06-07-2012, 02:41 PM
Government vs Weather The True Story of Crop Insurance in India
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Abstract
The government of India started offering widespread crop in insurance in 1985,
with the Comprehensive Crop Insurance Scheme. The CCIS has been replaced by
the National Agriculture Insurance Scheme. The NAIS is considered to be an
improvement over the CCIS, but it has simply replaced one flawed scheme with
another slightly less flawed one. Government crop insurance has proved to be a
failure worldwide, but India seems to have ignored both its own failure and the
failure of other countries. The main flaws of the NAIS are the goal of financial
viability, its mandatory nature, its failure to address adverse selection, arbitrary
premiums, and the area approach. Internationally, private crop insurance is not
highly developed but varied successful private programs do exist. Even if India
withdrew from crop insurance schemes, it could still support farmers through an
income guarantee or investment in infrastructure.
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Farmers face floods, drought, pests, disease, and a plethora of other natural
disasters. The weather is their greatest adversary, something that can never be
controlled by man. Yet, farming has been in existence since the caveman turned his
spear in for a hoe. Farming has come a long way since then; nevertheless; farmers
are still at the mercy of the heavens. Crop insurance is a risk management tool that
farmers can use in today's agricultural world. For a premium, farmers can pass
their weather-related risk onto a third party. Farmers in India have been subjected
to publicly administered insurance schemes since 1972. Every scheme has been
flawed, yet the government of India is still attempting to strengthen agriculture by
protecting its farmers from the weather.
India's failure at providing public crop insurance does not stand alone. In both the
developing and developed world, governments' crop insurance schemes have run
at huge losses while not delivering an effective product. The inadequacy of such
schemes is a well-established fact. On the other hand, private insurance does exist
in situations where it is feasible and no subsidized insurance is offered. The
farmers stand to benefit even more from private insurance when there are several
competitors.
The government's most current crop insurance scheme, the National Agriculture
Insurance Scheme, has only been implemented since the Rabi season of 1999-2000.
Within five years the NAIS is supposed to become financially sustainable, charging
farmers premiums based on actuarial rates and administrative costs. A data based
analysis of the NAIS is not possible, as data for only two seasons exists. However,
shortcomings of previous crop insurance schemes, general trends of agricultural
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insurance in other countries, and inherent theoretical flaws in the NAIS all point
towards disaster.
The main flaws of the NAIS can be summarized as follows:
Lofty goal of financial viability
Mandatory for loanee farmers
Adverse selection, in the case of non-loanee farmers
Premiums do not equal Risk level
The area approach
Show me the money!
The Comprehensive Crop Insurance Scheme, predecessor to the NAIS, was
implemented for 15 years, from Kharif 1985 to Kharif 1999. A Ministry of
Agriculture Publication, Background Note on Crop Insurance, states that:
The Scheme had a positive and stabilizing influence on agricultural production and
productivity in respect of crops insured and is a popular program particularly in
those areas of certain States where the risk factor in agriculture is relatively higher.
This "positive" and "stabilizing" influence came at a large cost. The claims
percentage (percentage of claims to premiums) was 572%. The loss between
premiums paid and insurance claims amounted to 184,446 lakhs, exclusive of
administrative costs (five to seven percent typically). Only four of the 22
participating states had insurance charges greater than claims.
The CCIS only charged premiums of 1-2% percent, while claims made were
approximately 9% of the sum insured. Factoring in administrative costs,
participating farmers as a whole would have had to pay approximately 15% of the
sum insured without the subsidy. The NAIS has premiums of 1.5 to 3.5, varying
from crop to crop. Although premiums are higher than those of previous schemes,
based on past experience, they are still not high enough to cover claims.
Farmers growing commercial or horticultural crops covered under the NAIS are
supposed to pay actuarial rates. For all crops, the NAIS is supposed to become
financially viable within five years, with yearly increases in premiums based on
administrative costs and actuarial rates. If the NAIS becomes financially viable,
private crop insurance would also be feasible. The effect of the opening of
insurance markets in India is still to be seen. However, if the government stays in
the crop insurance market private companies will be discouraged from entry,
especially considering the state controls on almost every aspect of agriculture.
Government controls range from setting input prices to output prices, all of which
distort agricultural production. Therefore, any reform in crop insurance will be
most effective when accompanied by overall reform in the agricultural sector.
Who is insured?
The CCIS was mandatory for loanee farmers growing covered crops and insured
100% of the crop loan. The NAIS is also mandatory for loanee farmers growing
covered crops in implementing states. The indemnity is based upon the value of
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the threshold level for each crop grown in a set area. The threshold yield is based
upon a moving average of the yield over past five years. Anyone remotely familiar
with agriculture would understand that five years yield data does not accurately
represent complex weather patterns. Additionally, non-loanee farmers are
allowed to participate in the NAIS, but up to this point very few, except in
Maharashtra, have chosen to do so.
The CCIS was often criticized as being "bank insurance," and the NAIS is no better
on this count. Producers taking out loans have no choice--if the state authorities
decide to implement the NAIS the producer must purchase insurance. Insurance is
not the only risk-management tool available to farmers in India. Diversification,
fragmented land holding, off-farm employment, and savings are just of few of the
options. Requiring loanee farmers to prove their ability to manage risk is good
business--forcing one option upon them is not. Farmers with adequate risk
management capabilities should not be forced to purchase crop insurance in order
to receive a loan.
Twenty-two states/union territories participated in the CCIS, while only 16 are
participating in the NAIS. Punjab and Haryana are two of the leading agricultural
states, but have yet to participate in the CCIS or NAIS. Agriculture in Punjab and
Haryana is less risky than that of other states. However, one cannot assume that no
demand exists for crop insurance in these states, as no cropping system is without
risk. Three levels of indemnity do exist within the NAIS, but three risk levels can in
no way address the diverse climate and agriculture in India. If premiums were
based upon true risk levels, farmers in any agricultural system could avail of crop
insurance if it fit their risk-management needs. If a farmer faces such high risks
that he cannot survive without subsidized insurance the cropping system is not
sustainable
Adverse selection can be observed when a group of farmers is offered crop
insurance at the same premium, as is often the case in government
administered/subsidized crop insurance. The worst farmers will avail of the
insurance, making claims unreasonably high. Publicly administered crop
insurance schemes worldwide have been largely unsuccessful partially due to
adverse selection. In India adverse selection can clearly be seen at the state level, as
Punjab and Haryana do not participate in the NAIS. If adverse selection were
unavoidable, the entire insurance sector would not exist. History tells us that
private insurance has been better able to address the problem of adverse selection.
The NAIS makes insurance mandatory for loanee farmers, so adverse selection is
more apparent at the state level. Non-loanee farmers have no obligation to
purchase crop insurance and will most likely follow the pattern of adverse
selection. If the NAIS can become financially viable, premiums would have to
continually rise due to adverse selection.
A yield "guarantee"
Farmers insured under the NAIS are not guaranteed indemnity for their yield
losses. The uncertainty that even insured farmers face is due to claims/indemnity
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being based upon the 'area approach.' The area approach was considered the only
feasible way to administer the CCIS. As expressed in a Ministry of Agriculture
publication an 'individual' crop insurance scheme is not possible in India for
several reasons, including "prohibitive costs due to huge requirement of men and
material" and "disputes over fixing guaranteed yield and loss assessment." The
NAIS is being operated under the area-approach currently. In a few selected
districts the “individual” approach is being implemented on an experimental basis.
Considering past experience, the individual approach is not likely to suddenly
become a feasible option.