown. MetLife’s rural plans protect your loved ones
against financial liabilities and help you save for tomorrow. All at
affordable premiums.

Met Suvidha (Rural) is a participating flexible Endowment Plan that

combines savings and security. In addition to providing you protection up
to maturity, it helps you save for your specific long term financial
objectives. This long term savings-cum-protection plan comes to you at
affordable premiums.

 BENEFITS

Death Benefit

In the event of death during the term of the policy, the beneficiary will
receive the base Sum Assured, the accrued reversionary bonus and
terminal bonus if any.

Maturity Benefit
On maturity of the policy, you will receive the base Sum Assured, the
accrued reversionary bonus and terminal bonus if any.
6
Bonuses

Bonuses are available only on participating policies. The bonuses are

not guaranteed as they are based on the Company’s actual investment
returns, persistency and expense experience. No bonus is payable for
the first 2 years of the policy.

ADVANTAGES

 It is an Endowment plan that offers both savings and life insurance.

 Flexible premium paying options to suit various income cycles.
 A plan which participates in the bonuses declared by the company.
 Customization possible with Accident Death Benefit, Critical Illness,
Term, Waiver of Premium Riders for comprehensive protection.

FEATURES & ELIGIBILITY

Minimum Entry Age 15 years – 60 years

Minimum Sum Rs. 5,000
Assured
Maximum Sum Rs. 74,000
Assured
Term 15 years – 30 years
Premium Paying Single Pay, Limited Pay (5
Terms or 10) & Regular Pay
Minimum Annual Rs. 173
Premium Amount

RIDERS

MetLife, wants their customers to get the maximum out of their lives. Be
it in terms of making their dreams come true or getting the best out of
their insurance plan. With this in mind, we created MetMore which allows

7
you to customize your life insurance plan. So that it can be tailored to
meet the unique needs of you and your family members. MetMore offers
you a choice of riders which are optional contracts that allow you to
enjoy additional benefits. They are always attached to the basic policy at
the time of purchasing it, and cannot be bought separately or
independently. Each rider comes with its own premium rates and
separate policy conditions. The premium, nature and characteristics of
the rider are based on the base policy to which the rider is attached.

So go on, get more out of life.

Accidental Death Benefit – Death caused due to an accident is one of

the most unexpected and painful of all causes of deaths. Due to the high
unpredictability of this form of mishap, the benefits offered by the
Accidental Death Benefit Rider become all the more important and
relieving.

This Rider provides for the payment of an additional amount should

death occur as a result of an accident by outward violent and visible
means before age 60 years.

Death of the Life Insured must occur within 180 days from the date of the
accident.

Minimum Entry 15 years

Maximum Entry 55 years
Maximum age at maturity 60 years
Minimum Sum Assured Rs. 50,000
Maximum Sum Assured Rs. 10, 00,000 or base
Sum Assured whichever is

8
 lower.

Death Benefit
In the unfortunate event of death due to an accident the Rider Sum
Assured is paid and the policy is terminated.

Critical Illness Rider – No one likes to think about the possibility of

suffering a critical illness like cancer, heart attack and stroke etc. It is
something that many of us assume will not happen to us. In the daily
grind of activities, one ends up never being prepared for such an
eventuality. Metlife offers a ‘Critical Illness Rider’ which provides
payment of an additional amount on the diagnosis of as many as 10
critical conditions. You can have the money to pay for the illness when
you need it rather

Waiver of Premium Rider

Waiver of Premium (WOP) Rider is an additional offering which can be

purchased by paying a nominal extra premium over and above the base
premium. The WOP rider ensures that a policyholder’s future due
premiums are waived off.

In case of total and permanent disability of the life assured due to

accident by outward, violent or visible means, this rider allows premium
on base policy and attached riders, if any, to be waived. Total and
permanent disability means that at the time at which disability starts or
any time thereafter, the life assured can never be capable of doing
something to earn wages, compensation or profits. The total disability
should last for at least 6 consecutive months. There is no disability cover
during the first 6 months of the policy.

9
The Premium rider will be terminated on the earlier of:
1. The end of the grace period of the first unpaid premium.

2. The policy anniversary on which the life assured is aged 60 years (as
on last birthday) or the maturity date of the base policy which ever is
earlier.

3. Death of the life assured.

Term Rider

This is an additional benefit that can be attached to the life insurance

coverage to enhance the death cover on your policy.

The term rider allows the payment of an additional amount should death
of the life insured occur before 60 years. You can match your changing
needs (risk protection) and buy additional insurance at a low cost.

The Term Rider will be terminated on the earlier of:

1. The end of the grace period of the first unpaid premium.

2. The policy anniversary on which the life assured is aged 60 years (as
on last birthday) or the maturity date of the base policy which ever is
earlier.

