Sharing farm risk: crop insurance

Detail

1. Why farmers need insurance

• Swapna's case (Class 10, Money and Credit): Swapna, a small farmer, takes a loan to grow her crop. Pests destroy the crop, so she cannot repay. She sells part of her land to clear the debt.

• Loan taken → crop fails → no income → loan cannot be repaid → land is sold → she ends up poorer than before.

• Lesson: credit alone is risky for a farmer. Without "support in case of loss", one crop failure turns a crop loan into a debt trap (a loan so large that the borrower can never repay it and has to borrow again).

• Crop insurance protects farmers against crop loss from natural calamities, pests and diseases.
• The farmer pays a small premium (the fee paid to an insurance company for cover).
• If the crop is lost, the insurer pays a claim.

• The government usually pays most of the premium as a subsidy.

• Link to rural credit: insurance protects the farmer and also the bank's loan. So banks are more willing to lend to farmers.

2. Three designs of crop insurance

Type	Claim paid when	Strength	Weakness
Indemnity-based insurance	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 insurance	The average yield of the notified area falls below the threshold yield. Yield is measured by crop-cutting experiments	Cuts moral hazard, since one farmer cannot change the area average	Basis risk: one farmer's loss may go unpaid if the area average is fine
Weather-based crop insurance	Rainfall, temperature or humidity crosses agreed limits, which act as a stand-in for crop loss	Quick, objective triggers	The weather reading may not match the actual crop damage

Key terms

• Indemnity means paying back the actual loss suffered.
• Notified area is the unit fixed by the government 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 is the level of yield that is guaranteed. If the area's yield falls below it, a claim is paid.
• 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's actions cannot change the area average, so this problem shrinks.
• Basis risk: the gap between what the index shows and what one farmer actually lost.

Area-yield claim: the shortfall logic, with an example

• Claim = [(Threshold yield − Actual area yield) ÷ Threshold yield] × Sum insured
• Sum insured is the maximum amount the policy will pay.
• 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.

• Basis risk in the same example: suppose the area yield is 19 quintals/ha, but hail destroys one farmer's whole field. The area-yield claim is only 5% of the sum insured. The farmer gets far less than the real loss.

• Parametric insurance design (paying on an index trigger rather than on assessed loss) is covered in financial-markets-instruments.

3. Lineage of Indian crop insurance schemes

• Comprehensive Crop Insurance Scheme (CCIS), 1985: the first national scheme. It was linked to crop loans.
• National Agricultural Insurance Scheme (NAIS), 1999: widened the crops and farmers covered. 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.
• 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 [4].

4. PMFBY design

Farmer premium: low and uniform

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

Worked example (kharif paddy)

• Sum insured = ₹1,00,000. Actuarial premium = 12% = ₹12,000.
• 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.

Voluntary enrolment

• Before kharif 2020, insurance was compulsory for farmers who took crop loans.
• From kharif 2020 it is voluntary for all farmers, including loanee farmers [9][3].
• PMFBY is also voluntary for states. Each state decides whether to join [3].

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 [3][5].

• It started for paddy and wheat from kharif 2023. Soybean was added from kharif 2024 [3].

• WINDS (Weather Information and Network Data Systems) plans Automatic Weather Stations (AWS) at block level and Automatic Rain Gauges (ARGs) at panchayat level [3][5].

• 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 [3][4].

• FIAT (Fund for Innovation and Technology): a corpus of ₹824.77 crore for YES-TECH, WINDS and research. The aim is more transparent and faster claim calculation [4].

• National Crop Insurance Portal (NCIP): handles online enrolment, data sharing and monitoring. Claims are paid directly into farmers' bank accounts [2][3].
• 12% penalty for delay: from kharif 2024, if a claim is paid late, a 12% penalty is added automatically for the farmer [2][3].

Scale (latest official data)

• From 2016 till 2024-25 (as on 30.06.2025): 78.407 crore farmer applications were insured, and 22.667 crore farmers got claims worth ₹1.83 lakh crore [2][3].
• Farmers enrolled rose from 3.17 crore (2022-23) to 4.19 crore (2024-25), an increase of 32% [2][3].
• By farmer applications, PMFBY is the largest crop insurance scheme in the world [2][3].

