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”, 16th 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”,
16th 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”, 16th 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
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