03-09-2021

Agricultural Insurance: A risk

management tool

Income risks facing poor rural households

Crop failure (partial or complete)

Death of livestock
Price shocks
Illness or death of household members
Loss of employment or self-employment
Natural calamities (drought, flood, fire etc.)
War and other forms of violence, e.g. crime

2. RISK-COPING STRATEGIES I.E.

1. RISK-MANAGEMENT STRATEGIES TO STABILIZE
STRATEGIES I.E. STRATEGIES CONSUMPTION
TO STABILIZE INCOME
A.Saving
B.Access to credit from formal and
A.Crop and field diversification informal sources
B.Diversification of income C.Marriage outside the village and
sources other means of building alliances
C. Contractual arrangements such D. Reducing consumption
as sharecropping, bonded labour
E.Risk sharing arrangements , i.e.
D.Adoption of hardier crop and insurance 8
livestock varieties

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Parable to explain insurance

• Holy man:
“ Your next child will be a boy or money back”
• Two families send Rs 100 each
• Logical possibilities:
Family 1 Family 2 Holy man’s
earnings
Boy Boy 200
Boy Girl 100
Girl Boy 100
Girl Girl 0

Parable continued
• 3 families: logical possibilities
Family 1 Family 2 Family 3 Earnings
Boy Boy Boy 300
Boy Boy Girl 200
Boy Girl Boy 200
Boy Girl Girl 100
Girl Boy Boy 200
Girl Boy Girl 100
Girl Girl Boy 100
Girl Girl Girl 04

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Parable continued
• When 2 families send money, chance
that
holy man has to return all the money?
1 / 22 = 1 / 4
• When 3 families send
money? 1 / 23 = 1 / 8
• When 20 families send money?
1 / 220 = 1 / 1 000 000 (!!)

What does this have to do with

insurance?
• Take case of 3 families,
• Insurance company says:
– Send us money every month (premium), we
give you powerful charm to protect car (!!)
– If your car is stolen, we return your premium
and give you enough money to buy new car
– This has the same structure as the boy-girl
problem
• Change girl to “car stolen” and boy to “not stolen”.

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What is insurance and how does it
work?
• A way of sharing or pooling risk
– Risk: “undesirable fluctuations in consumption
that are not perfectly predictable”

• But does not eliminate risk

• Spreads risk across an industry or

economy and through time

• Pooling
• Risk 1+ Risk 2+…………………………..Risk 100
• Claim 1

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Benefits of insurance
• Helps households and governments
manage natural hazards
• More efficient than credit and savings if the
financial market is not well developed
• Reduces credit default risk
• Facilitates adoption of production
innovations
• Enhances agricultural production and
possibly competitiveness
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What is required for insurance to work?

“Work” means that insurance company should
not lose money and should be able to pay
back insured people when loss occurs

1. Large no. of people take out insurance

2. Risks are independent

3. “Making whole”:
1. Company should know how much it costs to restore
insured to original position
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1
1

Crop insurance: special issues

• Risks are not independent (“covariate
• risks”)

• How to “make whole” is difficult to decide

• – E.g. hailstorm before crops harvested. How
does insurance company know what the
value of the final crop would have been?

• Loss to individual farmer is hard to assess

1
2

Crop insurance: solutions

• Link crop insurance to credit and savings
schemes
– Provide insurance for input loans
– Work with micro lenders to allow farm
households to build up their savings

• Crop insurance and livestock insurance

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1
3

Traditional insurance products

• Single (Named) Peril

• Multiple Peril

Actual physical loss or damage is measured

in-field, and the claim is specific to that
field/farmer

1
4

Innovative insurance products

• Crop area yield index insurance

• Crop weather index insurance

• Livestock mortality index insurance

The claim is calculated based on an external

index designed to reflect as accurately as
possible the loss incurred by the farmer

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6
Agricultural insurance:
Key considerations
• What perils should be protected against?
• Target commodities / target audience?
• Requirements of different agricultural
sectors (crops, livestock, fisheries,
forestry)
• What are the legal & regulatory
requirements?
• What is the real demand for the insurance
product?

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Agricultural insurance: Case study of

India
• NAIS area-yield index multiple peril crop
insurance scheme
• NAIS came into existence in 1999-2000 rabi season
replacing Crop Insurance Scheme
• Has 3 objectives:
– Provide financial support to farmers if crop
failure
– Restore credit eligibility of farmers after crop failure for
next season
– Support and stimulate prod of cereals, pulses and
oilseeds

1
8 Agricultural insurance:
Case study of India
• Market structure:
– Agriculture Insurance Company of India (AIC)
• Public sector specialist crop insurance company
• Responsible for implementing NAIS
– ICICI Lombard and IFFCO-Tokyo
• Crop weather index insurance for poor farmers
– Public sector insurance companies providing
livestock insurance

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1
9 Agricultural insurance:
Case study of India
• Agricultural insurance products:
– MPCI (Multiple Peril Crop Insurance ): covers food
crops, oilseeds, horticultural and
commercial crops
– MPCI Multiple Peril Crop Insurance): Yield loss resulting
from
• Natural fires and lightning
• Storms, hailstorms, hurricanes, cyclones etc
• Floods, landslides etc.
• Droughts, dry spells
• Pests/diseases etc.