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

• The problem: in a normal year, claims are low, so insurers keep most of the premium as windfall profit (a large, unearned gain).
• The rule (80:110 "cup and cap"):
• 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 up to 20% of the premium as its margin and refunds the surplus to the state.

• Worked example: total premium = ₹1,000 crore.

• Bad year, claims = ₹1,500 crore → the insurer pays ₹1,100 crore (110%) → the state pays ₹400 crore.

• Good year, claims = ₹500 crore → the insurer keeps ₹500 crore for claims plus ₹200 crore margin (20%) → it refunds ₹300 crore to the state.

• Official status: the PMFBY operational guidelines offer three Alternate Risk Transfer models. States may choose the main scheme or one of these [3]:

• Cup and cap (80:110)
• Cup and cap (60:130)

• Profit and loss sharing model, where low claims send part of the government's premium subsidy back to the state treasury

• Trade-off: the state saves money in good years. But in a bad year it carries a large, uncertain bill.

6. Issues with crop insurance

Delays

• States often pay their share of the premium late, so claims are settled late.
• Response: the 12% automatic penalty for late claims (from kharif 2024) [2].

Insurer profits

• Insurers make windfall profits in normal years.
• Response: the Beed and risk-sharing models (section 5).

Yield data

• Crop-cutting experiments can be inaccurate or manipulated. There are too few CCEs, and they can be done badly or under local pressure.
• Response: YES-TECH, with at least 30% weightage for technology-based yields [3].

State exits and re-entry

• Bihar, Telangana, Andhra Pradesh, Jharkhand, West Bengal and Gujarat left the scheme after some seasons. Their reasons were the risk they saw and financial constraints [6].
• Some have since returned:
• Andhra Pradesh rejoined from kharif 2022 [7].
• Jharkhand rejoined from kharif 2024 [8].
• West Bengal rejoined from kharif 2026 [8].

• Bihar has decided to return from rabi 2026-27 [8].

• (NCERT scaffold: "Bihar and Gujarat have exited and run their own schemes". This is now partly outdated. Bihar is returning. Gujarat's return was not found in the sources checked.)

Prelims Hooks

• Under PMFBY, the 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.
• PMFBY has been voluntary for all farmers, including loanee farmers, since kharif 2020. It is also voluntary for states.
• Area-yield index insurance limits moral hazard but suffers from basis risk. Weather-based insurance pays out on weather thresholds, not on the loss that was measured.
• YES-TECH estimates yield by remote sensing, with at least 30% weightage. It covers paddy and wheat from kharif 2023, and soybean from kharif 2024.
• WINDS sets up AWS at block level and ARGs at panchayat level.
• FIAT: a ₹824.77 crore fund for technology in crop insurance.
• 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 and refunds the rest to the state. The 60:130 variant also exists.
• Sequence trap: CCIS 1985 → NAIS 1999 → WBCIS 2007 → MNAIS 2010 → PMFBY/RWBCIS 2016.
• Since kharif 2024, a 12% penalty is automatically added when a claim is paid late.

Mains Points

• Credit and insurance must go together. Crop loans without insurance turn a weather shock into a debt trap (Swapna's case). PMFBY's scale supports this link: ₹1.83 lakh crore paid to 22.667 crore farmers from 2016 to 2024-25.
• Design trade-off: accuracy vs cost and fraud.
• Indemnity insurance pays the true loss, but it is costly and open to fraud.
• Index designs (area yield, weather) are cheap and quick, but carry basis risk.

• Technology such as YES-TECH, WINDS and satellite data can shrink basis risk. So it is the main reform path.

• Fiscal federalism and fairness to insurers.

• States pay 50% of the subsidy. When their payments come late, claims are delayed.
• When insurers earn windfall profits, states feel the scheme is poor value, so some exit.

• Risk-sharing models such as Beed (80:110) and the rejoining of states show a move towards shared risk.

• Voluntary enrolment since 2020. Farmers now have a choice, and banks cannot deduct premiums without consent. 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 take-up is recovering.