PMFBY – providing business to corporate insurers or relief to stricken farmers?

This piece was first published in Scroll.in on 1/2/2019

The Modi government replaced the existing crop loss insurance schemes with the Pradhan Mantri Fasal Bima Yojana in 2016. The new scheme was advertised as incorporating the best features of the earlier schemes while removing all their shortcomings.

But as the first part in this series reported, after the scheme’s introduction, crop insurance coverage shrunk, with a drop in the number of enrolled farmers.

The second part of the series takes stock of the extent of public funding for crop insurance and examines whether the funds are being utilised efficiently for the intended purpose.

How was crop insurance funded in India in the past?

Just as any other insurance, crop loss insurance works on the idea of spreading risk across a large number of people exposed to the same risk – in this case, farmers.

Insurers consider the risk of crop damage in India to be high as there is a record of a significant loss of food grain production once in every three years. Unsurprisingly, premiums arrived at on actuarial considerations, that is, after a statistical analysis of past production figures, are also high. The average across India was 10%-15% of sum assured for kharif or monsoon crops, with higher premiums in some areas and seasons. In 2016, for instance, it was between 19%-21% for kharif crops in Gujarat, Rajasthan and Maharashtra.

Such high premiums are unaffordable for small and marginal farmers who constitute 86% of the farmer population. The state needs to step in with public funds to make crop insurance work.

Two models for public funding of crop insurance have been tried in India. Before the launch of PMFBY, multiple insurance schemes were in operation using both these models.

Trust model: Farmers pay premiums to a trust which manages the funds and compensation payouts. Premiums are set at levels affordable by farmers. When crop loss compensation claims exceed the capacity of the trust to pay, the state steps in and makes good the deficit.

This model was followed by the National Agricultural Insurance Scheme (NAIS). Premiums were fixed by the government at relatively low levels – averaging under 3.5% for kharif crops as a whole. A public sector entity, the Agriculture Insurance Company, acted as the trust which collected premiums and serviced claims. If claims exceeded the ability of AIC to pay, the government with central and state contributions made good the deficit.

Insurance model: Here an insurance company collects premiums and pays compensation. Premiums are charged based on actuarial considerations that spread the risk across the insured, minimise the residual risk borne by the company and allow it to cover its overheads and make a profit. Farmers pay a portion of the premium and the state pays the rest. By paying actuarial rate premiums, the government together with the farmers have actually absorbed most of the risk.

This model was used in two schemes – the Modified National Agricultural Insurance Scheme (MNAIS) and the Weather Based Crop Insurance Scheme. Premiums and claims were managed by insurance companies. Insurers charged actuarially determined premiums – averaging across India to 10-11% for kharif crops – which were paid partly by farmers and partly by the government with central and state contributions. In order to control its overall expenditure, the government defined caps for the premium subsidy (75% of the premium in the case of MNAIS) and premium rate (11% for kharif crops in MNAIS). Insurers setting premium rates higher than this cap had to reduce the sum assured so that government expenditure did not increase beyond the limit.

How does PMFBY funding differ from earlier schemes?

In 2015-16, the scheme based on the trust model, the National Agricultural Insurance Scheme,

accounted for 64% of the farmers and 70% of the sum assured.

The other schemes based on the insurance model not only had a smaller footprint, most of the farmers enrolled in them had been compelled to take insurance along with public sector loans.

The voluntary participation was virtually non-existent in the Modified National Agricultural Insurance Scheme and less than 3% of farmers enrolled in the Weather-Based Crop Insurance Scheme.

All three schemes were replaced by PMFBY in 2016. The PMFBY conformed to the insurance model with actuarially determined premiums – all India average of 12-15% for kharif crops. The government fixed the premium contributions to be paid by farmers at levels similar to the National Agricultural Insurance Scheme and paid the rest with central and state contributions.

From the insurer’s perspective, the PMFBY was made much more attractive than earlier schemes. The caps present earlier on sum insured as well as the ‘premium subsidy’ provided by the government were relaxed. This meant that insurers could look forward to a potentially larger business from higher sums assured as well as higher enrolment. Since premium paid by farmers was fixed at low levels, the government would be largely footing the bill.

Where does money for crop insurance come from?

Even before PMFBY was introduced, crop insurance was largely funded by the state. In the last three years, more than 80% of the overall spending has come from public funds.

The table below shows the contribution of farmers and the government for the last five years. Government expenditure appears under two heads, premium contribution for all schemes and claims support for NAIS, the ‘trust model’ scheme that existed till 2015-16.

Data Sources: Lok Sabha (MoAFW 2018a, MoAFW 2018b, MoAFW

2018c); Rajya Sabha (MoAFW 2018d)

It is surely in the public interest to ask if the funds are being utilised efficiently to achieve its objectives. One measure to look at is what portion of government expenditure actually reaches the intended beneficiaries.

