INSURANCE COVER FOR

THE RURAL SECTOR

BY
R.R. JOSHI
Insurance Regulatory and Development Authority (Obligation of
Insurers to Rural Social Sectors )
Regulations, 2000

A. Rural sector:
Shall mean any place which has:
3. Population of not more than 5 thousand
4. Density of population of not more than 400 per square KM
5. At least 75% of the male working population is engaged in
Agriculture

B. Social sector Includes both in rural and urban areas the

following categories:
8. Unorganized sector
9. Informal sector
10. Economically vulnerable or backward classes
11. Other categories of persons
Insurance Regulatory and Development Authority (Obligation of
Insurers to Rural Social Sectors )
Regulations, 2000 …contd

“ Unorganised sector” includes self-employed workers such as

agricultural labourers, bidi workers, brick kiln workers,
carpenters, cobblers, construction workers, fishermen, hamals,
handicraft artisans, handloom and khadi workers, lady tailors,
leather and tannery workers, papad makers, powerlom workers,
physically handicapped self-employed persons, primary milk
producers, rickshaw pullers, safai karmacharis, salt growers,
sericulture workers, sugarcane cutters, tendu leaf collectors,
toddy tappers, vegetable vendors, washerwomen, working
women in hills or such other categories of persons.
“economically vulnerable or backward classes” means persons who
live below the poverty line;
“ Other categories of persons” includes persons with disability as
defined in the Persons with Disabilities (Equal Opportunities, Protection
of Rights, and Full Participation ) Act, 1995 and who may not be
gainfully employed; and also includes guardians who need insurance to
protect spastic persons or persons with disability;
Insurance Regulatory and Development Authority (Obligation of
Insurers to Rural Social Sectors )
Regulations, 2000….contd

A. Obligations of insurers towards Rural sector are as follows:

(I) In respect of Life insurer:
A. Five percent in the first financial year
B. Seven Percent in the second financial year
C. Ten percent in the third financial year
D. Twelve percent in the fourth financial year
E. Fifteen percent in the fifth financial year
(II) In respect of General Insurer
A. Two percent in the first financial year
B. Three percent in the second financial year
C. Five percent in the third financial year
B. Obligations in respect of Social sector are as follows
A. Five thousand lives in first financial year
B. Seven thousand five hundred in second financial year
C. Ten thousand lives in third financial year
D. Fifteen thousand lives in the fourth financial year
E. Twenty thousand lives in the fifth financial year
 RISKS FACED BY LOW-INCOME HOUSEHOLDS

The following framework identifies and classifies risks based on the

household’s perspective on two variables;
3. The degree of uncertainty caused by the risk and
4. The relative size of the loss.
By positioning the risk faced by low-income households along
these two dimensions, it is possible to assess how well
various risk management options protect low-income
households against each type of risk
The uncertainty of a risk can be thought of in terms of three
elements
1. If the risky event will occur
2. When the risky event will occur

3. How often the risky event might occur

To apply this framework to low-income households, it is important to

compare the loss to the household’s income or assets. The larger the
loss relative to a household’s existing assets and future potential
income, the fewer are their alternatives available to recover from the
loss, and the more severely the loss will affect the household.
 RISKS FACED BY LOW-INCOME HOUSEHOLDS
….Contd

 RISKS PERTAINING TO LIFE CYCLE NEEDS : Life cycle

needs will include children education, households
requirement, marriage of children and saving for retirement.
While individually these events have the least severe impact,
their frequency makes managing them a pressing need for
many low-income households.

 DEATH RISKS : Death risks include the costs that result from
the death of a family member. The loss a household
experiences when a death occurs (besides the emotional
loss) includes both a one-time component (e.g. cost of proper
burial, cost of settling the deceased’s accounts, etc) and
potentially an ongoing component to replace income that the
deceased formerly provided to the family.
 RISKS FACED BY LOW-INCOME HOUSEHOLDS

 PROPERTY RISKS : Property risks includes events

leading to theft, damage, loss or destruction of a
household asset. Crop losses, livestock illness or
death, fire to a family home, the impact of property
risks will vary in terms of family and locality. In
general, property risks are likely to cause households
greater uncertainty than death risks or lifecycle needs
because they cannot be sure whether, when or how
often a fire or theft might occur.

