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Crop Insurance In Developing Countries
Chapter 1
Introduction on Crop Insurance
1.1 Introduction
1.2 Crop Insurance – In Some Developing Countries
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1.1 Introduction
Risk is an important consideration in agriculture. Yield and price risks induce
farmers to allocate their resources conservatively. Farmers pursue more diversified
cropping patterns than is socially optimal, and they are sometimes reluctant to
adopt improved technologies because of the increased risks associated with their
use. In many regions there is also risk of widespread catastrophic losses because of
drought, flood, hail, pest, or other natural disasters. Such catastrophes can seriously
set back farm development, they can lead to difficult welfare problems for farmers
and other agriculturally dependent households, and they can cause widespread
defaulting on loans from agriculture development banks. Traditionally, farmers
have learned to cope with risks through various management practices. Risk can be
reduced through prudent husbandry techniques and through appropriate choice of
cropping patterns. Strategies such as storage, credit, and off-farm employment can
also help minimize the effects of serious crop losses when they occur. Rural
institutions have also evolved to help farmers manage risks. In industrialized
countries, market conditions often exist whereby agricultural risks can be spread to
other sectors of the economy. These include efficient credit markets, some types of
insurance, and, sometimes, commodity future markets. Such institutions are much
more rudimentary in developing countries. These practices and institutions can
reduce risks for farmers, but they never fully remove them. Crop insurance is one
of several policy instruments for managing agricultural risks. It is a special purpose
instruments – it addresses only yield risks. Therefore, it is only relevant when yield
risks, and particularly the possibility of disastrous yeilds, are the predominant
source of income variability. Even then, alternative policies may still be more
effective or cheaper.
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1.2 Crop Insurance – In Some Developing Countries:
Crop insurance is primarily a business which invloves developed country farmers.

However, some 13% of global premiums are paid in the developing world. The
aim is to illustrate the types of situations where inusrance is used, or is being
cosidered as a risk management mechanism, across a number of countries, and
involving a variety of both farming systems and agriculatural enterprises.
A. ARGENTINA
This country has many of the features of developed agriculture, so it is not
surprising that some 25% of the total crop area is insured – mostly just against hail
damage, though a start has been made to introduce multi-peril policies. The crops
concerned include soyabean, wheat, sunflower and maize (corn). Insurance on
grapevines and other fruits is also important.
The agricultural insurance business is competitive. Some 25 companies and mutual

entities operate in this area. Some of them have invested significantly in technical
expertise. For example, one company, with about 12% of the market, employs 8
fulltime agriculturalists in order to have an in – house team, both to design policies
and to manage the insurance products being sold.
B. BRAZIL
This major agricultural country has had a crop insurance progamme subidized by
the government. This has gone through some serious problems, originating from its
desire to cover too much risk too quickly. The result was that the insurer bearing
the risk had insufficient understanding of that risk – a major error for any branch of
insurance. More recent developments have progressed in a slower and better
informed manner, and have been largely led by the private sector. New style apple
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cover started in 1998, wine and table grape covers in 1999, and broad acre crops
such as soyabean, wheat and maize in 2000. Despite these developments, crop
insurance business is very small in relation to the size of the agricultural sector in
the country. Some recent developments include moves to introduce crop revenue
products, under area- based determination of loss.
C. INDIA
The crop insurance scene in India is two- pronged. One of these prongs, a
government programme that has a strong social objective, loses vast sum each
year. 4 officials are believed to be attempting to re- design this programme, in
order to make it more efficient and sustainable. The task is immense. In 2000 the
programme insured 10.5 million farmers, with a total sum insured of US$1.8
billion on 15.7 million half of crop land. On the other hand, a few insurance
companies are active in offering commercially sound insurance products,
especially geared to producers of high quality fruits, and much develpmental work
is being done in India on new products and approaches, following actuarially
sound underwriting practices.
The General Insurance Company (GIC) of India has fromed a specialist subsidiary,
Agricultural Insurance Corporation (AIC) in order to provide a company/
institutional focus for this class of business.
An interesting example of a new product is “Failed Well Insurance” the demand

for which is not surprising in a country which has in excess of 10 million pump
sets, most of which pump from boreholes and wells, and which are therefore
vulnerable to significant falls in the water table. A recent water table is that private
sector banking/ insurance interests, with some advisory assistance from the World
Bank, now offer index insurance, an insurance product cobering non- irrigated
farmers against the risk of insuffifcient rainfall during key parts of the cropping
season. The policies are offered by a commercial firm ICICI Lombard General
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Insurance and are marketed to growers through microfinance banks which are
linked to an apex microfinance entity known as BASIX (Bhartiya Samruddhi
Finance Ltd.).
D. MALAYSIA
Malaysia’s agricultural sector combines large-scale, plantation enterprises with
large number of small-scale producers. Both types have access to crop insurance,
but the larger scale farms are more likely to buy insurance. Cover is available for
oil palm, cocoa, rubber, for several species of timber tress, as well as tropical fruits
as durian, mango and mangoes teen.
As with my other countries, the Malaysian experience with crop insurance has
been mixed, but compaines are taking a professional attitude to understanding the
risks and to the design of policies accordingly. A new intiative is a possible pool of
commercial insurers to develop insurance for paddy rice.
E. MAURITIUS
A parastatal agency, the Mauritius Sugar Insurance Fund (MSIF) was established
some 50 years ago in order to provide protection to the island’s sugar farmers
against losses from cyclones. As experience has been gained, and staff trained, this
programme has gradually taken on the coverage of other risks.For example, fire
and excessive rain were added in 1974, and losses from yellow spot disease (only
in conditions of excessive rain) in 1984. The programme has also developed a
sophisticated method for rewarding growers whose claims experience has been
good for the insurer. All growers are placed, for each insurance/growth season,
somewhere on a 100 point scale. Their position on this scale determines the level
of a claim for that insurance period. The scale is dynamic with movements up and
down being dictated by claims experience.
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F. PHILIPPINES
Some 22 cyclones, on average, strike the Philippines each year, and of these four
cause significant damage. The northern and central parts of the country are more
affected than is the south, where the main perils for farmers are drought and pests.
The present crop insurance programme grew out of an agricultural guaranteed
fund, which was operated by the Land Bank of the Philippines, the principal
government bank servicing the agricultural sector. The insurance is operated by a
parastatal entity, the Philippines Crop Insurance Corporation (PCIC), which began
business in 1981, after a three year preparatory period. Designed initially to
provide risk management to borrowing farmers and their lenders, the PCIC also
offers policies to self- financed farmers. Participation in insurance is compulsory
for farmers in the higher- potential agricultural areas for two crops, maize and rice.
This element of compulsion has not resulted in a negative reaction by growers-
probably because the premiums paid to PCIC, at approximately 8% for rice and
7% for maize, are heavily subsidized, by the government and by institutional
lenders, so farmers pay only a propotion of thses amounts.
G. SYRIA
The Syrian government has investigated introducing crop insurance, and is still (in
2004) understood to be undecided as to whether to direct the state- owned
insurance company, a monopoly insurer, to develop and market crop policies. A
major constraint to the introduction ofcrop insurance is that the most important
peril by far is drought. As is well known, drought is perhaps the most difficult peril
to include in any insurance cover, especially in the early years of a programme,
when procedures are still being developed, and when staff are gaining experience.
The Sybrian position illustrates a classic dilemma that has fairly general
applicability in arid and semi-arid countries. Officials understand that drought will
be difficult to include at start of any crop insurance programme, yet are well aware
that unless insurance products cover this peril, then there will be a very negative
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reaction from farmers. This may justify investigating the applicability of one of the
new developments in crop insurance, namely index (coupon) insurance products.
Source: Strategies for Crop Insurance Planning: - Robert R.A.J. & Dick W.J.A.
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Chapter 2
Growth in Demand for Crop Insurance Products
2.1 Growth in Demand for Crop Insurance

Products
2.2 Increasing Incidence of Crop Damaging
Weather Events
2.3 Greater Commerlization of Farming /
Contact Farming
2.4 World Trade Organization
Regulations
2.5 Classic/Public Crop Insurance
Products
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2.1 Growth In Demand For Crop Insurance Products

The expected growth in demand has its origins in changes in the farming sector.
Powerful influences here are summarized below, and discussed briefly, in this
section
a. Evidence is accumulating of connections between cliate change, and the

increasing incidence of crop damaging weather events of extreme severity.
b. Farming is becoming steadily more commercialized, with greater levels of

financial investment. Farmers/investors and their banks will frequently
examine the feasibility of using a financial mechanism i.e. insurance, in
order to address part of the risk to their financial investment. As a part of
this trend to commercialization greater use is now being made of contract
farming arrangements, where insurance is one of many services provided,
along with inputs, to growers. In summary, there is a trend to formalize risk
management in farming, with insurance being one obvious mechanism
which can be harnessed for this task.
c. The World Trade Organization (WTO) regulations generally forbid

governments from subsidizing agriculture directly; however, they permit the
subsidization of agricultural insurance premiums. For those countries
wanting and able to effect transfer payments into their farming sectors,
insurance provides a convenient channel for doing so. In the face of this
WTO regulation, it is clear that demand for crop insurance will increase in
those economies that wish to implement a policy of permitted subsidization
of their farmers.
d. The dynamism of the farming sector, and its environment, is reflected in

developments in the design of new insurance products. In the last decade
two types of new products have been introduced. In some cases these have
partially displaced exisiting covers; in others they have resulted in demand
for new clients. The products are firstly, Crop Revenue products, secondly,
Index or Derivative products.
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e. Accidental introduction of exotic pests/diseases is something which

concerns all countries where agriculture is an important part of the economy.
Insurance can address the risk of a breakdownof these measures.
f. Insurance can also assist in managing the on-farm prouction risks

consequent to changes in pest management practices. Such changes are
increasingly required in order to address environmental protection and food
safety concerns.
g. Many of these apparently diverse influences have a major common theme.

