Pradhan Mantri Fasal Bima Yojana: Insuring crops, ensuring happiness

The Pradhan Mantri Fasal Bima Yojana (PMFBY) is the largest risk-mitigation programme launched by the government for providing a protective shield to farmers from all natural risks over the entire cropping cycle. This scheme is the first in terms of the lowest premium payable by farmers and the highest value of crop insured. All general insurance companies registered by the IRDAI (Insurance Regulatory and Development Authority) in the country that have a reasonable rural presence have been empanelled for the implementation of the scheme. At present, all the five government companies and 13 private companies registered with the IRDAI are empanelled.

The basic idea for increasing the number of companies was to leverage their cumulative network in rural areas and to take the advantage of efficiency of the private sector in scheme implementation. The scheme is in its fifth year of implementation and has been recently revamped to address the challenges in smooth implementation, including making it voluntary for all farmers and leveraging technology.

A lot has been said about the participation of private companies and insurance companies reaping supernormal profits from the scheme. In the first three years of scheme implementation for which complete data is available, the claims ratio at the national level for all insurance companies combined is 89%. This would mean that for every Rs 100 collected as premium by insurance companies, Rs 89 have been paid as claims by them; insurance companies generally incur a cost of 10-12% for reinsurance and administrative expenses. Thus, insurance companies have barely broken even in the first three years in spite of a good monsoon in those years. Any catastrophic risk programme should be evaluated at least over a five-year horizon and at the national (aggregate) level. Arguing that a particular company had higher or lower loss ratio in a particular season/year is not the right way of looking at the performance of a company or of the scheme.

The Kharif 2019 season was particularly good for crop, but widespread unseasonal rains damaged the harvested crops leading to substantial claims pay-outs in Maharashtra and Madhya Pradesh where the claims ratios were 121% and 213%, respectively. Claims pay-outs to farmers require timely sharing of Crop Cutting Experiments (CCE) data with insurance companies by the states and the release of the state share of premium subsidy. In certain instances, there has been a delay in sharing of CCE data/release of state subsidy, leading to delay in release of claims to farmers.

There has been criticism of low claims ratios and profits earned by insurance companies including private insurance companies based on incomplete data, which leads to unfounded criticism of the scheme. Later, when the complete data for the season was available, the claims ratio went up substantially. To address the problem of gaps in data in the public domain, the agriculture ministry has been releasing the season-wise data every month to ensure that experts can do analysis of the performance of the scheme on the basis of the most recent data.

On analysing data for public and private insurers for the period of three years (2016-17 to 2018-19) for which majority of the data has been received, the claims ratio stands at 98.5% and 80.3% for public and private companies, respectively. For kharif 2019, as CCE data has not been received from Gujarat, Jharkhand and Karnataka, and rabi 2019-20 data is pending from half a dozen states, the final claims ratio for all companies including private companies for 2019-20 is bound to increase significantly on the receipt of pending data.

In the revamped scheme effective from kharif 2020, the provision has been made to allocate work to insurance companies for a period of three years, which will average out any volatility in terms of high/low claims ratio seasons and will act as an ideal period for the analysis of the scheme in terms of claims paid by insurance companies with respect to the premium collected. The primary driver of the premium is the unavailability of historical yield data at the granular level and the discrepancies on account of human errors in computation/calculation and recording of yield data. Technology-based yield estimation through a robust arithmetical model incorporating satellite imagery, gridded weather data and soil moisture data can go a long way in moderating the premium rates and stabilising the scheme implementation.

The agriculture ministry has initiated large-scale prominent government, international and private technical agencies and it is expected that a tech-based protocol for yield estimation would be in place in 1-2 years. That would lead to a paradigm shift in the implementation of crop insurance schemes and would meet the needs of smallholder farmers in the long run.

Source: Financial Express