Insurers brace for highest ever claim ratio in FY20 for govt's crop scheme

Insurers are expecting claim ratio to be as high as 120 per cent this year as unseasonal rains and natural calamities led to high amount of crop damage

The year 2019-20 could see the highest claims ever under the government’s crop insurance scheme, the Pradhan Mantri Fasal Bima Yojana (PMFBY).

According to sources, insurers are expecting the claim ratio to be as high as 120 per cent this year. This is because unseasonal rains and natural calamities led to high crop damage, they said.

This year, at least three private insurers, ICICI Lombard General Insurance, Tata AIG and Cholamandalam MS General Insurance, did not participate in the scheme.  The claim data for 2018-19 is yet to be released by the government. Together, these companies accounted for about Rs 3,000 crore of premium.

According to sources, last year, in many areas, the insurers had to pay very high amount of claims, leading to reluctance in bidding for the scheme this year.  

As a result, many reinsurers also increased their overall rates this year. Earlier, reinsurance companies used to pay commission in the range of 7-20 per cent to insurance companies, which protected the latter against huge losses.

After last year, reinsurance companies have reduced the commission to 3-3.5 per cent. The PMFBY, being a mass scheme, is heavily dependent on reinsurance support.

“This is a particularly bad year for insurers in the PMFBY. Hence, much of the viability of the scheme as a private-public partnership model will be tested in the future,” said a source close to the development.   

Further, insurers are reluctant to bid in high risk areas. In about 10 drought-prone districts of Maharashtra, there were no bidders for the scheme this year.

Moreover, many private insurers also faced delay in payments from state governments, according to an official of a private insurance firm.  Political intervention in claim settlements is another issue faced by private companies, say insurers.  Further, crop cutting experiments, which determine overall yield and are crucial in assessing losses, are still conducted manually in most states, making it highly prone to human error. 

According to government data, a little more than seven million CCEs are conducted annually. In the first two years, the PMFBY was particularly good for insurance firms in terms of profitability. 

In the 2016-17 and 2017-18 financial years, total premium collected under the PMFBY was about Rs 48,267 crore.  The claim payout in the period was about Rs 39,789 crore, indicating that close to Rs 9,000 crore went collectively to insurance and reinsurance firms.  

The PMFBY is based on actuarial calculations; rates are based on risk perception. Thus, premiums differ, based on crop and region. However, a farmer pays only a flat 2 per cent premium to insurance companies, the rest being reimbursed by the central and state governments.  On an average, the premium is 12-15 per cent, with the central and state governments bearing 5 per cent each. Insurers in each state are chosen on the basis of competitive bidding.

Bad FY for insurance firms

• ICICI Lombard General Insurance, Tata AIG and Cholamandalam MS General Insurance did not participate in the scheme 

• Reinsurance companies have reduced the commission to 3-3.5% 

• Insurers are reluctant to bid in high risk areas 

• In about 10 drought-prone districts of Maharashtra, there were no bidders for the scheme this year

• Many private insurers faced delay in payments from state governments 

• Political intervention in claim settlements is another issue faced by private firm, say insurers