Types of Crop Insurance

There are two types of crop insurance policies namely

• Named Peril Crop Insurance (NPCI)
• Multi- Peril Crop Insurance (MPCI)

Named Peril Crop Insurance (NPCI)

This assesses losses that occur due to a specific peril(s) through assessments. Hail insurance is the most common form of named peril insurance and is effectively sold in the private sector in the developed countries

Advantages

• Can be arranged for large number perils
• Easy to understand and is transparent
• Claim payouts are based on losses observable on the ground

Disadvantages

• It is only suitable for perils which means causes measurable and under impact damage to crops
• Cannot easily address the perils of drought, pest and diseases
• Where veterinarians are not available, a certificate of health issued by livestock inspectors will be accepted for purposes of the proposal only.
• New inspection report at renewal may be required by the same insurer.

Multi-Peril Crop Insurance (MPCI)

MPCI policies protect standing crops against a weather related risks and can be extended to include insects and plaques, as long as these cannot be attributed to negligence in farm management., in some countries with strong government support and control within a national MPCI scheme, market price fluctuation risk can be added to the policy. For annual crops, coverage incepts soon after planting and continuous until completion of harvest.

MPCI establishes an insured yield as the percentage of the historical average yield. If yield is less than the insured yield, an indemnity ids paid. Typical insured yield is 50 to 70 percentage of the yield after it has been ascertained that the loss is not the consequence of an excluded event. this approach is the basis of subsidized federal crop insurance programmes in the US, Canada and India.

Advantages of MPCI

MPCI  covers all risks of loss or damage , unless specifically excluded. This way, the farmer is given full protection.

Disadvantages

• High Adminstrative Costs – individual farmer enrollment and loss adjustments have to be done by farmers. This can be expensive especially for small scale farmers.
• Adverse selection – adverse selection occurs when high risk farmers opt to insure more than others and elect high levels of sums insured.
• Moral hazard – moral hazard in agriculture insurance occurs when the insurer is called upon to pay for losses which were not directly caused by insurable perils.

Benefits of Crop Insurance.

• It cushions the shock of disastrous crop loss by assuring the farmers the minimum of protection
• It spreads the crop losses over space and time
• It gives farmers confidence in making greater investment in agriculture
• It improves the position of farmers in relation to credit as it can guarantee the money lender payment of outstanding loan in the event of loss failure.