Where is the government money going?

Before 2016, insurers retained less than 12% of government funding for any season and the rest reached farmers. That situation changed dramatically with the advent of the PMFBY.

The chart below indicates the portion of government expenditure retained by insurers after settling claims of farmers during successive kharif seasons. Kharif season accounts for two-thirds of the sum assured over a year and data for this season is available till 2017 unlike for rabi or winter season. The portion shown as ‘routed to farmers’ is the flow of money to farmers over and above the premium amount collected from them.

Data Sources: Agricultural Statistics at a Glance, 2016; Lok Sabha (MoAFW 2018a, MoAFW 2018c); Rajya Sabha (MoAFW 2018d)

Examining 2015, the year before PMFBY was implemented, is instructive. This was a major drought year. The bulk of claim payouts to farmers was under the NAIS, which accounted for 70% of the sum assured, where the government paid the major share of the claims as they exceeded AIC’s capacity to pay. This meant that almost all the money ploughed in by the government was paid to farmers.

With the advent of the PMFBY, upwards of 80% of the actuarial rate premium is paid by the government to the insurers who have retained about 46% and 18% of it respectively in the last two kharif seasons. The amount retained by insurers has increased by an order of magnitude after the PMFBY was introduced in 2016. In two kharif seasons, 2016 and 2017, this amounted to Rs 9,300 crores.

Is the PMFBY model superior to the NAIS model?

The Modi government has tried to respond to the criticism that it has allowed insurers to make windfall gains with the PMFBY.

The agriculture secretary claims that the PMFBY model is superior to the NAIS model, as the government no longer carries the liability for claims which were “unlimited” earlier and could result in a huge payout in case of a major drought.

This argument is naive to say the least. Insurance companies have far lower capacity to absorb risk than the government and must minimize the risk they carry. They use actuarial rates to decide premiums which allow risk to be spread across the insured – in this case farmers and the government which pays over 80% of the premium. High risk equates to high premiums.

While in some specific year a situation can arise when the payout to farmers is higher than the premium collected, when cumulated over several years, premium collected on actuarial considerations must exceed the payouts to farmers and overheads to enable insurers to turn in profits. The government will spend more money over several years on actuarial rate premiums than if it just provided claims support when needed as in the NAIS.

The PMFBY with its actuarial rate premiums allows the participation of private insurers which is not possible in a scheme such as the NAIS operating on a trust model. Are there advantages for the farmer from this?

The usual argument in favour of private service providers is that because of competition they are more responsive to customers. This argument is not valid for the PMFBY as there is only one insurance provider in any area and the farmer has no choice. This means that competition is not driving improvement in service metrics. It is left to the government to cajole or threaten insurers for something as basic as timely settlement of claims.

The entire infrastructure used for insurance in rural India belongs to the public sector – from rural bank branches offering insurance and collecting premium to state machinery to determine crop yields and measure crop loss. Reports (such as this) suggest that private insurance providers have hardly any “boots on the ground” and farmers find it difficult to access these insurers for grievance redressal. It is not clear what value they add as an intermediary between the government and the farmers.

Who benefits from PMFBY?

To sum up, the government currently pays 80% - 85% of the premium to make insurance affordable to farmers. This means that the crop loss insurance program essentially runs on public funds. And the quantum of public expenditure is large, over Rs 47,000 crore in the last two years, during which only 25-30% of crop area has been covered.

Public infrastructure is almost exclusively used to advertise insurance, enrol farmers who have taken crop loans, collect premium from farmers and receive claims payment, specify sum to be assured for different crops and estimate crop loss.

It stands to reason that using a trust to manage the crop insurance program will lead to a far more efficient use of scarce public funds than working through insurance intermediaries and paying for their overheads and profits. The utilisation of public funds in the PMFBY and the NIAS bears this out.

The question that is left with us is what was the main consideration of the Modi government when it designed the PMFBY – providing business to corporate insurers or relief to stricken farmers?

References:

MoAFW (2018a): “Claims under crop insurance”, 16^th Lok Sabha, Unstarred question No 582, Ministry of Agriculture and Farmers Welfare, 6 February, http://164.100.47.190/loksabhaquestions/annex/14/AU582.pdf

                 (2018b): “Crop insurance schemes”, 16^th Lok Sabha, Unstarred question No 956, Ministry of Agriculture and Farmers Welfare, 24 July, http://164.100.47.190/loksabhaquestions/annex/15/AU956.pdf

(2018c): “Beneficiaries under PMFBY”, 16^th Lok Sabha, Unstarred question No 3435, Ministry of Agriculture and Farmers Welfare, 7 August, http://164.100.47.190/loksabhaquestions/annex/15/AU3435.pdf

(2018d): “Crop insurance under PMFBY”, Rajya Sabha, Unstarred question No 521, Ministry of Agriculture and Farmers Welfare, 14 December

Crop insurance is losing credibility

This piece was published in scroll.in on 31/1/2019. Reproduced below with charts and tables

Is crop insurance losing credibility?