This is that any insurance arrangement will involve not only the farmer and
the insurer, but also important third parties. Consideration is now given to
thses changes to the business of farming, and to how they have increased
demand for crop insurance, or might be expected to do so in the future.
2.2 Increasing Incidence of Crop Damaging Weather Events
One major insurer has calculated that the economic losses (adjusted for
inflation) of weather-related events in the period 1985-1999 amounted to some
US$707 billion. Over a longer period, 1950-1999, the average annual losses
(again adjusted for inflation) have increased by more than 10 times, while the
global population has increased by a factor while crop and forest losses are only
a part of this, the same reinsurer estimates that the costs associated with crop
damaging weather events are doubling each decade.
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The scientific community is not unanimous in attributing the increases in

extreme weather events to global warming. However, there is strong body of
opinion which holds that is this is the case. Their thesis is that global warming
means more more energy in the system. A consequence of this is a rise in the
frequency and magnitude of extreme weather events. This is considered one of
the causes of the increases in the losses noted in the pervious paragraph. The
other major cause is linked to socio-economic factors such as increasing wealth
(so there is more to be lost), and movements of populations to coastal areas
which, although more productive in some senses, ar more vulnerable to
windstorm, storm (tidal) surges and flood damage.
The increasing incidence of crop damaging weather events is likely to continue

to push demand for insurance coverage of losses. At the same time the
insurance exposures, and is exploring new financial instruments to assist in
managing this exposure.
2.3 Greater Commerlization of Farming / Contact Farming

Implementation of technology developments in farming usually involves
investments. Such changes also frequently alter the risk profile of the enterprise.
A common example is in minor irrigation. The availability of low cost pump
sets has greatly increased the productivity of small farms in much of rural India,
and has brought a boom in irrigated vegetable production in semi-arid areas of
the middle east, for example in Syria. But in both areas there is now
vulnerability to falling water table levels.
Investor/farmers who have substantial interest in the success of a given crop

systematic risk- i.e. risk that affect many at the same time. An example is
unfavorable weather conditions over a wide geographical area. In both cases i.e.
borrower and lender, there is an interest in managing the risk of crop failure
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through the most economic means. There are occasions where insurance can be
a key component in a range of risk management strategies.
This type of link, crop insurance and loans, is already very common, both in
developing and developed agriculture. The vast, heavily subsidized scheme in
India, mentioned above, is largely linked to bank lending. A more recent crop
insurance initiative, in morocco, is primarily motivated by a desire to safeguard
the loan asset portfolio of the government agricultural bank, the Caisse
Nationale de Credit Agricole.
From an administrative point of view bank/insurer linkages make a lot of sense,

since both these providers of financial services require similar client data.
Moreover a bank can readily act as an agent for selling insurance. This means
significant cost asvings in obtaining data and in making financial transactions
(payment of premiums and paying out indemnities). Also known as “inter-
linked transactions” contract farming arrangements are one of the fastest
growing business arrangements in both developed and developing countries.
They are becoming partially common in countries which were formerly
centrally planed, and where liberalized marketing arrangements under structural
arrangements have meant the closing down of marketing boards and the loss of
a known, secure market for small scale farmers. The impetus for the further
development of fast food outlets, the growing role supermarkets, and the
continued expansion of world trade in fresh and processed products.
In contract farming both the grower and the buyer expect to benefit financially
from a crop which is up tp normal expectations in terrms of both quantity and
quality. Both therefore have an “insurable interest”. This means that an
insurance prouct could be structured so that each party receives an indemnity in
the event of an insured loss. Since contract farming arrangements are generally
renewed annually, a record of production is built up over the years. This
availability of accurate records, coupled with the existing financial linkages
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between contractorand grower, means that insurance can be included in the

range of services by the contract at minimal operational cost.
Some examples of contract farming arrangements in developing countries:
a. Many thousands of out growers produce tea under contract to the Kenya
tea industry;
b. 2,200 farmers from 164 villages in India grow maize and soybeans for a
major poultry producer;
c. 30,000 farmers from in northern Thailand grow vegetables for local

exporting firms to export to Japan;
d. Banana production by small holders in Central America is very

commonly arranged under contract with major fruit corporations;
e. Fast food chains in the Philippines and elsewhere frequently contract

with local farmers for supplies of potatoes for French fries, and also for
salad vegetables;
f. 44 growers in Northern Indiagrow tomatoes for paste under contract to

Hindustan lever.
In many of these cases insurance protection could be arranged against major

weather perils as part of the contractual arrangement.
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2.4 World Trade Organization Regulations

One of the policy-making priorities of governments is to facilitate trade. For most
developing countries agricultural exports are important, and it is vital therefore
that WTO’S regulations are respected. Subsidization of crop insurance premium is
permitted by the WTO. They are considered as falling into the ‘Green Box’ of
measures by which a government can support its producers.
Whereas this development is still relatively now, the commercial insurance

industry has experienced an upsurge in demand ofr information, from
governments; on crop insurance. The nature of these enquiries makes it clear that
they are prompted by awareness of this apparent venue for permitted asistance to
the farming community. There are several types of assistane by which a
government can facilitate crop insurance.
2.5 Classic/Public Crop Insurance Products

These crop insurance products account for by far the bulk of all crop insurance
written globally. There are two main types, damage-based and yield-based
products respectively. These are introduced below.
A. Damage-Based Products, E.G. Hail/Named-Peril Products

Insurance against crop losses from hail have been insured for more than 200 years.
This type of crop insurance still accounts for a considerable proportion of crop
insurance worldwide. Suffice it here to note that hail policies are based on a
measure of the actual damage which resutls. Other named-peril policies, such as
those for frost and fire, are very similar to hail cover in essentails. The key features
are:
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a. Damage resulting from the peril is localized;
b. Low degree of correlation of risk over a given area;
c. Sum insured is agreed when the policy is purchased;
d. Loss adjustment and eventual indemntiy based on measured of the

percentage of damage after the incidence of the loss event;
e. This type of insurance is not suitable for perils which can impact over wide
areas, e.g. drought, pest, disease
B. Yield-Based Products, E.G. Mutli-Peril Crop Insurance (Mpci)

Multi-peril crop insurance (MPCI) products have the defining characteristic that
insurance is geared to a level of expected yield, rather that to the damage that is
meaured after a defined loss event.
Other features are:
a. MPCI policies are suited to perils the nature of which maen that their
individual contribution to a crop loss is difficult to meaure;
b. Similarly these yiels-based policies are suited to peris which impact over a
period of time. Establishing a farmer’s yield history provides the basis for
determining the percentage of shortfall after a loss event;
c. The yield is measured at harvest; insured yield may typically be in the range
of 50 to 70% of historic average yield.
Source: www.management paredise.com
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Chapter 3
Experience with Public Crop Insurance Programs
3.1 Reasons for Failure of Public Crop