3. Death of the life assured.

 Review of Rural Insurance

In the absence of formal risk sharing / diffusion mechanisms, farmers

rely on traditional modes and methods to deal with production risk in

10
rural. Many cropping strategies and farming practices have been
adopted in the absence of crop insurance for stabilizing crop revenue.
Availability and effectiveness of these risk management strategies or
insurance surrogates depend on public policies and demand for crop
insurance (Walker and Jodha 1986). The risk bearing capacity of an
average farmer in the semi-arid tropics is very limited. A large farm
household or a wealthy farmer is able to spread risk over time and space
in several ways; he can use stored grains or savings during bad years,
he can diversify his crop production across different plots. At a higher
level of income and staying power, the farmer would opt for higher
average yields or profits over a period of time even if it is achieved at the
cost of high annual variability on output (Rao et al., 1988). Binswanger
(1980), after studying the risk in Rural investments, risk averting
tendencies of the farmers and available strategies for shifting risk,
concludes that farmers‟ own mechanisms for loss management or risk
diffusion are very expensive in arid and semi-arid regions. The major
role played by insurance programmes is the indemnification of risk-
averse individuals who might be adversely affected by natural
probabilistic phenomenon. The philosophy of insurance market is based
on large numbers where the incidence of risk is distributed over
individual. Insurance, by offering the possibility of shifting risks, enables
individuals to engage in risky activities which they would not undertake
otherwise (Ahsan et al., 1982). Individuals cannot influence the nature
and occurrence of the risky event. The insurance agency has fairly good
but generalized information about the insurer. However, this does not
hold true in the case of rural or crop insurance. Unlike most other
insurance situations, the incidence of crop risk is not independently or
randomly distributed among the insured. Good or bad weather may
affect the entire population in the area.

11
Lack of data on yield levels as well as risk position of the individual
farmer puts the insurance company in tight spot. As in the case of
general insurance, Rural insurance market also faces the problem of
adverse selection and moral hazard. The higher premium rates
discourage majority participation and only high risk clients participate
leading to adverse selection. Moreover, in crop insurance the individuals
do not have control over the event, but depending on terms of contract,
the individuals can affect the amount of indemnity. Tendency of moral
hazard tempts an insured individual to take less care in preventing the
loss than an uninsured counterpart when expected 4 indemnity
payments exceed the value of efforts. The imperfect information
(gathering information is costly) discourages participation of private
agencies in crop insurance market. Similarly, incidence of random
events may not be independent. Natural disasters may severely damage
crops over a very large area and the domain of insurance on which it is
based crumbles down i.e., working of the law of large number on which
premium and indemnity calculations are based breaks down. The private
insurance companies of regional nature will go bankrupt while paying
indemnity claims unless it spread risk over space. Farming or crop
production being a biological process, converting input into output
carries the greatest risk in farming. This, coupled with market risk,
impinges on the profits expected from farming. Efficient risk reducing
and loss management strategies such as crop insurance would enable
the farmers to take substantial risks without being exposed to hardship.
The farmer does not have to go for distress sale of his produce to repay
private debts. Credit insurance ensures repayment of credit, which helps
in maintaining the viability of formal credit institutions. The government is
relieved from large expenditures incurred for writing-off Rural loans,
providing relief and distress loans etc., in the case of crop failure. A

12
properly designed and implemented crop insurance programme will
protect the numerous vulnerable small and marginal farmers from
hardship, bring in stability in the farm incomes and increase the farm
production (Bhende 2002). The farmer is likely to allocate resources in
profit maximizing way if he is sure that he will be compensated when his
income is catastrophically low for reasons beyond his control. A farmer
may grow more profitable crops even though they are risky. Similarly,
farmer may adopt improved but uncertain technology when he is
assured of compensation in case of failure (Hazell 1992). This will
increase value added from rural, and income of the farm family. Access
and availability of insurance, changes the attitude of the farmer and
induces him to take decisions which, otherwise, would not have taken
due to aversion to risk. For example, rain-fed paddy was cultivated in
one of the riskiest districts i.e ., Anuradhapur district, of Sri Lanka, for the
first time in 1962, as insurance facility was available to the farmers (Ray
1971). Bhende (2005) found that income of the farm households from
semi-arid tropics engaged predominantly in rain-fed farming was
positively associated with the level of risk. Hence, the availability of
formal instrument for diffusion of risk like crop insurance will facilitate
farmers to adopt risky but remunerative technology and farm activities,
resulting in increased income. Some of the studies confirm the
conventional view that moral hazard incentive lead insured farmers to
use fewer chemical inputs (Smith and Goodwin 1996). Babcock and
Hennessy (1996), find that at reasonable levels of risk aversion, nitrogen
fertilizer and insurance are substitutes, suggesting that those who
purchase insurance are likely to decrease nitrogen fertilizer applications.
A study by Horowitz and Lichtenberg (1993) find that in the US Midwest,
crop insurance exerts considerable influence on maize farmers' chemical
use decisions. Those purchasing insurance applies significantly more

13
nitrogen per acre (19 %), spend more on pesticides (21 %), and treats
more acreage with both herbicides and insecticides (7 % and 63 %) than
those not purchasing insurance. These results suggest that both fertilizer
and pesticides may be risk-increasing inputs.
An analysis of data from US rural indicates that the producer's first
response to risk is to restrict the use of debt. Price support programmes
and crop insurance are substitutes in reducing producer risk. The
availability of crop insurance in a setting with price supports allows
producers to service higher levels of debt with no 6 increase in risk
(Atwood et al., 1996). Mishra (1994) analyzed the impact of a credit-
linked Comprehensive Crop Insurance Scheme (CCIS) on crop loans,
especially to small farmers in Gujarat. It is observed that CCIS had a
collateral effect as reflected through the increased loan amount per
borrower and reduction in the proportion of non-borrowers among small
farmers.

