The government’s flagship Pradhan Mantri Fasal Bima Yojana (PMFBY), or crop insurance scheme, is likely to see a crunch in insurance capacity as companies as well as re-insurers move away from offering covers.
While on one hand, re-insurers have increased rates for offering cover to insurers, on the other, claims continue to pile up. Firms like ICICI Lombard General Insurance as well as a slew of foreign re-insurers have taken a stand to not write crop insurance till there is an improvement in the rates.
Launched in 2016, PMFBY compensates farmers if any of the notified crops fail due to natural calamities, pests and diseases. The scheme seeks not just to insulate farmers from income shocks, but also encourage them to adopt modern agricultural practices.
Globally, rates for crop insurance have hardened (premium increased) because of the rise in crop losses affected by natural catastrophes. India, too, has seen a series of incidents related to floods and cyclones that have led to a rise in crop losses.
“The rates have seen a spike and even with the higher premium reinsurers are going cautious on this business. Hence, several of us in the non-life space are slowing down crop,” said the head of underwriting at a mid-size general insurer.
Take ICICI Lombard General Insurance for instance. In Q3FY20, crop insurance underwriting losses dropped to Rs 92 lakh compared to Rs 39.70 crore loss in the year-ago period. This is after the insurer took a conscious call to not write crop business.
Unlike previous schemes, PMFBY is open for both farmers who have taken loans (loanee) as well as those who have not (non-loanee). The scheme covers food crops (cereals, millets and pulses), oilseeds as well as horticultural crops.
Here, farmers pay 2 percent of sum insured as the premium for Kharif crops while it is 1.5 percent of the sum insured for Rabi crops.
While all other general insurance schemes have a policy of hike in premium on an annual basis depending on the past claim, PMFBY does not have this provision. This has made the business unviable.
State-owned General Insurance Corporation of India posted an underwriting loss of Rs 1,398.55 crore in the agriculture portfolio in Q3FY20 compared to Rs 233.93 crore underwriting profit in the year-ago period.
“Even if there is no major natural catastrophic incident, an excess rainfall incident in one district alone can wreak havoc to our balance sheets. Though the idea was to use drone for weather predictions and crop yields, it has not yet been implemented on a larger-scale,” said the chief financial officer of a large general insurance company.
In FY19, gross incurred claims under PMFBY was Rs 27,550 crore while the premium collected was Rs 20,293 crore.
On one hand insurance companies are choosing to stay from bidding for new tenders, on the other global reinsurers have refused to provide coverage unless premiums are revised. Insurance companies need a risk cover as a backing from reinsurers as a protection against large claims.
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