The Agricultural Insurance Company of India Limited's Varsha Bima 2005 scheme to insure farmers against the vagaries of the monsoon promises to mitigate rural distress.
INDIA has always been a land of extreme diversity - be it culture, landscape or weather. Of this, the weather factor presents formidable challenges since it is impossible to control. At the same time, it holds the key to economic well-being of at least 60 per cent of the population, which depends upon agriculture directly or indirectly.
In many parts of India, irrigation is still a dream because 60 per cent of the sown area depends on rainfall and at least 50 per cent of the variability in crop yields is caused by rainfall variations. Another complication is that the weather itself is becoming increasingly unpredictable, thanks to climate change and other global environmental factors. In such a situation, perhaps the only way for the farmer to avoid financial distress is through insurance. The failure of the monsoon is the single largest reason for crop failure, leading to social turmoil in several States where indebted farmers are driven to despair.
Agricultural insurance is an industry that is still in its teething stages in this country. However, there have been constant efforts to improve upon the kind of insurance cover offered to farmers. Earlier this year, the state-run Agricultural Insurance Company of India Limited (AIC) launched the Varsha Bima 2005, a scheme intended to protect the interests of farmers in case of an adverse rainfall season.
According to the AIC, rainfall insurance has inherent advantages over traditional crop insurance. For one, the reason for the failure of the crop can be independently recognised and verified. Secondly, the insurance claims will be settled faster. The premium for insurance is flexible, making it easier for people in rural areas to seek coverage. The administrative costs for the rainfall-based insurance scheme are lower. The scheme is also suitable for areas that are entirely rain-fed.
The AIC introduced Varsha Bima during the 2004 kharif season as a pilot project in 20 raingauge station areas, across four States. Based on the experience, the scheme was designed and fine-tuned before being launched as Varsha Bima 2005. The scheme is being implemented in 10 States initially, in areas that correspond to 140 Indian Meteorological Department (IMD) raingauge stations. The States selected for implementation are Andhra Pradesh, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Orissa, Tamil Nadu, Uttaranchal and Uttar Pradesh.
Besides this, the AIC has offered the Sookha Suraksha Kavach (SSK) an exclusive product for Rajasthan, an exceptionally drought-prone State. The SSK is being made available in 23 districts of Rajasthan, and it covers major crops such as bajra, jowar, maize, guar, soybean and groundnut. The sum insured will be roughly equal to the cost of production and there will be a flexible premium rate, ranging from 4 to 8 per cent.
Varsha Bima compensates farmers for financial losses incurred owing to crop losses, as a result of adverse rainfall. Insurance is offered to large, small and marginal farmers both for loanees and for non-loanee. However, it is compulsory for loanee farmers.
The scheme offers coverage to both short-sowing periods and entire crop seasons. However, farmers must choose between either the `sowing failure' insurance or the full season option. The latter is split into two options - seasonal rainfall cover and rainfall index insurance cover.
The insurance period lasts from June to September for short-duration crops, from June to October for medium-duration crops and June to November for long-duration crops. But this period of insurance differs from State to State, since the cropping and land-use pattern also changes. In the case of the sowing failure option, the insurance lasts from June 15 to August 15.
Under this scheme, the sum insured is pre-specified, which lies between the cost of production and the value of production. And the premium rates are flexible, between 4 and 7 per cent.
Under the `seasonal rainfall' option, farmers are covered against adverse deviations of 20 per cent and more between the `actual' rainfall and `normal' rainfall. These figures are calculated cumulatively in millimetres. Actual rainfall is the amount of rain (in mm) calculated from June to November for the longer duration crops, from June to September or October for short, and medium duration crops, respectively.
The payout structure is based upon the `yield output elasticity'. The claims are also settled on the basis of a graded scale. The different slabs correspond to different degrees of adverse deviation in actual rainfall. However, if the adverse deviation (shortfall) touches 80 per cent, then the full sum assured is given to the insured.
Farmers can also opt for the rainfall distribution index, where they are covered against deviations of 20 per cent or more in the actual rainfall index from the normal rainfall index.
This index is constructed in such a way that it assigns key factor weights for the area's weekly rainfall within the season. These weights are based on yield response factors (these are based on research conducted by the Food and Agriculture Organisation) and the Crop Weather Calendar, which is issued by the IMD.
The claims shall be settled according to slabs that correspond to different degrees of adverse deviation in the actual rainfall index. The entire sum assured is given if the adverse deviation (shortfall) touches 90 per cent.
The `sowing failure' option is offered against an adverse rainfall deviation of 40 per cent or more between the actual (in mm) and the normal rainfall. The time period taken into account here is June 15 to August 15. The sum insured is the maximum input cost incurred by the cultivator per hectare until the end of the sowing period. This is a pre-specified sum and the claims are also settled according to a graded scale, depending on the degree of rainfall deviation. Under this option, the complete sum assured is given out if there is a deviation of 80 per cent or more.