The Modi government replaced the existing crop insurance schemes with the Pradhan Mantri Fasal Bima Yojana in 2016. The new scheme was advertised as incorporating the best features of the earlier schemes while removing all their shortcomings.

Unveiling the guidelines of the PMFBY, Prime Minister Narendra Modi attributed the low enrolment in crop insurance to farmers’ “lack of faith” in the earlier schemes. A rapid increase in enrolment was to be the hallmark of the PMFBY. The target was to cover 50% of the area under crops, about 98 million hectares, by 2018-19.

But in 2017-18, the second year of the PMFBY, the enrolment numbers fell sharply, taking the coverage to below 2015 levels. Against the target of 50% for 2018-19, the coverage stands at less than 26% in 2017-18.

Why did the coverage shrink? This analysis takes a closer look at the Modi government’s failure at expanding insurance coverage for farmers and the governance issues that it reveals.

What does the data show?

Prior to the introduction of the PMFBY in 2016-17, the number of farmers and crop area insured had been sequentially increasing. This trend continued through the first year of the implementation of the PMFBY. What is noteworthy is the sharp fall in numbers in 2017-18.

The government has been reluctant to put out 2018 kharif (monsoon crop) enrolment data even several months after the end of the season. The reason for this reluctance becomes apparent from a recent reply to an Right to Information query dated October 10, 2018. Enrolment as of date was down 10% from even 2017 levels. This data did not include enrolment in Bihar, but even after Bihar data gets included, 2018 kharif enrolment will fall short of 2017.

Can increasing coverage be equated with insurance gaining popularity?

In uninformed commentary, increasing coverage is equated with insurance gaining popularity with farmers. This is not necessarily true in the context of crop insurance in India because of the strong element of coercion exerted on farmers to take crop insurance cover.

Crop loans are given almost entirely by public sector financial institutions and cooperative banks which, following government directives, automatically deduct insurance premium from the loans they make to the farmer.

Compelling farmers to take insurance offers dual benefits from the government’s point of view. First, it ensures a minimum number of captive customers to make crop insurance viable. Second, the insurance serves as collateral for the farmer’s loan, since any insurance payout in the event of crop loss is routed through the same financial institution.

The government counts farmers whose insurance premium is deducted compulsorily from a crop loan as ‘loanee’ farmers and all others as ‘non-loanee’ farmers.

A rise in the number of crop loans or government pressure on banks for full compliance can result in a rise of ‘loanee’ farmers. But the real data of interest is the number of farmers who take insurance voluntarily.

Farmers enrolling voluntarily could be those who have never taken loans or those who have taken in the past, but not in the current season. Those who have never taken loans face several obstacles to enrolling, including access to insurers and the ability to produce documentation such as sowing certificates and land records. Those who have taken loans in the past presumably have access to all the above, and should not find it a problem to enrol voluntarily if they desire.

Has there been a “quantum jump” in the voluntary enrolment of farmers?

It appears that the government is extremely keen to show that the PMFBY is more popular with farmers than earlier schemes. The Agriculture Secretary recently claimed that after the implementation of the PMFBY in 2016, there has been a “quantum jump” in voluntary enrolment. He was repeating a claim first made by the Ministry of Agriculture and Farmers Welfare on December 7, 2016 (press release).

The Ministry claimed that the number of ‘non-loanee’ farmers which was only 1.5 million in kharif 2015 had jumped to 10.2 million in kharif 2016.

But data available in the public domain tells a different story. The graph below is based on the CAG Audit of Agriculture Crop Insurance Schemes, 2017 (CAG report 2017), barring the data for 2017 and 2018, which are taken from answers to queries posed in the Lok Sabha (7-8-2018) and under the RTI Act (10-10-2018). Kharif accounts for roughly two third of the insured farmers and crop area.

There were 9.8 million ‘non-loanee’ farmers insured in kharif 2015 as per the CAG report. This is also confirmed by Ashok Gulati, former Chairman of the Commission for Agricultural Costs and Prices, in a recent paper where he attributes his data to industry sources.

The important takeaway from the chart is that ‘non-loanee’ numbers have barely changed since 2015, remaining in the range of 10-11 million. There has been no “quantum jump”.

What explains the data discrepancy?

