Agriculture plays a pivotal role in the Indian economy, especially in rural areas. According to the recently-released Situational Assessment and Land Holdings of Agricultural Households in Rural India Report (SAS, 2019) by the National Statistics Office, 54 per cent of rural households are agricultural, earning 37 per cent of their household income from farming. 

This sector, however, is also subject to a multitude of constraints – marginal land holdings, lack of irrigation facilities, susceptibility to price and weather induced shocks, crop loss and crop failure – making it hard for farming households to practice agriculture sustainably.

Moreover, they also face vulnerabilities like climatic changes, erratic weather, diseases, damage caused by insects, pests, or animals, and by natural disasters like floods among others.  Insurance, therefore, becomes a very important tool for agrarian families to manage and mitigate their risk.

This article draws insights from SAS, 2019 to highlight some of the existing gaps in marketing, servicing, claim payout and coverage in the crop insurance market in India.  

Deep fault lines

Insurance take-up is still relatively low and the average share of agricultural households holding crop insurance stands at 10.5 per cent for both the July-December 2018 and January-June 2019 seasons and all crops combined.

Also read: Crop insurance claims for 2020-21 lower by over 60 per cent from previous year

Though these numbers are an improvement from the previous report published in 2014 (for July 2012- Juny 2013 seasons), a closer analysis reveals some deep fault lines. At the stage of access, the report captures the reasons for farmers not taking up insurance and 39 per cent, on average, reported not being aware about crop insurance. An additional 14.2 per cent of households were not aware of the availability of insurance facility, highlighting a significant gap in marketing and outreach. 

Furthermore, of the 10.5 per cent of households that reported ownership of insurance, less than half of them (47 per cent) received their insurance documents. Considering that it is mandatory to submit a copy of this insurance document when registering a claim, this is a worryingly low number that speaks of the poor service offered by insurance providers.  

Crop insurance take-up can be of two kinds – one is by households availing of agricultural loans who are mandated to insure their crops, while the other is by those who take up insurance on their own volition. The data for those farmers who took up insurance on their own shows a rather high percentage of these farmers reporting crop-loss. 

For instance, during the July-December 2018 season, 99.1 per cent of farmers who self-insured for potato reported crop loss, and in the January-June 2019 season, 86.4 per cent of those self-insured for maize reported crop loss. The average percentage of self-insured households who reported crop loss for both seasons and for all crops stands at 54.2 per cent. 

As for the general population (including both insured and uninsured farmers), the average percentage of households reporting crop loss was 43 per cent. 

Blind spot

With crop loss being so high, the data on claim payment is not reassuring either. As per the report, none of the households that were self-insured for potato and reported crop loss, received any claim, either full or partial. 

Overall, of the farmers who were self-insured and reported crop loss, only around 8 per cent on average received full claim payment while 7.9 per cent received partial claim. Further, the report tries to capture the reason for non-payment of claim under the following three heads: “cause outside coverage”, “documents lost”, and “others”.

Here, a striking majority of 77.2 per cent (100 per cent in the case of potato farmers who registered crop loss) report the reason to be “others”. This indicates a blind spot in our understanding of whether claims are being registered, and if they are, then the reasons that they are possibly being rejected for most farmers. 

Interestingly however, we see the Agricultural Insurance Company of India (AIC) reporting an incurred claim ratio of 92.25 per cent for FY 2018-19 (IRDAI Annual Report 2018-19). 

Also, according to PMFBY, the reported claims for FY 2019-20 was ₹26, 893 crore, of which ₹25,822 crore has been paid in claims. These data from the farmers on one side and the insurance companies on the other side paint a very contrasting picture. There is therefore an urgent need to go beyond take-up numbers to make crop insurance beneficial for a larger section of farmers, and sustainable for insurance providers as well.   

Making it a habit

Agriculture, like any enterprise, is prone to risks and crop insurance offers a reasonable way to mitigate loss. For the farmers, this mitigation is possible only when they have access to and make a habit of insuring their crop. For the insurance companies that intend to bring down adverse selection and concentrated risk, crop insurance needs to become more widespread. Governments offering subsidies on premiums aim for a well-functioning crop insurance market that provides appropriate cover and handholding to farmers.

Evidently, crop insurance can fulfil the priorities of all these stakeholders only when farmers from diverse geographies, growing varied crops, are covered under a large common risk pool, and are provided adequate, appropriate, and detailed information about using their policies. Also, to expand and strengthen crop insurance take-ups, farmers should start benefiting from crop insurance. This requires concerted efforts by insurance companies and the government to strengthen the servicing mechanism for existing policies, educate the farmers on how to use their insurance policies, and make the claim procedure easy and transparent.

Furthermore, crop insurance that is seen to benefit a small farmer can act as a nudge to other farmers. As the report itself finds, advice from a fellow farmer is the most accessible (22 per cet of agricultural households) and the most willingly adopted (92.1 per cent). We, therefore, cannot ignore the positive (or negative) network effects to insurance take-up from the good (or bad) experience of peer farmers.

With 70.4 per cent of rural agricultural households having a landholding of less than one hectare, this sector mostly comprises either landless or marginal and small farmers, making for low turnovers and net income generation. Crop loss only exacerbates their financial vulnerability, impacting their well-being immediately as well as in the long-term. The proper management of risk backed by a robust crop insurance ecosystem will help the farming community tide over adverse events and act as a bulwark against unfavourable shocks.

Natasha D’cruze is Research Associate and Priyadarshini Ganesan is Senior Research Associate with the Household Finance Research Initiative at Dvara Research