PMFBY- Have better days arrived for farmers?

Kolli N Rao, PhD

India primarily adopted parametric crop insurance – ‘yield’ as index with a pilot program initiated in 1979, converted into a countrywide program in 1985. Thereafter with minor improvements it’s continuing under various names. Pradhan Mantri Fasal Bima Yojana (PMFBY)’ or ‘Prime Minister’s Crop Insurance Scheme’ is a revamped yield index product, introduced w.e.f. Kharif 2016 season. ‘Weather’ as index insurance made entry in 2003 and continuing thereafter as an important supplement to yield index insurance. Despite mandatory nature of insurance (loanee farmers), crop insurance penetration in India has been historically low.  Of a total gross cropped area of about 190 million hectares, during 2014-15 a little over 40 million hectares were insured for a sum of approx. Rs. 85,000 crore. This was merely 20 percent of cropped acreage with just about 6 percent of Crop GDP insured.  The low level of crop insurance penetration was what drove the government to revamp the insurance program, which promises to take the penetration to 50 percent within next three years (2019). The key action areas identified by the government for this are: (i) affordable premium rates for farmers; (ii) large scale enrollment of non-loanee farmers through better & broader insurance coverage; (iii) improvements in enrollment process to capture details of each individual farmer; (iv)  improvement in the underwriting and claim processing timelines using effective IT interface, (v) Transparent Yield estimation process using technology assisted audit, (vi) individual farm assessment and settlement of losses in case of localized losses, etc.

Among a series of improvements in PMFBY, the average per hectare sum-insured in the earlier scheme used to be significantly below the output value of the crop (almost less than 50 percent of the value of the crop). It is that coverage gap which the PMFBY sought to eliminate by removing artificial capping of the sum-insured and the premium rate. PMFBY also moved the insurance product to risk based premium regime supported by up-front subsidies in premium. PMFBY charges a uniform premium of 2 percent for all ‘Kharif’ crops, 1.5 percent for ‘Rabi’ crops and 5 percent for commercial/horticulture crops.  The difference between the premium paid by the farmer and the actuarially fair premium is subsidized by the government. PMFBY has also two other components – revised Weather Index Based Insurance Scheme (rWBCIS) and Unified Package Insurance Scheme (UPIS), of which UPIS is an addition to meet all insurance needs of a farmer through a single insurance scheme.

Thanks to the efforts, over 60 million hectares of crops were insured during 2016-17 for a sum insured of Rs. 205,000 crore with a premium volume of Rs. 21,500 crore (US$ 3.3 billion), making it 3^rd largest line of insurance in the country behind Motor and Health lines. Now, India also ranks as the 3^rd largest crop insurance market behind United States of America and China. Whether or not the crop insurance penetration reaches 50 percent by 2018-19, it will certainly set to double to over 40 percent from around 20 percent of 2014-15.

Farmer is at the heart of the PMFBY. Its, therefore, pertinent to take note as to how the government has largely taken care of the farmers’ interest in revamping the crop insurance scheme. The key aspects of PMFBY are:

1. Safety net for the farmers: The minimum sum insured is equivalent to the production cost, so that every farmer has a safety-net to protect against all the paid-out costs. In due course the sum insured may be extended to cover value of production.
2. Threshold yield: Threshold yields are set in a manner providing a reasonable protection covering all medium and larger losses. In case of yield index it’s about 80% of the average of past seven years’ yield. It’s a moving average, so in order to assure a reasonable yield trigger upto a maximum of two calamity years can be excluded in fixing the threshold yield.
3. Farmers’ ability to afford premium: Keeping in mind the poor financial condition of the farming community, farmers’ share of premium is fixed at 1.5 to 2 percent for food crops & oilseeds and 5 percent for commercial crops.
4. Protection for key localized losses: Indian index insurance is a unique program which comes with a ‘spill over’ cover for paying losses of ‘localized risks’, like hailstorm, landslide, inundation and post-harvest losses on individual farm basis.
5. Credit linkage: Insurance is mandatory for loanee farmers of scheduled banks, and the insurance kick in the moment crop credit is approved. The banks also finance the premium component. It also encourages credit to farm sector.
6. Multi-agency approach to minimize administrative cost: Thanks to the involvement of multiple agencies, the administrative cost of running the program is less than 2 percent. Banks effectively work as the distribution channels and claim disbursement points. State agencies provide yield assessment services and also promote insurance education & awareness.
7. Close-ended financial liabilities (premium subsidy): There was a time it used to be claim subsidy model with an open-ended financial commitment. The government moved to close-ended model completely by 2016, so that the fund requirements are budgeted more accurately. An estimate puts 1-in-100 year event to burn over 35% of the total sum insured. Assuming we are talking about a sum insured of Rs. 350,000 crore (at 40 percent penetration), a 1-in-100 year event can lead to a loss of over Rs.120,000 crore (as against expected premium of approx. Rs. 40,000 crore).
8. Ease of enrolment: The government started a dedicated portal in 2016 for enrolment of farmers, which can be used by the individual farmers and the participating banks. This makes underwriting quicker, and gradually moving the operations to a ‘paperless’ system.
9. Special drive for enrolment of non-loanee farmers: The government wants to take the insurance penetration to about 50 percent by 2019, and opened up channels like Common Service Centres (CSC) to service non-loanee farmers. This feeds the larger objective of de-risking the agriculture.
10. Transparent tender process and level playing ground for selection of insurers: The government advocated a transparent system of allowing all insurance providers to participate in the selection, also consistent and uniform rules for evaluating the premium bids.
11. Yield / loss assessment audit system (digital proof of yield estimation surveys and near real time uploads on the portal): The manual crop yield assessment process is brought under the audit system with mandatory digital proof and uploading of pictures and data into a government portal.