The numbers for 2015 reported in the agriculture ministry’s press release are completely at variance with numbers available in the CAG report. The CAG attributes its data to the Department of Agriculture Cooperation and Farmers Welfare. This means the Ministry has revised 2015 numbers after the implementation of the first season of PMFBY in 2016.

Clues as to the nature of revision are available in a recent RTI response from the Ministry dated October 10, 2018 which shows the number of ‘non-loanee’ farmers in Maharashtra to be under 0.2 million in 2015-16 instead of a number of 8.2 million gathered from Maharashtra government officials.

A 2005 Bombay High Court judgement prohibits the deduction of premium from farmers taking loans in Maharashtra without their consent. Farmers providing consent as well as those taking crop loans and insurance from different institutions all get reported as ‘non-loanee’ (voluntary) farmers by insurers. According to Maharashtra government officials, a very high percentage of insured farmers have been counted in the ‘non-loanee’ category in the state for many years.

Maharashtra typically accounts for more than half of the ‘non-loanee’ farmers across India in any year. It appears that the Ministry has changed the definition of ‘non-loanee’ as applicable to Maharashtra in a way that has resulted in the “quantum jump”.  

Questions about the numbers quoted in the agriculture ministry’s press release of December 2016 have been raised by the Centre for Science and Environment in its 2017 report on PMFBY  and also directly with government officials with no answer forthcoming. If the figures supplied to the CAG were wrong and the ministry has revised it since then, does it not owe a public clarification?

What does the sharp fall in enrolment in 2017 indicate?

We now return to the issue of fall in coverage that was raised earlier. An acutely embarrassed government has gone to great lengths to dispel the idea that this could be attributed to farmers’ dissatisfaction with the PMFBY.

It has advanced two reasons. One is that when states announce farm loan waivers, farmers keep payments on old loans pending, making them ineligible for new loans. This would mean a lesser number of farmers applying for new crop loans. Two, the introduction of Aadhar seeding in the loan approval process has eliminated the earlier practice of some farmers taking multiple loans for the same crop. Both these reasons could account for the lower number of insurance policies linked to loans, that is, the lower number of ‘loanee’ farmers, it claims.

An analysis of kharif data shows the number of insured farmers came down not only in Maharashtra and UP, which announced farm loan waivers, but in seven other states. These nine states account for more than 80% of the farmers insured for kharif 2016.

Jharkhand, Orissa, Karnataka, Tamil Nadu and Telangana bucked the trend, but these accounted for only a little over 10% of the insured in that season.

The loan waiver related argument advanced by the government begs the question: why is it that the farmers who did not get loan-linked insurance (as they did not take loans) not voluntarily opt for insurance if this was to their benefit?  

Rather than seeing an increase in ‘non-loanee’ enrolment, states such as MP, Maharashtra and West Bengal saw a significant fall. Other states saw negligible change.

Reports (like this one) in the media suggest that farmers are unhappy with the PMFBY because of delays in settlement of claims and the lack of avenues for redressal. There are even instances reported of farmers taking collective action to oppose the mandatory deduction of insurance premium from their crop loan accounts because claims have not been settled for a previous season. The drop in 2017 enrolment may have more to do with this than the government cares to acknowledge.

Has governance improved with PMFBY?

The quality and timely availability of data in the public domain is a window to the quality of supervision by the government. How does the government measure up on this account?

There are blatant errors in the data put out by the agriculture ministry. For example, the number of farmer beneficiaries in Rajasthan for kharif 2016 is indicated as 18.7 million in the PMFBY website while the total number of insured farmers in the state is only 10.1 million. The total number of kharif 2016 beneficiaries is shown as 25.8 million though the real number is around 10 million.This error has been repeated in a reply to a question raised in Parliament in Aug 2018. It appears that no one in the ministry even glances at the data.

Insurance premium paid for by (deducted from) farmers is almost exclusively handled by public sector financial institutions and service centres. Yet final kharif 2018 enrolment figures have not been released, though the official period for claims settlement is over. The government took 8 months after enrolment would have been completed to provide figures for rabi 2017-18 (Lok Sabha 7 Aug 2018).

It is imperative for farmers that claims of crop loss for any season are settled before the start of the next season, and the PMFBY guidelines on claims settlement recognize this. Yet the government is unable to provide even provisional claims data for rabi 2017-18 when we are in the midst of rabi 2018-19, surely indicating that there are huge delays in settling claims. The delays are of course confirmed by reports from the ground.

The delayed availability of data, frequent revisions and blatant errors all point to poor systems and oversight of the crop insurance program by the central government.

Farmers may have lacked faith in earlier insurance schemes, but the PMFBY has done nothing to restore it.