Govt may create ‘de-risk pool’ for crop-cover claims settlement

The government is looking to create a pool for claim settlement under its crop insurance scheme in order to diversify the risks for insurers — and to lower the cost of re-insurance.

The measure is also intended to address the erroneous perception that insurers are profiting unduly from the crop insurance scheme.

Insurers re-insure their crop portfolio, mostly with foreign companies; nearly 50 per cent of the crop re-insurance goes to global players. Typically, insurance players retain 25 per cent of the risk and premium, and hive off the rest to re-insurance companies.

The creation of a pool for claim settlement under the Pradhan Mantri Fasal Bima Yojana (PMFBY) will likely redress a situation where a substantial portion of the surplus goes to re-insurers.

Joint settlement

Under the proposed pool, insurance companies will keep 25 per cent of the premium/risk (as they do now), and hive off the rest to the pool. Claims will be settled jointly by the insurance company and the pool in the ratio of the premium, that is 1:3.

The pool will be managed by a pool manager/administrator, which will be a government entity. Premium rates will be fixed by a government-appointed technical committee, and any surplus generated will remain in the pool, and be invested.

Such a model will likely help insurance players diversify their risk, and also lower reduce re-insurance costs (if the government opts to take a re-insurance cover for the pool in the initial years).

The pool model of crop insurance works successfully in Spain and Turkey, and can work well for India, too, say experts. However, insurance regulator IRDAI has to first come up with guidelines and framework.

Currently, listed companies in the general insurance space have been incurring loss in their crop insurance portfolio. Yet, the aggregate industry claims ratio (that is, incurred claims/premiums) is less than 100 per cent, which suggests insurance companies are registering a surplus.

Claims ratio

Indicatively, the claims ratio was 73.5 per cent in 2016-17, the first year of PMFBY. In 2017-18, it rose to 81 per cent. Insurers’ administration and re-insurance costs add up to 10-12 per cent, but the rest is their surplus.

Farmers’ organisations and political parties had claimed that insurance companies were profiting at the expense of farmers.

Yet, many insurers currently face a major risk, given their exposure to just two or three States, and their re-insurance cost is high.

Sample these claim ratios across a few States in the past six crop seasons: in kharif 2016, the claim ratio 209 per cent in Kerala and 134 per cent in Karnataka. In rabi 2017, it was 286 per cent in Tamil Nadu and 172 per cent in Andhra Pradesh172 per cent.

In kharif 2017, it was 451 per cent in Chhattisgarh; 269 per cent in Haryana; and 216 per cent in Odisha. In rabi 2018, it was 226 per cent in Odisha and 122 per cent in Tamil Nadu. In kharif 2018, it was 215 per cent in Himachal Pradesh; 120 per cent in Haryana; and 115 per cent in Uttarakhand.

With the pool model, the high risk arising from a concentrated portfolio will likely be addressed.

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