By 2018-19, potentially there could be coverage of over Rs. 350,000 crore sum insured, requiring over Rs. 30,000 crore premium subsidy. This is best realized if the transparency, reliability and sustainability issues are taken care of in administering the program. Also, with huge premium subsidy bill, the government needs to sense that there is a value for the funds.

While PMFBY is well conceived, its success and the utility to the farming community will largely depend on the execution on the ground. A few important areas to ponder in this regard are:

1. In almost all countries running multi-peril insurance with the state support, the prices are set by the government or an independent agency, and the insurance providers primarily compete for service quality and value added services. However, in India the insurers compete for prices to win the clusters / districts. With price as the sole deciding factor, it’s very important the pricing follows stability and sustainability.

2. States have to make sure the tender for selection of rates and insurers is completed well before the start of the crop season. Both during 2016 and 2017 the last tender for Kharif went into August, depriving the non-loanee farmers’ opportunity to enroll. Some states are also waiting for monsoon forecast (April and June) before deciding on PMFBY. This is not a healthy practice, and, hence is the need for completion of all formalities before the crop lending starts in April for Kharif and September for Rabi.

3. Central government has taken ownership at the highest level. Some states have problem in providing for premium subsidy, as well as inordinate delay in releasing the premium subsidy affecting both timely payment of claims and the solvency of insurers. Dedicated budget at state level can help resolve the problem. It’s very essential for effective implementation of PMFBY, states set up exclusive ‘implementation unit’.

4. Yield estimation has been the subject of greater concern for states and insurers. The huge numbers and lack of transparency is affecting the confidence. Innovative technology on yield estimation and yield audit, which the government is pushing hard have to improve the quality and reliability. Also PMFBY becomes a meaningful risk mitigation tool, if the insurance unit is a village. States in the interest of farmers should strive to notify smaller insurance units.

5. Multiple insurers for non-loanee farmers: With the government looking to increase the penetration to 50 percent by 2019, a great majority of increase in penetration has to be contributed by non-loanee farmers. This being the case, the government may like to allow, not just the L1 bidder, but L2 & L3 bidders to service non-loanee farmers at the premium rate quoted / finalized for L1 bidder. Practically, L1 is decided merely on the basis of premium quote and the L1 bidder (insurer) may not have adequate resources / infrastructure to effectively service non-loanee farmers. So it makes sense to involve at least three insurers in any given district to service the non-loanee farmers. One fear could be that a farmer may avail insurance for the same crop from more than one insurer. But, with checks and balances already provided in portal based enrolment, such instances can be effectively stopped.  Also participating insurers can exchange list of farmers to check for duplication, if any.

6. Incentivize early participation of non-loanee farmers: To minimize adverse selection and to encourage farmers to enroll early in the season, the insurers should be encouraged to offer premium discount to farmers. As an illustration, say for a Kharif crop in a particular district the actuarial premium is 10 percent and the farmers’ share is 2 percent. Those farmers enrolling before 31st May will pay only 1.5 percent, instead of 2 percent, and the difference is being borne by the insurer. This can to some extent minimize the adverse selection and moral hazard, and also last day rush for enrolment of farmers.

7. Rate adjustment for multi-year contract: Also PMFBY should provide for premium adjustment based on claim ratio in case of multi-year contracts to ensure that the interest of both the parties (state and insurer) is balanced. This is needed because at the end of a claim free year, state may be tempted to go for tender again as lower premium rates are expected at the end of a claim free year.

8. Insurers need not be insisted to participate in all the clusters of the state, to avoid disinterested insurers to quote exorbitantly high rates. An insurer quoting a rate which is significantly higher than L1 rate (say, two times that of L1 rate) needs to explain as to how such a rate was arrived at. Failing to explain rationally, warrants black-listing in the state for a period of three years.

There is no perfect insurance product. PMFBY is a reasonably good product which attempted to balance the interest of the key stakeholders, particularly the farmer. Its upto the states and insurers to administer it in true spirit to ensure a fair and timely settlement for genuine losses!

(The author is the Senior Advisor at International Reinsurance & Insurance Consultancy & Broking Services, Mumbai. Views expressed here are purely personal.)