Extended cut-off dates hurt crop insurance scheme

Flaws have started surfacing in the Pradhan Mantri Fasal Bima Yojana (PMFBY), a little over a year after it was launched in January 2016. 

The cut-off date to enrol in the scheme for the kharif season is July 31, by when monsoon patterns are known. If predictions of a weak monsoon come true this year, insurers would have to face big claims. 

“We would like a short cut-off time, so that there is no adverse selection against us. We have articulated this to the state as well as the central governments. Though we have accepted the business, we have also recorded our protest,” said Sanath Kumar, chairman and managing director of National Insurance Company.

With demonetisation affecting financial services in November-December 2016, the government had extended the window for insuring rabi crops till January 10, 2017, from December 31, 2016. By then, drought conditions were already apparent in the southern states. 

According to insurers, nearly two-thirds of the premiums were collected during the extension period. Now, with claims in states such as Tamil Nadu expected to exceed 300 per cent of the premium, reinsurers have objected to paying for claims received after the cut-off date.

“Crop insurance involves a very volatile risk. It is one of the most unpredictable forms of cover, and has large-scale implications. Reinsurers do not welcome any sort of anti-selection. We have taken up the issue at different levels,” said Sanjay Datta, chief of underwriting and claims, ICICI Lombard General Insurance.  

Under the PMFBY, sowing failure due to adverse weather, insurance companies are liable to pay up to 25 per cent of the sum insured.

In the previous kharif season, the total premium collection in Maharashtra was close to Rs 4,000 crore and claims were around Rs 2,000 crore. Several private insurers have hesitated in providing cover in Maharashtra on predictions of a weak monsoon.

“There is a need to deliberate whether this model is right. There is a good possibility that in a bad year, private insurers might not participate in states like Maharashtra,” said an executive with a public sector insurance company.

Ideas mooted by insurers to streamline the PMFBY in recent meetings include the suggestion that when the claims exceed 100 per cent of premiums, particularly when the cut-off date is extended, insurance companies should be liable to pay only up to the premium received, with the extra amount to be given by the government. 

“The PMFGY has an element of welfare built into it. If this scheme is to be run on a commercial basis, the government should be ready to compensate insurance companies,” said another executive with a public sector insurance firm.

Earlier, crop insurance schemes were solely administered by the government-owned Agriculture Insurance Company (AIC) and the premium amount was fixed at around 1.5-3.5 per cent. Up to 100 per cent of the claims were borne by AIC.  The PMFBY is based on actuarial calculations, or rates dependent on risk perception, with participation from empanelled private and public sector insurance companies chosen on the basis of bidding.  The farmer pays a 2 per cent premium and the rest of the premiums quoted by insurers are borne by the Centre and the states. 

However, the entire claim has to be borne by the insurers, which, in turn, depend on reinsurers to reimburse the claims.

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