Lecture No 17: Crop Insurance –schemes, coverage, advantages and limitations in

application, estimation of crop yields - Assessment of crop losses, determination of

compensation. Livestock Insurance Schemes.

Insurance-meaning
Insurance is a legal contract that transfers risk from a policy holder to an insurance
company in exchange for a premium.
Risk: The possibility of financial loss
Policyholder: The person who has purchased and owned an insurance policy.
Insurance Company: A company that provides the insurance coverage for its
policyholders
Premium: The cost of insurance

Crop Insurance

Crop insurance is an arrangement aiming at mitigating financial losses suffered by the

farmers due to damage and destruction of their crops as a result of various production
risks. It is undertaken by agricultural producers, including farmers, ranchers, and others
to protect themselves against either the loss of their crops due to natural disasters, such as
hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural
commodities.

Various Crop Insurance Schemes implemented in India

 First Individual Approach Scheme 1972-1978

 Pilot Crop Insurance Scheme (PCIS) 1979-1984
 Comprehensive Crop Insurance Scheme (CCIS) 1985-99
 National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana): 1999-2000
 Weather Based Crop Insurance Scheme (WBCIS): 2007
 Coconut Palm Insurance Scheme (CPIS): 2009-10
 Modified National Agricultural Insurance Scheme (MNAIS) -2010-11
 National Crop Insurance Programme (NCIP)
 NCIP was launched by the Indian Govt. in 2013 by merging 3 earlier schemes : 
o Modified National Agricultural insurance Scheme (MNAIS)
o Weather Based Crop insurance Scheme (WBCIS)
o Coconut Palm Insurance Scheme (CPIS).

First component MNAIS will be replaced by Pradhan Mantri Fasal Bima

Yojana (PMFBY) in June 2016.
1. First Individual Approach Scheme 1972-1978
 The Scheme was implemented in Andhra Pradesh, Gujarat, Karnataka,
Maharashtra, Tamil Nadu and West Bengal.
 Crops covered : H-4 cotton, groundnut, wheat and potato.
 It continued up to 1978-79 and covered only 3,110 farmers for a premium of
Rs.4.54 lakh against claims of Rs.37.88 lakh.
2.Pilot Crop Insurance Scheme (PCIS) 1979-1984
Following Prof. Dandekar’s suggestion, GIC prepared a crop insurance scheme
based on the area approach and put it into operation from 1979–80.
 Launched by the GIC in 1979, which was based on the ‘Area Approach’ for
providing insurance cover against a deficit in crop yield below the threshold
level.
 Crops covered: Cereals, millets, oilseeds, cotton, potato and chickpea
 Confined to loanee farmers of institutional sources on a voluntary basis.
 Implemented in 12 states till 1984-85 and covered 6.23 lakh farmers for a
premium of Rs.195.01 lakh against claims of Rs.155.68 lakh during the entire
period.
3.The Comprehensive Crop Insurance Scheme (CCIS)
The Government of India introduced CCIS in the financial year 1985–86. Operated
by GIC in collaboration with the respective State governments, the scheme covered
cereals, pulses and oilseeds. Crop insurance was linked to institutional credit; farmers who
availed themselves of loans for specified crops were eligible for insurance coverage.
Once it was operational, participation of farmers taking out short-term crop loans
from credit institutions was compulsory. The indemnity and premium were shared by the
Central and the State governments in the ratio of 2:1. In pilot crop insurance scheme, the
participation by farmers was voluntary, whereas in CCIS scheme, it was compulsory.
The scheme was based on the area approach. Area units called “defined areas”
were identified for the purpose of assessing the indemnity. A defined area could be a
district, a taluka, a block or any other contiguous area.
The actual average yield per hectare of the defined area was determined on the
basis of crop-cutting experiments. If the actual yield of an insured crop would fall short of
the specified TY, for the area, all insured farmers growing that crop in that area would be
deemed to have suffered the shortfall in the respective yield and entitled to receive the
indemnity.
4.WEATHER BASED CROP INSURANCE SCHEME (WBCIS) - 2007
The basic approach of “weather index” insurance is to estimate the percentage
deviation in crop output due to adverse deviations in weather conditions.
Objective: To bring more farmers under the fold of Crop Insurance
The WBCIS is intended to provide insurance protection to the farmers against
adverse weather incidences, such as deficit and excess rainfall, high or low temperature,
humidity etc. which are deemed to impact adversely the crop production.
Advantage: To settle the claims within shortest possible time.
The WBCIS is based on actuarial rates of premium but to make the Scheme
attractive, premium actually charged from farmers has been restricted at par with NAIS8.
The WBCIS was implemented in 18 States and 469.38 lakh farmers were covered for a
premium of Rs.7,51,920 lakh against the claims of Rs. 52,860 lakh under the Scheme from
2007-08 to 2012-13. The total area insured was 632.01 lakh hectares during the same period