 Issues Related to Rural Insurance

Issues related to rural are of two types. One, issues concerning or

related to existing scheme namely NAIS, and two, issues of general
nature which go beyond the present mechanisms for Rural insurance.

14
  ISSUES RELATED TO NAIS

The farming community at large does not seem to be satisfied with the
partial expansion of scope and content of crop insurance scheme in the
form of NAIS over Comprehensive Crop Insurance Scheme (CCIS).
There are issues relating to its operation, governance and financial
sustainability. After extensive reviewing, gathering perceptions of the
farming community and discussion with experts from AIC, Rural
department, bankers, academicians and other representatives in Andhra
Pradesh on the performance of NAIS, some modifications have been
suggested in its designing to make to it more effective and farmer-
friendly. Reduction of insurance unit to Village Panchayat level As of
now, the National Rural Insurance Scheme is implemented on the basis
of "homogeneous area" approach, and the area (insurance unit) at
present is the Mandal / Taluk / Block or equivalent unit, in most
instances. These are large administrative units with considerable
variations in yields and impact of natural calamities. For the scheme to
become more popular, the unit for determining claim should be reduced
to the level of „village‟ in the case of large villages and to „cluster of
villages‟ in the case of small villages. However, because of
infrastructural and financial constraints States could not lower the unit to
village panchayat. Ideally, "Individual approach" would reflect crop
losses on a realistic basis, and has been regarded most desirable
(Dandekar, 1985). However, under the Indian conditions, implementing a
crop insurance scheme at the "individual farm unit level" is beset with
problems, such as:
 Non-availability of the past records of land surveys, ownerships,
tenancy and yields at individual farm level

15
  Small size of farm holdings

 Remoteness of hamlets and inaccessibility of some farm-holdings

 A large variety of crops, varied agro-climatic conditions and

package of practices, and
 Inadequate infrastructure.

We feel that lowering of the insurance unit to the Gram Panchayat (GP)
level, is a welcome move, as it would reflect yield losses at a reasonable
level. However, data being the lifeline of insurance, the actuarial rating of
the product at GP level would be possible only if the historical yield data
at that level (GP) is available for a reasonably long period. In real 46

GENERAL ISSUES
Even several years after the initiation of first rural insurance project in
1972, the coverage and scope of rural insurance remains far from
adequate, even-though the need for various forms of insurance for rural
sector has been widely expressed. Some of the issues related to
expansion of rural insurance and improving its effectiveness are
discussed below Role of Government As mentioned before, crop
insurance to be successful requires public support. This could be in
terms of subsidy on premium, meeting part of administrative
expenditure, and reinsurance etc. Global experience shows that due to
special nature of rural production, in several countries, premiums
payable by farmers is subsidized by government. Rural in India is not
just dependent on weather conditions, but also suffers the brunt of
natural disasters. It will be quite in order for crop insurance to be
regarded as a support measure in which government plays an important
role, because of the benefit it provides not merely to the insured farmers,

16
but to the entire national economy due to the forward and backward
linkages with the rest of the economy. Society can significantly gain from
more efficient sharing of crop and natural disaster risks. The principle
behind the evaluation of crop insurance schemes all over the world are
along these lines for receiving the active support and finance of the
Government. Integrating the various risk mitigation methods and
streamlining the funds not only injects accountability and professionalism
into the system, but also increase economic efficiency. The support
mechanism of major countries is given in the Table 7.1. Government can
facilitate Rural insurance in several ways. In case farmers are asked to
pay full premium themselves then chances of adoption of insurance are
bleak. There is a need for some subsidisation by government. It can
provide information, on weather patterns, locations of farms and crops,
incidence and history of perils and crop yields. It can help to meet the
costs of the research to be undertaken before starting an Rural
insurance program. It can also provide reinsurance.

 Why You Need A Rural Insurance

It's always best to be prepared for unfortunate circumstances and this is

why you should consider getting a rural insurance policy. A rural
insurance policy will shield you from financial ruin in case accidents
happen. Getting rural insurance will also give you added security

17
 1. Guaranteed Surrender Value
2. Maturity Benefit
3. Death Benifit

Why You Need A Rural Insurance Policy

It's always best to be prepared for unfortunate circumstances and this is why you
should consider getting a rural insurance policy. A rural insurance policy will
shield you from financial ruin in case accidents happen. Getting rural insurance
will also give you added security

o Increase in credit finance in the rural areas

o Increase in income and assets of rural poor
o Availability of information for decision making

o Design tailored products

o Establish efficient methods of premium collections and

claims settlements.

