Insurance Article, The Insurance Times 2021, The Insurance Times August 2021


Risk and uncertainties are common in agriculture due to the very characteristic of agriculture i.e., dependence on nature. The Pradhan Mandri Fasal Bima Yogana (PMFBY), a government sponsored crop insurance scheme, is expected to run into a cool reception from insurers after the national reinsurer GIC Re decided not to reinsure more than 45% of any insurer’s crop insurance business. This is in effect would mean insurers would have to bear the risk of crop failure due to drought or heavy rains. Two major insurers, New India Assurance and ICICI Lombard, have decided not to provide crop coverage this year. This decision is also because of the removal of the compulsory clause by the government, leading insurers to feel that farmers genuinely in need of coverage will stay away from the scheme. Insurers say, there have been instances of fraud in Gujarat, Rajasthan and claims loss ratio is higher than 120%. PMFBY was launched in 2016 and contributed to a 32% growth in the non-life insurance sector in 2017. Since then, this class of business has lost its luster because of losses. The problem of small farmer livelihood is aggravated due to the fact that small farmers suffer from many production risks like drought, flood, lack of adequate use of inputs, poor extension leading to large yield gaps, lack of assured and adequate irrigation, crop failure and so on. The production risk coverage which was being attempted through crop insurance has not worked well and now has been made voluntary for farmers which would further reduce the insured area from already inadequate coverage of 30%. There are number of factors that affect the returns from farming, many of which are beyond the control of farmers. Occurrence of drought, flood, untimely rainfall, hailstorm etc is only a few among the long list of factors that affect the returns from farming directly. The increase in the probability of occurrence of such extreme climatic events has worsened the status of farmers, who are at the receiving end. The occurrence of such untoward climatic incidents has become very normal, in recent years, as a consequence of global climate change.

Further, there are market risks like absence of market, poor price realization, high transaction cost, and poor bargaining power due to small marketed surplus. This leads to low and unstable farm income for these producers. It is here that the role of market becomes crucial as even if a farmer has produced efficiently but is not able to sell well, the story is lost. The distress among small famers in India is therefore market driven to a large extent in both ways- too much protection (MSP) or too little protection. India is considered to be vulnerable to the effects of climate change due to several factors like high dependence on agriculture, low coverage of irrigation, lower resource availability at individual farms and unavailability of proper technology to combat the risk. Other factors like dominance of small and medium sized holdings coupled with inherent lacunae like farmers’ apathy towards newer technologies, unscientific post-harvest management, and un-organized and chaotic marketing system, also contribute to making agriculture a perilous endeavor in India. Crop insurance offers benefits for both, farmers as well as Government: it helps farmers to cope with risk through pay offs at the event of crop loss, and help Government by reducing the burden on disaster payments to farm sector. In spite of its importance, crop insurance in India has not gained much popularity amongst the farming community. Innate lacunas in insurance schemes coupled with apathy of farmers to such schemes rooted through lack of awareness are the main reasons for low spread of crop insurance in India. Giving much required policy thrust to crop insurance, the Government has launched the insurance programme PMFBY, which is an improved version of earlier similar schemes. Though there are many issues and challenges, the new scheme is a boon to farming community, if implemented in the right spirit.  A progression of Indian crop insurance schemes followed as the country put forth efforts to improve its program:

The Power Balance:

The power balance hence is not with the farmer but with the MNCs that are calling the shots through the WTO, the World Bank and governments. The ordinances promulgated by the government reflect a growing partnership with this corporate power and not actions taken in favour of farmers. India cannot become ‘Atmanirbhar’ by selling our farmers interests to the corporates. At a time when the world is debating over how to deal with the impacts of climate change on agriculture and countries are contesting policy measures, there have been growing calls from farmers’ advocacy groups and non-governmental organizations to revamp the trade regime of the WTO to coordinate it with mitigation and adaptation policies to tackle climate change. Now, when India is witnessing twin problems of drought and floods simultaneously, the need of the hour is to have laws that protect farmers’ income. What is needed is a drought, flood and cyclone protection law for farmers to ensure income for damaged crops, not with an insurance model advocated by WTO but a state-supported scheme. We have seen how the AoA promoted insurance scheme turned out to be cash juggler for the insurance companies and loss for the government and farmer with claim rates and claim amounts being low. Making MSPs redundant through the latest ordinances show how India is playing to the developed nation’s gallery. Moreover, by allowing contract farming in India through these ordinances brings under questions the intention of the government in a nation where more than 86% of the farming community owns less than two hectares of land. The policy of contract farming shifts the power balance away from the farmer to the company. It will push the farmer as a land-owning tenant to the interest of the corporates. Gauging crop risk in India is challenging because risks for different locations, crops, and crop seasons depend on many variables, some correlated and some uncorrelated. Limited PMFBY experience (loss history) also contributes to uncertainty about present risk. Probabilistic modeling is the best approach to overcome this uncertainty and account for the complex mixture of factors associated with risk to PMFBY-insured crops and associated (re)insurance losses. Growth of premiums and annual variation in claims for India’s three national MPCI schemes in operation since 2000: NAIS, 2000–2015; MNAIS, 2010–2015; and the PMFBY, 2016–present is shown as follow:

The Ground Reality:

Indian agriculture has for long suffered from apathy and policies rigged to benefit others at the cost of the farmer. Under successive Congress governments, ringing tributes were ritualistically paid to the industry of “kisan”, but the loudly declared intent to help farmers never translated into ground reality. Committees were formed with the avowed objective of developing agriculture and improving farmers’ lot, only to consign the recommendations of experts commissioned for the job to the growing pile of files never acted upon. It is known that 85% of India’s farmers operate less than or just five acres of land, half of which in many parts of India may be dry/rainfed. Small farmers contribute 51% of agricultural output with 46% of operated land, and a much higher share (70%) in high-value crops, such as vegetables and milk. However, small farmers are less literate and are from more marginalized castes and communities, and are generally excluded from modern market arrangements, like contract farming or direct purchase. In this context, it is important to examine the role and scope of impact of recent farm produce trade (APMC bypass) Act and the farmer empowerment or Contract Farming Act on smallholder livelihoods. . Though Tamil Nadu was late in joining the PMFBY, the State has emerged as one of the major beneficiaries of the programme, with its farmers having been sanctioned around Rs. 7,000 crore cumulatively in the last two-and-a-half years.

Farmer’s Suicide:

India has one of the highest suicide rates in the world. In 2019, a total of 10,281 farmers and farm laborers died by suicide across the country, according to statistics from the National Crime Records Bureau. Taking one’s own life is still a crime in India, and experts have said for years that the actual numbers are far higher because most people fear the stigma of reporting. Farmers, struggling to save their crops, dug their bore wells even deeper. And to fend off increasing pest attacks, they loaded their fields with chemicals. The skyrocketing agricultural costs forced many farmers to take on more debt, and crop failures over the years eventually destroyed generations of rural families. Over the years the premiums against sum assured, as quoted by insurers, have been steadily rising, reflecting the firms’ concerns over the shirking margins. The latest trend may be indicating the cementing of the scheme, largely dependent on government support, as a viable insurance model, according to industry watchers. Among different clusters for different crops, the highest premium in the current kharif season after finalization of bids, is around the same level as the average of last summer crop season MSP culture, and too much reliance on low value land intensive crops has been the culprit in many suicide prone areas while high production and market risk crops like cotton in others.

Most problematic is farmers’ reliance on traders, commission agents, and moneylenders for credit as institutional credit reaches only 65% of them and more of small and marginal farmers are excluded from this institutional credit net. This private source borrowing leads to interlocking of credit and output, input and output, and credit and input markets where there is implicit over pricing of farm inputs and under-pricing of farm output of the farmers and they can’t access other channels even if they offer better prices as they don’t offer credit to farmers who are tied to traders and agents. This restricts their freedom to choose channels provided by new Acts.. The prices are still determined and driven by APMC markets which are still not adequately regulated and, in many cases, mistreat farmers. Whatever new market channels like contract farming and direct purchase may emerge for farmers, small farmers will continue to depend on APMC markets for many commodities. There is no need for co-operative farming. What is needed is pre-production and post production aggregation to buy better and sell better or to capture higher surplus in the food and fibre value chains.  Annual (combined kharif and rabi) loss cost of India’s three national MPCI schemes in operation since 2000: NAIS (2000–2015); MNAIS (2010–2015); PMFBY (2016–present) is as follow:

Landmark Bills:

This approach has now seen the passage of two landmark bills by Parliament: Agricultural Produce Trade and Commerce (Promotion and Simplification) Bill and Farmers (Empowerment and Protection) Price Assurance Bill. The protests against them represent political dishonesty and the influence of middlemen, considering that they together with changes in Essential Commodities Act to remove cap on stock holdings can herald a New Deal for the agriculture sector:

  1. The first bill is aimed at liberating the farmer from the oppressively unjust situation he had been locked in. He was forced to sell his produce at the local market, where factors such as the domination of a cartel, price information asymmetry, and poor infrastructure worked to his detriment. If the ordeal of having to wait endlessly in adverse and humiliating conditions forced him to submit to the ruthless mandi mafia, high transportation costs ate into his already meager profit. This virtually amounted to a state sanctioned heist. Once the first legislation is enacted, farmers will be freed from the grip of the middleman, and able to sell their produce to buyers from across the country at a price they deem to be fair and at a time of their choosing. Freedom to sell at the farm gate will do away with transportation expenses, and thus boost incomes. This is a giant stride towards the fulfillment of the dream of ‘One Nation, One Market’ 73 years after Independence.
  2. The second soon-to-be enacted law will help farmers go for contract farming with agriculture trade firms, wholesalers, big retailers and exporters. The provision of market linkages at the sowing stage itself will insulate them from production and price vagaries. It will also lead to introduction of better technologies, technical assistance, crop insurance and credit facilities. Contract farming will also encourage private investment in the financially starved sector and open the way for growth of agro-based industries and better storage, thus removing shackles which caused stagnation. This will lead to higher income for farmers who will be able to modernize farming methods and innovate to suit the demand for cash crops and agro-industry. Kharif season loss cost for combined NAIS, MNAIS, and PMFBY historical results (orange bars) and AIR MPCI Model for India recast using current PMFBY insurable exposure and 2018 revised policy conditions (blue bars) can be seen as below:

Reasons of losing Interest in the Centre’s Flagship Crop Insurance Scheme:

Launched from Kharif 2016, the scheme has now been implemented for four seasons each of kharif and rabi. Out of all the ‘Pradhan Mantri’ schemes launched over the last few years – and there have been quite a few – none has received as much criticism as the PM Fasal Bima Yojana (PMFBY). Due to the variety of crops even within a cluster, the small size of farms, differences in farming practices, uncertainty of weather and budgetary constraints of state governments, there is no central scheme which is more difficult to administer than this. To its credit, the government has been responsive to the criticism and the scheme guidelines have undergone major changes twice, in September 2018 and February 2020. There have been three major criticisms of the scheme.

  • The first is that, at an all-India level, the claims paid by insurance companies are less than the gross premium received by them and this, critics say, resulted in ‘undue’ enrichment.
  • The second form of criticism is that the scheme is compulsory for all farmers who avail crop loans on their Kisan Credit Cards.
  • The third major criticism is that the assessment of crop losses is done through a large number of crop cutting experiments (CCEs) conducted by state governments. Not only are these CCEs quite time-consuming, they are also not reliable enough. In several cases, the yield data produced by CCEs has been challenged by both farmers and insurance companies. In several cases, the Government had to take the services of Mahalanobis National Crop Forecast Centre to resolve the disputes on yield of a crop.

The guidelines issued by the Centre in February 2020 have sought to address the above criticisms by making at least three major changes in the scheme.

  • Firstly, from Kharif 2020, the scheme was made voluntary and the farmers were given an option to opt out of crop insurance by submitting a written request to the bank.
  • Secondly, like the Modified National Agricultural Insurance Scheme (MNAIS), introduced by UPA II in 2010-11, the government capped the Central government’s liability in the premium at 30% for unirrigated areas and crops and 25% for irrigated areas or crops. Districts having 50% or more irrigated area are to be considered as irrigated areas or districts (both under the PMFBY and Restructured Weather Based Crop Insurance Scheme). It means that the states will have to bear additional premium subsidy if actuarial premium exceeds the above limits. Normally, unirrigated areas and risky crops attracted higher rates of premium in the tenders. However, there is no capping of benefits to the farmers, unlike the earlier scheme of MNAIS.
  • Thirdly, the government decided to substantially enhance the use of modern technology (satellite, drone, mobile, etc.) for assessment of crop yield and estimation of losses and claims. For this a two-step process is to be adopted based on a ‘deviation matrix’ using triggers like weather parameters etc. It was also decided that the CCEs are to be conducted only in those areas in which there are strong deviations, noticed from use of remote sensing and other technologies.