Insurance Programs
3.2 Guidelines for Improving Government
Sponsored Insurance
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Publicly provided crop insurance has been implemented in many developed and
developing countries (Hazel, Pomareda, and Valdes). These crop insurance
programs are generally multiple peril or all risk programs, meaning that the
insurance compensates all yield losses, regardless of cause. Although insured
hazards are often enumerated the lists of covered hazards are so comprehensive
that uninsured hazards cannot be excluded in practice, including losses from bad
management. Indemnities are typically based on the difference between actual
yield and a pre-specified target yield, not on actual crop damage or input costs lost.
Setting the target yield can be difficult, as one must either base the target on short
history of yields for each farmer or accept the farmer’s declaration of his/her
potential yield. Most programs attempt to compute an average or expected yield
and then gurantee some percentage of the value. Most programs include
deductibles, so as to help control for adverse selection and moral hazard. In many
countries insurance is tied to loans from an Agricultural Development Bank
(ADB), with the bank paying the premium and collecting the indemnities. In some
countries is compulsory for all farmers growing the insured crops or borrowing
from the ADB.
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3.1 Reasons For Failure Of Public Crop Insurance Programs
Why has public crop insurance failed so badly? One of the most important reasons
is that many of the risks covered by multiple risk insurance are inherently
unisurable, leading to large acturial losses of the insurer. Vaughan reviews many of
the conditions for insurance markets.
An insurable risk has the following 4 characteristics:
a. The likelihood of the event must be readily quantifiable;
b. The damage it causes must be easy to attribute and value;
c. The probability of occurrence should not be too high to make the insurance
unaffordable; and
d. Neither the occurrence of the event or the damage it causes should be

affected by the insured’s behavior (i.e. no normal hazard)
While the traditional insurance literature list a fifth characteristic (i.e. independent
risk), many catastrophic risks that are covariate are now insured by private
markets (e.g. hurricanes, typhoons, earthquakes, floods). Private insurance
companies typically do not insure yield losses due to pest and diseases, and prefer
to write insurance against specific and uninsurable perils; it is rare to see a private
company that writes multiple risks or all risk insurance, and the ones that have had
very short lives.
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Another important reason for failure in agricultural insurance is that public insurers
are often mandated to extend their insurance to small farms, and this can add
enormously to administration costs. By the name token, programs that offer
contracts on a field-by-field basis (as in the U.S.) are also expensive to administer.
A third reason for failure is that inappropriate incentive problems arise within
insurance institutions when the government underwrites most of their programs.
When insurers know that the government will automatically cover most losses,
they have little incentive to pursue sound insurance practices when assessing
losses. In fact, they may find it profitable to collude with farmers in filling
exaggerated or falsified claims. Hazel reports that in Mexico prior to closing the
national agricultural insurance agency, it was not uncommon for inspectors to
receive bribes of about 30% of the value of the indemnity payments made to
farmers. When the insurer underwrites the loans of an ADB, these incentive
problems can easily infect the bank too, leading to a serious loss discipline in
banking practices. Why, for example, should ADB staff try to collect loans from
tardy borrowers if they can more easily obtain repayment from the insurer?
Another common reason for failure has been that governments undermine public
insurers for political reasons. Hazel gives examples where insurers have had to pay
out against exaggerated loses in election years. In the U.S., the government has
repeatedly undermined its crop insurance program by providing direct assistance to
producers in disaster areas (Goodwin and Smith; Skees, 1999a). Why should
farmers purchase crop insurance against major calamities (including drought) if
they know that farm lobbies can usually apply the necessary political pressure to
obtain direct assistance for them in times of need at no financial cost?
Many crop insurance programs also tend to be too specialized, focusing on specific
crops, regions and types of farmers, particularly when the insurance is tied to the
loans of an ADB that has a mandate to serve particular target groups identified by
the government. Without a well- diversified insurance portfolio, crop insurers are
susceptible to co variability problems, and face the prospect of sizeable losses in
some years. Since public insurers are rarely able to obtain commercial insurance or
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government or contingent loan arrangements, this specialization increases their

dependence on the government.
3.2 Guidelines for Improving Government Sponsored Insurance
Publicly owned crop insurance programs are probably impossible to design as

sustainable financial entities without some level of government support if they are
to continue to reach intended target groups. However, the following principles for
sound insurance could lead to considerable improvement in performance in most
cases.
a. Make the insurer responsible for its own financial affairs, and deny it
automatic access to government funds when they incur losses. Subsidies are
not necessarily ruled out, particularly for important target groups, but they
should be fixed in advance on a pro-rated basis.
b. Only insure “insurable” risks to the maximum extent possible, e.g. specific
perils like hail damage. Where moral hazard cannot be avoided, then use
deductibles and other co-insurance arrangements.
c. Premiums should be based on sound, actuarial calculations, and adjusted

over time to reflect actual loss payments.
d. The insurer should develop a national insurance portfolio for managing risk,
and should not be tied rigidly to the lending portfolio of an agricultural
development bank. They should be required to purchase realistic levels of
reinsurance in the national or international insurance markets.
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e. The insurance should be voluntary and in competition with the private

sector.
f. To avoid adverse selection, premium rates should be tailored to the

indemnity payments that individual farmers receive, to the largest extent
possible.
g. Administrative cost must be controlled.
Commercial insurers rigorously adhere to such principles, not least because they
know that the government is unlikely to bail them out should they incur large
losses. Even so, the volume of private crop insurance is not trivial. Grudger
estimated total premium income at about $1 billion per year, and it seems to have
grown since then. The drawback is that private insurance is almost exclusively sold
to large-scale, commercial farmers growing high value crops. If public crop
insurance were operated strictly along the same principles, it would not be able to
serve many of the medium to smaller sized farms that are the traditional targets of
government assistance programs.
The situation is similar to the experience with the reform to rural financial markets.
As financial markets are liberalized and banks become more efficient and
financially sound, they also become less willing to lend to small-scale farmers. In
the finance case, the lending vacuum for small borrowers has been filled by an
explosion of agencies offering microfinance. Micro finance is not only reaching
many of the small-scale farmers previously targeted by ADB’s but it is also
reaching many other kinds of small-scale borrowers who were previously ignored
by formal lending institutions. As more governments begin to reform their
agricultural insurance markets, and to set their insurers on a financially sound
basis, the same kind of service vacuum seems likely to emerge for small scale
farmers. As yet, the insurance equivalent of microfinance has not emerged, but it
clearly needed to reach both small- scale farmers and other rural dwellers that are
impacted by catastrophic weather events. We turn now to some new developments
in insurance that offers not only “micro-insurance” possibilities for the poor, but
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which could also be attractive to large farms and many other commercial
enterprises in rural areas.
Source:-Developing Rainfall: - Based index insurance in Morocco: Skees Jeal.
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Chapter 4
New Approaches to Crop Insurance
4.1 Area-Based Index Insurance Has A

Number of Attractive Features
4.2 Rainfall Insurance Contracts (Rics)
4.3 Crop-Revenue Insurance Products
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What is needed is a system of insurance that meets the following requirements:
a. It is affordable and accessible to all kinds of rural people, including the poor.
b. It compensates for catastrophic income losses to protect consumption and

debt repayment capacity.
c. It is practical to implement given the limited kinds of data available.
d. It can be provided by private sector with little or no government subsidies.
e. It avoids the moral hazard and adverse selection problems that have
bedeviled crop insurance programs.
Area-based index contracts, such as regional rainfall (and other weather) insurance
could meets all these requirements. The essential principle of area-based index
insurance is that contracts are written against specific perils or events (e.g. area
yield low, drought, or flood) defined and recorded at a regional level (e.g. at a local
weather station). Insurance is sold in standard units (e.g. $10 or $100), with a
standard contract (certificate) for each unit purchased called a Standard Unit
Contract (SUC). I he premium rate for SUC is the same for all buyers who buy the
same contract in a given region, and all buyers receive the same indemnity per
SUC if the insured event occurs Buyers are free to purchase as many unit of the
insurance as they wish. Area-based crop yield insurance is a good example of such
a scheme. In this case the insurance is written against the average yield for the
region falls below some pre10 defined limit (say 80% of normal). Such schemes
already exist in the US, India, Sweeden, and the Canadian province of Quebec. In
the U.S., the Group Risk Plan uses county yields to trigger a payment and coverage
upto 90% of the country yield is available. Payment are made based on the
protecion (liability) selected by the farmer and the percentage below the trigger
yield (coverage times the expected county yield). Since county yield data are
available for long periods of time, adjustments to th trigger yield are made for
technical advances.
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Area-based yield insurance requires long and reliable series of area-yield data, and
this kind of data is not available in many countries. Hence alternative indices may
be more attractive. Such as area rainfall or soil moisture indexes. Rainfall and soil
moisture contracts could effectively protect against crop losses due to drought of
excess rainfall. Improved ground instruments coupled with satellite and remote
sensing technologies made measuring rainfall and soil moisture less expensive than
in years past. These technologies can also be used to add credibility to the
measurement so that those outside the country have confidence in the numbers.
4.1 Area-Based Index Insurance Has a Number of Attractive