 RURAL INSURANCE SCHEMES

 CATTLE INSURANCE

18
Cattle Insurance was governed under Market Agreement as devised by
GIC and the rates, terms, conditions etc. all were applicable to all the
four Insurance Companies. However, w.e.f May 2003, it is no longer
under Market Agreement.
This policy covers indigenous cross bred and exotic cattle owned by
private owners, various financial institutions, dairy farms, cooperatives,
corporate dairies etc. The word cattle includes Milch, Cows and
Buffaloes calves and heifers, stud bulls, bullocks and he-buffaloes and
mithuns. Age group is specified for all the animals.

 SHEEP AND GOAT INSURANCE

This scheme is also governed under Market Agreement. Policy provides
indemnity to indigenous cross-bred and exotic sheep and goat against
death due to accident (including fire, lightening, flood, cyclone, famine,
strike, riot and civil commotion) and disease. Earthquake and landslide
covers are also provided. Standard and common exclusions apply as per
Cattle Policy. Animals are identified by means of small brass buttons ear
tags. Animals under scheme category enjoy certain benefits in premium
rate and claim

 CAMEL INSURANCE
The camels are covered against death due to accident or disease as per
Standard Cattle Insurance Policy. The maximum S.I. is restricted to
Rs.3000/-.
19
  PIG INSURANCE
All indigenous, cross-bred and exotic pigs are covered however under
scheme category exotic animals are not covered. The age group is from
4 months to 3 years. The coverage is against death due to accident or
disease.Exclusions as per Cattle Policy apply here also. Permanent total
disablement, breeding and furrowing risks are not covered. Vaccination
in applicable diseases is compulsory. Evaluation depends upon the age
of the animal. Animals are identified by means of small brass buttons ear
tags.

 HORSE, MULE, DONKEY, PONY, YAK

 INSURANCE
The Coverage is as per Standard Cattle Policy. However the age group
is restricted to 2 years to 8 years.

 POULTRY INSURANCE
This is also governed by Market Agreement, amongst all the four
subsidiary companies. The policy shall provide indemnity against death
of birds due to accident (including fire, lightning, flood, cyclone, strike,
riot and civil commotion and terrorism) or diseases contracted or
occurring during the period of insurance. The word Poultry includes
layers, broilers and hatchery birds, which are exotic and cross-bred.
Indigenous and non-descript birds will not be insured

20
  DUCK INSURANCE APPLICABILITY

i. All types of Migratory and Non-migratory birds in India.

ii. Duck farms consisting of minimum of 100 ducks for non-
IRDP and 50 ducks for IRDP and other Government
subsidized schemes.
Note: All birds in Duckery Farm should be insured Duck Insurance
Scheme shall provide indemnity against death of ducks due to accident
including lightning, flood, cyclone, famine, riot and strike, civil commotion
or diseases contracted or occurring during the period of insurance.

 ELEPHANT INSURANCE
This scheme is applicable to elephants used for commercial and
religious purposes. This policy covers death due to disease or accident
and the coverage is given from 5 to 60 years of age. Identification is
done from the records of forest department of the State Govt. and also
by measuring the trunk of each elephant. Valuation of the elephant
varies from breed to breed, area to area and time to time. Exclusions are
as per Cattle Market agreement and some specific exclusion are as per
policy schedule. Company indemnifies the insured only 80% of market
value or sum insured whichever is less.

 FAILED WELL INSURANCE

The scheme is applicable only to those wells financed by banks where
re-financing by NABARD is involved and in other case where wells are

21
financed by a nationalized bank but not re-financed by NABARD,
approval of Head Office is must .Sum Insured, premium, perils covered
and exclusions are different in both the schemes and as per policy
schedule

 HONEYBEE INSURANCE SCHEME

This policy is to cover beehives and/or colonies belonging to individual,
cooperative societies and those sponsored and subsidized under various
projects of respective State and Central Government against total loss
damage to beehives and/or bee colonies as a result of an accident
caused by fire, flood, inundation, storm, tempest, cyclone, hurricane and
tornado. This cover is only for Indian Honeybee and Italian Honeybee.
Sum insured depends upon the cost of Beehives as given by the
respective state KVIC Board or

 Crop insurance 

Crop insurance is purchased by Rural 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 Rural commodities.
The two general categories of crop insurance are called crop-yield
insurance and crop-revenue insurance.

