Crop, Cattle and Rural Property Insurance

In one line

Rural insurance abandons the individual loss adjustment that runs the rest of this module and pays on an area yield instead, because you cannot send a surveyor to every field.

In the wording a student can write in an exam: crop insurance in India is delivered principally through the Pradhan Mantri Fasal Bima Yojana, a Government scheme administered by the Department of Agriculture and Farmers Welfare and underwritten by empanelled general insurers; it operates on the area approach, taking a defined insurance unit rather than an individual holding, indemnifies the shortfall of actual yield below a threshold yield, caps the farmer's premium at 2% of the sum insured for Kharif food grains and oilseeds, 1.5% for Rabi and 5% for annual commercial and horticultural crops, and is subsidised by the Centre and the State in equal shares.

Why rural risks are insured differently

Because the sum at risk is small and the cost of adjustment is not. A surveyor's visit costs more than the crop on a two hectare holding, so the ordinary machinery of proposal, survey and individual assessment cannot be used.

Because the losses are correlated. A drought does not fail one farm; it fails the district. So the class has the same catastrophe problem as earthquake, and no commercial pool can carry it without the State.

Because moral hazard is unusually severe. A farmer decides how much to sow, what to sow, how much to irrigate and when to harvest, and every one of those decisions changes the loss.

And because the buyer cannot pay the risk based price. The actuarial premium for a rainfed Kharif crop is many times what a marginal farmer can pay, so the scheme is a subsidy scheme with an insurance mechanism inside it, not an insurance product with a subsidy attached.

Each of those four facts explains a design choice, and a student who can connect them to the scheme's features has the essay.

Pradhan Mantri Fasal Bima Yojana

Who is covered. All farmers, including sharecroppers and tenant farmers, growing notified crops in notified areas, provided they have an insurable interest in the crop. A non loanee farmer must submit documentary evidence of land records, or the applicable contract or agreement in the case of a sharecropper or tenant.

Compulsory or voluntary. The guidelines describe a compulsory component, under which farmers sanctioned Seasonal Agricultural Operations loans by financial institutions were covered compulsorily, and a voluntary component for others. The Union Cabinet decided on 19 February 2020 to make the scheme voluntary for all farmers from Kharif 2020, a loanee farmer being able to opt out by a declaration to his bank branch before the cut off date. So the compulsory limb in the printed guidelines is now historical, and an answer should say so.