The procedure for working out the claims is automated. The farmers need not submit loss information or claims intimation. Claims are paid on the basis of actual rainfall data, starting from one month after the end of the indemnity period.
Varsha Bima also takes into account the fact that there is very little connection between rainfall predictions made on an all-India basis and the actual rainfall in different regions. Therefore, premium rates also vary according to local rainfall distribution and based on crop sensitivity to rainfall.
The scheme gives farmers the option of group insurance, so that a group of cultivators can opt for Varsha Bima or SSK by submitting a single crop-wise proposal, followed by a summary sheet containing details of each insured individual.
Under Varsha Bima, all insurance products must be bought before June 30. However, there is one caveat. Farmers who buy Varsha Bima cannot simultaneously take other crop insurance schemes for the same crop in the same area, and for the same time period.
In the meantime, the AIC is planning special products for specific crops such as coffee (to be implemented in Karnataka), Basmati rice and poppy. The AIC is also planning to cover perennial crops, plantation crops, vegetables, medicinal and aromatic plants.
The AIC, which is not taking any financial support from the government for this scheme, plans to sell Varsha Bima through an existing network of rural finance institutions (RFIs). The cultivators who seek insurance cover must have a bank account at the nearest RFI branch, which can facilitate all the insurance transactions. Direct marketing will also be promoted depending on the availability of a marketing network. The AIC plans to take help from formal and informal institutions that are already working in rural areas, including non-governmental organisations (NGOs) and self-help groups (SHGs), as well as farmers' associations, to help promote agricultural insurance.
So far, Varsha Bima is viewed as a scheme still evolving. There are efforts to expand its scope further. For instance, the AIC has been considering ways and means to extend the scheme to labourers.
GROWTH of the agricultural sector in India is not just a desirable end but an imperative, since it supports the majority of the workforce and contributes 22 per cent to the gross domestic product (GDP). The Planning Commission had commented on the impact of agricultural growth on poverty eradication. To ensure food security in 2050, the overall sown area needs to be increased to 145 million hectares, while the crop intensity must increase by 145 per cent just to meet the country's foodgrain requirements.
However, food security for the nation must be accompanied by financial security for the producers of food. Unfortunately, in India, the rural economy is very fragile, since 65 per cent of the agricultural sector is dependent on natural factors, especially rainfall.
As a result, farmers are often debt-ridden and extremely vulnerable to destitution. Clearly, the need for insurance in the agricultural sector cannot be stressed enough.
The idea of crop insurance germinated as early as the beginning of the 20th century. Leaders had been talking about it since Independence; but it has taken several decades of surveying, political decision-making, planning and experimentation with smaller schemes, before we had recourse to a wide-coverage crop insurance facility.
Soon after Independence, the Ministry of Food and Agriculture took steps to introduce crop and cattle insurance and commissioned a special study. The major subject of debate then was whether to adopt a homogenous approach or an individual one. If an individual approach was chosen, then each farmer would be fully compensated, depending on the extent of loss. The premium would also depend on how much his yield has been in previous years.
This option would require, however, that each farmer's crop yields be recorded in detail, every season, over a sufficiently long period, before a fair amount of premium could be decided upon.
On the other hand, the homogenous `area' option takes into account the fact that enough reliable data on each farmer is not available. Therefore, each `area' would be taken into consideration as a basic unit. This area would include villages that are similar from the perspective of crop production and which have similar variations.
A 1947 study had reported in favour of the `homogenous area' approach. In such cases, the entire unit would pay the same rate of premium and get the same coverage benefits. The Ministry did circulate this scheme but most of the States refused to accept it.
Later, in 1965, the Central government introduced a Crop Insurance Bill. The Bill provided for a re-insurance scheme, where the Central government would cover the indemnity obligations of the States. A model scheme of crop insurance on compulsory basis was circulated among various State governments. Again, none of the States agreed since the financial obligations were too high.
After this, there were a few experiments with crop insurance schemes, mostly on a limited scale and in a rather ad-hoc and scattered manner. In 1972, the general insurance business was nationalised, and, through an Act of Parliament, the General Insurance Corporation of India (GIC) was set up. The new entity began by taking over a small experimental scheme introduced specially for H-4 cotton. It was later expanded to include groundnut, wheat and potato crops. It was being implemented only in Gujarat, Maharashtra, Tamil Nadu, Andhra Pradesh, Karnataka and West Bengal.
This scheme was offered until 1979, but it only managed to insure 3,110 farmers, for a premium of Rs.4.54 lakhs. The claims settled amounted to Rs.37.88 lakhs.
After this, the GIC commissioned a study by well-known agricultural economist Professor V.M. Dandekar. Based on his recommendations, a pilot crop insurance scheme (PCIS) was introduced.