 Crop-hail insurance 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. The

22
 earliest crop-hail programs were begun by farmers cooperatives
in France and Germany in the 1820s.
 Multi-peril crop insurance (MPCI): covers the broad perils of
drought, flood, insects, disease, etc., which may affect many
insureds at the same time and present the insurer with
excessive losses. To make this class of insurance, the perils
are often bundled together in a single policy, called a multi-peril
crop insurance (MPCI) policy. MPCI coverage is usually offered
by a government insurer and premiums are usually
partially subsidized by the government. The earliest MPCI
program was first implemented by the Federal Crop Insurance
Corporation (FCIC), an agency of the U.S. Department of Rural,
in 1938. The FCIC program has been managed by the Risk
Management Agency (RMA), also a U.S. Department of Rural
agency, since 1996.

 Crop-revenue insurance: is a combination of crop-

yield insurance and price insurance. For example, RMA
establishes crop-revenue insurance guarantees on corn by
multiplying each farmer's corn-yield guarantee, which is based on
the farmer's own production history, times the harvest-time
futures price discovered at a commodity exchange before the
policy is sold and 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

23
 may occur from one growing season to another. That would be
called "price support," and would raise a series of complex Rural-
policy and international-trade issues.

 Progress and Performance of Rurall Insurance

The question of introducing an rural insurance scheme was examined

soon after the Independence in 1947. Following an assurance given in

24
this regard by the then Ministry of Food and Rural (MOFA) in the Central
Legislature to introduce crop and cattle insurance, a special study was
commissioned during 1947-48 to consider whether insurance should
follow an „Individual approach’ or a „Homogenous area approach‟. The
study favoured „homogenous area approach‟ even as various agro-
climatically homogenous areas are treated as a single unit and the
individual farmers in such cases pay the same rate of premium and
receive the same benefits, irrespective of their individual fortunes. In
1965, the Government introduced a Crop Insurance Bill and circulated a
model scheme of crop insurance on a compulsory basis to State
governments for their views. The bill provided for the Central
government to frame a reinsurance scheme to cover indemnity
obligations of the States. However, none of the States favoured the
scheme because of the financial obligations involved in it. On receiving
the reactions of the State governments, the subject was referred to an
Expert Committee headed by the then Chairman, Rural Price
Commission, in July, 1970 for full examination of the economic,
administrative, financial and actuarial implications of the subject. CROP
INSURANCE APPROACHES It is important to mention in the beginning
that crop insurance is based on either Area approach or Individual
approach. Area approach is based on „defined areas‟ which could be a
district, a taluk, a block/a mandal or any other smaller contiguous area.
The indemnity limit originally was 80 per cent, which was changed to 60
per cent, 80 per cent and 90 per cent corresponding to high, medium &
low risks areas. The actual average yield / hectare for the defined area is
determined on the basis of Crop Cutting Experiments (CCEs). These
CCEs are the same conducted as part of General Crop Estimation
Survey (GCES) in various states. If the actual yield in CCEs of an
insured crop for the defined area falls short of the specified guaranteed

25
yield or threshold yield, all the insured farmers growing that crop in the
area are entitled for claims. The claims are calculated using the formula:
(Guaranteed Yield - Actual Yield) * Sum Insured of the farmer
(Guaranteed Yield)
The claims are paid to the credit institutions in the case of loanee
farmers and to the individuals who insured their crops in the other cases.
The credit institution would adjust the amount against the crop loan and
pay the residual amount, if any, to the farmer. Area yield insurance is
practically an all-risk insurance. This is very important for 24
developing countries with a large number of small farms. However,
there are delays in compensation payments. In the case of individual
approach, assessment of loss is made separately for each insured
farmer. It could be for each plot or for the farm as a whole (consisting
of more than one plot at different locations). Individual farm-based
insurance is suitable for high-value crops grown under standard
practices. Liability is limited to cost of cultivation. This type of
insurance provides for accurate and timely compensation. However, it
involves high administrative costs. Weather index insurance has
similar advantages to those of area yield insurance. This programme
provides timely compensation made on the basis of weather index,
which is usually accurate. All communities whose incomes are
dependent on the weather can buy this insurance. A basic
disadvantage could arise due to changing weather patterns and poor
density of weather stations. Weather insurance helps ill-equipped
economies deal with adverse weather conditions (65% of Indian rural
is dependent on natural factors, especially rainfall. Drought is another
major problem that farmers face). It is a solution to financial problems
brought on by adverse weather conditions. This insurance covers a
wide section of people and a variety of crops; its operational costs are

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low; transparent and objective calculation of weather index ; and
quick settlement of claims.

