Agriculture, crop, cattle and micro insurance

1. Meaning and need

Agricultural insurance covers the farmer against loss of crops, livestock, farm assets and income from natural and other risks. Indian agriculture is exposed to drought, flood, cyclone, hailstorm, pests and disease, price falls and the failure of the monsoon. Most farmers are small and marginal, borrow for each season, and are ruined by one bad harvest. Insurance does not prevent the calamity; it puts money in the farmer’s hands afterwards.

Reasons for introducing agricultural insurance in India:

• Instability of farm income, which depends on weather the farmer cannot control.
• Indebtedness: crop failure leaves loans unpaid, leading to distress sales and farmer suicides. Insurance protects both the farmer and the lending bank.
• Credit flow: banks lend more readily where the crop is insured, which is why crop insurance was linked to crop loans.
• Encouraging investment and new technology: a farmer protected against loss is more willing to use better seed and inputs or to grow a riskier, higher-value crop.
• Reducing relief burden on the State, which otherwise pays ad hoc relief after disasters.
• Market failure: private insurers find individual farm risks costly to assess and prone to correlated losses, so the State must design and subsidise schemes.

2. Objectives

• financial support to farmers suffering crop loss from natural calamities, pests and disease;
• stabilising farm income so that farmers continue farming;
• encouraging adoption of modern practices;
• ensuring flow of credit and protecting the lender;
• food security, crop diversification and growth of the agricultural sector.

3. History of crop insurance in India

• 1947–65: proposals discussed after Independence; a draft Crop Insurance Bill and model scheme were circulated to the States in 1965 but not adopted.
• 1972–73: the first scheme, on H-4 cotton in Gujarat, by the general insurance department of LIC and later the General Insurance Corporation.
• 1979: Pilot Crop Insurance Scheme on the area approach, run by GIC with the States.
• 1985: Comprehensive Crop Insurance Scheme, linked to short-term crop loans, compulsory for loanee farmers.
• 1999–2000: National Agricultural Insurance Scheme, extending cover to all farmers, loanee and non-loanee, and more crops.
• 2002–03: Agriculture Insurance Company of India Ltd. set up by the public sector insurers and NABARD to specialise in farm insurance.
• 2007 onwards: Weather Based Crop Insurance Scheme (paying on rainfall, temperature or humidity data rather than yield) and, from 2010, the Modified NAIS.
• 2016: Pradhan Mantri Fasal Bima Yojana from Kharif 2016, replacing NAIS and MNAIS, with the Restructured Weather Based Crop Insurance Scheme alongside. In 2020 it was made voluntary for loanee farmers.

4. PMFBY: main features

• Who: all farmers, including sharecroppers and tenants, growing notified crops in notified areas.
• Premium paid by the farmer: at most 2% of the sum insured for Kharif crops, 1.5% for Rabi crops, and 5% for commercial and horticultural crops. The balance of the actuarial premium is shared by the Centre and the States.
• Risks covered: prevented sowing, standing crop loss from drought, flood, pests, disease and similar causes, localised calamities (hailstorm, landslide, inundation, cloudburst, natural fire) assessed for the individual farm, and post-harvest losses from cyclonic rain and similar perils for a short period while the crop lies in the field.
• Implementing agencies: Agriculture Insurance Company and empanelled public and private general insurers, selected by the States.
• Technology: remote sensing, smartphone-based crop cutting, and a national crop insurance portal.

5. Underwriting and claims

Crop insurance is underwritten on the area approach, not farm by farm. A village or group of villages is an insurance unit. For each crop a threshold yield is fixed from the average yield of past years multiplied by an indemnity level. After harvest, crop cutting experiments on sample plots give the actual yield. If it falls below the threshold, every insured farmer in the unit is paid:

Claim = (Threshold yield − Actual yield) ÷ Threshold yield × Sum insured.

Localised and post-harvest losses are an exception: the farmer must notify the insurer within a short period (72 hours under PMFBY guidelines) and the loss is assessed for his own field. Weather-based schemes pay automatically when the measured weather index crosses the trigger.

6. Problems associated with crop insurance

• Basis risk: a farmer whose own crop failed may get nothing because the unit’s average yield was normal.
• Delay in claims, often because States release their premium subsidy late or yield data arrives late.
• Inaccurate crop cutting experiments and disputes over yield data.
• Low awareness, especially among non-loanee and tenant farmers; loanee farmers often did not know they were insured.
• High actuarial premiums and a heavy subsidy burden, leading some States to leave the scheme and run their own.
• Moral hazard and fraud, and difficulty in verifying sown area.
• Grievances: the farmer’s remedies are the scheme’s grievance committees, the Insurance Ombudsman and Consumer Commissions.

7. Cattle (livestock) insurance

Livestock insurance covers death of cattle, buffaloes, sheep, goats, poultry and other animals from disease, accident, natural calamity, surgical operations and the like, usually for the market value certified by a veterinary officer. The animal is identified by an ear tag, which must be produced with the claim. Exclusions: theft, slaughter, intentional injury, pre-existing disease, transport by sea or air. Policies are sold to individuals and, more commonly, to borrowers under rural development and dairy schemes, with Central and State subsidy under the National Livestock Mission. Problems: verification of identity of the animal, valuation and slow veterinary certification.

8. Micro insurance

Micro insurance is insurance of small value for low-income people: small sums assured, low premiums, simple terms, sold and serviced through channels that reach villages and slums (self-help groups, NGOs, co-operatives, micro-finance institutions, common service centres). IRDAI first made specific regulations for micro insurance in 2005 and has since folded it into its product regulations, allowing micro insurance agents and combined life and general products. Public schemes on the same idea are Pradhan Mantri Jeevan Jyoti Bima Yojana (life cover) and Pradhan Mantri Suraksha Bima Yojana (accident cover), both launched in 2015 and sold through bank accounts.

How this is examined

“Outline the reasons and objective of introducing agricultural insurance in India” (June 2025, 10 marks): sections 1 to 4. Short notes: “Agriculture insurance” (January 2026) and “Crop insurance in India” (February 2025): sections 3 to 6 in compressed form. Cattle and micro insurance are short-note topics. Marks go for the timeline and for naming the problems.