5.National Agricultural Insurance Scheme (NAIS)

(Rashtriya Krishi Bima Yojana - RKBY)
Objectives
 To provide insurance coverage and financial support to the farmers in the event of
failure of any of the notified crop as a result of natural calamities, pests & diseases.
 To encourage the farmers to adopt progressive farming practices, high value in-
puts and higher technology in Agriculture.
 To help stabilise farm incomes, particularly in disaster years.

Salient Features of the NAIS Scheme

1. Crops Covered:
Food crops (Cereals, Millets & Pulses),    Oilseeds, Sugarcane, Cotton & Potato     
(Annual Commercial / annual Horticultural crops)
2. States and Areas to be covered
The Scheme extends to all States and Union Territories. The States / UTs opting for the
Scheme, would be required to take up all the crops identified for coverage in a given year.
3. Farmers to be covered
All farmers including sharecroppers, tenant farmers growing the notified crops in the
notified areas are eligible for coverage.
The Scheme covers following groups of farmers:
On a compulsory basis: All farmers growing notified crops and availing Seasonal
Agricultural Operations (SAO) loans from Financial Institutions i.e. Loanee Farmers.
On a voluntary basis: All other farmers growing notified crops (i.e., Non-Loanee farmers)
who opt for the Scheme.

4. Risks Covered & Exclusions

Comprehensive risk insurance will be provided to cover yield losses due to non-
preventable risks, viz.:
 Natural Fire and Lightning
 Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane, Tornado etc.
 Flood, Inundation and Landslide
 Drought, Dry spells
 Pests/ Diseases etc.
 Losses arising out of war & nuclear risks, malicious damage & other preventable
risks shall be excluded.
5. Sum Insured / Limit of Coverage
The Sum Insured (SI) may extend to the value of the threshold yield of the insured crop at
the option of the insured farmers. However, a farmer may also insure his crop beyond
value of threshold yield level upto 150% of average yield of notified area on payment of
premium at commercial rates.
6. Premium Rates
S.No Season Crops Premium rate
1 Kharif Bajra & Oilseeds 3.5% of SI or Actuarial rate,
whichever is less
    Other crops (cereals, other millets 2.5% of SI or Actuarial rate,
& pulses) whichever is less
2 Rabi Wheat 1.5% of SI or Actuarial rate,
whichever is less
    Other crops (other cereals, 2.0% of SI or Actuarial rate,
millets, pulses & oilseeds) whichever is less
3 Kharif & Annual Commercial / annual Actuarial rates
Rabi Horticultural crops

7. Premium subsidy
50% subsidy in premium is allowed in respect of Small & Marginal farmers, to be shared
equally by the Government of India and State/UT Govt.
8. Sharing of Risk
Risk will be shared by Implementing Agency (IA) and the Government in the following
proportion:
Food crops & Oilseeds: Till, complete transition to Actuarial regime in a period of five
years takes place, claims beyond 100% of premium will be borne by the Government.
Thereafter, all normal claims, i.e. claims upto 150% of premium will be met by IA and
claims beyond 150% shall be paid out of Corpus Fund for a period of three years. After
this period of three years claims upto 200% will be met by IA and above this ceiling, out of
the Corpus Fund.