Discontinuation of Scheme by States:

Several states have decided to discontinue this centrally sponsored scheme, in which the states had to pay 50% of premium subsidy. Bihar and West Bengal discontinued PMFBY from kharif 2018 and kharif 2019 respectively. From rabi 2019-2020, Andhra Pradesh opted out. From kharif 2020, Telangana and Jharkhand have also decided to opt out.  Bihar and Jharkhand have started their own crop insurance schemes under which farmers do not have to pay any premium and they are eligible for crop insurance up to 2 hectares, if shortfall in yield is more than 20% of threshold yield. The insurance scheme in West Bengal is modeled on PMFBY and the companies are selected through a tender. The state does not take any premium subsidy from the Centre. Discontinuation of Scheme by several States:

Andhra Pradesh has decided to set up its own crop insurance company and it has applied to Insurance Regulatory and Development Authority for a licence. No premium is charged from farmers. So far, the scheme is being operated by the state government and there is no participation of insurance companies. As a result, the state government will be responsible for payment of any claims. Andhra Pradesh, Telangana and Jharkhand wrote early this year to the Centre, communicating their decisions to exit the scheme. Now, Gujarat and Madhya Pradesh seem to follow suit. While Punjab never implemented the PMFBY, Bihar and West Bengal have their own crop insurance schemes under which farmers do not pay any premium. Haryana is also said to be exploring if it can form its own insurance company. For kharif 2020, however, it has gone in for PMFBY. However, the claims ratio of the last kharif season is unlikely go up to the 2018-level. In the states which have set up their own insurance companies, premium subsidy from the Centre will be available only if actuarial premium rates are discovered through a transparent process of tendering. In any such tenders, all the empanelled companies of private and public sector will also be eligible to participate. It is yet to be seen how the state level insurance companies will compete with Agriculture Insurance Company (AIC) and other private companies which have long experience of running crop insurance. Over 65% of about Rs 14,000 crore of claims have been paid to 1.08 crore farmers, bulk of it after the Covid-19 lockdown:

Insurer’s dilemma:

One of the major criticisms of PMFBY in the media and public discourse was that it has resulted in undue enrichment of private insurance companies. In 2019-20, out of Rs. 31,391 crore of gross premiums of all the insurance companies, PSU companies collected Rs 16,325 crore (52%). AIC alone collected GP of Rs 13,651 crore (43.5%). But the fact is ICICI Lombard, Cholamandalam MS, Shriram General Insurance and Tata AIG have opted out of PMFBY from kharif 2019-20, as they felt that the claim ratios in previous seasons were too high. The government’s own Public Sector Undertakings (PSUs) – General Insurance Corporation, United India Insurance Company, National Insurance Company, Oriental Insurance Company and New India Assurance have also faced difficulties in getting reinsurance due to their losses and high claim ratio in previous seasons. As a result, only 10 out of 18 empanelled insurance companies were eligible to participate in crop insurance in the kharif 2020 season. PMFBY will complete five years when rabi crops are harvested in March-April 2021. In 2019-20, the Centre and the states paid Rs 27,075 crore as premium subsidy. It is time the government launched a comprehensive evaluation of the scheme which should be concurrent with this year’s kharif and rabi crops. This can enable the Centre and the states to decide the way forward.  Recently, the government took a good decision to engage 12 organizations to conduct pilot studies in kharif and rabi 2019-20 for gram panchayat level crop yield estimation using remote sensing, artificial intelligence bases softwares, drones, mobile applications and other technologies. International Food Policy Research Institute (IFPRI), International Crops Research Institute for the Semi-Arid Tropics (ICRISAT), Gokhale Institute of Politics and Economics and Trinity League India are among those who have submitted detailed technical reports to MNCFC. These reports suggest that accuracy up to 85-90% can be achieved in assessment of crop yield for rice & wheat. This can reduce dependence on crop cutting experiments. There is a need to integrate use of technology for assessment of yield. This can shorten the time taken by CCEs which has been a major cause of delay in settlement of claims. . This year, the State government may have to shell out up to Rs.150 crore so that farmers are not taxed in any way. Till now, after giving allowance for farmers’ share of 2% generally, the Union and State governments shared the premium amount equally. The sharp decline in claims to premium ratio in kharif 2019 season also indicates reluctance of the insurers to accept the farmers’ claims.