Features
a. Because buyers in a region pay the asme premium and receive the same
indemnity per SUC, it avoids all adverse selection problems. Moreover, the
insured’s management decisions after planting a crop will not be influenced
by the index contract, eliminating moral hazard. A farmer with rainfall
insurance possesses the same economic incentives to produce a profitable a
crop as the uninsured farmer.
b. It could be very inexpensive to administer, since there are no individual

contracts to write, no on-form inspections, and no individual loss
assessments. It uses only data on a single regional index, and this can be
based on data that is available and generally reliable. It is also easy to
market; SUCs could be sold rather like travelers checks or lottery tickets,
and presentation of the certificate would be sufficient to claim a payment
when one is due.
c. The insurance can be sold to anyone. Purchasers need not be farmers, nor
even have to live or work in the region. The insurance should be attractive to
anybody whose income is correlated with the insured event, including
agricultural traders and processors, input suppliers, bands, shopkeepers, and
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laborers. Defining SUCs in small denominations would raise their appeal to

poor people.
d. It would be easy for the private sector to run, and might even provide an ntry
point for private insurers to develop other kinds of insurance products for
rural people. For example, once an area-based index removes much of the
co-variate risk, an insurer can wrap individual coverage around such a polic
to handle independent risk (i.e. certain situations were the individual has a
loss and does not receive a payment from the area-based index.)
e. As long as the insurance is vlountary and unsubsidized, it will only be

purchased when it is a less expensive or more effective alternative to
existing risk management strategies.
f. A secondary market for insurance certificates could merge hat would enable
people to cash in the tradable value of SUC at anytime.
g. Recent development in micro-finance also make area-based index insurance

an increasingly viable proposition for helping poor better manage risk. The
same borrowing groups established for micro-finance could be used as a
conduit for selling index insurance, either to the group as a whole, or to
individuals who might wish to insure their loans.
A key question is whether the inusrance would prove attractive to

individuals. An index product should be more affordable than individual
insurance, particularly if government does not subsidize either. Moreover,
by offering an index contract that removes most of the systematc correalted
risk that an individual faces, he/she only faces independent risks that may
more easily be insured through conventional insurance or credit markets.
However, a problem with index contracts is that an individual can suffer a
loss and not be paid because the major event trigging a payment has not
occurred. For example, a farmer with rainfall insurance could lose his/her
crop to drought at a micro location, but not receive an indemnity if the
rainfall at the region’s weather station remains above the trigger point. With
26
index contract it is also possible for an individual to be paid when they

suffer no losses. In futures markets, this type of risk is referred to as basis
risk. Index contracts essentially tradeoff basis risk beomes too high.
Individual decisions to purchase area-based index insurance can be analyzed
through extensions of portfolio theory, include those evolving from
Markowitz and capital asset pricing models, hedging models, and contingent
claims models. Index insurance becomes another asset in the individual’s
portfolio. In some cases, index insurance may improve the performance of
the portfolio more tha adding another activity (e.g. another crop is the case
of a farmer who is trying to manage risk by diversifying), especially if better
terms of credit are available when the insurance index is purchased.
For a rainfall index, the degree of correlation between net receipt from the
index and farm income will play a large role in the efectiveness of the risk
protection offered to a farmer. With higher correlation there will be less
basis risk. Understanding income rainfall correlation requires crop yield
modeling. Further, it is possible that a set of rainfall indexes may fit best for
different farming systems. Farm income risks for certain crops may fit best
for different farming systems. Farm income risks for certain crops may be
most sensitive to rainfall shortfalls at different times during the season (e.g.
planting and blooming). Income may also be at risk during harvest if there is
excess rain.
The specific design of the index contract will also have a bearing. Models
such as the capital asset pricing models (CAPM) can be used to determine
the optimal level of these contracts once the income-rainfall relationships are
understood. One advantage of CAPM type models is they also help indentify
the independent risk and the covariate of systematic risk. Having a high
covariate risk improves the efficacy of an index insurance contract.
Therefore, index products are a bit different than traditional insurance in that
the very presence of high levels of covariate risks improves their
attractiveness.
27
But the presence of high covariance risk is potentially troublesome for the
insurer. When a payment is due, then all those who have purchased
insurance against the regional index must be paid at the same time.
Moreover, if the insured risks in different regions are highly correlated, then
the insurer faces the possibility of having to make huge payments in some
year. To hedge against this risk, the insurer can either diversify reinally by
selecting indices and sites that are not highly correlated, or sell part of the
risk to the international and financial markets either through reinsurance or
the emerging markets for sharing catastrophic risk.
4.2 Rainfall Insurance Contracts (Rics)
Even through either area-yield or area-soil moisture indexes may be better

contracts, rainfall insurance contracts may be technically more feasible for
most countries because of the existence of long data series at regional
weather stations. Although excess rainfall insurance contracts have existed
for years, drought rainfall contracts have existed for years; drought rainfall
contracts are relatively new. Nonetheless, there is a growing interest in
drought rainfall contracts among insurers and reinsurers. Part of the reason
for this interest is the growing weather derivative market in the US.
Temperature is now traded in the U.S., allowing energy companies to hedge
against swings in revenue when there are extremely high or low temperature.
Some significant work has taken place by the World Bank in investigating
rainfall contracts for Nicaragua. Still, to our knowledge, there are no rainfall
contracts in the developing countries at present. The essential principle of
rainfall insurance is that contracts are written against specific rainfall
outcomes recorded a local weather station. The rainfall outcomes should be
defined at catastrophic levels and should be highly correlated with the value
of regional agricultural production or income. For example, an insured event
might be that rainfall during the most critical month of the growing season
falls 70% below normal. In years when the insured events occurs, all the
28
people who purchased the insurance receive the same payment per unit of
insurance in all other years, no paments are made. Such a zero/one contract
could be very important for individual insured in areas that are subjected to
large losses when rainfall drops below a certain level. This design is easy to
understand and should be offered to small growers.
While there are many ways to design rainfall contracts, the simplest is to sell
the insurance in standard SUCs. The insurance would be sold on a full cost
basis and the price of the SUC is the premium. The insurance must be sold
before season-specific information about the insured risk becomes available.
This requires a purchasing deadline, after which new SUCs are not old. In
some cases, the deadline may be as much as a full year ahead. For example,
emerging ENSO events can now be forecast upto 12 months ahead.
Besides the zero/one contract, one can envision contracts that pay in layers.
For example if rainfall is between 40 and 60% or normal the insured might
get a payment equal to 1/3; the next 1/3 would come if rainfall equaled to 20
to 40% of normal; a full payment would come for rainfall below the 20% of
the normal level. Finally, a percentage contract could also be offered where
payments would be calculated on the basis of precentage below a certain
rainfall level (a strike rainfall). The percentage would be multiplied by the
protection (liability) purchased. The alternative designs should be based on
the sophastication of the customer and incentives and opportunities that
might exist to manipulate the rainfall measures. When people know that the
ranifall is close to trigger a full payment (for the zero/one) contract, they
have more incentives to tamper with rainfall measures. Thus, a zero/one
contract may require more monitoring, even though it is the simplest design.
In principle, one might expect the private sector to take the intiative in
developing rainfall insurance, but there are several setup problems that
might require a 16 public intervention to jump start activity in many
developing countries. Setting up the basic infrastructure to get started may
be an important government activity. Start up activity includes
29
a. The research costs of identifying key catastrophic rainfall events that

correlate strongly with agricultural production and income in different
types of rained agricultural regions;
b. Educating rural people about the value of rainfall insurance;
c. Ensuring secure rainfall stations;
d. Establishing an appropriate legal and regulatory framework for rainfall

insurance; and
e. Underwriting the insurance in some way ( perhaps through contigent

loans) until a suficient volume of business has been established that
international reinsures or bank are willing to come in and assume the
underwriting role for themselves. These roles need not be costly but
could prove crucial in launching rainfall insurance. But it is also
important not to launch the insurance on a heavily subsidized basis, so as
not to distort incentives for private insurers or farmers.
Despite the promise of rainfall insurance, there are significant issues that must be
resolved. These are
i. The need for secure rainfall measurement,

ii. The acturial challenges that are present due to the EI Nino Southern Oscillation
(ENSO) and
iii. The covariate risk problem for the insurer mebtioned earlier.
30
4.3 Crop-Revenue Insurance Products
The essence of this product is to combine production and price risk, the
combination of production and price being the determinants of gross revenue from
a given crop. Under normal supply/demand conditions a production shortfall. But
this will only be the case if he harvests sufficien crop and sells it at sufficient
premium over the expected price. Crop-revenue insurance is designed to meet any
reamaining shortfall in revenue from crop sales.
Frequently, too, crop-revenue products involve the detrmination of loss on an area

basis, introducing important economies in the loss assessment process. At present
crop-revenue products are marketed mainly in North America, where they first
became available to all corn and soybean growers in Iowa and Nebraska in 1996.
Here their use is facilitated by commodity markets being highly developed and by
related information being reliable and readily available. In this connection it is
important that the price element of the policy be market based, that is, on future
prices for the coming season. The alternative to use some sort of target prices,
could lead to distortion of supply.
Futhermore, it is unlikely that a crop-revenue product based on a target(i.e. non-

market price) would find underwriting support. Crop-revenue products have now
(2002) spread beyond North America. The extent to which they could apply to
developing countries will depend on the development of local crop future market,
as well as on the availability of the necessary local expertise. However, these
changes are really only a matter of time. Given the advantages to grower and to the
insurer, this type of insurance product is likely to grow in importance, though for
smaller crop areas, as with yield assurance, it will always suffer from the problem
of high administrative cost per unit of value.
31
The crop-revenue approach follows from a new trend in agricultural insurance.

