Reinsurance terms, a challenge for the industry

When Pradhan Mantri Fasal Bima Yojana was rolled out three years ago, insurers were excited and made a beeline to offer it.

But now, most private insurers are going back to the drawing board as stress under the portfolio has been mounting.

According to industry sources, at least two players have lined up their exit from the segment while more are in wait and watch mode for any intervention from the Government or Insurance Regulatory and Development Authority of India (IRDAI).

Basic concerns

Many fundamental issues have not been addressed since the beginning. Even in the pre-PMFBY era, delay in providing data of Crop Cutting Experiments (CCE) by States to insurance companies was a serious problem which delayed claim settlements. This has not been addressed adequately after the launch of PMFBY, say insurers.

Pricing

Increasing issues with monsoon and steadily expanding reach of the scheme where distress is more is making pricing untenable. “If the scheme is not expanding in areas where there is less distress and fast spreading in those districts where distress is regular, then offering crop insurance is not viable because it it bound to result in losses,” says the Chief of Underwriting and claim settlement of a private insurer.

Bhargav Dasgupta, MD and CEO of ICICI Lombard, recently ascribed the trouble to pricing of reinsurance. “Reinsurance terms have turned adverse for insurance companies, so it doesn’t make sense. Rates on the ground are more aggressive,” he pointed out. “With foreign players taking a big pie of reinsurance of crop cover, we have no control on pricing of re-insurance which is calculated on changing data and perceptions of risk,” he said.

In a way, the situation is similar to heavy losses incurred by the insurers on motor pool which became a major concern during 2011-13. IRDAI chipped in by ending the commercial third party motor pool and brought in a declined pool in 2013.

“While one cannot straightaway compare declined pool with crop insurance modalities today, various options are being examined to come out with a viable solution,” said a senior official. PMFBY is market-led when it comes to discovery of premium rates. While the insurance companies charge the Actuarial Priced Premium Rate (APR), a farmer has to pay a maximum of 2 per cent for Kharif, 1.5 per cent for Rabi and 5 per cent for commercial and horticultural crops. The difference between APR and what is being paid by the farmers is treated as Rate of Normal Premium Subsidy, which shall be equally borne by the Centre and States. The problem here is delay in payments as well as ‘aggressive’ pricing by insurers initially.