Agricultural insurance:
Case study of India
• Agricultural reinsurance
– NAIS is reinsured by government under 50:50
excess of loss agreement by the central
government and participating state govts
• If made more market oriented, could face serious
constraints in obtaining reinsurance bec large size
– AIC’s weather index program reinsured partly
by GIC (General Insurance Co.) and partly by
international reinsurers
– Livestock epidemic disease reinsurance is not
available 26

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National Agricultural Insurance

Scheme(NAIS)
Salient features are:
1. Crops covered - food crops, oilseeds and annual
commercial/annual horticultural crops eg. Cotton,
potato, onion etc.
2. All states & U.T. to be covered
3. Farmers to be covered - All, on loanee farmers
compulsory and non-loanee farmers voluntary basis.
4. Risks covered - natural non-preventable
5. Sum insured - for loanee farmers = loan amount (may
be extended upto 150% of avg. yield) and for
nonloanee farmers = 150% of avg. yield

6. Premium rates :
a) food crops & oilseeds -
Kharif season= 3.5% of sum insured for bajra and oilseeds, & 2.5% for
other food crops OR actuarial rate, whichever is less.
Rabi season= 1.5% for wheat and 2% for other food crops & oilseeds
Or actuarial rate, whichever is less.
Sum Insured (or loan amt.) above thresh hold yield would attract
actuarial rate
b) annual commercial / horticultural crops-actuarial rates
7. Premium subsidy: 50% to the small & marginal farmers
8. Scheme approach :
a)Widespread calamities- based on area approach i.e. defined area for
each crop
b)Localized calamities- operate on individual basis

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9. Levels of indemnity and Threshold yield

90% - low risk Rice & wheat– moving avg. of past 3years
80% - medium risk * indemnity level
60% - high risk Other crops - moving avg. of past
5years*indemnity level

10. Loss assessment and indemnity:

a)Widespread calamities- coverage to be given if
A.Y./hec < T.Y./hec
b)Localized calamities- in case of localized perils
like hailstorms etc. loss assessment will be based on
individual basis
11. Corpus fund – 50:50 for centre and state

Working Examples Of Premium And Claims Under NAIS :-

Season-Kharif Farmer-xyz
Parameters Rice Groundnut

Area declared for availing loan (ha) 3 2

Loan availed (Rs.) 30,000 15,000

Average Yield (kg/ha) 2,000 1,000

Minimum Support Price (Rs./Quintal) 750 1,100

Sum Insured Opted 50,000 25,000

Flat Premium Rate 2.5 % 3.5%

Actuarial Premium Rate 6.5 % 8.0%

Indemnity Limit 90 % 80 %

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Based on above data , how much premium is the

farmer required to pay ?

Rice – Groundnut –
Threshold Yield-1000*80/100
Threshold Yield-2000*90/100
=800Kg/Ha
=1800 Kg/Ha
Value Of Threshold Yield-
Value Of Threshold Yield- 1100*(800/100)*2
750*(1800/100)*3 =Rs.17,600
=Rs.40,500
150% Of Value Of Average Yield - 150% Of Value Of Average Yield
750*2000/100*150/100*3 1100*(1000/100)*(150/100)*2
= Rs.67,500 =Rs.33,000
Premium at threshold level- Premium at threshold level-
Rs.17600*3.5/100
40,500*2.5/100
=Rs.616
=1,012.50
Sum insured exceeding value of Threshold
Sum insured exceeding value of Yield- Rs.(25,000-17,600)
Threshold Yield- Rs.(50,000-40,500) =Rs.7,400*8/100
Rs.9,500*6.5/100 =Rs.617.5 =Rs.592

Total Premium –
For Rice-
Rs.1,012.50+Rs.617.50
=Rs.1,630.00
For Groundnut-
Rs.616.00+Rs.592.00
=1,208.00
Total-Rs.1,630.00+Rs.1208.00
=Rs.2,838.00

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What’s the claim payable to the farmer if actual yield

is 1500 kg/hec for rice and 600 kg/hec for groundnut?
Rice
Threshold yield: 1800 kg./hec
Shortfall = (1800 – 1500) kg./hec = 300 kg. / hec
Claim Payable=shortfall/Threshold Yield *Sum Insured
= 300/1800*50,000
= Rs.8.333.33
Groundnut
Threshold yield: 800 kg./hec
Shortfall = (800 – 600) kg./hec = 200 kg. / hec
Claim Payable=shortfall/Threshold Yield *Sum Insured
=200/800*25,000
=Rs.6250.00

Total Claims=Rs8,333.33+ Rs.6,250.00

=Rs.14,583.33

Yield Estimates

• Obtained through analysis of scientifically

designed crop cutting experiment(CCEs) under
General Crop Estimation Survey(GCES).
• Primary objective-Obtain reliable estimates of
average yield of crops
• The information is used for planning, policy
formulation and implementation

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Coverage
• Involves details of number of CCEs in the
crops in different seasons.
Sampling design for CCEs

Tahsil

Revenue Village

Survey No./Field

Experimental
Plot

ANALYSIS OF INSURANCE
CONTRACTS

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BASIC PARTS OF AN INSURANCE

CONTRACT
• Declarations
• Definitions
• Insurance agreement
• Exclusions
• Conditions
• Endorsement and riders

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DECLARATIONS

• These are the statements that provide information about the

particular property or activity to be insured.
• Usually found on the first page of the policy.
• The information in this section is used for underwriting and
rating purposes.