This is to define the insurable interest as an income stream rather than as an
intrinsic value (or expected value) of the biological item at risk. This redefination
leads readily to a consideration of farm loan and insurance linkages, since the
servicing of interest and principal payments on an agricultural loan depend on the
income stream produced. As already noted, some crop insurance programme have
been administratively arranged so that the insurance element is made a part of the
loan, with the bank being the first recipient of any indemnity paid by the insurer,
while the premium is a working capital item that is packaged with the loan itself.
A more recent development is that some banks are believed to be interested in

direct coverage of portfolios, more particularly for catastrophic losses following a
systematic peril. At the time of writing this development must be noted as an area
where much future development is likely.
Source: - www.managementparedise.com
32
Chapter 5
Challenges Implementing Crop Insurance in Developing
Countries
5.1 Challenges Implementing Crop

Insurance
33
5.1 Challenges Implementing Crop Insurance

There had been a feeling that agriculture/Crop Insurance itself cannot increase
productivity or be a source of financing. But it can clearly play a role in enhancing
both. There are some limitations and inherent constraints, which prevent rapid
growth of insurance business in rural areas. On the basis of experience of
implementation of crop insurance in developing countries some important issues
have been indentified as given under:-
a. According to some experts, Crop Insurance is one of the means for

providing compensation to farmers suffering from serious crop losses due to
climatic factors, Plants disease and Pests etc. during various stages of crop
growth.
b. Crop Insurance claims outgo is estimated at about 15% of crop value and
expenses of crop insurance administration amount to about 5% so that the
overall cost crop insurance premium comes to about 20% of crop value in
most of the developing countries which is uneconomic.
c. Among the different types of Crop Insurance in vogue, Crop Hail Insurance
is the most popular and transacted quite extensively in most countries of
Europe and North America. It is transacted on commercial basis mostly by
private Insurance Companies, in the countries where Hail may than 50 days
in a year.
d. Under specified risk cover crop insurance in many countries over one
particular risk like Hail or Fire or Drought or Cyclone or sometime more
than one specified risk cover. The other major tpe of crop insurance is what
is know as All Risks or Multi-Peril Insurance.
e. To implement Crop Insurance in the developing countries a number of

problems have to be faced. These are:-
i. Lack of reliable long period data on crop yields and losses.

34
ii. Wide variety of agricultural practices.
iii. Existing land venture and land record systems.
iv. General ignorance and poverty of farmers.
v. Lack of trained personnel.
vi. Limited financial resources of the countries.
vii. Lack of insurance consciousness amongst farmers.
viii. Lack of reinsurance support from professional reinsurer.
35
Chapter 6
Conceptual Framework for Designing Crop Insurance
Products in Developing Countries
6.1 Critical Elements

6.2 Key Elements
6.3 Other Requirements
36
Insurance programme for agriculture could be designed for different countries

keeping in view the agricultural situation, prevailing socio economic factors and
administrative infrastructure available. But foremost and most important for
framing the Crop Insurance Scheme is to specify the broad objectives. The
objectives of crop insurance can be decided on the basis of priorities for the
development of agriculture in the country. Considering crop insurance as a ris
management measure for agriculture production, following objectives may be
assigned:-
a. To stabilize agricultural production or farmer’s income by reducing adverse

effects resulting from crop losses due to natural hazards.
b. To encourage farmers to adopt improved technologies which can lead to

increased production and more sufficient use of inputs/resources?
c. For having better credit rating required for the increased flow of crop loans to
the farmers.
There are some critical elements which determine the basic structure and some key
elements which give ultimate shape to the scheme. In addition to critical and key
elements there are some some essential requirements which provide operational
viability and key elements there are some essential requirements which provide
operational viability and sustainability.
37
6.1 Critical Elements

These elements determine basic structure of the scheme and lay foundation of the
sheme. Brief description for each of the critical elements is given in the following
paragraph:
A. Perils To Be Covered
A fundamental issue in the design of the crop insurance scheme is whether to cover
all or certain specified risks. The former implies yield insurance. In other words, an
insured farmer is eligible to get indemnity if the yield is below certain guaranteed
level. It is argued that in case of yield insurance it is difficult to identify losses
arising out of uninsured events.
In view of the above an alternative approach envisages coverage against crop

losses caused specific perils, e.g. hail, windstorm, typhoon and so on. In the recent
literature more emphasis is placed on such schemes. In Mauritius windstorm was
the only risk that was covered during the first 27 years of the scheme. In Cyprus
the risks covered are hail, rust and drought. The schemes operated in Brazil,
Canada, India, Japan, Philippines, Sri Lanka and U.S.A. is of all-risk type.
According to FAO survey, most of the schemes are specific peril and multi-peril
categories. Two aspects of crop insurance with specific perils need special
mention:
i. There is general opinion that schemes covering specified risks provide much
less economic benefit than the all risk type.
ii. It may not always be possible to attribute and measure the loss due to the
insured perils.
38
Hence, one has to consider the agro climatic situation to determine the degree of
comprehensiveness or to idntify the risks to be covered by a crop insurance
scheme. A scheme based on named perils is feasible if the insured crops are
affected by specific perils causing damage, which are measureable. If a scheme
envisages coverage of all risks, it is necessary to provide adequate safeguards to
minimize the incidence of moral hazard.
B. Involvement Of Public Or Private Sector
Relatively, large numbers of crop insurance schemes have developed in the

public sector. They are often of multi-risk or all-risk type. Some of these
schemes are linked to agricultural credit. An insurance scheme in public sector
has an advantage that it could have access to government budget and
cooperation of their public institutions and banks. The role of the government
can take various forms:
i. The government bears fully or partly the cost of administration;
ii. The government also shares a part of the indemnity, or pays a part of the
premium with a view to ensuring that farmers can afford to buy insurance.
Private agricultural insurance has been in existence for many years in the form of
hail insurance in Europe, U.S.A., Canada and Australia. Private sector insurance
has three chareacterisitcs:
i. Coverage of specific risks which are insurable;

ii. Unsubsidized premium;
iii. Voluntary insurance.
39
C. Individual or Area Approach
There are two main approaches for determination of indemnity in crop insurance:
the individual approach and the area approach. In case of the individual,
assessment of loss is made separately for each insured farmer. It could be for each
plot or for the farm as a whole.
In case of area approach, indemnity is determined for a group of farmers. The

insured farmers are indemnified on the basis of the average loss experienced by a
specified homogeneous area that could be a district, a block or even a village. Ot
was Prof. Danekar who gave it a concrete shape in the Indian context. However,
there are certain problems with this approach too. Farmers may be less interested
to buy insurance if individual farm yields are not adequately correlated with the
average area yield of the region. Further, it may be difficult to insure damage,
which affects an area smaller than the specified area unit. The choice of either the
individual o the area approach depends on the nature of the agricultural insurance
program and the agro- economic conditions: target farmers, farm size, crop insured
and even communication facilities.
D. Voluntary or Compulsory Participation

A crop insurance scheme may envisage voluntary or compulsory participation. In
case of the vlountary approach, participation is optional for a farmer who is
eligible to be insured. Such schemes are in Canada, USA and Chile. As regards the
compulsory participation, certain categories of farmers who are eligible to be
insured or who grow specified crops participate automatically. The work
compulsory implied that there is a system of automatic insurance for a group of
farmers. In Japan crop insurance is compulsory for all farmers who grow the
insurable crops over more than a minimum prescribed area. The Mauritius, Cyprus
and Windward Islands schemes are compulsory for all growers of certain crops. In
India and Philippines crop insurance is compulsory for farmers who borrow fron
banks and other financial institutions. The compulsory has two advantages. The
problem of adverse selection is reduced significantly, and there is reduction in the
40
cost of sale of insurance. There may, however, be dissatisfaction among low-risk

