Tag: agricultural insurance companies

If Crop Insurance Continues to be Viable, Will Centre’s Plan for Smoothing Out Other Wrinkles Work?

The other two major problems with PMFBY have been non-payment or delayed payment of premium subsidy by state governments and the tedious process of conducting crop cutting experiments.

This is the second in a two-part series about the changes made by the government to the Pradhan Mantri Fasal Bima Yojana. Read the first part here.

It was the Motor Vehicles Act of 1988 that first made it mandatory in India for all vehicles to have  valid third-party insurance coverage.

As per a recent amendment to the Act, driving an un-insured vehicle can attract a penalty of Rs 2,000 or imprisonment of up to three months or both. According to a General Insurance Council (GIC) report of 2016, only about 8.26 crore vehicles had a valid third-party insurance policy while the number of registered automobiles was about 19 crore. It is estimated that about 60% of two-wheelers on Indian roads are uninsured.

This, in a nutshell, is the challenge that an optional crop insurance scheme will face and it will have to do a lot better than motor vehicle insurance. It has to attract a sufficiently large number of farmers so that actuarial premiums remain in the range of 10-12%. Higher premiums will increase government subsidy and both the Centre and states will find it too burdensome if average premiums (for all crops taken together) are much higher than this range.

Nevertheless, if the PMFBY is a viable proposition for insurance companies even after becoming optional, various other decisions taken by the Cabinet on February 19, 2020, will substantially improve its performance by paying the claims much faster.

But there is a big ‘if’.

In the past, two major reasons for a delay in settlement of claims were: non-payment or delayed payment of premium subsidy by state governments and a tedious process of conducting crop cutting experiments. The government has decided to address both these issues in an exemplary manner.

It has been decided that if a state government does not pay premium subsidy for kharif and rabi by March 31 and September 30 respectively, it will not be allowed to operate the scheme in the next season. The Madhya Pradesh government has not paid a premium subsidy of Rs 1694 crore for kharif 2018 and Rs 500 crore for rabi 2018-19. Since the farmers insurance claims were lower than gross premium paid to insurance companies for kharif 2018, the MP government has not bothered to pay its share of subsidy for kharif 2018.

Also read: Ground Report: Congress Is Not Fulfilling Promises Made to Farmers in MP

At the same time, the Madhya Pradesh government wants that insurance companies should pay the claims arising out of unseasonal and late rains in kharif 2019. For this, the government has paid Rs 509.60 crore as advance for premium subsidy of kharif 2019.

The Cabinet decision of February 19, 2020 addresses this problem and it has been decided that the Centre will not allow insurance for a subsequent crop season if a state has not paid its share of premium subsidy for previous season. It is expected that this decision will ensure payment of premium to companies in time which would enable them to pay the farmers’ claims expeditiously.

The second set of decisions of Cabinet relate to crop cutting experiments (CCEs). The government has decided to reduce the number of CCEs by using scientific parameters of weather and remote sensing satellite imagery. CCEs will be required only in areas where there are deviations from normal. Smart sampling will also reduce the number of CCEs by focusing on areas where loss in productivity is predicted.

It has also been decided that if states do not provide CCE data to insurance companies by cut-off date, the claims will be settled by using remote sensing and weather technology. In case of disputes between states and insurance companies regarding yield, the centre was already using the RST and market arrival data. The states will now have to gear up to complete CCEs within the time prescribed in guidelines of crop insurance.

If successful, India will be the first country in the world to marry technology with CCEs to assess loss of productivity. The world is watching India with interest.

Farmers plant saplings in a rice field on the outskirts of Srinagar June 10, 2015. Photo: Reuters/Danish Ismail

The third major challenge addressed by the government decision is the appropriateness of certain crops in various regions. So far, the government was paying premium subsidy even if insurance companies found a crop so risky that they quoted premiums above 30%.

For example, the premium was 49.8% for groundnut in Rajkot, Gujarat in kharif 2018. The Centre has now decided that its premium subsidy will be restricted to only those crops which get premium of only 30% in un-irrigated areas and 25% in irrigated areas. If states still want to insure such crops, they will have to bear much higher premium subsidy than they were paying so far.

The Centre has done well to recognise that agriculture in such unirrigated areas requires interventions other than crop insurance.

For example, Bundelkhand in Uttar Pradesh and Madhya Pradesh, and Marathwada in Maharashtra need larger investment in irrigation which can reduce the risk to crops. One hopes that this will nudge the state governments to modify their policies e.g. setting up sugar units in Marathwada or growing paddy in water stressed areas in Tamil Nadu.

They will also do well to persuade farmers of these areas to go in for less water intensive crops in such areas. Investment in development of drought and flood tolerant varieties will also help agriculture in these areas.

Also read: Exclusive: Centre’s Crop Insurance Scheme Fails the Drought Test, 40% Claims Unpaid

In another innovative decision, the Cabinet has introduced insurance coverage for single peril e.g. hailstorm. So far, Punjab did not participate in the flagship crop insurance scheme due to a high irrigation ratio and lower risk to crops. However, hail and pests continue to threaten productivity of crops in Punjab. The state can now design single peril insurance policy.

The above changes will however help only if insurance companies and state governments are able to persuade farmers to take insurance for their crops. The experience of motor vehicle insurance as well as cattle insurance does not inspire much confidence. In 2012, the population of cattle and buffaloes was 29.96 crore but the total number of insured animals in 2016-17 was a paltry 7.44 lakh.

The only silver lining for crop insurance is in Maharashtra where in 2018-19, 1.28 crore non-loanee farmers insure their crops. It will require a lot of effort of state governments, banks and insurance companies to persuade farmers, both loanee and non-loanee, to insure their crops to shield themselves from vagaries of nature.