 HEALTH RISKS : Besides risks in respect of life cycle

needs and Death and property risks, health risks-
accidents, illnesses and injuries that require
households to pay for medical treatment - are among
the most common concerns of low-income households.
Health risks generate a greater degree of uncertainty
 RISKS FACED BY LOW-INCOME HOUSEHOLDS

 DISABILITY RISKS : A disabled family member may require

on-going treatment expenses besides the cost of the initial
medical attention. Households may also incur additional
costs in replacing lost income if the family member is no
longer able to work. This is especially problematic if the
disabled family member is young. When these risks occur,
low-income households have great difficulty overcoming
disability risks than health risk.

 MASS COVARIANT RISK : Mass covariant risks are the

threat that an event, such as epidemics, natural disasters,
and war etc. may cause. These risks result in substantial
losses to a large portion of a population at the same time.
These risks could fit into the categories described above
based on the impact they have on households. They affect
many people at the same time, thus hampering the ability of
risk-pooling mechanisms to protect against these risks; and
the cost associated with mass, covariant risks tends to be
significantly greater than that resulting from other risks.
 RISKS FACED BY LOW-INCOME HOUSEHOLDS

 Households are forced to deal with multiple losses at the

same time (e.g. severe flooding leading to death of a family
member, destruction of the family’s home and severe injuries
to remaining family members; and
 Households’ traditional risk coping strategies, such as intra-
family gift giving, reciprocal exchange and non-financial
savings tend to be weakened or destroyed because
neighbours and local family members are suffering from
similar losses at the same time.

Conclusion
The threat of a natural disaster or epidemic, which may result
in multiple losses at once, causes a greater degree of
uncertainty than other risks. A household can cope
more easily with individual risks than a mass-covariant risk
because they can plan for the event and because it generally
involves a smaller cost.
Risks in Agriculture

 Risks in Agriculture can be

classified under the following
heads:
 Production risks- Agriculture yields
depends on weather (rainfall,
temperature variation, frost, solar
radiation, wind, vapour pressure etc.),
soil condition (fertility, pH, texture and
depth), pest control, variety of crop,
agronomic inputs – seeds, manure,
fertilisers management practices,
Risks in Agriculture …contd
 Price or market risks
 Investment and credit risks
 Institutional risks – risks relating to
unexpected changes in regulations,
services, support programmes etc.
 Technology risks
 Personal risks

Agricultural risks are not governed by the

normal premium pooling concept and
premium has to be spread over areas
and time periods
 CROP INSURANCE SCHEMES IN INDIA

 India is a predominantly Agricultural country providing gainful

employment to almost 75% of the total population
 Large scale crop failure will have adverse effect on the
economic condition of the people who are dependant on
agriculture. As a result of such crop failure, farmers in
general and Small & Marginal farmers in particular not only
lose their current crop but are also left with no money to
invest in the next crop season. Non-repayment of Bank
Loans render them ineligible for fresh loans.
 A beginning in Crop Insurance was made by Life Insurance
Corporation of India (General Insurance Department) in 1972
by implementing an Experimental Scheme for Hybrid-4
Cotton in few Districts of Gujarat State. This Scheme was
based on individual approach and uniform guaranteed yield
was offered to selected farmers. These Schemes continued
till 1979 and it was concluded that under the situation
prevailing in the country, Crop Insurance Scheme based on
individual approach is not feasible and economically viable to
implement on large scale. Hence, these Schemes were
 CROP INSURANCE SCHEMES IN INDIA
…Contd

 On the basis of feasibility study conducted by (Late) V

M Dandekar,a Pilot Crop Insurance Scheme based on “
Area Approach” meant for loanee farmers in selected
areas for selected crops were implemented from 1979
to 1984-85.
 Based on the experience of the pilot Crop Insurance
Scheme, Government of India decided to implement a
Comprehensive Crop Insurance Scheme (CCIS) from
Kharif 1985 season. Salient Features of the Scheme
were:-
 Crops Covers : Rice, Wheat and Millets, Oilseeds and
Pulses
 Premium Rates (Insurance Charges) : 2% Sum
Insured for cereals, Millets and 1% of Oilseeds and
Pulses. Subsidy to Small and Marginal Farmers- 50%
for Premium
 Farmers Covered: All farmers availing of Crop Loans
from Co-operative Credit Institutions, Commercial
 CROP INSURANCE SCHEMES IN INDIA
…Contd

