yield risks. However, if a farmer’s yields are perfectly correlated with the index, the index-based plan will provide perfect coverage for their yield risks.

However, index-based plans may offer some advantages. A greater availability of data will likely allow insurance premium rates and other parameters of the contract to be measured with greater accuracy. This limits the problems associated with adverse selection. Index-based plans also lessen concerns of moral hazard. If an individual farmer is so small as to be unable to affect the overall index, there is no potential for moral hazard since the agent’s actions cannot influence the likelihood that indemnities will be paid. In addition, reflecting the fact that such index-based plans are much cheaper to administer since individual producer records are not needed and loss adjustment need only be done at the aggregate level, index-based plans can generally be offered at a lower cost.

It may also be the case that there is a lag in measuring the index, generating a delay in settlement of claims. Under the Indian crop insurance program, for example, the delay is close to one year. It is caused by the time taken to carry out crop cutting experiments and, in some cases, delayed flows of funds from the state government. The delays prevent the restoration of credit eligibility of farmers for the following crop season (World Bank 2003). Likewise, indemnity payments under the U.S. area yield plan, are not made until the following year due to the lag associated with the measurement of area yields.

# **_2.2.  Specific Peril versus Multiple Peril versus All Peril Coverage_**

An important distinction in the nature of coverage offered under alternative crop insurance plans pertains to the types of hazards that are insured against. Some forms of insurance are specific peril, meaning that only losses from a pre-specified peril are insurable. A prominent example is hail insurance, which will pay only for those losses that are caused by hail damages. Fire insurance is another example. Alternatively, crop insurance may provide indemnity payments when losses are realized as a result of multiple causes of loss. As an example, crops are commonly insured against losses caused only by both fire and hail. It is more common for such multiple peril policies to list causes of loss that are not insurable. That is, all causes of loss except for a specific list of perils will trigger indemnity payments. Finally, some agricultural insurance plans provide all peril coverage. For example, the U.S. federal crop insurance program is designed to insure yields of farm producers over an entire growing season on an all risk basis. The primary cause of loss is weather, either for a single identifiable event or over an extended period. This program provides protection against all losses except the following: (1) negligence, mismanagement, or wrongdoing; (2) failure to follow recognized good farming practices; (3) losses caused by water contained in any public dam or reservoir; and (4) failure to carry out good irrigation practices for irrigated crops.

A fundamental issue that is key to the question of whether coverage can be single or multiple peril involves the extent to which the loss adjustment process is able to adequately determine the causes of loss. As was noted in the case of the U.S. crop insurance program, losses occurring due to improper actions of the producer are generally not insurable. Such exclusions are closely related to the issue of moral hazard. Insurance against the adverse actions of farmers will naturally work against the soundness of the insurance program. Monitoring of insured agents’ actions and adequate loss adjustment is 7