Smallholder farmers worldwide struggle to adopt agricultural insurance that could safeguard their livelihoods
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VIVEK PRAKASH
India’s agriculture sector employs nearly half of the population and contributes about 18 per cent to the GDP. It relies on smallholder farmers, representing around 86 per cent of the farm holdings. These farmers and other vulnerable communities at the bottom of the economic pyramid suffer the most due to an increasingly erratic weather pattern. Recent news reports indicate that the Indian government plans to design a nationwide climate-linked insurance program. This initiative for parametric insurance arrives at a particularly crucial moment. The government’s decision to adopt parametric insurance offers a data-driven, transparent mechanism that protects vulnerable communities from climate-induced losses that escalate daily. Under the parametric model, insurance payouts are triggered once specific climatic thresholds are breached.
Smallholder farmers worldwide struggle to adopt agricultural insurance that could safeguard their livelihoods. High premium costs, tiresome application and claims processes, limited transparency around indemnity terms, and historically low claim settlement rates are some key barriers to adoption. All these issues have contributed to farmers’ reluctance and eroded their trust in traditional indemnity-based insurance models. Parametric insurance offers a fundamentally different approach built on objectivity, simplicity, transparency, and certainty of settlement compared to conventional crop insurance products. Underwriters and administrators spend less effort and money to process claims.
Numerous challenges
Farmers face numerous challenges, such as soil degradation and extreme weather events like unpredictable monsoons, droughts, and cyclones. Each weather shock threatens their crops and their families’ survival. Many farmers lack adequate financial support, which often forces them to rely on high-interest informal credit or multiple loans and leads to overleverage, persistent indebtedness, and poverty. The Government of India (GoI) launched the Pradhan Mantri Fasal Bima Yojana (PMFBY)1 in 2016 to provide a reliable safety net. The new scheme replaced the National Agricultural Insurance Scheme (NAIS) and the Modified National Agricultural Insurance Scheme (MNAIS). While this indemnity-based insurance model has seen considerable success, it also faces a few challenges. High premiums, delayed claim settlements, low uptake among marginalized groups, and limited reach in remote areas are key issues.
Government policies can shift to a parametric insurance model that uses weather indices tracked through satellite data and AI to trigger automatic pay-outs. This approach cuts administrative costs, speeds up claims, lowers premiums, and makes coverage more accessible, especially for smallholder and remote farmers.
The parametric model ensures scalability and aligns with national policies as it builds on the PMFBY’s existing frameworks. Remote sensing and AI-driven assessments enhance risk evaluation accuracy, boosting trust and promoting inclusion. Farmer education campaigns will further drive adoption and ensure marginalized communities benefit from faster, fairer insurance. These systems will enhance transparency and accountability as they simplify the monitoring and verification of insurance payouts. They also reduce the financial burden on the government and minimize the need for unplanned disaster relief payments after extreme weather events. Most importantly, they will promote climate resilience and provide farmers with the financial stability to withstand and recover from environmental shocks beyond mere crop protection.
Holistic approach
This holistic approach will ensure that insurance solutions meet the unique needs of different regions. The initiative will involve partnerships with local agricultural extension services. These services will help disseminate information on parametric insurance, educate farmers on enrolment processes, and ensure timely updates on claim procedures. Parametric insurance offers a transformative, holistic solution that can significantly lower administrative costs and premium rates to make insurance affordable for smallholder farmers. Satellite imagery and weather data enable real-time monitoring and remote claims processing, which extends coverage to farmers in remote rural areas. Automated pay-outs ensure faster, transparent settlements and eliminate long delays that discourage participation. Targeted awareness and training programs boost enrollment, particularly among marginalized groups typically excluded from conventional insurance schemes. Advanced technologies, such as AI, machine learning, and real-time analytics, enhance risk modeling, premium calculation, and claims accuracy. This creates an efficient, inclusive, and trustworthy insurance ecosystem that strengthens farmers’ resilience to climate shocks.
The path forward demands action. Policymakers must integrate parametric models within existing agricultural insurance frameworks. Technology providers must collaborate with agricultural departments to ensure seamless data infrastructure. Most importantly, farmers must be empowered to receive the education and support necessary to embrace this innovation.
Bhanu, Associate Partner in MSC, and Sinha, Senior Manager, MSC
Published on October 26, 2025
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