(b)Annual Commercial crops / annual Horticultural crops: Implementing Agency shall

bear all normal losses, i.e. claims upto 150% of premium in the first three years and 200%
of premium thereafter subject to satisfactory claims experience. The claims beyond 150%
of premium in the first three years and 200% of premium thereafter shall be paid out of
Corpus Fund. However, the period of three years stipulated for this purpose will be
reviewed on the basis of financial results after the first year of implementation and the
period will be extended to five years if considered necessary.

To meet catastrophic losses, a Corpus Fund shall be created with contributions from the
Government of India and State Govt / UT on 50:50 basis. A portion of Calamity Relief
Fund (CRF) will be used for contribution to the Corpus Fund.

9. Area approach and Unit of Insurance

The Scheme would operate on the basis of ‘Area Approach’ i.e., Defined Areas for each
notified crop for widespread calamities and on an individual basis for localized
calamities such as hailstorm, landslide, cyclone and flood.

10. Estimation of Crop Yield

The State/UT Govt. will plan and conduct the requisite number of Crop Cutting
Experiments (CCEs) for all notified crops in the notified insurance units in order to assess
the crop yield.
11. Levels of Indemnity & Threshold Yield
Three levels of Indemnity, viz., 90%, 80% & 60% corresponding to Low Risk, Medium Risk
& High Risk areas shall be available for all crops (cereals, millets, pulses & oilseeds and
annual commercial / annual horticultural crops) based on Coefficient of Variation (C.V) in
yield of past 10 years’ data. However, the insured farmers of unit area may opt for higher
level of indemnity on payment of additional premium based on actuarial rates.
12. Nature of Coverage and Indemnity
If the ‘Actual Yield’ (AY) per hectare of the insured crop for the defined area [on the basis
of requisite number of Crop Cutting Experiments (CCEs)] in the insured season, falls short
of the specified ‘Threshold Yield’ (TY), all the insured farmers growing that crop in the
defined area are deemed to have suffered shortfall in their yield. The Scheme seeks to
provide coverage against such contingency.
‘Indemnity’ shall be calculated as per the following formula :
Shortfall in Yield
Indemnity = x Sum insured
Threshold Yield
Shortfall in yield = Threshold Yield - Actual Yield

6.Modified National Agricultural Insurance Scheme (MNAIS)

MNAIS was initiated during the 11th Plan from Rabi 2010–11 on pilot basis on the
recommendation of the Government of India Joint Group, in 50 districts. The salient
features of MNAIS are as under: Actual premium, with subsidy in premium ranging up
to 75 per cent to all farmers Only upfront premium subsidy is shared by the Central and
State government on 50:50 basis; all claims liability is on the insurance company Unit area
of insurance is reduced to village/village panchayat level for major crops. More realistic
basis for TY calculation; and minimum indemnity level increased to 70 per cent, from 60
per cent in NAIS. Like NAIS, MNAIS is compulsory for loanee farmers and voluntary
for non-loanee farmers.
Private-sector participation to create a competitive crop insurance environment Setting
up a catastrophe-relief fund at the national level, with 50:50 contributions from the Central
and State governments, to provide protection to the insurance companies in the event of
premium to claim ratio exceeding 1:5 at the national level and failure to procure
appropriate reinsurance cover at competitive rates.
7.National Crop Insurance Programme (NCIP)
The Government of India has discontinued NAIS from Rabi 2013–14, with the
exception of a few States for one season only, and launched NCIP from November 2013. In
the new programme, WBCIS, MNAIS and Coconut Palm Insurance Scheme (CPIS) are
included as full-fledged schemes with certain modifications over their pilots. Farmers
are entitled to maximum premium subsidy up to 50 per cent under WBCIS and 75 per cent
under MNAIS on a graded scale. Premium rates have been capped according to the type
of crop and season, and in cases where the actuarial premium rates are higher than the
capped limit, the sum insured for such crops will be reduced in proportion to the cap
level.

