With two-thirds of the population dependent on agriculture for a livelihood, crop insurance is an important element of agricultural risk management in India. The Government of India (GoI) has historically focused on crop insurance as a planned mechanism to mitigate the risks of natural perils on farm production. In 1999, GoI established the National Agricultural Insurance Scheme (NAIS) to reduce farmers’ vulnerability to natural disasters. The NAIS offers insurance for food crops, oilseeds, and selected commercial crops through stateowned insurer, Agriculture Insurance Company of India (AICI). With about 25 million farmers insured, it is the largest crop insurance program in the world.
NAIS is based on an indexed approach known as the area yield-based approach, where the index used is the crop yield of a defined area called an insurance unit (IU, e.g., an administrative block). The actual yield of the insured crop, measured by crop-cutting experiments in the IU, is compared to historical yields. If the former is lower than the latter, all insured farmers in the IU are eligible for the same rate of indemnity payout. Individual crop insurance would have been virtually impossible given the large number of very small landholdings. Using the area yieldbased approach also has other merits. Most importantly, it mitigates moral hazard and adverse selection.
NAIS is funded by post-disaster government contributions, entailing an open-ended and highly variable fiscal exposure for GoI. Farmers’ premiums are subsidized; the annual claim/farmers’ premium ratio is higher than 100 percent. At the end of the crop season, aggregate claims exceeding the farmers’ premium are funded 50-50 by the state and central governments. India’s post-disaster funding arrangement was necessitated by the lack of an actuarially sound premium rating methodology, which means that estimating payouts is not feasible. This system is not optimal for GoI’s budget management and delays claims settlement, leading to distress of farmers and exposing farmers to a vicious debt cycle.
To address these challenges, in 2005 the Government formed a joint task-force with AICI and requested the World Bank to provide non-lending technical assistance (NLTA) in modifying the crop insurance program and in improving insurance coverage