 Area Approach : The scheme operated in Defined

Areas for each Crop as notified by the Crop Insurance
Fund Committee constituted by each State
Government.
 Nature of Coverage: If the actual average yield per
hectare of the Insured Crop for the Defined Area
determined on the basis of Crop Cutting experiments in
the insured season, was short of the specified
threshold yield, all the Insured farmers growing that
Crop in the defined Area were deemed to have suffered
shortfall in their respective yields and provided
coverage under the scheme.
 Limit of Coverage i.e. Sum Insured: The sum
Insured per insured farmer was 150% of the Loan
disbursed for growing the Crop in the Defined Area
during the insured season.
Crop Insurance …contd
Crop Individual basis Cotton, Farmers: 3110
insurance (6 states) groundnut Premium: Rs 4.5
by GIC , wheat, lakh
(1972- potato Claim: Rs 37.9
1979) lakh

Comprehe Area basis (17 Cereals, Farmers: 7.6

nsive Crop states) pulses, crore
Insurance Loanees compulsory oilseeds Premium: Rs
Scheme 50% premium 403.6 cr
subsidy for SF/MF
(1985- Claim: Rs 2303.4
Optional for States
1999) cr
 NATIONAL AGRICULTURAL INSURANCE SCHEME (NAIS)

The Government of India considered the demands from various

quarters and launched “ National Agricultural Insurance Scheme
“(NAIS) .” w.e.f. Rabi 1999-2000 season replacing CCIS. The
Scheme was dedicated to the Nation by the Hon’ble Prime
Minister on 22nd June, 1999.
The salient features of Scheme include:
c) Coverage of all Farmers including share croppers and tenant
Farmers.
d) Coverage of food crops and oil seeds and annual commercial/
horticultural crops
e) No restrictions on sum insured per farmer
f) Rationalising of premium rates
Premium Rates : Kharif crops:
3.5% for Bajra and Oil seeds
2.5% for other food crops including Pulses
Rabi Crops:
1.5% for wheat
2% for all other food crops and oilseeds
NATIONAL AGRICULTURAL INSURANCE SCHEME (NAIS)
…Contd

e) Compulsory for loanee farmers, voluntary

for non-loanee farmers
f) Perils covered:
Fire, lightening, storm, tempest, flood,
inundation, cyclone etc. , landslide/ rockslide,
drought/ dry spells, pests and diseases
g)Settlement of claims
 Area approach basis for widespread calamities –
Claims in an notified area becomes automatically
payable if there is a shortfall in yield. The shortfall is
converted into claims by multiplying the percentage
shortfall with the sum insured.
 Claim Payable = (Short fall in yield /
threshold yield )* sum insured
 Where shortfall = threshold yield – actual
NATIONAL AGRICULTURAL INSURANCE SCHEME (NAIS)
…Contd

 Individual approach for localised calamities –

In the case of hailstorm, landslide, local
flooding etc. the claim will be settled on
individual basis
h) Summary of coverage under NAIS:
Rabi 1999-2000 to Rabi 2006-07:
Total no. of farmers covered = 9,70,73,736
Total area covered = 15, 62,10,772 Hectares
Total sum insured = Rs. 97180 Crores
Total premium = Rs. 2943 Crores
Total claims = Rs. 9763 Crores
Claim Ratio = 1:3.2
NATIONAL AGRICULTURAL INSURANCE SCHEME (NAIS)
…Contd

