Indemnity-based insurance
Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Beyond NCERT
Meaning
Indemnity-based insurance pays each farmer for the actual loss on their own field, after that loss has been assessed and verified. Its strength is that it pays for the real loss. Its weakness is that inspecting each field costs a lot and takes time. It also carries a risk of fraud, because the loss is assessed one farmer at a time.
Example
Suppose pests destroy most of a farmer's groundnut crop. Under indemnity-based insurance, an official inspects that farmer's field, assesses the loss and pays for it, even if neighbouring fields did well.
Don't confuse with
- Area-yield index insurance: this pays only when the average yield of the whole notified area falls below a threshold. That average is measured through crop-cutting experiments. A farmer with an individual loss may get nothing if the area average is fine (this gap is called basis risk).
- Weather-based crop insurance: this pays when rainfall, temperature or humidity cross agreed limits. The weather reading stands in for crop loss, and fields are not inspected.