 Global Picture of Rural Insurance

27
The rural insurance schemes both in developed and developing nations
are highly dependent on the government support in various forms like
subsidy on premium, reimbursement of administrative expenses of
insurance companies, reinsurance support for risky crop lines, technical
guidance and financial support. Subsidy on insurance premium in the
recent years was estimated to be 60 per cent in USA, 70 per cent in
Canada, 50-60 per cent in Philippines and 58 per cent in Spain. Over
100 countries in the world have some form of crop insurance. The USA,
Canada, Mexico, and Spain dominate the world crop insurance market in
terms of premium. The total annual rural insurance premiums,
worldwide, in 2003 was US$ 7.1 billion which amounted to 0.6 per cent
of estimated farm gate value of rural production. As against this,
premium to farm gate value of output in India in the same year was
0.015. Geographically these insurance premiums are concentrated in
developed farming and forestry regions, i.e. in North America (69 per
cent), Western Europe (21 per cent), Latin America (5 per cent), Asia (3
per cent). Australia and Africa 1 per cent each (Roberts, 2005). It would
be useful to draw lessons from the experience of other countries in rural
insurance. LESSONS FROM OTHER COUNTRIES In 1929 a group of
farmers started a pool scheme which was the beginning of crop
insurance in South Africa . Many hazards are covered in this program,
and hail is the main risk. Initially, multi-peril insurance was subsidized,
but for the past 15 years it has not been subsidized. Many private
players have now entered the field of crop insurance. These companies
fix the premium amount based on the history and past of the particular
risk. Estimation of damage is the biggest challenge faced by the crop
insurers. Several crops such as maize, wheat, sunflower and citrus are
covered. South Africa is an example of how farmers can get the benefit
of crop insurance through private companies even after withdrawal of

28
subsidies. As in India, crop insurance in Canada was implemented
through an area approach. Research by Turvey and Islam pointed out
that the area approach was not only unbalanced but also ineffective. The
empirical research from different farms confirmed the belief that
individual approach to crop insurance is better for reducing risk, but it
also implies the use of higher premiums. The area approach in Canada
proved to be inequitable, as it did not ensure a fair distribution of benefits
among the farmers. Farmers with yields closest to the average would be
the ones to get the most benefits.

In Philippines, crop insurance programme is implemented through

Philippines Crop Insurance Corporation (PCIC) which was established in
1978. Major crops covered are rice and corn. High value crops such as
viz. tomato, potato, garlic, and other root 52 crops are also covered
under interim insurance coverage. The coverage is limited to cost of
inputs plus an additional amount up to 20 per cent, thereof on an
optional basis. Multi risks cover providing comprehensive coverage.
Coverage is available under (a) multi risk cover, which is a
comprehensive coverage against crop losses caused by natural
disasters as well as pests and diseases and (b) natural disasters cover,
which is limited to coverage against crop losses caused by natural
disasters only. Premium rates are charged on actuarial basis.

29
. The Government subsidy in premium goes up to 50 per cent. In case of
borrowing farmers, lending institutions will also share part of the
premium. In Japan, the rural insurance scheme was established in 1947.
At present, the scheme is composed of 6 programmes: Rice, Wheat and
Barley insurance, Sericulture insurance, Livestock insurance, Fruit &
Fruit tree insurance, Field crop insurance and Green House insurance.
The main features of the scheme are as follows:
1. The Central government reinsures the programmes.
2. In principle, implementation of three programmes, viz., Rice, Wheat
and Barley insurance, Livestock insurance, is compulsory.
3. As for Rice, Wheat and Barley insurance, Sericulture insurance, the
participation of farmers who grow these crops over a certain size of
cultivated area or a certain scale of operation is compulsory.
4. The Central government subsidizes farmers with part of their
premiums, and
5. The Central government subsidizes the insurers with part of their
office expenses.

In Sri Lanka the first experimental crop insurance scheme was

established in 1958 as a pilot project covering rice cultivation only. The
experience during the first 15 years period was quite favorable. The crop
insurance board was established in 1973 under a parliamentary act to
operate a comprehensive rural insurance scheme, covering all major
crops and livestock. Incase of rice and other crops, insurance protection
was provided against lack of water, drought, excessive water, floods,
diseases, insect infestation, damage by wild animals and losses due to
non-adherence to approved methods of farming. A large percentage
(85%) of the total acreage insured is paddy and other crops that

30
received rural credit. Due to increased cost of inputs, more farmers are
expected to seek rural credit. A lending institution will not disburse any
rural credit without proper insurance coverage. The coverage of
insurance scheme is based on the cost of production. The scheme
covers payment of indemnities of complete and partial losses as well as
losses at various stages of production.
In USA, the government supported crop insurance program is
implemented by about 15 private insurers, besides Federal Crop
Insurance Corporation (FCIC), a government company. The program is
administered by the Risk Management Agency (RMA), on behalf of the
US Department of Rural (USDA). Once a crop insurance program is
approved by the government, the RMA gets the premium rates
calculated for different crops / states / counties by utilizing the services
of the National Crop Insurance Service (NCIS). Any approved insurer,
can sell these insurance products, at the rates certified by the RMA. All
insurers implementing the program, are eligible for the same level of
premium subsidy, and the administrative and operating expenses of the
insurer 53 towards implementing crop insurance program, are entirely
reimbursed by the government. Since the insurance companies are
implementing the crop insurance program at a premium rate set by
RMA, the government also provides a reasonable level of reinsurance
support (Hazel, Peter et al., 1986) . The reinsurance support would be
highest for developmental lines (new and unstable crops) and lowest for
commercial lines (established and stable crops). In Spain, the
Government subsidy in premium ranges from 20 per cent to 50 per cent,
of which nearly 95 per cent comes from Central Government and the
balance from the autonomous regions.