This scheme was based on the area approach. It covered cereals, millets, oilseeds, cotton, potato and gram. But it was limited to loanee farmers on an entirely voluntary basis. The financial risks were being shared between GIC and various State governments, on a 2:1 basis. The maximum sum insured was 100 per cent of the crop loan, which was later increased to 150 per cent. The PCIS was implemented in 13 States and carried on until 1984-85.
In 1985, a scheme called the All-Risk Comprehensive Crop Insurance Scheme (CCIS) was launched, to protect major crops. The scheme was optional for the State governments, and 15 States and two Union Territories finally implemented it. The scheme was linked to short-term crop credit and used the homogeneous area approach. It was compulsory for farmers who had taken crop loans from financial institutions.
At this time, attempts were being made to modify CCIS on the basis of demands of the States. In 1997, the Experimental Crop Insurance Scheme (ECIS) was introduced during the rabi season in 14 districts. The scheme was supposed to cover only small and marginal farmers, giving them a 100 per cent subsidy in premium, to be borne by the Central and State governments on a 4:1 basis. But this scheme lasted one season because of administrative and financial difficulties.
These schemes were replaced by the National Agricultural Insurance Scheme (NAIS) in 1999-2000. The NAIS is administered by the Ministry of Agriculture and implemented by the GIC. It covers all food crops, oilseeds and commercial and horticultural crops. During the first year of implementation, cotton, sugarcane and potato were covered, while four more crops were added in the second year - onion, chillies, turmeric and ginger. In the third year, jute, tapioca, annual banana and pineapple were also brought under its purview. This is a nation-wide crop insurance programme offering yield protection, and is being implemented in 23 States and two Union Territories.
The NAIS covers the most number of farmers in the world. Overall, it covers over 30 crops during the kharif season and over 25 crops during the rabi season. Since its inception the scheme has offered coverage to 46.21 million farmers. The total sum insured for the year came to Rs.40,298 crores, with premiums worth Rs.1,243 crores earned. The claims settled that year amounted to Rs.4,991 crores.
GRADUALLY, the government saw the need for more evolved forms of crop insurance in the country and the need for a specialised entity to plan and implement such schemes. With this need in sight, the AIC was set up in December 2002. The newly formed company took over crop insurance activities from the GIC, in April 2003.
The AIC is promoted by the GIC, which holds 35 per cent, the National Bank for Agriculture and Rural Development (NABARD), which holds 30 per cent, and four public sector general insurance companies, which hold 8.75 per cent each. The AIC has an authorised share capital of Rs.1,500 crores, and an initial paid-up capital of Rs.200 crores.
The number of farmers it has insured has gone up from 12 million during 2002-03 to 18 million during 2004-05, an increase of 50 per cent.
The only major private player in the insurance industry to offer agricultural insurance is ICICI Lombard, which is believed to have insured about one lakh farmers against crop failure.
In the current scenario, the AIC is the largest body offering insurance cover to cultivators in India. Apart from more recent schemes such as Varsha Bima and SSK, the NAIS is also being continued.
Since its formation the AIC has also implemented various other crop-related insurance schemes such as the Farm Income Insurance Scheme (FIIS), launched in the rabi season of 2003-04.
The AIC is currently working towards the expansion of the areas covered by its schemes. It is also trying to spread awareness through crop insurance education programmes. It has set up a research and development department as part of the attempt to design farmer-friendly and affordable insurance products.
It is already using remote-sensing technology for crop insurance, as was done in six districts of Andhra Pradesh, Gujarat, Karnataka and Maharashtra. This involves acreage estimation, stress detection, crop health and yield modelling.
Currently, each State has its own way of measuring land units and these variations, along with sociological factors, have been taken into account now. The unit of insurance in Andhra Pradesh, for instance, is a mandal or a group of mandals. In Assam, it is a circle, or a group of circles. In Chhattisgarh, it is the tehsil, and in Goa, it is the taluk. In Pondicherry, it is the commune panchayat. In Karnataka, it may be the tehsil or the hobli. But in Bihar, the unit is the block, for paddy and the district, for maize. In Uttaranchal, there are different units for the hills and the plains.
The AIC is planning to expand further the coverage area of the NAIS. It will try to bring all eligible crop loans and more areas, into its fold over the next three to five years. Towards this end, the AIC is investing in publicity and awareness programmes, so that even non-loanee farmers get insured. The NGO network, micro-finance agencies and rural cooperatives will be used for achieving this goal.
The other need of the moment is to devise a wide range of rural insurance schemes, catering to specific regional needs. Coffee insurance has already been launched. Horticulture and floriculture will be next. Research is under way for a tea insurance product based on IMD data, soil type and satellite images that convey the leaf area index.
The AIC further plans to tie up with sponsoring agencies in related industries, such as sugarcane factories and other agro-based industries. Efforts are being made to cover contract farming as well as corporate farming.