PRADHAN MANTRI FASAL BIMA YOJANA (PMFBY)

OBJECTIVES:
 Providing financial support to farmers suffering crop loss/damage arising out of
unforeseen events

 Encouraging farmers to adopt innovative and modern agricultural practices

 Stabilizing the income of farmers to ensure their continuance in farming

  Ensuring flow of credit to the agriculture sector; which will contribute to food
security, crop diversification and enhancing growth and competitiveness of
agriculture sector besides protecting farmers from production risks.

CROPS COVERED:
The Scheme can cover all the Crops for which past yield data is available and grown
during the notified season, in a Notified Area and for which yield estimation at the
Notified Area level will be available based on requisite number of Crop cutting
Experiments (CCEs) being a part of the General Crop Estimation Survey (GCES).

NOTIFIED AREA:
Notified Area is the Unit of Insurance decided by the State Govt. for notifying a
Crop during a season. The size of the Unit of Insurance shall depend on the area under
cultivation within the unit. For major crops, the Unit of Insurance shall ordinarily be
Village/Village Panchayat level and for minor crops may be at a higher level so that the
requisite number of CCEs could be conducted during the notified crop season.

FARMERS TO BE COVERED: All farmers growing notified crops in a notified area

during the season who have insurable interest in the crop are eligible.
COMPULSORY COVERAGE: The enrolment under the scheme, subject to possession of
insurable interest on the cultivation of the notified crop in the notified area, shall be
compulsory for following categories of farmers:
 Farmers in the notified area who possess a Crop Loan account/KCC account
(called as Loanee Farmers) to whom credit limit is sanctioned/renewed for
the notified crop during the crop season and such other farmers whom the
Government may decide to include from time to time.
ESTIMATION OF CROP YIELD:
The State/UT Govt. will plan and conduct the requisite number of Crop Cutting
Experiments (CCEs) for all notified crops in the notified insurance units in order to assess
the crop yield. The State / UT Govt. will maintain single series of Crop Cutting
Experiments (CCEs) and resultant Yield estimates, both for Crop Production estimates and
Crop Insurance.
RISKS TO BE COVERED & EXCLUSIONS
1.YIELD LOSSES :
Comprehensive risk insurance is provided to cover yield losses due to non-
preventable risks, such as
(i) Natural Fire and Lightning
(ii) Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane, Tornado
(iii) Flood, Inundation and Landslide
(iv) Drought, Dry spells
(v) Pests/ Diseases etc.
2. PREVENTED SOWING :
In cases where majority of the insured farmers of a notified area, having intent to
sow/plant and incurred expenditure for the purpose, are prevented from sowing/
planting the insured crop due to adverse weather conditions, shall be eligible for
indemnity claims upto a maximum of 25% of the sum-insured.
 3. POST-HARVEST LOSSES :
Coverage is available upto a maximum period of 14 days from harvesting for those
crops which are kept in “cut & spread” condition to dry in the field after harvesting,
against specific perils of cyclone / cyclonic rains, unseasonal rains throughout the country.
4. LOCALISED CALAMITIES (individual farm basis):
Loss / damage resulting from occurrence of identified localized risks i.e. hailstorm,
landslide, and Inundation affecting isolated farms in the notified area.
5. SHARING OF RISK:
Risk will be shared by Implementing Agency and the Government as follows:
The liability of the Insurance companies in case of catastrophic losses computed at
the National level for an agricultural crop season, shall be upto 35% of total premium
collected (farmer share plus Govt. subsidy) or 35% of total Sum Insured (SI), of all the
Insurance Companies combined, whichever is higher. The losses at the National level in a
crop season beyond this level shall be met by equal contribution (i.e. on 50:50 basis) from
the Central Government and the concerned State Governments.
CHALLENGES IN THE IMPLEMENTATION OF PMFBY
• Extension of cut off dates
• Actuarial Premium rates and premium subsidy
• Inadequate insurance coverage
• Insufficient and inefficient CCEs
• Assessment and payment of claims
LIMITATIONS IN IMPLEMENTATION OF CROP INSURANCE SCHEMES IN
INDIA:
• Low penetration of agricultural insurance
• Premium and sum insured related issue
• Delay in assessment and settlement of claim
• Area discrepancy
• High Actuarial Premium Rates
• Faulty Product Design
• Ethical Issues