i) Sum insured:
 Loanee farmers- amount of crop loan availed for
notified crops is minimum amount of sum insured.
Farmers can opt for higher coverage up to the
value of Threshold Yield at flat rate. Coverage up
to value of 150% Average Yield is also available.
Premium is charged on actuarial rates for sum
insured exceeding value of Threshold Yield.
 Non Loanee Farmers- Coverage at normal flat
rate of premium is available upto the value of
threshold yield, additional coverage upto 150% of
the value of threshold yield can be availed by
paying premium at actuarial rate
Weather/ Rainfall Insurance
 Weather based crop insurance arrived in India
during Kharif 2003 season through BASIX – a
micro finance institution. Since then the
scheme has been implemented by: AICL, ICICI
Lombard and IFFCO Tokio
 Pursuant to the announcement in the union
budget that he intended to allocate Rs. 100
Crore for this scheme in 2007-08 the AIC
launched the pilot Weather based crop
insurance scheme during kharif 2007 season in
Weather/ Rainfall
Insurance…contd
 Weather insurance is directly linked
to rainfall and / or temperature as
measured by weather stations. The
policy pays when the levels of
rainfall and / or temperature
increase or decrease around certain
predetermined levels.
 Weather insurance is an index-
based insurance product (Based on
historical data the yield and rainfall
are correlated to arrive at a rainfall
Weather/ Rainfall
Insurance…Contd
 Use of RFIs/ NGOs/ SHGs for
delivery
 The working group on risk
management in Agriculture has
submitted its report for the
eleventh five plan (2007- 2012)
asking the government to year
mark US $ 700 million for various
crop insurance schemes and the
target is to insure 40% of farmers in
Weather/ Rainfall Insurance
Varsha Bima (AICI)
 Started in Kharif 2004 as a pilot project in
20 rain-gauge stations across 4 states
(AP,Karnataka,Rajasthan &UP)
 Covers adverse deviations in rainfall
during Khariff season. It is based on
rainfall index
 Based on 100 years’ average rainfall data-
compared with current data
 Shortfall/ deficiency in % is the criterion for
compensation
 Role of weather insurance (Double trigger
approach): combining weather insurance with NAIS can
be done effectively in such a way that weather index can
provide a trigger to release early payout under NAIS
Weather insurance –
Important features
 Detailedcorrelation analysis is
carried out to ascertain the way
weather impact yields of the crops
over a long period. The weather
indices will include –
 Deficit/ excess rainfall
 Extreme fluctuations of temperature

 Relative humidity

 Index
is created by assigning
weights to critical time period of
Weather insurance –
Important features …contd
 The past weather data are mapped
on to this index to arrive at a
normal threshold index.
 The actual weather data are then
mapped to the index to arrive at
the actual index level.
 In case there is a material deviation
between the threshold index and
the actual index, compensation is
paid out to the insured on the basis
Comparative study
Area Yield Crop insurance
 Various physical risks
covered eg. Fire, flood,
excess rainfall etc.
 Easy to design if
historical yield data is
available upto 10 years
 Objectivity and
transparency is low
Weather based crop
insurance
 Parametric weather
related risks like rainfall,
frost, heat, humidity etc.
are only covered.
 Technical challenges in
designing weather indices
and co-relating the
indices with yield losses
 Objectivity and
transparency are high
Comparative study (Contd.)
Area Yield Crop insurance
 Yield data can be
tampered and influenced
by local administration
 Farmer has less incentive
to protect the crop
 High loss assessment
cost
Weather based crop
insurance
 Weather data is largely
tamper-proof
 Farmer has higher
incentive to protect the
crop as the claim is
based on the weather
and not the yield
 Relatively low loss
assessment cost
Comparative study (Contd.)
Area Yield Crop insurance
 Slow claim settlement
 Re-insurance is not easily
available
 Low basis risk
Weather based crop
insurance
 Faster claim settlement
 Re-insurance is easily
available
 High basis risk
(Basis risk may result from
poor density of weather
stations & poor design of
weather index may result in
“no claim” despite the poor
crop at individual farmer’s
level & vice versa)
Role of Micro insurance in
Agriculture
 What is Micro-insurance?
 Micro-insurance refers to protection of assets
and lives of target populations against
insurable risks. It is different from the other
traditional products in the market in it being
a targeted instrument for inclusive insurance
for low income households. It intends to offer
the poor protection against risks in return for
payment of affordable premiums in ways
that support small ticket size; coverage for
most vital risks; and a responsive and service
oriented distribution infrastructure.
Main features of Micro-insurance
 Insurance simplified by the regulator for
the ease of distribution.
 Licensing of agents is not compulsory
and the training norms are also relaxed.
 Servicing of Micro-insurance products is
open to other existing intermediaries like
MFI’s, NGO’s, and SHG’s also.
 Single window composite insurance
policies combining the products of life
insurance and non life insurance can be
devised and issued to low income
earning segments of the population.
Main features of Micro-insurance
…contd
 Simplification of underwriting and claim
settlement procedures
 Making premium payment plans flexible
and simplifying premium collection
 Designing long term policies to coincide
with the loan period of the farmers under
the various micro finance schemes
 Use of innovative distribution channels
like the banking network, agri-preneurs,
fertiliser/ seeds/ pesticide distributor
companies, social/ charitable institutions