Organizations and Types of Relationships
Organizations today live in highly dynamic environments. Essentially the existence and growth of the business is dependent upon several external and internal factors such as highly segmented geographical markets, aggressive competition and shorter life cycle. These and many more factors exert a lot of pressure on the Organizations to innovate both in terms of its […]
Human Brain, Neurons and Behaviour
Several years of research have made important advancements in explaining the functioning of human brain and explaining how biological processes can influence human thoughts, feelings and behaviour. For understanding biopsychology, it is important to understand the three most important physiological components of human anatomy, i.e. Brain, the neurotransmitters and the Nervous system. The Nervous System […]
Structuring a Public Issue
One of the responsibilities of an investment banker is to set up the basic ground rules which will have to be followed while going public. Some of these rules are imposed by regulatory and governing bodies, whereas some other rules are self-imposed. The setting up of all these rules and communicating it to the relevant […]
Financial Intermediaries – Meaning, Role and Its Importance
Introduction A financial intermediary is a firm or an institution that acts an intermediary between a provider of service and the consumer. It is the institution or individual that is in between two or more parties in a financial context. In theoretical terms, a financial intermediary channels savings into investments. Financial intermediaries exist for profit […]
Home Country Bias
The activities of most investors have historically been limited to their home country. This is largely because earlier, there were rules which made the transfer of capital between countries an arduous process. Not only was the process complex, but it also took a lot of time and was riddled with transaction costs. This is the […]
Agriculture is a prehistoric occupation. In fact, it is said that human beings only started building civilizations after they discovered agriculture. But agriculture has always been an inherently risky business. Thousands of years have passed between the discovery of agriculture and the modern society that we live in today. However, the modern farmers are exposed to the same natural risks as their ancestors. Weather, plays the most significant part in the prosperity of farmers and they do not have any control over it!
Insurance companies have been able to help people mitigate risks for centuries now. However, the products that they offer to mitigate agricultural risks are substandard to say the least. In this article, we will first understand what crop insurance is and why it is still unable to provide relief to the members of the agricultural community.
Crop insurance is an insurance product that is meant to protect farmers from risks that arise in due course of the business of agriculture. The risks must be beyond the control of farmers. Crop insurance includes clearly identified risks such as lack of rainfall. The adverse outcome of such risk factors must necessarily lead to an adverse economic impact. Also, the relationship between the risks and the loss must be clear and irrefutable.
For instance, if crop insurance is taken to protect against the adverse effects of rainfall, then it must be possible to ascertain whether the fall in yield is because of a drop in rainfall or whether there are other factors at play as well.
Insurance risk factors can be classified into several types. Most risk factors pertaining to crop insurance have a low chance of occurring. In places where drought and floods are common, insurance companies will typically not offer these products at all!
However, if the risk factors do occur, they have a huge impact on the lives of the farmers. Hence, people who purchase crop insurance expect speedy settlement of claims.
The whole concept of crop insurance is tacitly based on the concept of reference yield. Let’s understand how this works with the help of an example. All farms in one particular geographical area are considered to be homogenous. The data pertaining to historical yields of these farms is collected. Statistical processes are run on this data to arrive at an average yield. This is the benchmark number based on which the sum to be paid out as insurance claims is calculated.
Farmer’s loss is defined as a deviation from the reference yield. Suppose the reference yield was 5 kgs per hectare and a farmer has an actual yield of 3 kgs per hectare, then they have incurred a loss of the balance 2 kgs. Insurance companies will pay the minimum sales price that has been set by the government for the lost 2 kgs per hectare. This loss is derived on the basis of deviation from an assumed yield.
Crop insurance has a lot of scope to grow and develop. At the moment, only a fraction of farmers in developing countries opt for crop insurance because of its irregular payouts. New techniques need to be developed so that crop insurance becomes a regular business practice. A bad crop should just be a normal part of business. It shouldn’t be a life threatening event causing mass farmer suicides.
Your email address will not be published. Required fields are marked *
What the Current Wave of Protectionism and Populism mean for the Future of Globalization and Free Trade
February 12, 2025
