Crop insurance grows in value for state-owned insurers

The importance of crop insurance is set to rise steeply at government-owned companies in the segment.

The change is being facilitated by the Pradhan Mantri Fasal Bima Yojna (PMFBY), which has triggered  competition among general insurance companies. Almost all of them expect crop insurance to contribute close to a fifth of their premiums in the next three to four years, from close to nil last year. At present, motor and health insurance together account for close to half their premiums. Till now, public sector general insurance entities were passive distributors of crop insurance schemes administrated by the state-owned Agriculture Insurance Company of India (AIC). National Insurance has collected close to Rs 750 crore as premium from the kharif and ensuing rabi season in 2016-17 under the scheme. “Crop insurance will contribute four to five per cent of our total premium collection this year. Over the next three years, it will be  20-25 per cent, and could be even the biggest portfolio in our business,” said a senior executive.

United Insurance has collected Rs 1,300-1,400 crore as premium from PMFBY in the earlier kharif season. “Crop insurance will be a major growth driver, contributing 20-25 per cent overall premium in the years to come,” said an executive.      

Oriental Insurance could not bid for PMFBY in the earlier kharif due to non-availability of actuaries. It is now looking to expand its portfolio significantly in the rabi season. At present, it has got mandates for Himachal Pradesh and Jammu & Kashmir, and has collected close to Rs 600 crore as premium. In 2015-16, the entire non-life insurance sector collected premiums of Rs 90,000 crore, with health and motor accounting for the lion’s share. This year, agricultural insurance itself has garnered around Rs 20,000 crore as premium.

Money flows in

One factor driving the growth of PMFBY is the huge amount from the central government. This year, the total premium collection by PMFBY is expected to be around Rs 22,000 crore, of which close to Rs 18,000 crore is expected to come from the Centre, according to sources in the sector. Earlier, the cost to the exchequer for crop insurance would be close to Rs 5,500 crore a year. The number of farmers under crop insurance has grown by around 20 per cent, to 38 million. The sum insured has nearly doubled, to about Rs 140,000 crore this year. Thus, with the higher sum assured, premiums have gone up, and the money has largely come from the government.

Earlier, crop insurance was solely administrated by AIC. Under the earlier scheme, the premium amount was fixed at 1.5-3.5 per cent but up to 100 per cent of claims were borne by AIC. However, normally, the claim ratio in crop insurance is as high as three times the premium. For instance, for a premium of Rs 100, the claim in general was as high as Rs 350. AIC paid Rs 100 and the other Rs 250 was shared by the Centre and the state. For state governments, it was not easy to determine the losses in absence of any budget for crop insurance, resulting in delay in payment. More, mostly loanee farmers would purchase crop insurance, as it was mandatory for getting a loan. Yet, it covered only damage to the  standing crop. If the farmer defaulted on payment, the crop insurance ceased.

PMFBY is based on actuarial calculations, rates based on risk perception. Thus, for different crops and regions, the premiums are different. In Gujarat, for groundnut insurance, companies are charging as much as 44 per cent in premium under PMFBY. The lowest rate being  less as one per cent, as with sugarcane in Uttar Pradesh, explains Rajeev Chaudhary, chief risk officer, AIC. However, the farmer pays only a flat two per cent premium; the rest is provided by Centre and state. On an average, the premium rates come to around 12 per cent, with five per cent each borne by state and Centre. In West Bengal, even the farmer’s share is borne by the state government. However, all claims have to be borne by the insurance companies.

“Since all the companies are now liable for claims, they want to ensure crop cutting is properly conducted. Emphasis is given on technology, and it is ensured only genuine claims are paid,” says Chaudhary, one of the architects of PMFBY.

Earlier, no claims were paid for crop failure on account of sowing, as claims could only be made for damage to the standing crop. In the present scheme, claims have to be paid for sowing failure, individual claims due to local calamities and post-harvest losses. All over India, nearly 15 companies have been empanelled under PMFBY. Each state government issues a tender and companies bid for it. Further, each state has different clusters, with a variety of crops in different districts grouped, so that no one company gets a very profitable crop portfolio.

AIC role

Notably, with crop insurance open for all companies under the government scheme, the dominant role of AIC is being challenged.

About 30 per cent of AIC is owned by the National Bank for Agriculture and Rural Development, 35 per cent by General Insurance Corporation, and the other 35 per cent by the four general insurance companies of the Centre. After long deliberation, AIC been entrusted with the role of hand-holding the others in rolling out PMFBY, providing them technological support. AIC is to also compete with the  other companies in the tenders to roll out the scheme in states. “It is like father competing with son,” according to an official of AIC.