CROP INSURANCE DESIGN

CONSIDERATIONS
• Farmers use various tools to manage price and
yield fluctuations, with crop insurance being
one option whose effectiveness varies by
design, influencing its costs and benefits.
• Establishing crop insurance involves extensive
consultation and research, considering factors
like demand, coverage, and premiums, and
can benefit from reinsurance expertise and
support from international agencies.
Crop insurance - General concepts
1. Insurability of agricultural risks
Not all risks are insurable; to be insurable, the
risk must be predictable based on past data,
cause significant economic loss, and be
financially estimable. The loss shouldn't be
minor or catastrophic, and the insured must feel
the need and be able to afford the premium, or
have it subsidized by the government or another
agency.
 Crop insurance
• Crop insurance helps protect farmers from
unpredictable crop losses due to natural
factors beyond their control. It works by
pooling many risks together, spreading the
burden of loss. This way, the financial impact
on any single farmer is reduced.
 Agriculture insurance Vs Agriculture relief

• Crop insurance is a financial tool, often with a social welfare

aspect, usually administered by insurance companies, including
private ones.
• It is scientific, based on established insurance principles, and relies
on the indemnity principle, requiring farmers to pay a premium.
• Agricultural relief, on the other hand, is mainly a government
social welfare effort handled by departments like Revenue and
Agriculture, and funds like the Calamity Relief Fund.
• It's welfare-oriented, sometimes politically influenced, and based
on ad-hoc assessments, with no premiums required from farmers.
• Unlike crop insurance, farmers receiving relief cannot demand
compensation as a right.
 Crop insurance as risk management
• Crop production faces many risks, including natural,
social, economic, and personal factors, but it's
especially dependent on nature.
• This dependency leads to constant uncertainties,
making crop yield a basic risk for farmers everywhere,
especially in developing countries.
• Most farmers in these countries are poor and lack the
resources to handle crop failures.
• As a result, they are particularly vulnerable to
disastrous crop losses.
 Measures to counter risks
• While technical and social improvements can reduce some
uncertainties in crop production, it's impossible to
eliminate all natural risks.
• Sometimes, preventing risks like floods isn't cost-effective,
making such measures bad economics.
• Despite periodic risks, lands need to stay cultivated to
support the growing population, as crop failures can have
widespread repercussions.
• Traditional relief methods help but aren't guaranteed, so
crop insurance remains a crucial tool to cover losses from
natural hazards.
 Benefits of crop insurance
• Crop insurance cushions farmers against disastrous
crop losses, ensuring a minimum level of protection
and helping them maintain their dignity.
• It spreads crop losses over time and space, boosting
farmers' confidence to invest more in agriculture and
improving their access to credit.
• Additionally, it reduces the government's irregular
financial burden for relief, stabilizes supplies and
prices, and helps maintain systematic crop
production records.
 Crop insurance - Classification
• Crop insurance can vary by the type of risks covered: single
peril (like hail), named peril (up to four perils), multi-peril
(five or more), or all peril (all natural, non-preventable risks).
• It can also be based on the insured object: single crop or
multiple crops. Administration can be public (government-
run), private (without government support), or cooperative
(involving both government and private agencies).
• The scope can be voluntary, compulsory, or compulsory for
specific crops in certain areas.
• Finally, it can be based on unit size: individual farm,
household, homogeneous area, or a combination.
 Approach to crop insurance
Area approach for Indian conditions
• In 1947-48, a study was commissioned to explore
the feasibility of crop insurance in India, which
recommended a "Homogenous area" approach.
• Professor V.M. Dandekar's study also supported this
approach, leading to the introduction of the Pilot
Crop Insurance Scheme (PCIS) in 1979 based on it.
• This scheme aimed to provide more effective
coverage by grouping farmers in similar conditions.
Problems in implementing individual based crop
insurance scheme
The "Individual approach" to crop insurance would
be ideal for realistic loss assessment but is tough
to implement in India.
There are no reliable records of land surveys,
ownership, tenancy, or yields, and most farmers
are illiterate and practice subsistence farming.
Small and fragmented farm holdings,
inaccessibility of farms, and the wide variety of
crops and conditions make implementation
difficult.
• Collecting small premiums from millions of
scattered farmers and assessing simultaneous
crop harvests nationwide is a massive
challenge.
• The cost of the necessary manpower and
infrastructure would be prohibitively high.
 Crop insurance design and operations
• Before delving into the detailed design and
operation of a crop insurance program, it's
important to first decide whether it should be
managed by the public sector, private sector, or a
combination of both, and to determine whether
the policy should be yield-based or damage-based
(named peril).
• These decisions lay the foundation for structuring