farmers who will have to cross-subsidize risks farmers.
6.2 Key Elements

Key elements that shape the structure and influence the working of a scheme of
crop insurance are given as under:-
A. Coverage Of Farms/Farmers
Farms with specialized activities include horicultural farms, aquaculture farms,
poultry farms and orchards. The sub-sector adopts improved technology and has
access to institutional finance in this sub-sector. It is in this sub-sector that private
sector insurance has already shown interest. There are farms of medium and large
size, which are integrated with the market. They are commercially viable and the
risks are insurable. One can follow an individual approach. In this case also there is
tremendous scope for private sector insurance. The semi-commercial and emerging
sector refers to small and medium size holdings, which are in a state of transition
from tradititonal to commercial agriculture. They also offer opportunities for
private insurers. However, there is scope for public sector insurance to operate on a
viable basis. Farmers with small holding who usually employ family labour and
produce primarily for self-consumption are in the traditional and subsistence
sector.
They are most vulnerable to agricultural risks and need insurance the
most.however, the basic criteria of insurability may not be satisfied in the
conventional sense. In many developing countries public sector programs try to
address this sector, which poses the greatest challenge.
41
B. Coverage Of Crops
The objective of agricultural insurance is to stabilize farmer’s income. It follows
logically that all crops grown by a farmer should be covered by insurance. In
practice, it is not feasible. During the initial years the scheme may be limited to
some crops and expanded gradually to other crops depending on the experience
and ability of the implementing agency.
C. Determination Of Sum Insured And Loss Assessment
Sum insured coverage is usually based on:
a) Cost of production;
b) A part of the value of yield; or
c) The amount of production loan or crop loan.
In most of the schemes, the sum insured is based on the cost of production. The
reason is because it is easier to assess the cost of production. Such cost of
production data is available from independent sources likw statistics and research
organizations. There are, however, certain conceptual and practical problems.
Should cost include only variable cost or also fixed cost? Should it include imputed
value of family labor and profit?
The assessment of loses is more difficult in case of agricultural insurance than for
the other general insurance, such as fire or property. For crop insurance loss relates
to something yet to come into existence, or that is in the process of growth. The
deductible level and its nature and application in relation to the risks insured are
also important for determining the loss. Usually, some part of the loss or reduction
in yield could be due to the negligence of the insured farmer. There may also be
problem of moral hazard. Hence, an insurance agency normally has a deductible
loss while finally determining the amount of indemnity.
42
D. Determination Of Premium
For a viable crop insurnce scheme, the premium rate nedds to cover the following:
i. Pure risks;
ii. Administration cost;
iii. Contribution to catastrophe reserve; and
iv. A resonable return.
The insurance premium may be on a net or gross basis. Net premium covers only
the average loss over a period and possibly an additional amount to a small reserve.
Gross premium involves some loading to include cost of administration and some
return or profit. A related issue is to whether and to what extent the government
should subsidize the premium. In many situations, even a premimum rate based on
pure risks would be too high for some farmers to afford.
E. Loss Adjustment Mechanisms
An important operational aspect is to have an effective system of loss adjustment

procedures. It should be effective enough to minimize spurious claims and at the
same time fair to the insured. The procedure will depend on whether the scheme is
based on an area approach or the individual approach. In case of the area
approach, it is necessary to determine the average crop yield of the area on the
basis of which indemnity is determined.
In case of the individual approach, it is necessary to have field inspections with the
help of field staff. If the coverage is based on the expected yield, valuations of
losses in yield are assessed through:
i. Eye estimation; or
ii. Crop cutting procedures.
43
F. ORGANIZATIONAL STRUCTURE
The administrative structure chosen by a country depends on socioeconomic

infrastructure, type of insurance scheme, target farmers and crops,
comprehensiveness of its coverage and size of operation. In recent times many
developing countries are striving to introduce economic liberalization including
reforms in the financial and insurance sectors. This will mean opening of the
insurance sector to international competition andallowing foreign insurers to
operate in the country.
Whichever is the structure for providing agricultural insurance in a country the

objective should be to:
i. Function on sound principles of insurance;

ii. Have operational freedom; and
iii. Ensure an access to outside resources, e.g. reinsurance.
It is necessary to have field level units, espcially in large countries, with

decentralization and delegation of operation and commercial activities.
G. Financing Of The Schemes
Financing is important to a program of agricultural insurance because in disaster

years the requirement of fund is very large. A scheme should be self financingif the
premium rates are set properly and if the loss adjustment mechanisms are
appropriately structured. In reality, there may at times be an imbalance between the
premium income and the fund required for payment of indemnity. Catastrophic
losses may overwhelm the normal financing arrangement of the program. Hence, it
is necessary to build a reserve should be determined keeping in a view a realistic
estimate of the maximum probable loss.
Public sector programme have access to government budget, though limited in

developing countries , as a source of fund not only for premium subsidy and cost
of administration but also as a safety net at the time of catastrophe.
44
H. Reinsurance Arrangements
Reinsurance provides access to larger reserves by spreading the risk wider. It can
take the following forms:-
i. Reinsurance support from thr government in Japan & Canada;

ii. Loan funds from the government at the time of catastrophe as in Japan &
Canada;
iii. Budgetary fund from the government as in India; and
iv. Private reinsurance in the international market as in case of the Mauritius
program.
I. Communication With Farmers
Farmers must be convinced that the program is in their interest. This is important if
the scheme envisages compulsory participation, otherwise will be dissatisfaction
among farmers. In case of voluntary participation coverage will depend on how
and to what extent farmers perceive it as beneficial to them. Farmers should feel
that the terms and conditions of insurance are fair, and have the confidence that
claims could be settled in time. Communication with farmers is an important
element of a program of agricultural insurance. This may be through mass media,
education programs and group interactions.
6.3 Other Requirements

Availability of adequate data, trained personnel and monitoring & evaluation etc.
will make the scheme operationally sound.
i. Adequate Data-Base
While considering the possibility of a crop insurance program, one needs to ensure
that data are available to work out the financial implications. Without adequate
45
data on yield over a period of time it is not possible to formulate scheme of crop
insurance. Such data from the basis for determination of premium, guaranteed
yield, indemnity, etc. it is also necessary to have adequate details on climatic
conditions, land tenure, land record systems, cropping pattern, availability of
agricultural inputs including credit, and other infrastructure in an area. Such
information can facilitate realistic assessment of exposure of various crops to the
perils proposed to be covered.
ii. Availability Of Trained Personnel
Trained personnel are necessary to operate insurance schemes at different levels,

at the headquarters and also in the field. Human resource isas important as
financial resources for any program. Agricultural insurance schemes are more
complex than other types of insurance. It is necessaryr to create facilities for
specialized training in the theory, techniques and practices of agricultural
insurance.
iii. MONITORING AND EVALUATION
Monitoring and evaluation are important aspects of a program. There should be a

system of regular monitoring and evaluation so as to take remedial measures on
time.
Source: - Developing Rainfall: - Based index insurance in Morocco: Skees Jeal.
46
Chapter 7
Suggestion & Recommendation
8.1 Suggestions
47
6.1 Suggestions
The market for crop insurance in a developing country is no doubt, as vast as the
coverage under cultivation. However at the present stage of developing of crop
insurance coverage of crops, areas and farmer will vary from country to country
depending upon national priorities and also the objective set and the limitation
imposed under crop insurance scheme.
There is concern that agricultural production in developing countries will cause

environmental threats in the future, as production will have to increase to satisfy
the growing demand for food. Intensification leads to high inputs of nutrients in the
form of mineral fertilizers and animal feed. Important parts of these inputs leak
from the system in the form of nutrient leaching to groundwater and gaseous losses
to the atmosphere. Pressure on the existing agricultural land may increase by
growing demand for productive land and degradation of the existing agricultural
land base. Expansion of agriculture generally leads to massive deforestation.
The study presented in this report concentrated on the interactions between

livestock production, crop production and land use. The link between livestock and
crop production is through the demand for animal feedstuffs. This report presents
long-term scenarios describing these interactions and the possible consequences for
crop production and animal waste production. As the world population is expected
to stabilize in the second half of the twenty-first century, the scenarios must cover
a period of 50-100 years to include the impacts of human population numbers.
Not all environmental consequences can be quantitatively evaluated. World

agriculture is currently responsible for more than half of the atmospheric increase
of nitrous oxide (N2O), two thirds of the global ammonia (NH3) input into the
atmosphere, and 40% of global methane (CH4) emissions. These compounds play
important roles in atmospheric chemistry, ozone depletion, aerosol formation and
greenhouse warming. Therefore, a number of examples were selected to be worked
out in detail, including the emission of ammonia (NH3) and nitrous oxide (N2O)
48
from animal waste and mineral fertilizers, as well as projections of the emission of
methane (CH4) from ruminating animals. A number of other environmental effects
related to livestock and crop production are discussed in a qualitative way.
Starting from the AT2010 results, and using a population and per caput demand
scenario, we have made a projection of regional domestic demand and self-
sufficiency for groups of food products. Three scenarios of agricultural production
have been compiled: one medium scenario based on the trends of AT2010, one
more optimistic (high) scenario where all growth rates, yield and productivity
ceilings were taken slightly higher, and a more pessimistic (low) scenario. The low
scenario results in a development where more land is required for crop production
and more animals are needed to meet the growing demand. In the high scenario the
opposite occurs, with a smaller cropland area and fewer animals needed to achieve
the same production level.
49
Chapter 8
References
8.1 Bibliography
8.2 Websites
50
8.1 Bibliography
a. Strategies for Crop Insurance Planning: - Robert R.A.J. & Dick W.J.A.
b. Developing Rainfall: - Based index insurance in Morocco: Skees Jeal.
c. Flow of credit to small and marginal farmers- a case study of Karnataka-

Bhende M.J.
d. Karnataka crop insurance study:- World South Asia Region
8.2 WEBSITES
1. www.answer.com
2. www.management paredise.com
3. www.casestudies/insurance/croinindia.com
51
Chapter 9
Annexure
9.1 Case Study
52
9.1 Case study