CHALLENGES IN IMPLEMENTATION OF CROP INSURANCE SCHEMES IN

INDIA:
• Coverage of non loanee farmers:
• Lack of awareness:
• Low coverage in rainfed & remote areas
• Delayed/ non-payment of claims
• Discrepancy in area insured.
• Delay in receiving crop – cutting data and quality and reliability of such data.

Agriculture Insurance Company of India (AIC) Limited:

Agriculture Insurance Company of India Limited (AIC) had been formed by the
Government of India in 2003 to subserve the needs of farmers better and to move towards a
sustainable actuarial regime. It was proposed to set up a new corporation for agriculture Insurance.
AIC has taken over the implementation of National Agricultural Insurance Scheme (NAIS) which
until 2003 was implemented by General Insurance Corporation of India. In future, AIC would also
be transacting other insurance businesses directly or indirectly concerning agriculture and its allied
activities.
Agriculture Insurance Company of India Limited is a public sector undertaking with
headquarters at New Delhi. It currently offers area based and weather based crop insurance
programs in almost 500 districts of India. It covers almost 20 million farmers, making it one of the
biggest crop insurers in the world.
Agriculture Insurance Company of India Ltd (AIC) is promoted by General Insurance
Corporation of India (GIC), NABARD and the 4 public sector general Insurance companies. AIC
has taken over the implementation of National Agricultural Insurance Scheme (NAIS) in 2003
which until the financial year 2002 – 03 was implemented by GIC.
AIC is under the administrative control of Ministry of Finance, Government of India, and
under the operational supervision of Ministry of Agriculture. Insurance Regulatory and
Development Authority, Hyderabad, is the regulatory body governing AIC.

Main objective of AIC:

To provide financial security to persons engaged in agriculture and allied activities through
insurance products and other support services.
Share Capital
 Authorized share capital - Rs. 1500 crores
 Paid-up share capital - Rs. 200 crores
Promoted by:
 General Insurance Corporation of India - share holding: 35 %
 National Bank for Agriculture And Rural Development (NABARD) - share holding: 30 %
 National Insurance Company Ltd - share holding: 8.75 %
 New India Assurance Company Ltd- share holding: 8.75 %
 Oriental Insurance Company Ltd - share holding: 8.75 %
 United India Insurance Company Ltd.- share holding: 8.75%