No one is hit harder by climate change than a farmer. Next few months towards kharif 2020 will show whether these changes will make crop insurance attractive enough to farmers.

Siraj Hussain is Visiting Senior Fellow at ICRIER. He has served as Union Agriculture Secretary.

By Making Crop Insurance Optional for Farmers, Has the Centre Effectively Ended the Scheme? 

Making crop insurance mandatory for loanee farmers provided an attractive deal for insurance companies. Without this, will the business still be viable?

This is the first in a two-part series about the changes made to the Pradhan Mantri Fasal Bima Yojana. Read the second part here.

On February 19, 2020, the Union Cabinet approved major modifications to the two crop insurance schemes, the Pradhan Mantri Fasal Bima Yojana (PMFBY) and Restructured Weather Based Crop Insurance Scheme (RWBCIS).

While the former provides insurance on the basis of guaranteed crop yield, the latter provides coverage on the basis of weather parameters, irrespective of the yield of crop.

The two schemes were launched in 2016 and there were major modifications in guidelines in 2018. The implementation of the overall project has attracted criticism from farmers, some state governments and the media for delay in settlement of claims and inadequate pay outs in the event of losses.

The most important decision taken by Cabinet is to make the scheme optional.

Thus, at the time of availing crop loan from bank or cooperative, a farmer (henceforth referred to as ‘loanee farmer’) will be able to decide if he wants to take crop insurance. So far, insurance premium was deducted from his crop loan even if he didn’t want the insurance. There are several other positive changes in the scheme but this one decision alone will decide the future of crop insurance in India.

Also read: BJP Manifesto: Voluntary Enrolment Under PMFBY Could Kill the Programme

It was a long-standing demand of farmer organisations and activists that crop insurance should not be compulsory for loanee farmers.

Compulsory insurance was important, though, because it provided insurance companies an idea about the number of farmers and the premium they will be able to collect. Now that it has become optional, before submitting their bids for premium rates, insurance companies will have to devise alternative methodologies to estimate the number of farmers who will take insurance for their crops. If they want to continue in this business, they will have to aggressively reach out to farmers and explain to them the benefits of crop insurance.

This will not be easy as farmers in less risky districts (e.g. irrigated areas) may not opt for crop insurance. Similarly, in the event of a normal monsoon, farmers may not go for insurance either.

The real impact of this decision will be known soon, through the response of insurance companies in tenders in various states. In the last four years, after the launch of the scheme in 2016, the number of non-loanee farmers has been going up. In 2018-19, 2.11 crore non-loanee farmers insured their crop while the number of loanee farmers was 3.57 crore. But, out of 2.11 crore non-loanee farmers, 1.29 crore farmers were in Maharashtra alone.

West Bengal, Tamil Nadu, Karnataka and Jharkhand were other states where non-loanee farmers took crop insurance. In most other states, the scheme predominantly provided insurance coverage to loanee farmers only. Here, it must be noted that the state governments notified the crops which could be insured.

Sturdy crops, where risk was not perceived to be very high, like sugarcane, were generally not covered by the state governments under crop insurance.

Also read: Exclusive: Centre’s Crop Insurance Scheme Fails the Drought Test, 40% Claims Unpaid

Tenders of Uttar Pradesh, Haryana and Jammu and Kashmir to select insurance companies for 2020-21 have already been issued by state governments. After the Cabinet decision to make the scheme optional, the J&K tender was canceled on February 20.

Insurance companies retain only about 25% of premium in their books. For the rest, they take ‘reinsurance’, a form of insurance for insurers. The terms and conditions of reinsurance may also undergo a change due to this decision.

In all likelihood, insurance companies will quote a much higher premium due to chances of heavy reduction in the number of farmers and the premium, at least in kharif 2020. Due to this decision of the Union government, there may well be substantial decrease in area coverage under crop insurance in 2020-21.

If the insurance companies assess that there will be a substantial decline in the number of farmers who will insure their crops, they will quote higher (actuarial) rates of premium and the premium subsidy will substantially increase, as premium paid by farmers is fixed at 2% for kharif, 1.5% for rabi and 5% for annual commercial and horticultural crops.

The difference between premium quoted by companies and what the farmer pays is borne by the Centre and state governments in the ratio of 50:50.

A farmer carries firewood during the dry season in Nicaragua, one of the Central American countries affected by a recent drought. Photo: Flickr

If insurance companies do not quote in tenders or give exorbitant rates, the states may decide not to go for crop insurance at all. In this event, farmers will have to be provided relief under the State Disaster Relief Fund (SDRF). For agriculture, horticulture and annual plantation crops, compensation to small and marginal farmers (called input subsidy) is Rs 6,800 per hectare (of sown area) in non-irrigated areas and Rs 13,500 per hectare in irrigated areas.

In the case of farmers owning more than 2 hectares of land, the assistance is limited to only 2 hectares. Under crop insurance, the sum insured is based on the scale of finance for the district and it is many times more than the compensation for which farmers would be eligible under SDRF.

For example, in kharif 2018, the scale of finance in Rajkot district of Gujarat was Rs 39,000 per hectare for castor, Rs 58,000 per hectare for irrigated cotton and Rs 42,000 per hectare for groundnut.

So, in the absence of crop insurance, the farmers will get a much smaller amount of compensation under current norms of SDRF.

Implementation of crop insurance has substantially improved over the last four years and some decisions of Cabinet will further improve the scheme. But all this is subject to insurance companies finding it a viable business.

Siraj Hussian was Union Agriculture Secretary. Presently, he is Visiting Senior Fellow, ICRIER