an effective and sustainable crop insurance
scheme.
 Public or private sector?
Public sector
• Successful crop insurance programs globally often
require government support, especially in their initial
phases and when they serve as welfare measures in
agriculture.
• However, this government support should be temporary
and focused, such as covering administrative costs,
providing premium subsidies, facilitating re-insurance,
and establishing legal frameworks, which aligns with
WTO guidelines on agricultural subsidies.
Private sector
• In favor of private sector involvement in crop
insurance, it ensures financial discipline and
efficiency improvements due to market
pressures.
• However, if a parastatal body is established, it
must operate independently from political
influence to effectively manage premiums,
indemnities, and loss adjustments.
 Choice of Sector
• When selecting agricultural sectors and locations
for crop insurance, it's crucial to prioritize areas
where farmers face significant financial and
climatic risks, motivating them to purchase
insurance.
• Additionally, the chosen locations should allow
insurers to build a diversified portfolio, spreading
risks across policyholders and minimizing the
potential for catastrophic impacts from single
events.
 Role of crop insurance in the provision of
credit
• Crop credit insurance, specifically for loss of
growing crops, aims to safeguard seasonal loans
farmers use to buy seeds, fertilizers, and pesticides,
ensuring they can repay their debts despite crop
failures.
• Banks typically follow standardized lending scales
based on the production costs of each crop, which
are determined by technical committees to meet
the specific requirements of different crop sectors
and geographical areas.
Nature of the crops and perils involved
• Crop credit insurance, specifically for loss of
growing crops, aims to protect seasonal loans
used by farmers to purchase inputs like seeds,
fertilizers, and pesticides.
• These loans are crucial for farmers to manage
their production costs, which are standardized
based on technical assessments of each crop's
production needs and costs.
 Nature of the crops and perils involved
• Crop insurance programs find it easier to cover crops that
are highly commercialized and have reliable data on
production volumes.
• Staple food crops, especially those grown for local markets
without processing, pose challenges for insurance due to
their non-commercial nature and the poverty of farmers in
developing countries who grow them.
• Perennial crops typically receive indemnity based on the
loss of one season's production due to administrative
complexities involved in extending coverage to subsequent
seasons' yield reductions from damage to trees or vines.
 Procedures for setting indemnity and
premium levels
• Setting the right levels for premiums and indemnities in
crop insurance requires more than just meteorological
data;
• it also involves analyzing past loss events and
understanding how coverage features impact expected
claims.
• Insurers must continuously collect and analyze data on
actual crop losses due to climatic events to refine their
premium and indemnity levels, ensuring sound
underwriting practices and maintaining good
relationships with farmers.
 Collecting premiums and paying
indemnities
• Efficiency in crop insurance operations can
significantly reduce administrative costs.
• By partnering with organizations already
engaged in financial transactions with farmers,
insurers can minimize the expenses associated
with collecting premiums and processing
indemnities, as demonstrated by schemes like
CCIS and NAIS.
 Loss adjustment mechanism
• For a viable scheme, robust and fair loss
adjustment procedures are crucial to prevent
fraudulent claims.
• This involves deploying trained agronomists in
supervisory roles and simplifying assessment
procedures, especially when dealing with
numerous small farmers, to ensure accurate
evaluation of crop losses.
 Financing insurance programme
• Careful planning in financing crop insurance
programs is crucial to ensure financial stability
and minimize undue government interference.
• By focusing subsidies judiciously and aligning
with farmers' actual risk management needs,
insurance programs can enhance their viability
and operational effectiveness without ongoing
dependence on government funding.
 Reserves and reinsurance
• Crop insurance programs inherently face the risk of
catastrophic losses, necessitating substantial reserves from
the outset.
• Reinsurance plays a crucial role by providing access to a
larger reserve and sharing the risk with primary insurers,
though securing reinsurance for new programs can be
challenging due to the lack of track record and initial
reserves.
• Governments or insurers can mitigate these challenges by
starting small and gradually expanding, or by structuring
initial reserve funds carefully to avoid political influence and
ensure financial stability.
 Response to real risk management needs

• Selling insurance services to farmers is challenging,

whether voluntary or compulsory, as they require clear
and tangible benefits to participate.
• Public relations play a crucial role in gaining farmer trust
and feedback, ensuring their interests are represented
on insurer boards and throughout program
implementation.
• Education and clear communication through publicity
materials are essential to manage expectations and
ensure farmers understand both the benefits and
limitations of insurance coverage.