Rising cost of Crop Insurance:

In many states, affluent farmers have already been reaping the benefits of collaboration with the corporate sector. This law will help small farmers derive similar gains. They will have the freedom to withdraw from this agreement at any point without penalty, while sale, lease and mortgage of the land will be completely prohibited. Insurers used to complain of the high claim ratio under the crop insurance scheme in the initial years after its 2016 launch; now, state after state is quitting the scheme, as they find it difficult to foot the rising premium bill. A perceived tendency among insurers to admit less of farmers’ claims and the delays in settlement of claims also seem to have prompted some states to develop cold feet about the government’s flagship scheme, Pradhan Mantri Fasal Bima Yojana (PMFBY). The states’ share of premium jumped to 44% in FY20 from 41% in FY17 under the PMFBY and Weather Based Crop Insurance Scheme (WBCIS) while the Centre’s share increased to 42% from 40% during this period. The claims to premium ratio, which was over 90% in two previous consecutive seasons, dropped to a low of 65% during kharif 2019 (as on June 30, 2020), even though there was 52% above normal monsoon rains in September last year that deluged about 6% (nearly 64 lakh hectare) of the season’s sown area. Under PMFBY, farmers’ premium is fixed at 1.5% of sum insured for rabi crops and 2% for kharif while it is 5% for cash crops. The balance premium is split equally between the Centre and states.

Crop Insurance in USA:

Crop insurance helps make America’s farmers and ranchers world leaders in agriculture, allowing them to stay competitive and be more innovative. It also helps them sleep better at night knowing that, should the unexpected happen, they will have the financial security to stay in business and go on to plant the next season. Crop insurance is a key component to the tremendous success of country’s agricultural economy.  Here are twelve reasons why crop insurance is an essential business tool for America’s agricultural farmers and ranchers.

  1. Farmers Receive Individualized Risk Management Solutions
  2. Farmers Can Use Crop Insurance as Collateral for Loans
  3. Farmers are Involved in, and Take Responsibility for, Risk Management Choices
  4. Farmers Can Use Crop Insurance to Improve their Pre-Harvest Marketing Plans
  5. Farmers Receive Crop Insurance Indemnities in the Timeliest Way
  6. Farmers Do Not Receive Unnecessarily Excessive Payments
  7. Farmer Indemnities are not Capped by Arbitrary Payment Limits
  8. Farmers Share in the Program Cost
  9. Farmers Benefit from the Efficiencies and Service of the Private Sector Delivery System
  10. Crop Insurance is Comprehensive and Program Features can be Adjusted Quickly
  11. Crop Insurance Has Already Contributed to Deficit Reduction
  12. Crop Insurance Has Flexibility to Help Meet World Trade Organization Disciplines

Effective Kharif 2020, the Centre has decided that it will foot the PMFBY subsidy bill to the extent of its formulaic share so long as gross premium level is up to 30% of the sum assured in non-irrigated areas and 25% in irrigated areas. The onus will be on states if they want to implement the scheme even if insurers quote any premium above 25-30%. This has put further burden on states, who were already worried over the cost of running the schemes. The Centre has recently written to state governments urging them to invoke the penalty clause on insurance companies that have defaulted on settling the claims made by farmers under PMFBY. The move followed reports that insurers had not cleared as much as a third of the amounts claimed by farmers as crop insurance for the Kharif 2019 season as on June 30 and the new crop year began on July 1. What is disconcerting the farmers is that they are already under pressure from the authorities to opt for crop insurance for the forthcoming season despite the failure to honour last year’s claims due to them. Farmers availing institutional finance are forced to avail the PMFBY as the loan component is linked to crop insurance and there is no escape. But when the crops fail, neither do the banks offer them relief by waiving off interest nor does the insurance company pay them in a time-bound manner. Agriculture is labour intensive but this year farmers are averse to hiring workers from other villages and regions due to fear of the pandemic. The impact  of low output due to lower crop coverage area – will be felt during the harvest season. The economic slump and its impact on the reinsurance market have also marred the scheme. The commission that insurance companies receive when they reinsure the risk cover has gone down from 10 per cent to just 3 per cent in the past five years. The commission amount itself runs into crores of rupees and this dip has impacted the companies. The losing interest of private players can seriously weaken the scheme. It is true, in India; Crop insurance is both obnoxious and indispensable.

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