31
Crop Insurance in Spain is a well developed product with systematic
development of actuarial science and pricing and standard loss
assessment procedures. Insurance coverage is available for majority of
the crops against most of the natural and non-preventable risks. Spain
has a unique model of crop insurance in terms of both the program and
the organizational set-up. Spain has, what's known as the 'Combined
Rural Insurance System'. The system started in 1980, has recently
celebrated its Silver Jubilee. The basic feature of the system is that all
insurable rural risks are covered by the private sector and all types of
policies are subsidized by the state. Most policies are of the multiple
risks type. The customers of the system are farmers who can take out
rural insurance individually, or obtain coverage through co-operatives
and professional organizations. Participation in the system is voluntary. It
is a system in which 'AGROSEGURO' operates, both in its own right and
on behalf of the insurers, who make up the co-insurance pool. The
system is based on an intricate partnership between the private and the
public sector. The key players of the system besides farmers, are
ENESA (Entidad Estate de Seguros Agrarios), attached to the Ministry of
Rural; AGROSEGURO (Agrupacion Espanola de Entidades
Aseguradoras de los Seguros Agrarios Combinados) a pool of forty
private insurance companies which participate in a system of co-
insurance; CCS (Consorcio de Compensacion de Seguros), a public
enterprise with its own resources, operating re-insurer (under the control
of the Ministry of Economy), etc. A key feature of the Spanish system is
the participatory approach. All stakeholders are represented in ENESA,
which enables taking strategic decisions and fixing the framework for the
System (annual plans) in line with their needs. For any given year,
ENESA takes the lead in publishing the annual plan. On the basis of the
framework set out in the plan, AGROSEGURO fixes the detailed

32
conditions for all insurance products, in particular the regionally
differentiated premium rates which vary according to risk exposure and
also include administrative and reinsurance costs. Subsidies from the
State and the autonomous regions are paid out by ENESA and
channeled through AGROSEGURO to the insurance companies.
Based on experience from 1980 to 2005, of the total rural insurance
income of 6.79 Billion US$, the contribution of farmers towards premium
was 3.08 54

33
  Conclusions and Policy Suggestions

Rural Insurance market is on the threshold of a spectacular growth. The

support measures proposed by the government in the horticulture sector;
potential of organic farming; growing clout of aromatic and medicinal
plants; Bio-diesel plants; contract farming; corporate farming and
integrated insurance (supply chain and ware housing) etc are likely to
put rural insurance on high pedestal. The government underlined its
priorities for agriculture in 2004 by setting a target of doubling rural credit
in next three years. A large chunk of credit for agriculture would be
supported by insurance collateral. Considering consumers‟ preference
for branded rural products; big corporate houses too have taken up
corporate farming, increasing the demand for insurance. Rural 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 rural insurance

CONCLUSIONS
Despite progress of irrigation and improvement in infrastructure and
communication the risk in agriculture production has increased in the
country. The risk is much higher for farm income than production, as is
evident from lower risk in area and higher risk in production. State wise
results show that only in the states where irrigation is very reliable, it
helped in reducing the risk. Those states where irrigation is not very
dependable continue to face high risk. In some states farmers face twin
problem of very low productivity accompanied by high risk of production.
As, with the passage of time, neither technology nor any other variable

34
helped in reducing production risk, particularly in low productivity states,
there is strong need to devise and extend insurance products to rural production.
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 rural 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 therefore 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. This requires renewed efforts by Government in terms of designing
appropriate mechanisms and providing financial support for rural insurance.
Providing similar help to private sector insurers would help in increasing
insurance coverage and in improving viability of the insurance schemes over
time. With the improved integration of rural countryside and communication
network, the Unit area of 56 insurance could be brought down to a village
panchayat level. Insurance products for the rural areas should be simple in
design and presentation so that they are easily understood. There is lot of
interest in private sector to invest in general insurance business. This
opportunity can be used to allot some target to various general insurance
companies to cover agriculture. To begin with, this target could be equal to the
share of agriculture in national income. Good governance is as important for
various developmental programmes as for successful operation of an agriculture
insurance scheme. Poor governance adversely affects development activities.
With the improvement in governance, it is feasible to effectively operate and
improve upon the performance of various programmes including agriculture
insurance POLICY

35
SUGGESTIONS
Crop insurance program works as collateral security, therefore also benefit
banks. When claims are paid, banks first adjust the claim against their
outstanding dues, and balance if any is credited to the farmers. Therefore, the
Crop Insurance Scheme also benefits the banks. In Philippines, banks are made
to share a part of the premium burden. For rice where the premium is 10.81 per
cent, borrowing farmer pays only 2.91 per cent, while the government pays is
5.90 per cent and the lending institution, 2.00 per cent. A similar arrangement
can be recommended for participating banks in India. Such arrangement would
also bring non-loanee farmers into the fold of banking network, thus
institutional lending of crop loans. Remote sensing is the emerging technology
with potential to offer plenty of supplementary, complimentary and value added
functions for rural insurance. The present technology available shall not only
provide the insurers with tools like crop health condition, area-sown
confirmation, yield modeling which are very important, but also strengthen the
position of insurers vis-à-vis re-insurance market. Some of the possible
applications of for rural insurance could be as follows: 1. Estimating actual
acreage – sown at insurance unit level to check the discrepancy of „over-
insurance‟ (area insured being more than area sown). 2. Monitoring crop health
through the crop season, and investigation on ground for advance intimation of
yield reduction. 3. To check adequacy and reliability of CCE data. 4.
Developing satellite based crop productivity models for cereals and other crops.

