Domestic, foreign insurers big gainers under PMFBY; pool mechanism on cards

With insurance and reinsurance firms, particularly foreign reinsurance and private insurance firms, turning out to be big beneficiaries of premiums collected under the Pradhan Mantri Fasal Bima Yojna (PMFBY), the government is considering creating a pool mechanism for claim settlements. 

In the last six seasons, close to Rs 5,000 crore has flown to the books of foreign reinsurers, as overall claim ratio has been just around 77 per cent, which has led the government to rethink the involvement of reinsurance companies in the business, a senior government official said. 

Data from PIB also corroborates this. 

In the 2016-17 and 2017-18 financial years, the total premium collected under PMJDY was about Rs 48,267 crore, while the claim payout was about Rs 39,789 crore, indicating that close to Rs 9,000 crore went collectively to insurance and reinsurance firms. Of the total premium, about Rs 8,720 crore was paid by farmers, while close to Rs 39,547 crore was subsidised collectively by central and state governments. 

“The pool mechanism will help the money stay in the country itself, instead of going to foreign reinsurers,” said the official. 

Under the proposed pool mechanism, while private firms can retain a small part of the premium, a large part goes to the pool, which will serve to pay out the claims. While initial years, when the pool is small, proposals such as budgetary support from the government, in case the claim ratio exceeds 100 per cent, is also being discussed. 

At present, about 25 per cent of the risk — the premium from the scheme — is retained by insurance companies, while the rest is hived-off to reinsurance companies. About 50 per cent of the risk is reinsured by state-owned GIC, and the rest by international reinsurer firms. Thus, with claim ratio well below 100 per cent, a large part of profit from the scheme at present accrues to foreign reinsurers. 

“The new model should be sustainable in the long run,” according to a top official in a private insurance company. 
Under the PMFBY — introduced in 2016 — farmers have to pay a maximum of 2 per cent of the sum insured for kharif and 1.5 per cent for rabi food and oilseed crops and 5 per cent for commercial/horticultural crops. The remaining part of actuarial premium is shared equally between the central and state governments.

The PMFBY is based on actuarial calculations, and rates are based on risk perception. Thus, premiums differ, based on crops and regions. For example, in drought-prone areas, the premiums are generally higher, and the payouts are also high. Insurance companies get the benefit of volumes, by getting premium from other regions, where the cropping pattern is generally stable. 

Eighteen general insurance companies, including five public sector insurance firms, have been empanelled for the scheme’s implementation.

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