Crop insurance

Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Beyond NCERT

Meaning

Crop insurance is a scheme in which a farmer pays a small premium (the fee paid to an insurer for cover). If the crop is lost to natural calamities, pests or diseases, the insurer pays a claim. In India, the government usually pays most of the premium as a subsidy.

It matters because crop loans carry risk. Without insurance, one failed crop can push a farmer into a debt trap (a loan so large that the borrower can never repay it and has to borrow again). Insurance protects the farmer, and it also protects the bank's loan.

For area-yield insurance, the claim is worked out like this: Claim = [(Threshold yield − Actual area yield) ÷ Threshold yield] × Sum insured

Explanation

How it works: the link with credit

• Swapna's case (NCERT Class 10, Money and Credit):
• Swapna, a small farmer, takes a loan to grow her crop. Pests destroy the crop.
• With no crop there is no income, so she cannot repay the loan.

• She sells part of her land to clear the debt, and ends up poorer than before.

• Lesson: credit alone is risky for a farmer. It needs "support in case of loss".

• How insurance breaks this chain:
• The farmer pays a small premium, and the government subsidises the rest.
• If the crop fails, the claim pays back the loan, so the land is saved.
• Banks feel safer, so they are more willing to lend to farmers.

Three designs of crop insurance

Type	Claim paid when	Strength	Weakness
Indemnity-based	An official checks and confirms the individual farmer's actual loss	Pays the real loss	Checking every field is costly; fraud risk
Area-yield index	The average yield of the notified area falls below the threshold yield, as measured by crop-cutting experiments	Cuts moral hazard	Basis risk
Weather-based	Rainfall, temperature or humidity crosses agreed limits	Quick, objective triggers	The weather reading may not match the actual crop damage

Key terms

• Indemnity: paying back the actual loss suffered.
• Notified area: the unit the government fixes for insurance, such as a village, a gram panchayat or a block.
• Crop-cutting experiment (CCE): officials cut and weigh the crop from sample plots to estimate the average yield of an area.
• Threshold yield: the guaranteed level of yield. If the area's yield falls below it, a claim is paid.
• Sum insured: the most the policy will pay.
• Moral hazard: an insured person may take less care, or report a false loss, because the insurer will pay.

• Under an area index, one farmer cannot change the area average, so this problem shrinks.

• Basis risk: the gap between what the index shows and what one farmer actually lost.

Worked examples

Area-yield claim

• 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.

Basis risk in the same example

• Suppose the area yield is 19 quintals/ha, but hail destroys one farmer's whole field.
• The shortfall is (20 − 19) ÷ 20 = 5%, so the claim is only 5% of the sum insured.
• This farmer gets far less than the real loss.

PMFBY premium split (kharif paddy)

• Sum insured = ₹1,00,000. Actuarial premium (the real cost of the risk) = 12% = ₹12,000.
• The farmer pays 2% = ₹2,000.
• The remaining ₹10,000 is paid as subsidy:
• Normal state: Centre ₹5,000 + state ₹5,000.
• North-Eastern state: Centre ₹9,000 + state ₹1,000.

What makes claims and costs rise or fall

• Bad weather years raise claims. In normal years claims are low, so insurers keep most of the premium as windfall profit (a large, unearned gain).
• Poor yield data can push claims up or down wrongly. CCEs are too few, and they can be done badly or under local pressure.
• Late state subsidy payments delay claims.

In India

Lineage of schemes

• Comprehensive Crop Insurance Scheme (CCIS), 1985: the first national scheme. It was linked to crop loans.
• National Agricultural Insurance Scheme (NAIS), 1999: covered more crops and farmers. It used the area-yield approach.
• Weather Based Crop Insurance Scheme (WBCIS), 2007: payouts are triggered by weather readings.
• Modified NAIS (MNAIS), 2010: premiums were based on actuarial rates (rates worked out from the real risk of loss).
• PMFBY and RWBCIS (kharif 2016):
• PMFBY (Pradhan Mantri Fasal Bima Yojana) is the area-yield scheme.

• RWBCIS (Restructured WBCIS) is the weather-index scheme.

• The Union Cabinet extended both schemes till 2025-26, with a total outlay of ₹69,515.71 crore for 2021-22 to 2025-26 [3].

PMFBY: premium and funding

• The farmer pays 2% of the sum insured for kharif, 1.5% for rabi and 5% for annual commercial and horticultural crops. The government calls this "One Nation, One Crop, One Premium" [1].
• The rest of the actuarial premium, 95% to 98.5%, is shared by the Centre and the states 50:50 [1]. The share is 90:10 in the North-East.

PMFBY: who joins

• Before kharif 2020, insurance was compulsory for farmers who took crop loans.
• From kharif 2020, it is voluntary for all farmers, including loanee farmers [8][2].
• It is also voluntary for states. Each state decides whether to join [2].