A. Introduction
Land reform has been successful in Karnatka, as relected by the relatively large
number of landholders in the state. As a result of land reform coupled with
inheritance law in particular, the average land holdings as of 1996 was 1.95
hectares, compared to holdings of 1.45 and 0.48 hectares, respectively, for small
and marginal farmers account for 69% of total holdings, they operate onky 31% of
the total area.
As per the 1991 Census, there were 17.3 million workers in Karnataka. Of this
total farmers accounted for 5.92 million (34%); agricultural laborers, 5 million
(29%) and other workers, 6.38 million (37%). The small holding pattern and the
high dependents of the labor force on agriculture are reflected in cropping pattern.
More than 50% of the net sown area is devoted towards cereals and pulses,
primarily for consumption purposes.
Karnataka over the past 43 years had a rainfall deficit an average of 1 out of every
4.3 years. Rainfall deficit occurred in 12 out of 43 years during Kharif season. And
in 21 out of 43 years during Rabi season. A policy of cultivating cereals and pulses
in a state where more than 75% of arable land is dependent on rainfall innovative
risk management instruments to hedge against yield variability.
i. Holdings
The total number of holdings in Karnataka increased from 3.55 million in 1971 to
6.22 million in 1996. During the same period, small and marginal household
increased from 54% of total holdings to 69%, while the area held by these
smallholders expanded from 15.6% to 30.8%. as a result the average size of
holdings decreased from 3.2 hectares in 1971 to 1.95 hectares in 1996. Small and
53
marginal farms comprised half of the holdings in northern Karnataka and 75% in
the southern and coastal regions of the state.
The large increase in the number of small and marginal holdings in Karnataka,
largely reflecting growing population pressure is a matter of serious concern. The
average holding of less than 2 hectares is smaller than the three hectare estimate of
threesold viability. The declining size of holdings constrains the pace of agriculture
development because small farmers are less able than large farmers to invest in
development activities or in adoption of capital incentive technology. Moreover,
small-generally poorer-farmers are more vulnerable to poverty after disaster realted
income losses. As marginal land holdings become less and less viable the number
of marginal farmers leaving farming will swell the ranks of the urban poor.
ii. Cropping patterns

The net sown area in Karnataka is normally above 11.2 million hectares. Only 24%
of the arable area is under irrigation,so most of the cultivable area depends on the
occurrence and distribution of pre monsoon and southwest monsoon precipitation.
The cropping pattern of Karnataka is dominated by crops planted during the Kharif
southwest monsoon season (June to October). Normally 65% of the net sown area
is planted with crops during Kharif depending on pre monsoon and southwest
mosoon rains. Similarly, about 30% and 5% of the area is sown during Rabi, the
northeast monsoon season (November to March) and the summer season (April to
June) respectively, depending on the quantum of residual moisture.
According to 1999-00 data, 45% of the net sown area is in Karnataka is under
cereals, 14% under pulses, and 20% under oilseeds. In recent years the area under
horticultural crops has been growing rapidly due to economic liberalization,
availability of infrastructure, and incentives provided by the central and state
governments for the promotion of horticultural crops. The shift from subsitence
farming to more remunerative horticultural crops has been apparent since the early
1990’s. Karnatka now ranks third among the states in the production of fruits, with
11% of India’s total fruit production.
54
The area under horticultural crops in the state expanded from 0.8 million hectares
in 1980-81 to 1.8 million hectores in 1999-00, registering a grwoth rate of 4%
annually. At the micro level, the production of area under food crops decreases
with and increasing size of holding. The relatively higher share of food crops on
small holdings indicates a lower level of commercialization and a pre dominance
of substistence farming on small and marginal farms. In general, cash crops
comprise a larger proportion of irrigated land than food grain crops across farm
sizes and social groups. The proportion of irrigated land under cereals was higher
on small farms than on large farms, and the opposite was true in case of oil seeds.
Finally, most of northern Karnataka and rain fed areas of southern Karnataka have
largely diversified cropping pattern, while the coastal and irrigated regions tend
towards more monocropping.
iii. Scope for intervening with weather instruments

The initial attempt to characterize the relationship between crop yields and rainfall
parameters indicates a potentially hign correlation between yield shortfall and
rainfall deficit for some crops. Therefore, in talukas and for crops where rainfall
has a large impact on crop yield, rainfall based insex contracts may be an efficient
instrument for transferring relatively infrequent drought risk.
The next step in considering how to address the systematic and basic risks arising
from the differential impact of rainfall variations on crop yield through out the
state would be to study how area-yield based and weather-index based on he
respcetive comparative advantages in coping with the covariate and non-covariate
sources of risk.
55
B. Characteristics Of Farmers Income

As part of this study, a small survey of hundred households in Karnataka was
undertaken in 2003 to determine farmer’s source of income. According to the
survey, labor wages become increasingly important to farmers as farm size
decreases. After the drought year, the average household’s total income is cut in
half with small households the most afected. Following an income loss of this
magnitude, more than 40% of small and marginal farmers seek additional labor
employment. In contrast 60% of medium and large farmers would borrow funds.
i. Sources of income
Income from agriculture is uncertain due to the vagaries of nature and market
imperfections. Specialization in farming may earn fram household’s higher income
but increases risk. Diversification reduces income compared to specailized farming
but help reduce the risk associated with crop growing. Most farmers, regardless of
farm size undertake other farm activities to optimize use of resouces and augment
household income. In a normal year crop,livestock and wage earings may be the
major source of income for most households. However, during drought years the
contribution made by these sources is drastically reduced, and income is
augmented through other sources such as transfers and remittances, borrowing and
credit, and mortgage and sale of customer durable assets.
The hundred housegold farm surveys of income sources and drought mitigating
strategies were too small to derive general results. It did, however, produce some
original results that can be compared or added to pervious studies. Table 1
presents sources of income by farm size classes.
56
Table 1. Sources of income by farm size classes (%)
Sources of Marginal Small Other All

income
Agriculture 29 62 84 63
Livestock 13 13 8 12
Labor wages 50 19 2 20
Trade and 3 6 2 42
business
Other 5 0 4 2
Source: household farm survey (2003)
For marginal households, labor wages comprise half of income while agriculture
accounts for about a third, according to the survey. Small farmers derive 62% of
their income from agriculture, medium and large farmers derive 84%. Livestock is
also siginificant source of income for farmers, whatever the land holding size.
Failure of monsoon during the pre sowing and sowing season reduces the area
sown. A prolonged dry spell during crop growth farmers and landless laborers.
Drought not only reduces income, but also results in migration of households, loss
of livestock, depletion of assets, amd indebtedness. The survey analysis provides
estimates of the post drought reduction and household income. As expected, a
drought primarily affects agriculture income. Although the reduction in total
income for the average household is 52%, small households loose more incomes.
The total income of marginal households is reduced by 44% because of the
relatively low reduction in labor wages (minus 39%) their primar source of
income.
ii. Risk mitigating strategies

Farmers and rural societies have devised strategies to reduce risks and to cope with
income shortfalls. Risk reduction strategies include crop diversification into non
farm income earning activities. Risk reduction strategies stabilize farm income but
at a lower level.
57
Farmers use different strategies to adjust to an income shortfall, including transfers

from relatives, borrowing from consumption, increasing labor participation, sale of
asset and stored produce, and migration in search of better employment
opportunities. Traditional risk coping mechanisms cannot, however, deal
effectively with the co- variability problem because the drought affects an entire
area. For e.g. financial assistance in the form of transfers or loans from relatives
and friends may not be forthcoming when production and price risks
simultaneuosly affect nearly everyone living in a small rural community. Similarly,
borrowing for consumption is costly when risk affects many farmers are trying to
sell at the same time.
iii. Prioritization of mitigating strategies

Household survey collected information on the coping mechanisms used by
household in Karnataka after a drought. More than 40% of the small and marginal
farm operators identified wage employment as a prefer strategy, while medium and
large farm households prefer borrowing. More than 10% of the marginal and small
farms would sell goats and sheep to overcome the shortage in household income.
About ¼ of medium and large farms would use savings. None of the households
would reduce consumptions, sell stored farm produce, or sell farm implements.
Small and marginal farmers are highly exposed to an income shortage in the event
of drought because of their low resource endowment and savings. Large and
medium farm operators have more resources and can better manage fluctuations in
income. After effects of drought and other such catastrophic events for small
farmers are more severe because they are more likely to face liquidity problem in
purchasing farming inputs for the next planting season.
58
C. Current Crop Insurance Scheme

Karnataka has participated in every crop insurance scheme introduced in India
since 1972, when the first scheme, based on an individual farm approach for
cotton, was initiated.
a. Earlier Indian Crop Insurance Schemes

