A normal monsoon in 2016, after two years of drought, has not only led to a bountiful harvest for farmers, but also filled the coffers of private insurers.
The Kharif 2016 season resulting in lower claims has helped private insurers in particular rake in good profits from the Centre’s flagship scheme, the Pradhan Mantri Fasal Bima Yojana (PMFBY). But a chink in the armour is the short tenure of the policy that defeats the very purpose for which the scheme was launched.
Private insurers, not bound to bid every season, are unlikely to bet their shirt in a bad monsoon year. Also, since these players are not in the business for the long haul, it is unlikely that they would deploy their profits to improve processes and infrastructure as was envisioned earlier. A heads-I-win-tails-you lose scenario benefiting insurers hardly helps.
Insurers collected a total premium of around ₹16,130 crore under the PMFBY in the 2016 kharif season. Data with
Currently, in most States, bidding under PMFBY happens for a single season (six months) or two seasons (one year), and insurers who win the bid in one season are not bound to come for the next. After enjoying good profits last year, private insurers have not shown much interest this year. In this year’s bidding in Maharashtra, for instance, which happened a few weeks ago, most private players quoted exorbitantly high rates and outpriced themselves.
Five clusters have gone to public insurers (three to AIC and one each to United India and New India) and only one has been taken by a private insurer — IFFCO Tokio.
With expectations of El Nino playing spoilsport to the monsoon this year, private insurers, driven by commercial considerations, have no doubt decided to give this year’s bidding a go-by.
But this hardly serves the Centre’s purpose in launching the welfare scheme in the first place. A risk- or loss-sharing mechanism that ensures robust participation by all players in every season will go a long way in achieving the Centre’s objective of providing more efficient insurance support to farmers. The liability of the farmers under PMFBY is limited to 2 per cent of the SI (1.5 per cent in the case of rabi crops) with the balance being paid by the Government — with the Centre and the State making an equal contribution. This budgetary expense, like other development expenses and subsidies, is after all taxpayers’ money.
There are two parties who share the profits or loss in a crop insurance policy (here PMFBY) — one, the primary insurance company, and two, the re-insurers. The primary insurance company retains only 15-20 per cent of the risk and the balance is passed to re-insurers. The entire re-insurance risk is not taken by GIC (the public re-insurer) alone. It retains 50 per cent of it and hives off the rest to international re-insurers for a premium. So, when losses or profits arise, it is shared by all these players.
The capping ideaGiven that the premium under the scheme is subsidised by the Centre and State governments, a cap on profits earned in a good year could be considered. The Centre may, for instance, choose to keep ₹10 as profit if the claim in a good year amounts to ₹70, letting the insurer retain ₹20.
Similarly, if the claim is higher, say, ₹120, then ₹100 is borne by the insurance company and ₹20 by the Government. This model can serve two purposes. One, it will reduce the premium outgo for the Government as the re-insurer’s risk reduces. Two, as the Government retains a sizeable portion of the profits in a good year, it can use the funds to make necessary investments and cover its losses in a bad year.
Also the possibility of the Government being burdened with huge losses in a single year is highly unlikely. Situations of extreme loss like the rabi crop in Tamil Nadu in 2017 are rare (it was the worst loss in 140 years). The risk is spread geographically and among different crops and seasons, and the loss in any year may not be very large.
Aside from a proper profit- or loss-sharing system, issuing policies for a longer term — two-three years — will also ensure more bang for the buck. A short period of, say, one year, will no doubt result in ad hoc participation by private insurers, as seen in this year’s bidding process.
An insurer’s risks or profits will be better spread out if the policy is for a longer tenure — covering both good and bad years of the monsoon. But here, the Centre will have to lay down stringent selection criteria — awarding long-term contracts to players with a sound balance sheet and strong track record of claim settlement.