PASSING ON RISK TO REINSURERS
Crop insurers are retaining only 15-20 per cent premium
For the records, PMFBY has replaced two earlier initiatives, the 18-year-old National Agricultural Insurance Scheme ( NAIS) and the Modified National Agricultural Insurance Scheme ( MNAIS). Both had lower sum assured and no participation from private insurers. Under the new policy, the National Democratic Alliance ( NDA) government has already committed `13,240 crore for the current financial year, up from `5,500 crore in 2016/17. What’s more, insurance companies are getting actuarial premium rates – a market-linked approach where they can fix their rates without any ceiling, taking into account costs, risks and margin to avoid losses. Last year, this new category helped general insurance companies post a 32 per cent growth at `1,26,000 crore. In a year’s time, crop insurance has accounted for 18-20 per cent of their product portfolio, only next to auto and health covers.
In spite of these growth figures, crop insurance has always been a risky business all over the world. In 2012, US insurance companies suffered heavy losses due to a severe drought. Much like India, the US nurtures a subsidised crop insurance policy ( but has been doing it for decades), and President Donald Trump has now proposed some massive cuts in that field. India is still taking baby steps, but there are issues that could have longerterm implications for insurance companies as well as the economy at large.
Rise of Subsidy Culture
The bigger idea of a market-linked policy is to move away from farm loan waivers or compensation for crop damages. It protects some food crops such as cereals, millets and pulses, besides annual commercial and horticultural crops. Both central and state governments share the premium subsidy equally (after farmers’ contributions), and states can contribute more if they want. The scheme
PUSHAN MAHAPATRA MD & CEO, SBI General Insurance “We have to maintain a proper pricing for crop insurance and also focus on risk mitigation; otherwise, the capacity (writing crop insurance) available to individual companies and the country will get impacted”
is optional for the states, but 24 of them, out of a total 29, have already joined the programme. The cost to the farmer is negligible, though, and those covered under the scheme paid only ` 3,807 crore as their premium contribution in the financial year 2016/ 17 while the central and the state governments bridged the gap by paying `16,200 crore.
The PMFBY covers yield losses due to natural calamities ( drought, flood and so on), pest attacks, diseases and post- harvest losses. In the current financial year, the central and state governments have jointly contributed ` 22,600 crore as premium to provide crop protection worth ` 1,82,600 crore. In the case of 100 per cent claims on crop damages, when the entire liability of ` 1,82,600 crore will get invoked, the government will pay ` 80,000 crore, and the rest will have to be borne by the insurers. However, the government’s liability is triggered after the losses cross 350 per cent of the premium amount.
In some states like Karnataka, insurance companies have already witnessed claims amounting to 300-350 per cent of the premiums paid, opening a floodgate for higher compensation for the insured and steep losses for the insurers.
There is another downside of the programme as it encourages a subsidy culture, making use of taxpayers’ money. India is already struggling to reduce subsidies. In 2017/18, the country’s subsidy bill for food, fertilisers and petroleum will be reaching around `2.4 lakh crore, nearly 10 per cent of the Union Budget of `21.46 lakh crore. Another subsidy is only going to contract the budget for capital expenditure.
Bounty for the Selected
Inadequate reach is another anomaly as the benefits of crop insurance remain cluster-based instead of targeting individual farmers. Every state is divided into several clusters, each covering four-five districts, and insurance companies bid for each of these clusters. However, only the state (or the political establishment) decides which cluster/crop is to be covered under the scheme.
Insurance is mandatory for loanee farmers, but the major flaw lies in that the policy does not encourage companies to cover non-loanees. “Convincing an individual farmer to buy crop insurance is not only difficult but also costly due of our lack of presence in rural areas,” says an insurer requesting anonymity.
According to Tapan Singhel, Managing Director and Chief Executive of Bajaj Allianz General Insurance Company, more support aids may soon reach underserved communities. When a new market is created, the companies involved build infrastructure and create competencies, which should act as a solid foundation for servicing individual farmers, he points out.
Insurers’ Dilemma
The regulatory changes and the slowdown post-2008 have impacted the momentum of general insurers, with their premium growth stuck at an average 12-15 per cent for nearly a decade. Crop insurance has suddenly triggered
“We had an exceptional last year because of
good weather. The claim satisfaction for the industry will come over a period of time when we will see a cycle of good, bad and worst years”