PMFBY – Every cloud has a silver lining

Kolli N Rao *

Governments can use crop insurance to stabilize farm income over time, assist farmers when agriculture production is adversely impacted by a catastrophe, and improve farmers' credit worthiness. In addition, Government- subsidized crop insurance programmes smooth Government budgets across years by subsidizing premiums up front, leaving claims to insurers.

Natural disasters such as droughts and floods pose a great threat to agriculture in India, and financial arrangements (such as crop insurance) can play a key role in relieving fiscal pressure on Government and farmers. Catastrophic events cause distress to many farmers. Without crop insurance, such distressful events could easily lead to income loss, inability to repay loans, and in the most extreme of cases, farmer suicide.

Crop insurance in India has evolved to become more comprehensive and widespread since the 1970s, when it covered only select areas and crops. In consultation with stakeholders, Government decides how to design the most comprehensive and effective program, addressing issues along the way.

Pradhan Mantri Fasal Bima Yojana (PMFBY) replaced existing claim subsidy-based models in 2016. PMFBY is one of a number of Government initiatives that provide farmers with some level of security when faced with risky and uncertain situations.

Despite billions in premium subsidies every year globally, stakeholders are still unhappy. There is no perfect crop insurance scheme, and PMFBY is no exception. The criticism is true to some extent, but not everything.

There is an important point to note, the Government is taking feedback regularly and making changes as needed in key areas of dissatisfaction. It’s a continuous process. Although some States and insurers have pulled out of the scheme, still, its success is far from ordinary.

Here are some salient features and achievements that will help readers understand success:

Protection value: In the pre-PMFBY era, the average sum insured per hectare was Rs 16,388, which increased to Rs 44,829 by 2020-21, providing adequate insurance coverage.

National Crop Insurance Portal (NCIP)-a Centralized IT platform is developed linking the Central Government with all States and UTs, all participating Insurance Companies, 170,000 bank branches, and a network of 44,000 Common Service Centers (CSC) to ensure ease of enrolment of non-loanee farmers, better administration and coordination amongst all stakeholders. As compared to the pre-PMFBY period, when farmers had to line up at bank branches to enrol, often requiring multiple visits, this is a huge convenience.

Crop yield estimation utilizes technology both to audit the results of crop cutting experiments (CCEs) with CCE App, and to reduce the number of CCEs by using smart sampling techniques.

Farmer's Direct Credit: PMFBY remits claims directly to farmer's bank accounts. On average over 1/3rdof all insured farmers receive compensation, a large operation managed effectively, allowing farmers to receive compensation quickly. This also eliminates malpractice.

Overall Claim Ratio : The claim ratio for the period 2016-17 to 2019-20 was 88.6%, by no means a modest figure. Including the additional cost of insurers and reinsurers, the industry has almost a 100% combined ratio. Gross claim ratio of 88.6% translates to 540% on farmers’ share of premium.

Compensation for Key events : Since 2016, the weather has adversely affected nearly every State at least once, and farmers received decent compensation during these events. The scheme's ability to protect farmers from extremely adverse weather events in Tamil Nadu, Maharashtra, Karnataka, Madhya Pradesh, Chhattisgarh, etc. shows its worth.

Timely payment for losses : The key takeaway of insurance is timely payment. PMFBY included guidelines for the timely processing and settlement of claims (subject to subsidy) through penalties for delays. Although not perfect, it improved timeliness.

Index 'plus' Insurance: PMFBY combines yield index and indemnity insurance. Yield index captures widespread calamities, while individual farm loss assessments cover localized calamities. PMFBY has captured and handled losses due to sporadic events over the past few years. Maha-rashtra, Haryana, Rajasthan, Uttar Pradesh are testaments to the localized losses recovered through PMFBY.

It doesn't mean all is well with PMFBY. In spite of the Government of India taking feedback and implementing changes as necessary, some States remain concerned about (i) high premium rates for certain crops and (ii) a premium subsidy cap on the Central Govt's share that adds to the financial burden of the State. Perception of high premiums has led some States to demand a portion of premium refund during normal crop years.

There may be a solution to the above concerns by (i) changing the threshold yield calculation method (ii) giving greater weight to technology-based yields and (iii) establishing a mechanism for a fair profit sharing arrangement between States and insurers.

Threshold yield calculation is based on average yield, which is currently based on the last seven years after eliminating two of the lowest yields. A more balanced calculation can be achieved by excluding one highest yield and one lowest yield (Olympic average). According to this calculation applied to major Kharif crops in Gujarat, premium rates are dropping by about 20 percent.

The final yield is determined currently only by manual crop cutting experiments. It's time to factor in technology-derived yields when calculating final yields-starting with a lower weightage (e.g., 20%), and gradually increasing as experience grows. The USA and South Korea provide examples that illustrate how profits/losses are shared across a range of loss ratios.

Using this template, we can maintain State and insurer ownership over a wider range of loss ratios. For example, if the loss ratio is below 50%, the surplus could be split between the State and insurer with a larger share going to the State, which gradually shifts to the insurer as the loss ratio rises reducing the margin. The State may take on more losses when losses are high (for example, > 150%), while insurers can take on more losses when the loss ratio drops.

PMFBY has demonstrated some promising results, and with a few more improvements, it could become an important tool for managing crop failures and climate risks.