36
There is a need to promote private sector participation in agriculture insurance.
First license for the private sector, was issued in October 2000. As of today,
there are ten private sector insurers in the general insurance business: Reliance,
Tata-AIG, Royal Sundaram, IFFCO-Tokio, Bajaj-Allianze, ICICI-Lombard,
HDFC- Chubb, Cholamandalam, ECGC and Star Health. The latter two, are
limited to only a few lines of general insurance. The fact remains that these
insurers have not yet undertaken rural insurance to a significant extent. Only
two companies in the private sector have initiated crop insurance, albeit on a
small scale. ICICI-Lombard was the first company to experiment with rainfall
insurance in 2003. The concept is further extended 57 to weather insurance
since 2004. IFFCO-Tokio General Insurance (ITGI), the second company in
private sector, started piloting rainfall insurance, since 2004. The Insurance
Regulatory and Development Authority (IRDA) has stipulated that every new
insurer undertaking general insurance business, has to underwrite business in
the rural sector to the extent of at least 2 per cent of the gross premium during
the first financial year, which is to be increased to 5 per cent during the third
financial year of its operation. Crop insurance is included in the rural sector
insurance for this purpose. The business targets stipulated in rural insurance
apparently are very small. Those who do not meet even these small targets, are
getting away by paying penalties of nominal amounts. If private insurers are to
be spurred to enter the rural insurance market in a significant manner, the
business targets have to be raised substantially by IRDA. The experience of
government supported and subsidized crop insurance and the recent entry of
private insurers, raise questions about the co-existence of government and
private agriculture insurance. One view is that the private sector will be unable
to compete with government insurance, given the subsidies and access to the
administrative machinery for delivering insurance. An alternative view is that
given only 15 per cent coverage by government insurance, the private sector can
carve out a reasonable market for itself based on improved efficiency, better

37
design and superior services. Here one can even think of public-private
partnership in providing agriculture insurance as against public-private
competition. However, it is possible only when crop insurance can be run in a
more professional manner with clear objectives. Providing Government help to
private sector insurers would help in increasing insurance coverage and in
improving viability of the insurance schemes over time. There should also be
insurance provided by seed companies so that farmers who paid high prices for
seeds such as GM crops did not suffer in case of crop failure. In order to
promote public – private participation in agriculture insurance GOI should
follow the USA model to work out premium rate through an exclusive technical
agency, and offer the product to all insurers. Insurers can implement the
product, enjoying the same level of support and subsidy. As a variation from the
USA method, the government would not provide reinsurance support and
reimbursement of administrative and operating expenses, as these costs would
be loaded in the actuarial rates. The government can decide whether or not
different insurers compete in the same area, or allocate specific crops and areas
to a particular insurer (Planning Commission, 2007).
With increased commercialization of agriculture price fluctuations have become
highly significant in affecting farmers‟ income. Accordingly, market risk is
now quite important in affecting farmers‟ income. We feel that implementation
of market insurance to cover price risk is much easier than yield insurance. This
can be done by requiring interested farmers to register their marketable surplus
with insurance agency or market committee at the time of sowing of crop. The
insurance agency should offer insurance cover to include price guarantee which
could be minimum support price in some cases or market based price from the
past. Farmers should pay premium for this kind of price insurance and initially
government should share some burden of the premium.

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PROSPECTS OF RURAL INSURANCE

The farming community in India consists of about 121 million farmers of

which only about 20 per cent avail crop loans from financial institutions and
only three fourth of those are insured. The remaining 80 per cent (96
millions) are either self-financing or depend upon informal sources for their
financial requirements. Most of the farmers are illiterate and do not
understand the procedural and other requirements of formal financial
institutions and, therefore, shy away from them. Therefore, while the
institutional loaners are insured compulsorily under the NAIS, only about 15
per cent of the non-loanee farmers avail insurance cover voluntarily. This is
quite indicative of the enormous insurance potential that exists for
addressing the needs of the farming community and enhancing the overall
efficiencies as also the competitiveness of the agriculture sector. This also
signifies the tremendous potential of agriculture insurance in the country as
a concept, which can mitigate the adverse impacts that such uncertainties
would have on the individual farmers.

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  Bibliography

1. Websites :-

 www.scribd.com
 www.google.com
 www.wikipedia.com
 www.openpdf.com

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