Agricultural Insurance Types and PMFBY Scheme Details
Types of Agriculture Insurance
Agriculture insurance is classified based on the type of asset, type of risk, type of risk assessment method, and risk management method. It can be classified into three categories based on the type of asset: Crop, Livestock, and Farm implements.
Crop insurance covers protect farmers against the uncertainty of crop yield arising out of natural reasons beyond their control. Crop insurance is further classified on the basis of the type of crop into three categories: food crop, commercial crop, and plantation/horticulture.
Livestock insurance covers the risks of animal husbandry, poultry, fisheries, sericulture, apiculture, etc. It can be divided into cattle insurance, small farm animals, poultry, fisheries, and others.
1 Crop Insurance
Crop insurance is a product aimed at protecting cultivators from farm production-related risks, which are measured in terms of yield or weather parameters. Mahul and Stutely (2010) define crop insurance as: “Insurance that provides financial compensation for production or revenue losses resulting from specified or multiple perils, such as hail, windstorm, fire, or flood.”
1.1 Indemnity-Based Insurance
Indemnity means making compensation payments to one party by the other for the loss occurred. Indemnity-based insurance is a mutual contract between the insured and the insurer where the insurer promises the insured to compensate for the loss against the payment of premiums. There are two main indemnity products:
- (i) Damage-based Indemnity Insurance: Also called Named Peril Crop Insurance. The insurance claim is calculated by measuring the percentage damage in the field soon after the damage occurs. The damage measured in the field, less a deductible expressed as a percentage, is applied to the pre-agreed sum insured.
- (b) Yield-based Crop Insurance: Also called Multiple Peril Crop Insurance (MPCI). An insured yield (for example, tons/ha) is established as a percentage of the farmer’s historical average yield. The insured yield is typically between 50 percent and 70 percent of the average yield on the farm. If the realized yield is less than the insured yield, an indemnity is paid equal to the difference between the actual yield and the insured yield, multiplied by a pre-agreed value.
1.2 Index-Based Crop Insurance
Index-based insurance makes indemnity payments based on measures of an index that is assumed to be a proxy for actual losses, instead of indemnity payments based on an assessment of the policyholder’s individual loss. There are two types of index products explained below:
- (i) Area Yield Index Insurance: Here, the compensation is based on the realized average yield of an area, such as a country, district, or taluka, and not the actual yield of the insured party. The insured yield is established as a percentage of the average yield for the area. Compensation is paid if the realized yield for the area is less than the insured yield, regardless of the actual yield on a policyholder’s farm.
- (ii) Weather Index Insurance (WII) 232: Weather Index Insurance are contingent claims contracts for which payouts are determined by an objective weather parameter (such as rainfall, temperature, or soil moisture) that is highly correlated with farm-level yields or revenue outcomes.
2 Approach to Crop Insurance
There are two approaches to crop insurance depending on the unit of insurance: Individual and Area.
2.1 Individual Approach
Under this approach, the basic unit of insurance is the individual farmer. This approach indemnifies the loss of the individual farmer based on past yield data and the loss experience of the farmer. The premium paid by the farmer is also decided by the historical yield and loss data of the farmer.
2.2 Homogeneous Area Approach
In the homogeneous area approach, the basic unit of insurance is an area homogeneous in terms of crop production and variability. The unit of insurance under NAIS was the taluka/block, whereas it is the village/panchayat in the case of the Pradhan Mantri Fasal Bima Yojana (PMFBY) scheme.
3 Underwriting and Claims in Crop Insurance
Crop insurance is different from other lines of business as it provides cover season-wise and crop-wise. The nature of the crop and its productivity varies according to season and geographical location. The productivity of plants depends on the vegetation stage, weather conditions, and agricultural practices. Because of the number of variables involved in determining the productivity of a crop, the process of providing insurance cover is highly complicated.
Pradhan Mantri Fasal Bima Yojana (PMFBY)
Pradhan Mantri Fasal Bima Yojana (PMFBY) is an area-based, yield-based crop insurance scheme introduced by the Government of India in January 2016. The Defined Area (i.e., unit area of insurance) for this scheme is the Village/Village Panchayat level.
The unit of insurance for loss assessment is the affected insured field of the individual farmer for risks of localized calamities and post-harvest losses on account of defined perils. There is a provision for individual farm-level loss assessment for localized perils and unit-level loss assessment for yield losses. The crops covered under the scheme are:
- Food crops (Cereals, Millets, and Pulses)
- Oilseeds
- Annual Commercial / Annual Horticultural crops
The scheme provides insurance cover for all stages of the crop cycle, from preventive sowing to post-harvest risks in specified instances. All farmers growing notified crops in a notified area during the season who have an insurable interest in the crop are eligible.
1 Benefits Available Under the Scheme
The risks covered under the scheme are:
- Yield losses (standing crops, on a notified area basis)
- Prevented sowing (on a notified area basis)
- Post-harvest losses (individual farm basis)
- Localized calamities (individual farm basis)
The exclusions under the scheme are: Risks and losses arising out of war and kindred perils, nuclear risks, riots, malicious damage, theft, acts of enmity, or crops grazed and/or destroyed by domestic and/or wild animals.
2 Implementation and Distribution
Implementation of PMFBY is done on the basis of operational guidelines issued by the Ministry of Agriculture. The revamped operational guidelines replaced the earlier guidelines starting from the Kharif 2020 season. Distribution of the scheme is done by AIC, four public sector insurance companies, and thirteen empanelled private insurance companies.
3 Claim Process
The claim settlement process for the scheme is explained below. The scheme has four types of claims for crop loss as per the risks covered: Pre-harvest (prevented sowing), Crop Failure, Post-harvest losses, and Localized Risks.
Presented below are the risk-wise details of the claim settlement procedure:
- (a) Pre-harvest (prevented sowing): The assessment of loss is done on an individual farm basis. The responsibility for loss assessment is handled by a committee of representatives from the insurance company, government officials, and farmers. Immediate relief amounts are transferred to the insured account.
- (b) Crop Failure: In the case of crop failure or crop damage, a Joint Committee decides the eligibility for on-account payment based on weather data, long-term average rainfall data, or satellite imagery supported by estimated yield losses at the notified insurance unit level.
- (c) Post-Harvest Claim Settlement: For claims arising out of crop damage due to post-harvest losses and localized risks, the assessment of damage is made on an individual farm basis. The scheme provides for assessment of yield loss on an individual plot basis in case of cyclones, cyclonic rains, and unseasonal rains throughout the country resulting in damage to harvested crops lying in the field in ‘cut and spread’ condition up to a maximum period of two weeks (14 days) from harvesting for the sole purpose of drying.
- (d) Localized Risks: It is intended to provide insurance cover at the individual farm level for crop losses due to the occurrence of localized perils/calamities, viz., landslides, hailstorms, and inundation affecting part of a notified unit or a plot. In this case, surveyors are appointed by the insurance company to perform loss assessment by visiting individual farms. The remaining procedure is the same for claim settlement.