Area-yield index insurance

Also called: Area approach · Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Beyond NCERT

Meaning

Area-yield index insurance (also called the area approach) is crop insurance that pays a claim when the average yield of a whole notified area falls below a guaranteed threshold yield. It does not check each farmer's own field. The average yield is measured by crop-cutting experiments.

It matters because India's main crop insurance scheme, PMFBY, is built on this design. The design is cheap and hard to cheat, but it can leave an unlucky farmer with too little money.

Formula: Claim = [(Threshold yield − Actual area yield) ÷ Threshold yield] × Sum insured

Explanation

How it works

• Notified area: the government fixes the unit of insurance. It can be a village, a gram panchayat or a block.
• Threshold yield: the level of yield that is guaranteed for that area.
• Crop-cutting experiment (CCE): officials cut and weigh the crop from sample plots. From these samples they estimate the average yield of the area.
• Trigger: if the actual area yield is below the threshold yield, there is a shortfall.
• The shortfall is worked out as a percentage.
• That percentage of the sum insured (the most the policy will pay) is paid.
• Every insured farmer in the area gets the same percentage, whatever happened in their own field.

Worked example

• Threshold yield = 20 quintals/ha. The CCEs show an area yield of 15 quintals/ha. Sum insured = ₹50,000.
• Shortfall = (20 − 15) ÷ 20 = 25%.

• Claim = 25% × ₹50,000 = ₹12,500 for every insured farmer in that area.

• If the area yield is at or above 20 quintals/ha, there is no shortfall, so no claim is paid.

Strength: less moral hazard

• Moral hazard means that an insured person may take less care, or report a false loss, because the insurer will pay.
• Under the area approach, one farmer's actions cannot change the average for the whole area.
• So a farmer gains nothing by neglecting the crop or by claiming a false loss.
• There is also no need to send an official to check every field, which keeps costs down.

Weakness: basis risk

• Basis risk is the gap between what the index shows and what one farmer actually lost.
• Example: the area yield is 19 quintals/ha against a threshold of 20.
• Hail destroys one farmer's whole field.
• The area claim is only (20 − 19) ÷ 20 = 5% of the sum insured.

• This farmer lost almost everything but gets only 5%.

• Things that increase basis risk:

• Large notified areas, where one area can hold farms that fared very differently.
• Local disasters, such as hail, that hit only a few fields.
• Too few CCEs, or CCEs done badly. Then the "average" itself is wrong.

In India

• National Agricultural Insurance Scheme (NAIS), 1999: widened the crops and farmers covered. It used the area-yield approach.
• PMFBY (Pradhan Mantri Fasal Bima Yojana), from kharif 2016: this is the area-yield scheme today. Its partner, RWBCIS, is the weather-index scheme.
• Continuation: the Union Cabinet extended PMFBY and RWBCIS till 2025-26. The total outlay was ₹69,515.71 crore for 2021-22 to 2025-26 [3].
• Farmer premium under PMFBY: 2% of the sum insured for kharif crops, 1.5% for rabi crops, and 5% for annual commercial and horticultural crops ("One Nation, One Crop, One Premium") [1].

• The Centre and states share the rest of the actuarial premium (the real cost of the risk) 50:50 [1]. The share is 90:10 in the North-East.

• Fixing the yield-data problem:

• YES-TECH (Yield Estimation System based on Technology) estimates yield from satellite data. Technology-based yields must get at least 30% weightage in the final yield figure [2][4].
• It started for paddy and wheat from kharif 2023. Soybean was added from kharif 2024 [2].

• FIAT (Fund for Innovation and Technology) is a ₹824.77 crore fund for YES-TECH, WINDS and research. Its aim is more transparent and faster claim calculation [3].

• Paying claims: the National Crop Insurance Portal (NCIP) handles enrolment and monitoring. Claims go directly into farmers' bank accounts [1][2]. From kharif 2024, a 12% penalty is added automatically if a claim is paid late [1][2].

• Scale: from 2016 till 2024-25 (as on 30.06.2025), 78.407 crore farmer applications were insured. 22.667 crore farmers got claims worth ₹1.83 lakh crore [1][2].

Don't confuse with

• Indemnity-based insurance: an official checks and confirms each farmer's actual loss, and the claim pays that loss. Area-yield insurance pays on the area average, not on the individual loss.
• Weather-based crop insurance (WBCIS 2007 / RWBCIS 2016): the trigger is rainfall, temperature or humidity crossing agreed limits. These act as a stand-in for crop loss. Area-yield insurance uses the measured yield from CCEs.
• Moral hazard vs basis risk: the area approach reduces moral hazard (cheating or carelessness by the insured person). Its own built-in problem is basis risk (a farmer's real loss not matching the index).
• Threshold yield vs sum insured: threshold yield is the guaranteed yield in quintals/ha that triggers the claim. Sum insured is the maximum rupee amount the policy pays.

Prelims Hooks

• Under area-yield index insurance, the claim is triggered when the average yield of the notified area, measured by crop-cutting experiments, falls below the threshold yield.
• Claim = [(Threshold yield − Actual yield) ÷ Threshold yield] × Sum insured. Every insured farmer in the area gets the same percentage.
• Trap: area-yield insurance limits moral hazard but suffers from basis risk. Do not swap the two.
• PMFBY is the area-yield scheme and RWBCIS is the weather-index scheme (both from kharif 2016). NAIS (1999) also used the area-yield approach.
• YES-TECH: remote-sensing yield estimates get at least 30% weightage. It covers paddy and wheat from kharif 2023 and soybean from kharif 2024 [2].
• The notified area can be a village, gram panchayat or block. It is fixed by the government.

Mains Points

• Cost and honesty vs accuracy. The area approach avoids checking every field, so it is cheap and hard to cheat.
• But basis risk means a farmer hit by a local disaster, such as hail, may get far less than their real loss.

• Smaller notified areas and technology such as YES-TECH (at least 30% weightage [2][4]) and FIAT (₹824.77 crore [3]) are the main ways to narrow this gap.

• Quality of yield data decides fairness. Too few CCEs, or CCEs done under local pressure, give a wrong area average.

• A wrong average leads to wrong claims or disputes, and delays follow.

• Satellite-based estimates, direct payment through NCIP and the 12% late-payment penalty from kharif 2024 [1][2] aim to make claims faster and more trusted.

• Credit and insurance must go together. Area-yield cover protects both the farmer and the bank's crop loan, so banks lend more readily.

• Its reach shows in ₹1.83 lakh crore of claims paid to 22.667 crore farmers from 2016 to 2024-25 [1][2].
• But basis risk means it cannot fully prevent a debt trap for an individual farmer (Swapna's case).

Related concepts

• Crop insurance
• Indemnity-based insurance
• Weather-based crop insurance
• Beed model

Read more

• Sharing farm risk: crop insurance