PMFBY: technology

• YES-TECH (Yield Estimation System based on Technology) uses remote sensing (satellite data) to estimate yield.
• Technology-based estimates 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].

• WINDS (Weather Information and Network Data Systems) plans Automatic Weather Stations at block level and Automatic Rain Gauges at panchayat level [2][4].

• The Cabinet made 2024-25 the first year of WINDS, so states can get central funding in a 90:10 ratio [2][3].

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

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

PMFBY: 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].
• Farmers enrolled rose from 3.17 crore (2022-23) to 4.19 crore (2024-25), an increase of 32% [1][2].
• By farmer applications, it is the largest crop insurance scheme in the world [1][2].

The Beed model (Maharashtra): a limit on insurer profit

• Cap: the insurer pays claims only up to 110% of the premium. The state pays anything above that.
• Cup: if claims are below 80% of the premium, the insurer keeps at most 20% of the premium as its margin. It refunds the surplus to the state.
• Example with a premium of ₹1,000 crore:
• Bad year, claims of ₹1,500 crore: the insurer pays ₹1,100 crore and the state pays ₹400 crore.

• Good year, claims of ₹500 crore: the insurer keeps ₹200 crore as margin and refunds ₹300 crore to the state.

• The PMFBY guidelines offer three Alternate Risk Transfer models: cup and cap (80:110), cup and cap (60:130), and a profit and loss sharing model [2].

States leaving and rejoining

• Bihar, Telangana, Andhra Pradesh, Jharkhand, West Bengal and Gujarat left the scheme. They pointed to the risk they saw and to money constraints [5].
• Andhra Pradesh rejoined from kharif 2022 [6].
• Jharkhand rejoined from kharif 2024 [7].
• West Bengal rejoined from kharif 2026 [7].
• Bihar has decided to return from rabi 2026-27 [7].

Don't confuse with

• Area-yield index insurance vs indemnity insurance: area-yield pays every insured farmer in the area the same shortfall share, based on the area's average yield. Indemnity pays each farmer's own checked loss.
• PMFBY vs RWBCIS: PMFBY is the area-yield scheme. RWBCIS is the weather-index scheme. Both were launched in kharif 2016.
• Moral hazard vs basis risk: moral hazard means the farmer takes less care or reports a false loss. Area indices reduce it. Basis risk means the index does not match one farmer's real loss. Area indices create it.
• Farmer premium vs actuarial premium: the farmer pays only 2%, 1.5% or 5%. The actuarial premium is the full cost of the risk, and the Centre and states pay the rest of it as subsidy.

Prelims Hooks

• The PMFBY farmer premium is 2% for kharif, 1.5% for rabi and 5% for annual commercial and horticultural crops. The Centre and states share the rest 50:50, or 90:10 in the North-East [1].
• PMFBY has been voluntary for all farmers, including loanee farmers, since kharif 2020 [8][2]. It is also voluntary for states [2].
• Sequence trap: CCIS 1985 → NAIS 1999 → WBCIS 2007 → MNAIS 2010 → PMFBY/RWBCIS 2016.
• YES-TECH estimates yield by remote sensing, with at least 30% weightage [2][4]. WINDS puts AWS at block level and ARGs at panchayat level [2][4]. FIAT is a ₹824.77 crore fund [3].
• Beed model: the insurer's liability is capped at 110% of premium. If claims are below 80%, the insurer keeps at most a 20% margin. A 60:130 variant also exists [2].
• Since kharif 2024, a 12% penalty is added automatically when a claim is paid late [1][2].

Mains Points

• Credit and insurance must go together.
• Without insurance, a crop loan can turn one bad season into a debt trap, as in Swapna's case.

• PMFBY paid ₹1.83 lakh crore to 22.667 crore farmers from 2016 to 2024-25, which shows how large this safety net is [1][2].

• Design trade-off: accuracy vs cost.

• Indemnity insurance pays the true loss, but it is costly and open to fraud.
• Index designs are cheap and quick, but they leave basis risk.

• YES-TECH, WINDS and satellite data can narrow this gap, so technology is the main reform path.

• Fiscal federalism and fair returns for insurers.

• States pay half the subsidy. When they pay late, claims are delayed.
• In normal years insurers earn windfall profits, so states feel the scheme is poor value, and some left it.
• The Beed-type risk-sharing models and the return of states such as Andhra Pradesh, Jharkhand and West Bengal show a shift towards sharing risk [6][7].
• Voluntary enrolment since 2020 gives farmers a choice. But a smaller risk pool can push premiums up. The rise in enrolment from 3.17 crore to 4.19 crore between 2022-23 and 2024-25 suggests more farmers are joining again [1][2].

Related concepts

• Indemnity-based insurance
• Area-yield index insurance
• Weather-based crop insurance
• Beed model

Read more

• Sharing farm risk: crop insurance