The insurance coverage in the agriculture sector needs to be enhanced to protect the interest of farmers as well as banks lending to this sector, said the Financial Stability Report released by the RBI on Thursday.

The coverage of agricultural insurance continues to remain low, as only 4 per cent of the farmers reported having crop insurance and only 19 per cent of them ever used any crop insurance. The coverage, in terms of value of agricultural output, also continues to remain small. With limited coverage and relatively high premium, insurance schemes are prone to become unviable, it said.

Risk factor

Accepting that the crop insurance business is inherently riskier and costlier compared to other insurance products, the report said crop failures are not specific to one particular farmer, as weather-related events affect entire areas and populations at the same time.

Farmers are often uninterested from buying an insurance product, as insurance companies calculate the loss for individual farmers by taking into account the average yield of the area (block) in the past three to five years.

Though linking crop insurance with bank credit availed by a farmer protects the bank from losses (which indirectly helps the farmer too), it makes the insurance product a ‘compulsory’ add-on cost for a farmer, it said. To ensure faster settlement of crop insurance claims, the Insurance Regulatory and Development Authority of India is actively considering the possible use of satellite remote sensing technology as an efficient and reliable mapping tool for yield estimation, risk assessment, and settlement of crop insurance losses.

Coverage for rural areas

The regulator recently issued a draft regulation making it mandatory for insurance companies to provide cover to rural and economically weaker sections.

The regulation mandates that insurers have to necessarily sell a specified percentage of policies and underwrite a specified percentage of the gross premium with respect to life and non-life insurance companies respectively, to rural and economically weaker sections. Stringent penalties are prescribed under the Act for non-compliance.

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