Private Cos pull out of PM crop insurance scheme due to unviable biz model

At least three private insurers, ICICI Lombard General Insurance, Tata AIG and Cholamandalam MS General Insurance, have pulled out of the Pradhan Mantri Fasal Bima Yojana (PMFBY or prime minster's crop insurance scheme).

This has raised concern on viability of its business model.

Together, these companies accounted for about Rs 3,000 crore of premium. The three have not bid for the scheme this financial year. 

E-mails to Tata AIG and Cholamandalam did not elicit a response. A senior official at ICICI Lombard only said it had not participated in the scheme this year.

According to a top official at government-owned Agriculture Insurance Company of India (AIC), only crop insurer in the country before PMFBY's advent, private did not take part or quoted unrealistically high rates in at least three states— Maharashtra, Uttarakhand and Himachal Pradesh. 

One reason for private sector firms to shy away is last year’s high claims ratio, exceeding 100 per cent, according to a high-ranking government official. As a result, many reinsurers have increased their overall rates. 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. PMFBY, being a mass scheme, is heavily dependent on reinsurance support. 

More, in many states, insurance companies have faced delay in getting compensation from governments. 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 two per cent premium to insurance companies, the rest being reimbursed by central and state governments. On average, the premium is 12-15 per cent, with state and central governments bearing five per cent each. Insurers in each state are chosen on the basis of competitive bidding.

Political intervention in claim settlements is another issue faced by private companies, say insurers. Further, crop cutting experiments (CCE), which determine overall yield and are crucial in assessing loss, is still manually conducted in most states, making it highly prone to human error. According to government data, a little more than seven million CCEs are conducted annually.

Notably, in the first two years, PMFBY was profitable for both insurers and reinsurers, leading to a trend of aggressive bidding. According to government data, in the 2016-17 and 2017-18 financial years, total premium collected was Rs 48,230 crore, while claim payout was Rs 38,121 crore, indicating that close to Rs 10,000 crore went collectively to insurance and reinsurance firms. 

“For crop insurance to be a viable business, there should be good geographical spread. If companies concentrate risks in a few pockets, either there will be bumper profit or bumper loss. In the case of AIC, since our business is quite big, we are able to balance the portfolio,” said a senior official at AIC. It now accounts for more than half the market share in PMFBY.

AIC has also entered into a co-insurance agreement with three other public sector general insurance firms — New India Assurance, National Insurance and United India Insurance — for PMFBY. Under the scheme, while AIC will use offices, personnel and rural reach of the three companies, it will offer 12.5 per cent of the premium collected to each of them.