AGRICULTURAL INSURANCE

Agricultural insurance is the insurance policy which provides compensation to farmers for losses suffered. For
example, the loss of their crops due to natural disasters such as hail, drought and floods or the loss of revenue
due to declines in the prices of agricultural commodities.
Insurance is one of the tools that farmers and other stakeholders can use to manage risks that are too large for
them to manage on their own. Part of the risk is transferred to another party, who takes it in return for a fee (or
premium).
Agriculture has always been a risky business. Unlike the industrial sector, it is subject to the vagaries of the
weather. The variations in productivity induced by nature cannot be fully accommodated by farmers. It is true
that from time immemorial farmers have devised measures to limit these risks: crop rotation and diversification,
inter-cropping, use of low yield but hard varieties, tillage systems and share tenancy. Despite these practices,
risks are not taken away.
Importance of Agriculture:
1.) Agricultural insurance plays an important role in stimulating investment in agriculture and in agriculture and
in stabilizing farmers income.
2.) Insurance can assist farmers in accessing new opportunities by improving their ability to borrow either in
cash or kind as credit facilities. In doing so, farmers may potentially experience safer and possibly higher
returns.
3.) Another area where insurance is of relevance is in improving agricultural technology. New technology
usually requires additional borrowing and investment and the farmer may be reluctant to enter into
additional commitment since he is not sure of the production results. He therefore tends to take sub-optimal
decisions. With the security of insurance, the farmer might be more willing to take a chance with efficient
technology as his risks are now being shared.
TYPES OF INSURANCE POLICIES
1) Crop Insurance: Crop Insurance is purchased by agricultural operators, including farmers, ranchers and
other stake holders to protect themselves against the loss of their crops either due to natural disasters, such
as hail, drought, and floods or the loss of revenue due to declines in the prices of agricultural commodities.
Since the production of crops is the most important segment of Agriculture, crop insurance is the major
component of agricultural insurance.
Scope of Crop Insurance: The most common perils to which crops are exposed to are:
1.) Fire (including lightning),
2.) Hail,
3.) Frost (including snow),
4.) Windstorm or atmospheric disturbance (including hurricane, tornado, cyclone or typhoon).
5.) Rainstorm (including excessive or unseasonal rain).
6.) Malicious damage (including vandalism).
7.) Convulsions of nature (such as earthquakes, landslides, avalanches or volcanic eruptions) and pests, insects
and diseases.
When the damage occurs at an identifiable time and is of short and sudden duration, such as fire, hail and
convulsions of nature, the perils are manageable. Frost, windstorm, rainstorm and flood are the intermediary
categories of risks where the cause of the loss, or the proximate cause, is still determinable but the farmer has an
influence on the extent of the loss.
Crop Insurance Policy can be broadly grouped into 2 categories:
1.) Single or named peril
2.) Multi-peril or comprehensive or all risk.
A policy is regarded as single or named peril when one or a few identifiable and specific peris are insured. And
as multi-peril or all risk when compensation is provided if the yield falls below a specified point. Conceptually,
multi-peril insurance is not the same as all risk. However, in practice, each of the perils influences the other in a
multiplier manner, and when a large number of perils are insured it almost becomes an all risk cover, hence, the
two are treated in the same category.
2) Livestock Insurance: Livestock insurance has been defined as animals kept or raised for use or pleasure.
Livestock products, namely meat and dairy products are important source of nutrition. Livestock insurance
is one of the simplest of the various forms of agricultural insurance. This is evident from the fact from the
fact that it has been practiced in different forms for a long time and is the genesis of agricultural insurance.
Apart from its developmental role, it provides an opportunity to the insurance industry to make a
meaningful entry into the rural areas. The significance of livestock insurance is accentuated by the fact that,
in most of the developing countries, efforts are being made to improve the genetic quality of indigenous
animals by importing animals of high yielding breeds, particularly breeders, the imported animal is a high
risk since it may not readily adapt to the new environment and climate, but the offspring generally do so.
Insurance of the imported animal will facilitate the transition to improved breeds and thus the attainment of
higher productivity.
It should be noted; however, hat insurance of imported animals only is anti-selection against the
insurance company and could lead to the collapse of the livestock insurance scheme. Insurance of
imported animals should therefore be provided together with that of domestic animal. It is significant to
note that, unlike crop insurance, livestock insurance does not create a serious financial burden for the
insurance company.
3) Farm Vehicle Insurance: This includes tractors, trailers, power tillers, harvesters, threshers, pumps, pedal
cycles, wind mills, solar cookers and heaters and biogas units. These and similar mechanical devices are
gradually entering the agricultural sector of developing countries. The level is admittedly still low.
However, the rate of increase is higher in the developing countries of the world. Premium rates and terms
and conditions of insurance for tractors, trailers and power tillers are determined in some countries under the
motor insurance tariff. If this is not the case, either the appropriate authority or the insurance company may
finalize the terms and conditions.
4) Life Assurance (Farmers, Farm workers and Farmer’s household): Life assurance deals with the insurance
of human life either in death, retirement and disability. It has to do with the situation that will definitely
happen but when and how it will happen is not known. The policy holders are assured while they are alive
and their dependents they left behind after their demise will be provided with financial compensation. It is
long time insurance contract because it runs for not less than five years and above. The insurance cover that
falls within the group of life assurance are:
a) Term assurance
b) Endowment Assurance
c) Whole Life Assurance
d) Personal Accident Assurance
INSURANCE PREMIUM
Premium is the consideration given by the insured in return for the insurer’s undertaking to compensate or
indemnify the insured in the manner agreed on the happening of a specified occurrence.
In agricultural insurance policy, the determination of the premium is of utmost importance, This is so, because
sufficient revenue has to be generated to meet the payment of claims, but on the other hand, the premium should
be perceived as reasonable and affordable.
The losses vary from year to year and an amount average based on historical data of a few years has to be first
established. This may have to be modified to take care of the trend of losses, whether increasing or decreasing,
to determine the quantum of losses expected to be paid in the coming years. In other wirds, in estimating the
annual expected losses likely to be faced in the coming years, the past pattern of losses may have to be
modified, taken into account the changes in farming technology and climatic changes.
Measurement of Indemnity
Indemnity is the mechanism by which insurers provide financial compensation to the insured back to the
position he was before the loss. The indemnity payable in respect to livestock and farm produce is the local
market price where the farm produce is for sale. It is usually based on the market price less processing, handling
or transportation cost which are saved from its destruction. Any cost property which is for consumption at the
farm such as dairy cow, straw, feedstuffs, the indemnity is the cost of replacement which must be considered
any additional cost that will ensure replacement of such farm stock at the farm.
Problems of Agricultural Insurance:
1.) It is evident that insurance is not a panacea for the problems of the rural sector. Insurance in itself cannot
increase productivity or be a source of financing although it can play a role in enhancing both. Other basic
issues such as an effective network of extension service, supply of inputs, storage and marketing facilities
are important. Insurance can not be a substitute for deficiencies in these areas
2.) There are understandable limitations that prevent rapid growth of insurance business. A large number of
insurers in developing countries are under-capitalized. Consequently, their capacity to assume risk is
limited.
3.) Reinsurance for agricultural risks is not easily available.
4.) Skilled personnel, at both the managerial and operational levels, are scarce.
5.) Lack of adequate information. Farmers need to be convinced of the benefits of insurance before they accept
it
6.) Uncertainty of weather conditions.
7.) Some losses occurred due to natural disaster which is known as an act.