Insurance: Security for Poor Farmers?

(Atul and Deepak Alok)

An assurance of a minimum guaranteed return should act as an incentive to the farmers to take to the new technologies, as the risk of such an adaptation would be covered. This should work out fine if the cost of insurance (i.e. money s well as effort) is small. However most of the dairy farmers in the country are quite poor and for them the premium turns out to be a significant portion of their savings. This makes it natural for them to expect some return on the premium paid.

There is also a limit to the level that the premium can be brought down to, as the risk to the Indian cattle is quite high. (Presently cattle kept under the best animal husbandry practices report a death rate of 2%). The shortcoming of the schemes presently in operation is that the premium payment is a one-time affair and the member gets nothing if he has not made any claim. For example to get a cover of Rs10000 on his cattle a member is required to pay a premium of Rs 400 at the beginning of the year.

In case the cattle survive through the year the member gets nothing back on the Rs 400 he has given initially. This is a disincentive for the member to provide necessary care to the cattle. In the absence of necessary care, the cattle productivity may come down; the insurance then becomes a means to cover deliberate and adverse risks, which the member then finds desirable. The whole purpose of productivity enhancement gets defeated.