The Indian government started the Pilot Crop Insurance Scheme (PCIS) in 1979,
which shifted from the individual farm base 6 approach to an area yield approach,
available to any farmer utilizing agricultural credit. In 1985, the Indian government
introduced the Comprehensive Crop Insurance Scheme (CCIS), linked to short
term crop loans and implement on an area yield basis; claims in excess of
premiums were shared equally between the state and national governments. In
1997, an Experimental Crop Insurance Scheme similar to the CCIS was launched
for small and marginal farmers with a 100% premium subsidy, but it was
discontinued after one season due to administrative and financial difficulties. All
these insurance programs have generated claims well in excess of premiums.
b. National Crop Insurance Scheme

The current crop insurance system, the National Agricultural Insurance Scheme
(NAIS), was introduced in 1999 and first utilized in Karnataka in 2000. The state
objectives of the scheme are to:
i. Provide insurance coverage for all crops and financial support to all farmers in
the event any notified crop fails as a result of natural calamities, pests and
diseases.
ii. Restore the credit eligibility of farmers, after a crop failure, for the next crop
season.
iii. Encourage farmers to adopt progressive farming practices, high value inputs
and higher technology in agriculture.
iv. Help stabilize farm incomes, particularly in disaster years.
59
The governments policy on crop insurance is also influenced by concerns that

agricultural risks could cause welfare problems for the farming community, lead
default on loan repayments, cause an aversion to riskier but higher value crops,
lead sub optimal use of resources and destabilize commodity supplies. At another
level, the nature of risks and the financial capacity of the farming community have
a significant influence on the government’s policy. These considerations include:
i. Many agricultural risks are systemic in nature, with a single event leading to
multiple, highly correlated crop losses.
ii. Catasrophic losses are the norm rather than the exception. Consequently, crop
insurance is expensive. This is particularly the case in Karnataka where 7% of
the arable land is dependent on rainfall and where the state has witnessed
rainfall deficiency out of every 4.3 years.
iii. Production risks cary significantly across the country.
iv. The Indian farmer’s ability to pay is extremely limited.
D. Institutional Mechanism for Delivering Crop Insurance
Various ministries and government organizations are invloved in the design and
delivery of crop insurance. Product design is carried out at the national level by
the Agriulture Insurance Corporation of India in consulttion with the Ministry
of Agriculture, Government of India. The scheme is operational at the taluka
level. The central and state ministries for agriculture make the decisions on vrop
notification, channeling of the premium subsidy and contribution to the coprus
fund. Similarly the central and state ministries for finance determine the
funding to be earmarked for crop insurance each year and are directly involved
in mobilizing resources, particularly when claims exceed premium revenue.
60
The state revenue Revenue Department issues certificates that provide

information on land holdings, crops sown and crop yield. These certificates
become the basis for insurance coverage. The state Directorate of Economics
and Statistics (DES) carries out the crop cutting experiments to measure
production yields. The Agriculture Insurance Corporation of India (AICI), is the
implementing entering agency of the NAIS.
All inusrance related cash flows such as premiums, claims and subsidies are
maintained by AICI. Claim settlements are based on instruction from AICI. The
apex banks, state and district cooperative banks, and primary agricultural
cooperative societies and banks are the main credit institutions. They also
collect premiums and settle loss claims.
E. Claim Settlement Process
Claim settlement process depends closely on the crop cutting experiments that
detrmine the actual area yield for different unit areas. Once the yield data are
received from the state government, claims are worked out from declarations
received from participating finanicial instituttions for each notified area, and
approval is obtained. Both the central and state governments under the corpus
fund provide the funds needed to pay claims beyond the risk sharing limits of
the AICI. The claim checks along with claim particulars are released to the
financial institution involved, which in turn credits the acoounts of the
individual farmers. Claims for all crops have to be approved by the AICI.
However, the government may elect to scrutinize a claim within its risk ability.
61
F. Conclusions And Recommendations

As stated the outset of this report, minimizing the impact of natural disaster
related crop losses, particularly losses due to drought, is a significant public
policy objective for the government of Karnataka. An effective crop insurance
system is a critical element od a strategy to cushion income losses for farmers,
finance inputs for agricultural production in the next planting season, and
deepen the penetration of agricultural credit for investment to boost agricultural
productivity.
i. Conclusions
At the same time, Karnataka presents a challenging environment in which to

implement a crop insurance program. The large and growing number of small
and marginal holdings makes it difficult to expand the reach of a program to all
farmers, including those who are most vulnerable to extreme poverty in the
event of a catastrophic yield loss. Frequent droughts increase the importance of
crop insurance, while compounding the difficulties of desgning a crop insurance
system that is financially viable for the government yet affordable for farmers.
In practice, Karnataka appears to have a two-part system for compensating

farmers for crop losses. Although this study focuses on crop insurance, the
national and state disaster-relief programs play an equally important role for
natural disaters, and these programs extend to a wider swath of small and
marginal farmers than does the NAIS, which in any event reaches only 10% of
farmers in Karnataka. This coexistence of crop insurance and disaster relief
programs for farmers is not unique to India.
62
ii. Recommendations
In Mexico, the government established a Fund for Natural Disasters as a last
resort source of post-disaster financing for reconstruction of public
infrastructure and compensation to low-income producers for crop and livestock
losses arising from natural disasters.
Such a program in Karnataka could be based on all area yield index, building on
the existence crop insurance scheme. It would also be possible to introduce a
weather related trigger. A significant advantage of establishing a scheme of this
type iss that the arrangements for assessing claims and delivering relif could be
determined before the drought or other disaster occurs.
Source: Karnataka crop insurance study: - World South Asia Region
63

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Crop Insurance In Developing Countries

1.2 Crop Insurance – In Some Developing Countries

1.2 Crop Insurance – In Some Developing Countries:

Crop insurance is primarily a business which invloves developed country farmers.

The agricultural insurance business is competitive. Some 25 companies and mutual

An interesting example of a new product is “Failed Well Insurance” the demand

2.1 Growth in Demand for Crop Insurance

2.1 Growth In Demand For Crop Insurance Products

a. Evidence is accumulating of connections between cliate change, and the

b. Farming is becoming steadily more commercialized, with greater levels of

c. The World Trade Organization (WTO) regulations generally forbid

d. The dynamism of the farming sector, and its environment, is reflected in

e. Accidental introduction of exotic pests/diseases is something which

f. Insurance can also assist in managing the on-farm prouction risks

g. Many of these apparently diverse influences have a major common theme.

2.2 Increasing Incidence of Crop Damaging Weather Events

The scientific community is not unanimous in attributing the increases in

The increasing incidence of crop damaging weather events is likely to continue

2.3 Greater Commerlization of Farming / Contact Farming

Investor/farmers who have substantial interest in the success of a given crop

From an administrative point of view bank/insurer linkages make a lot of sense,

between contractorand grower, means that insurance can be included in the

Some examples of contract farming arrangements in developing countries:

c. 30,000 farmers from in northern Thailand grow vegetables for local

d. Banana production by small holders in Central America is very

e. Fast food chains in the Philippines and elsewhere frequently contract

f. 44 growers in Northern Indiagrow tomatoes for paste under contract to

In many of these cases insurance protection could be arranged against major

2.4 World Trade Organization Regulations

Whereas this development is still relatively now, the commercial insurance

2.5 Classic/Public Crop Insurance Products

A. Damage-Based Products, E.G. Hail/Named-Peril Products

a. Damage resulting from the peril is localized;

b. Low degree of correlation of risk over a given area;

c. Sum insured is agreed when the policy is purchased;

d. Loss adjustment and eventual indemntiy based on measured of the

B. Yield-Based Products, E.G. Mutli-Peril Crop Insurance (Mpci)

Other features are:

Source: www.management paredise.com

3.1 Reasons for Failure of Public Crop

3.1 Reasons For Failure Of Public Crop Insurance Programs

An insurable risk has the following 4 characteristics:

a. The likelihood of the event must be readily quantifiable;

b. The damage it causes must be easy to attribute and value;

d. Neither the occurrence of the event or the damage it causes should be

government or contingent loan arrangements, this specialization increases their

3.2 Guidelines for Improving Government Sponsored Insurance

Publicly owned crop insurance programs are probably impossible to design as

c. Premiums should be based on sound, actuarial calculations, and adjusted

e. The insurance should be voluntary and in competition with the private

f. To avoid adverse selection, premium rates should be tailored to the

g. Administrative cost must be controlled.

Source:-Developing Rainfall: - Based index insurance in Morocco: Skees Jeal.

4.1 Area-Based Index Insurance Has A

What is needed is a system of insurance that meets the following requirements:

b. It compensates for catastrophic income losses to protect consumption and

c. It is practical to implement given the limited kinds of data available.

d. It can be provided by private sector with little or no government subsidies.

4.1 Area-Based Index Insurance Has a Number of Attractive

b. It could be very inexpensive to administer, since there are no individual

laborers. Defining SUCs in small denominations would raise their appeal to

e. As long as the insurance is vlountary and unsubsidized, it will only be

g. Recent development in micro-finance also make area-based index insurance