Weather-based crop insurance

Also called: Weather index insurance · Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Beyond NCERT

Meaning

Weather-based crop insurance (also called weather index insurance) pays a claim when a measured weather reading, such as rainfall, temperature or humidity, crosses a limit fixed in advance. The weather reading stands in for crop loss, so no one checks the farmer's actual loss in the field.

• Why it matters: claims can be paid quickly, because the trigger is a number from a weather station, not a field inspection.
• The weakness: the weather reading may not match the damage to one farmer's crop.
• In India, it runs as the Restructured Weather Based Crop Insurance Scheme (RWBCIS), alongside PMFBY.

Explanation

How it works

• The contract fixes three things in advance:
• the weather parameter (the weather measure the policy watches), such as rainfall, temperature or humidity;
• the trigger (the limit which, once crossed, starts a payout), for example "too little rain in the season" or "too many very hot days";

• the sum insured (the most the policy will pay).

• During the season:

• a weather station near the farm records the parameter;
• if the reading crosses the trigger, the claim is paid;

• every insured farmer linked to that station gets the same payout rate.

• No field checks. There are no crop-cutting experiments (officials cutting and weighing the crop from sample plots) and no inspection of each farm.

• The farmer pays a small premium (the fee paid to the insurer for cover). The government usually pays most of the premium as a subsidy.

A worked scenario

• The policy says: pay a claim if seasonal rainfall at the local rain gauge falls below the agreed limit.
• Case 1: rainfall falls below the limit → the trigger is crossed → every insured farmer in that area is paid, even a farmer whose well-irrigated crop survived.
• Case 2: rainfall is normal, but a local pest attack or hailstorm destroys one farmer's field → the trigger is not crossed → that farmer gets nothing.
• Both cases show basis risk (the gap between what the index shows and what one farmer actually lost).

Where it sits among the three designs

Type	Claim paid when	Strength	Weakness
Indemnity-based	An official confirms the farmer's own actual loss	Pays the real loss	Checking every field is costly, and fraud is possible
Area-yield index	The average yield of the notified area falls below the threshold yield	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

• Moral hazard means an insured person takes less care, or reports a false loss, because the insurer will pay. A farmer cannot change the rainfall, so a weather index keeps this problem small.
• Weather insurance is one kind of parametric insurance design, which pays on an index trigger instead of on an assessed loss.

What makes it work better or worse

• Density of weather stations:
• the station is far from the farm → the local weather is different from the recorded weather → basis risk is high;

• there are more stations close to farms → the readings match field conditions better → basis risk falls.

• How well the trigger fits the crop: the parameter and its limit must match the crop's real weak points, such as dry spells at flowering.

• Perils the index cannot see: pests, disease, and very local hail or flooding may not show up in the weather reading at all.

In India

• Lineage of schemes:
• CCIS, 1985 (the first national scheme, linked to crop loans)
• NAIS, 1999 (area-yield)
• WBCIS, 2007 (payouts triggered by weather readings)
• MNAIS, 2010 (actuarial premiums, meaning premiums worked out from the real risk of loss)

• PMFBY and RWBCIS, kharif 2016

• Two schemes side by side from kharif 2016:

• PMFBY is the area-yield scheme.

• RWBCIS is the weather-index scheme.

• Continuation: the Union Cabinet extended PMFBY and RWBCIS till 2025-26, with a total outlay of ₹69,515.71 crore for 2021-22 to 2025-26 [2].

• Voluntary enrolment: the 2020 revamp of PMFBY and RWBCIS made enrolment voluntary for all farmers from kharif 2020, including farmers with crop loans [4][1]. Before that, farmers with crop loans had to be insured.
• WINDS (Weather Information and Network Data Systems) plans:
• Automatic Weather Stations (AWS) at block level;

• Automatic Rain Gauges (ARGs) at panchayat level [1][3].

• The Cabinet made 2024-25 the first year of WINDS, instead of 2023-24. This lets states get central funding in a 90:10 ratio [1][2].

• FIAT (Fund for Innovation and Technology): a corpus of ₹824.77 crore for YES-TECH, WINDS and research. The aim is claim calculation that is more open and faster [2].
• Link to rural credit: insurance protects both the farmer and the bank's loan, so banks are more willing to lend to farmers. Without it, one bad season can turn a crop loan into a debt trap (a loan the borrower can never repay, so they must borrow again). Swapna's case in Class 10 NCERT, "Money and Credit", shows this.

Don't confuse with

• Area-yield index insurance (PMFBY): the trigger is the area's measured crop yield from crop-cutting experiments. In weather-based insurance, the trigger is a weather reading, and no crop is measured.
• Indemnity-based insurance: it pays each farmer's actual, checked loss. Weather-based insurance pays on the index, whatever the real loss in one field.
• Parametric insurance: this is the wider family of insurance that pays on an index trigger. Weather-based crop insurance is one kind of it, not a separate idea.
• YES-TECH and WINDS: YES-TECH estimates crop yield from satellite data, which serves the area-yield scheme. WINDS builds the weather-data network (AWS and ARGs), which is the base that weather-index payouts need.

Prelims Hooks

• Weather-based crop insurance pays when rainfall, temperature or humidity crosses agreed limits. It does not pay on a measured loss, and it does not use crop-cutting experiments.
• Sequence trap: CCIS 1985 → NAIS 1999 → WBCIS 2007 → MNAIS 2010 → PMFBY/RWBCIS 2016. WBCIS came before MNAIS.
• RWBCIS is the weather-index scheme and PMFBY is the area-yield scheme. Both started in kharif 2016 and were extended till 2025-26 [2].
• WINDS: AWS at block level and ARGs at panchayat level [1][3]. 2024-25 is the first year, with central funding at 90:10 [1][2].
• FIAT: a ₹824.77 crore fund for YES-TECH, WINDS and research [2].
• Its strength is quick, objective triggers and little moral hazard. Its weakness is basis risk.

Mains Points

• Speed versus accuracy:
• Weather triggers settle claims fast and cheaply, with no field checks and no pressure on crop-cutting experiments.
• But basis risk means some farmers who suffered a loss get nothing, while some who suffered no loss get paid. This hurts farmers' trust in the scheme.

• A denser station network through WINDS (AWS at block level, ARGs at panchayat level) is the main way to close this gap [1][3].

• Credit and insurance together: RWBCIS and PMFBY protect both the farmer and the bank's loan. This stops a weather shock from turning into a debt trap. Voluntary enrolment since kharif 2020 [4][1] gives farmers choice, but it can shrink the pool of insured farmers.

• Fiscal and federal angle: the Centre has committed ₹69,515.71 crore for 2021-22 to 2025-26 [2] and funds WINDS at 90:10 [1][2]. This shows that better weather data is now treated as public infrastructure, with the Centre and states sharing its cost.

Related concepts

• Crop insurance
• Indemnity-based insurance
• Area-yield index insurance
• Beed model

Read more

• Sharing farm risk: crop insurance