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IGIDR-IFPRI- Agricultural Income Insurance Scheme- KV Gouri, BASIX
The document discusses agriculture income insurance in India, highlighting its importance for the livelihoods of farmers who constitute a significant portion of the workforce and GDP. It outlines various crop insurance schemes and risk mitigation mechanisms, emphasizing the role of insurance in protecting farmers from income volatility due to climatic and market uncertainties. The effectiveness and management of these insurance schemes depend on decentralization, accurate yield and price measurement, and addressing challenges such as adverse selection and moral hazard.
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IGIDR-IFPRI- Agricultural Income Insurance Scheme- KV Gouri, BASIX
- 1. Agriculture Income InsuranceScheme IGIDR-IFPRI Conference Delhi, July 24, 2014
- 2. Agriculture in India •Agriculture provides livelihood for two- thirds of the country’s population • It contributes to 15% of Indian GDP • Provides employment to 57% of the workforce • Raw material source for large number of Industries 2
- 3. Agriculture in India PolicyConcerns: To ensure that livelihoods of the people dependent on Agriculture are preserved Traditional Approaches: Improving Productivity through better variety of seeds, Increase land under irrigation, ensure marketing of produce Support Mechanisms: Minimum Support Price Insurance Schemes 3
- 4. Risks in Agriculture ProductionRisks • Weather and Climatic aberrations • Pest and disease attacks • Improper farming practices Output Risks • Price volatility • Policy related 4
- 5. Risk Mitigation Mechanisms thatdealt with income volatility Yield insurance Crop Insurance Schemes Drought Insurance Rainfall Insurance Price insurance Minimum support price Governments to buy and hold stock for price stabilization 5
- 6. Risk Mitigation throughInsurance Agricultural insurance • Addresses the risk to output and income resulting from various natural and manmade events. • Plays an important role in sharing the risks of farmers in an affordable form. • Helps the farmers to quickly recover from damages and losses. • Promotes savings and investment as regular premium paid for it. • Farmers can get loans against the security of insurance policy from insurance companies and banks. 6
- 7. Agriculture Insurance Schemesin India • National Agriculture Insurance Scheme (NAIS) Covers crop failure due to natural calamities • Farm Income Insurance (Discontinued) Protection by insuring production and market risks (yield & Price). Ensures minimum guaranteed income • Comprehensive Crop Insurance scheme Insurance linked to credit. Low premiums. Covers upto 100 % loan • Weather Based Crop Insurance Scheme (WBCIS) Insurance of losses due to vagaries of weather 7
- 8. Support Mechanisms Price &Non-Price instruments to support farmer’s Income • Subsidies on inputs (especially fertilizer, water, power and credit) • Mechanism for determining fair price (CACP). • Comprehensive Crop Insurance Schemes • Procurement systems for major cereals and maintenance of buffer stock. • PDS to provide stable demand to farmers and supplies at constant controlled price to consumers. • Tariff policies to protect domestic producers from unregulated flows of agricultural commodities. 8
- 9. Agriculture Income Insurance Income=Yield x (Price-Cost) per ton Insuring Yield , Income or Price? 9
- 10. Agriculture Income Insurance To protect against Production Risk To protect against price and market risks 10
- 11. Agriculture Income Insurance CANADABRAZIL CHINA Name of Insurance Scheme Farm Income Protection Act Income Insurance Program China Agriculture Insurance Scheme Features Covers both agriculture and livestock. Guarantees an income based on the premium paid by the farmer. Productivity coverage with a price guarantee is offered by a private insurer Covers both agriculture and livestock, but coverage is taken mainly for livestock Funding Source Private. However, premium subsidy program launched in 2007 to increase coverage Private, But premium subsidy program launched in 2005 to increase offtake Private, but premium subsidy provided by government in 2007 to increase coverage. Government covers approximately 80% of total premium What is covered Total Income of farmer can be covered, but coverage can be selected based on risk appetite of the farmer Total income of farmer based on productivity as well as historical prices Total income from damage of crops or loss of livestock Coverage Five provinces in Canada presently offer this insurance for farmers About 10% of the total planted area of Brazilian agriculture Administered by provincial governments. Coverage remains patchy. Cost Premium is approximately between 2% and 8% of the total sum assured Premium is approximately 9% of the total sum assured 8- 10% of total sum assured. 11