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DEFINITIONS

• These are the key words or phrases that have quotation marks
around them or in boldface type.
• e.g. –insurer is referred as “we”, “our” or “us” whereas insured
is referred as “you” and “your”.
• The purpose is to define clearly the meaning of key words or
phrases, so that coverage under the policy can be determined
more easily.

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INSURING AGREEMENT
• Heart of an insurance contract
• It summarizes the major promises of the insurer.
• There are 2 basic forms of insurer agreement in property insurance:
1. Named-perils coverage
2. “All- risks” coverage
Named-perils coverage- only the perils that are specifically named in
the policy are covered.
All –risks coverage-
o All losses are covered except those losses which are specifically
excluded from the policy.
o Also known as open perils policy/special coverage policy.
• All- risks coverage is preferred to named-perils coverage as the
protection is broader with fewer gaps in coverage.
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EXCLUSIONS
• There are three major types of exclusions:
1. Excluded perils – the perils or the causes of loss that are
excluded from the contract.
e.g. in a homeowners policy, the perils of flood, earth movement
and nuclear radiations or radioactive contaminations are
specifically excluded.
2. Excluded losses - e.g. in a homeowners policy, failure of an
insured to protect the property for further damage after a loss
occurs is excluded.
3. Excluded property - the contract may exclude or place
limitations on the coverage of certain property.
e.g. – in a homeowners policy, certain types of personal
properties are excluded such as cars, planes, animals, birds
and fish.
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EXCLUSIONS CONTD…….

• Exclusions are necessary for the following reasons:

1. Some perils considered uninsurable
2. Presence of extraordinary hazards
3. Coverage provided by other contracts
4. Moral hazard problems
5. Coverage not needed by typical insured

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CONDITIONS

• Conditions are provision in the policy that qualify or place

limitations on the insurer’s promise to perform.
• If the policy conditions are not met, the insurer can refuge to
pay the claim.
• Common policy conditions are-
❖Notifying the insurer if the loss occurs
❖Protecting the policy after a loss
❖Preparing an inventory of damaged personal property
❖Cooperating with the insurer in the event of a liability suit

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ENDORSEMENTS AND RIDERS

• In property and liability insurance, an endorsement is

a written provision that adds to, deletes from, or
modifies the provisions in the original contract
– e.g., an earthquake endorsement to a homeowners policy

• In life and health insurance, a rider is a provision that

amends or changes the original policy
– e.g., a waiver-of-premium rider on a life insurance policy

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DEDUCTIBLES
• A deductible is a provision by which a specified amount is
subtracted from the total loss payment that otherwise would be
payable
• The purpose of a deductible is to:
– Eliminate small claims that are expensive to handle and process
– Reduce premiums paid by the insured
• Under the large loss principle, insurance should pay for high
severity losses; small losses can be budgeted out of the
person’s income
– Reduce moral and morale hazard
– With a straight deductible, the insured must pay a certain amount
before the insurer makes a loss payment, e.g., an auto insurance
deductible

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CLAIM: PRO RATA LIABILITY

• It applies when two or more policies of the same type cover the same
insurable interest in the property.
• Each insurer’s share of the loss is based on the proportion that its
insurance bears to the total amount of insurance on the property.
• If a person has insurance contracts with 3 companies, Rs. 300,000 with
Company A, Rs. 100,000 with Company B and Rs. 100,000 with
Company C, for a total of Rs. 500,000.
• He occurs a loss of Rs.100,000, he may claim Rs. 100,000 from each
company. But each company will pay only its pro rata share of the loss.

Company A Company B Company C

Rs 300,000/Rs 500,000 Rs 100,000/Rs 500,000 * Rs Rs 100,000/Rs 500,000 *
* Rs 100,000 100,000 Rs 100,000
=Rs 60,000 = Rs 20,000 = Rs 20,000

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CLAIM: CONTRIBUTION BY EQUAL SHARES

• It appears in liability insurance contracts.
• Each insurer shares equally in the loss untill the full amount of loss is paid.
• Suppose a person has insurance with 3 companies INR 300,000 with
Company A, INR 200,000 with Company B and INR 100,000 with
Company C, for a total of INR 600,000.
• If he occurs a loss of INR 150,000, then each company will pay equal
share i.e. INR 50,000.
• If loss were Rs 500,000, then….
Companies Amount of Contribution by equal Total paid
insurance shares
Company A INR 300,000 INR 100,000 + INR100,000 INR 200,000
Company B INR 200,000 INR 100,000 + INR 100,000 INR 200,000
Company C INR 100,000 INR 100,000 INR 100,000

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Questions?

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