Project
A project is an integrated approach indicating all the requirements, right from the investment
stage to the marketing stage of farm produce and repayment of loan
Preparation of a project is one among several exercises namely identification of national
objectives, selection of area for investment, designing price policies, mobilizing resources,
ascertaining the availability of infrastructure etc., that facilitates the agricultural development.
Agricultural project involves, investment activities, where capital resources are expended to
create a producing asset from which benefits are derived over a period of time.
In the words of Price Gittinger a project is:
“ the whole complex of activities involved in using resources to gain benefits constitutes our
project. About all we can say in general about a project is that it is an activity on which we will
spend money in expectations of returns and which logically seems to lend itself to planning,
financing and implementation as a unit. It is a specific activity with a specific starting point and a
specific ending point intended to accomplish a specific objective. It is something which is
measurable both in its major costs and returns.”
Project Cycle
 While no two projects are alike, the different stages in the life of a project are interdependent.
The different stages are
1. Identification
2. Formulation
3. Appraisal
4. Execution and
5. Evaluation
Identification relates to the findings of the problems of the area and needs of the
beneficiaries/farmers. Depending on the objective of the project, identification is done.
On the basis of identification, a project has to be formulated to achieve the objective of agricultural
development. Project formulation enables to ensure efficient and economic use of capital resources
and it is carried out by taking into consideration the technical, economic, managerial,
organizational, commercial, financial and legal aspects.
Appraisal is the analysis of costs and benefits of a proposed project with the goal of assuring
a rational allocation of limited funds among alternative investment opportunities in view of
achieving certain specified goals. A careful appraisal facilitates to eliminate the flaws in the project;
indicate ways and means in which the project can be modified to improve its wealth-generating
capacity; and helps to execute project in time.
Evaluation of a project involves supervision, follow-up and monitoring. The impact of the
project is estimated through evaluation and it justifies how far the locality and the people have
benefited out of the project.
Appraisal techniques
The objective of the project appraisal is to compare costs with benefits to decide which
among alternatives yields more return to the investment. When the project lasts more than one year
or when the projects have different lifetime, they have to be compared by taking into account future
costs and benefits streams. The techniques adopted for making comparison of projects are based on
undiscounted measures and discounted measures.
There is no one best technique for estimating project worth. The aforesaid measures are only
a tool of decision making. There are many non quantitative and non economic criteria for making
project decisions (Price Gittinger). The technique discussed here is only to improve the decision
making process. Various undiscounted measures are discussed in this exercise.
There are two approaches to project appraisal viz., i) Economic appraisal and ii) Financial
appraisal. The economic appraisal considers the costs and benefits from the point of view of the
society as a whole regardless of who contributes to the costs of the project and who derives benefits
from it.
In contrast, under the financial appraisal the costs and benefits are considered from the point
of view of individual entities like individuals, firms or corporate bodies.

The techniques adopted for making comparison of projects are based on

1. Undiscounted measures --- (Refer Practical)

2. Discounted measures --- (Refer Practical)

There is no one best technique for estimating project worth. The aforesaid measures are only a
tool of decision making. There are many non quantitative and non economic criteria for making
project decisions (Price Gittinger).
Evaluation of farm credit proposal. Farm Financial Statements – Balance Sheet,

Income Statement and Cash flow Statement - Financial Ratio Analysis.

 Financial Analysis involves maintaining and using records and other information
needed to measure the financial performance of the business. The most widely used
financial statements are balance sheet (net worth statement), Income statement (profit and
loss statement) and cash flow statement.

A financial statement is an official document of the firm, which explores the entire
financial information of the firm. The main aim of the financial statement is to provide
information and understand the financial aspects of the firm. Hence, preparation of the
financial statement is important as much as the financial decisions.
MEANING AND DEFINITION
According to Hamptors John, the financial statement is an organized collection of
data according to logical and consistent accounting procedures. Its purpose is to convey an
understanding of financial aspects of a business firm. It may show a position at a moment
of time as in the case of a balance-sheet or may reveal a service of activities over a given
period of time, as in the case of an income statement.
Financial statements are the summary of the accounting process, which provides
useful information to both internal and external parties. John N. Nyer defines it “Financial
statements provide a summary of the accounting of a business enterprise, the balance-
sheet reflecting the assets, liabilities and capital as on a certain data and the income
statement showing the results of operations during a certain period”.
Financial statements generally consist of the following important statements:
(i) Balance sheet
(ii). The income statement or profit and loss account.
(iii) Cash Flow Statement
Financial Analysis involves maintaining and using records and other information
needed to measure the financial performance of the business. The most widely used
financial statements are balance sheet, income statement and cash flow statement.

(Refer Balance Sheet, Income Statement and Cash Flow Statement from Practical)