- 12. Agriculture Income Insurance Featuresof the Agri Income Insurance • Protects farm incomes-Guaranteeing income to farmers • Ensure Sustainable production by encouraging long-term investment • Enhance Food and Livelihood security • Encourage Crop diversification • Increase Competitiveness 12
- 13. Agriculture Income Insurance Whichis the best insurance mechanism? Yield, Price or Income ? Since aggregate price and aggregate yield are inversely correlated , we hypothesise σ income =<σ yield x σ price Therefore overall claims under farm insurance scheme will be lower than either yield or price insurance 13
- 14. Agriculture Income Insurance Howexpensive will the Scheme be? It is an opportunity to target those who need subsidy most. Targeting the small and marginal farmers with capping on sun assured allows reduced expenditure than other type of subsidies such as input subsidies which increases use of inputs and over production 14
- 15. Agriculture Income Insurance Howwill the scheme be managed? • Administered by state Governments with significant level of decentralization • Yield assessment by gram panchayats vetted through process of social audit or community audit • Use Farmer Producer organizations (FPOs) as vehicles for delivery 15
- 16. Agriculture Income InsuranceScheme How will the pay-outs be determined Expected Pay-out (EP) = SA x DF x (EI-AI)/EI SA-Sum Assured, will have a upper limit to cover only small and marginal farmers DF-Discount factor by Insurance Company EI-Estimated Income for that season assured on the basis of yield and price measurement AI-Average Income is the long-term average income of a farmer 16
- 17. Agriculture Income InsuranceScheme Measurement of yield • Yield would be measured on the basis of a pre- agreed weather index which is highly correlated with past yields, such as rainfall total or by period. Measurement of Price • Price would be measured as the average price prevailing in three pre-agreed accessible mandis for seven days before the pre-agreed pay-out date. 17
- 18. Agriculture Income InsuranceScheme Total Premium : The total premium to the Insurance company should cover the total pay-out, operating costs and profit Total Premium= EP+OC+∏ 18
- 19. Agriculture Income InsuranceScheme Farmer’s Premium : The premium payable by the farmer is dependent on the probability of the expected income falling below Average Income which is a multiple of the probability of yield falling below threshold yield based on weather index and probability of price falling below certain level in three pre-agreed mandis for seven days before the pre- agreed pay-out date Р income = Р yield x Р price 19
- 20. Agriculture Income InsuranceScheme Unit of Insurance: Per acre, Per crop for specific piece of land Cut off yield is required to decide whether crop is eligible to be classified as yield shortfall measured on the basis of pre agreed weather index correlated to past yields Price shortfall is measured as average price prevailing in three pre agreed mandis for seven days before the pre agreed pay out date 20
- 21. Agriculture Income InsuranceScheme Product to cover expected income and actual income Product to cover all or any causes for the gap viz.Yield shortfall and Price shortfall Causes for yield shortfall: Drought, Flood, Winds, Hail storms, pest attack, disease incidence, fire, theft, cattle grazing etc. Causes for Price shortfall: Excess supply due to bumper crop, imports, banning of exports, withdrawal of MSP. 21
- 22. Agriculture Income InsuranceScheme Critical aspects for success of the scheme For a success of a insurance scheme, it is critical that a large pool of farmers register who have different levels of risk. It is therefore necessary to avoid Adverse selection: Refers to a situation when farmers who more likely need insurance self- select themselves for the insurance policy. Moral hazard : Situation where farmer sees little or no incentive to keep risks of farming methods low as the insurance policy already covers the risks 22
- 23. Agriculture Income Insurance Advantages •Direct Income benefit to farmers through cash transfers • Guaranteed income to farmers that acts as incentive to invest in farming • Can promote sustainable farming • Ensures minimum living income to small and marginal farmers to move out of vicious circle of poverty • Can reduce Input subsidy burden on the Government 23
- 24. Agriculture Income InsuranceScheme What Income Insurance aims at 24 Low/Uncertain Income Low Investment Low Savings Low Productivity Income Insurance