The Press Information Bureau (PIB) recently disclosed that Pradhan Mantri Fasal Bima Yojana (PMFBY) is the third largest crop insurance programme globally. The scheme witnessed a 27 per cent increase in farmer enrolment from 2022-23, with 42 per cent of non-loanee farmers and 41 per cent of enrolled farmers (56.80 crore) indemnified from 2016-17 to 2023-24.

Despite the phenomenal growth , the penetration and density of PMFBY and restructured weather-based crop insurance (RWBCIS) programmes are significantly low.

Their penetration in terms of gross premium as a percentage of GDP is 0.62 per cent, and insurance density or per capita farmer premium is only ₹2,148. Further, the few insurers running crop insurance programmes indicate attendant and social equity problems for insured farmers.

How can the quality and efficacy of insurance service delivery, institutional capacity of programme implementation, inclusion, and regulatory oversight be improved?

First, a performance analysis of PMFBY and RWBCIS from 2016-17 to 2023-24 shows that while there was an uptick in farmer enrolment, with a 10 per cent CAGR, the area and sum insured exhibited a negative CAGR of 8.4 per cent and 5.1 per cent, respectively. The claims payout recorded a 5 per cent CAGR, indicating an uptrend from 2022-23.

Farmers’ share in gross premium was 15 per cent, exhibiting a negative 4.3 per cent CAGR. Insurers settled more than 94 per cent of total claims with a 70 per cent claim-to-premium ratio.

Second, while PMFBY has been skewed towards loanee farmers (over 50 per cent), RWBCIS is limited to resource-endowed male farmers, and their enrolment and premium payments are insignificant compared to PMFBY.

Third, higher transaction costs of service delivery for small farmers, lack of coordination between insurers, banks and governments, delays in indemnity payments, and an illiquid reinsurance market affected crop insurance penetration.

Fourth, an analysis of five insurers’ crop and weather insurance businesses from 2018 to 2022 reveals that the claims or indemnity payments to premium income averaged 92 per cent. The average underwriting expenses to expected premium income was 36 per cent. So, the average combined ratio (indemnity and expense) stood at 128 per cent, which indicates that for every ₹100 earned as premium income, insurers paid out ₹128.

Policy suggestions

First, a one-size-fits-all approach is not appropriate for crop insurance programmes. PMFBY is a multi-peril yield indemnity insurance, while RWBCIS is a parametric (index) insurance. So, these two programmes should not be jointly managed. Specialised agri (re)insurers with significant underwriting and claim processing experience in weather index insurance must be empanelled.

Second, the actuarial premium rate (APR) should differ for the two insurance programmes. Experience-based premium rate discounts can encourage uninsured and risk-averse farmers to subscribe to the programme.

Third, alternative risk-sharing models or a cap-and-cup approach need to be executed through which States/UTs reduce their net subsidy on premiums with lower claims or receive refunds if no claim is paid. Some amounts may be transferred to insurers to maintain their unearned premium and loss reserves.

Fourth, the agri-reinsurance market should be promoted. A reinsurance pool for high-value crops like plantations and horticulture must be created if quota or excess-of-loss and surplus-share treaties are unavailable.

And, an effective distribution network should be in place to deepen insurance penetration; for example, mobile network operators or banking correspondent channels for premium collection and claim settlement deserve mention.

The writer teaches at IIM Lucknow. Views are personal

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