Mangesh Niranjan Patankar
The introduction of Pradhan Mantri Fasal Bima Yojana (PMFBY) in 2016 was a breath of fresh air to India's agriculture. Strongly supported by the central and state governments, the scheme provided improvements over the previous National Agriculture Insurance Scheme (NAIS), which had remained stagnant for years.
First, the scheme is built on commercial principles with ambitious time-bound goals. It works on actuarial premium rates and insurers are expected to largely manage their risks on their own - a sharp contrast to NAIS which was ineffective with high loss ratio and provisioning of claims subsidies.
PMFBY also drove a paradigm shift in sales and distribution. The scheme implemented stringent checks and balances to prevent fraudulent enrollments and promoted use of unique identification of farmers via Aadhaar and land records to help ensure that the subsidies reach farmers with genuine needs.
With NAIS, it was compulsory for farmers with loans to be insured. While the requirement continued under PMFBY, the scheme has seen tremendous growth in insurance take-up among those without loans. Common Service Centers (CSCs) located in remote villages extended the product's reach to the rural population, and an online portal seamlessly connects farmers, banks, distribution channels, government and insurers, to provide much-needed functions.
Active use of technology for claim settlement was key to PMFBY's effectiveness. Under the Indian regulations, full premium settlement is required before claims can be paid and a delay in subsidy payment often entails delayed remittance of claims. In the winter of 2018, new operational guidelines were implemented to facilitate quick settlement of subsidies.
The guidelines enabled the use of mobile apps for yield recording and monitoring during Crop Cutting Experiments (CCEs)-the process which provides the basis for yield indices and determination of eventual claims. A vast improvement over manual records, the move sets the tone for digitisation and automation of claims in the scheme.
Some state governments are revamping their CCE sampling process with the use of satellite imagery, which will help them in rationalizing the number and locations of CCEs. A cost-saving initiative, this will help in gathering more representative production data-sets. Further enhancements can be expected as the central government deploys 26 external agencies to study ways to minimise dependence on CCEs and objectify yield assessment for the scheme.
Reinsurers have played a pivotal role in the scheme, providing financial capacity, sharing the risks with insurers and mitigating claims volatility. India's national reinsurance carrier-GIC Re-remains at the forefront as the leading reinsurer for this business, taking care of about half of the current reinsurance needs. While global reinsurers such as Swiss Re have always provided reinsurance for India's agriculture sector, regulatory changes enabled global reinsurers to set up branches which have bolstered the industry's support for the scheme.
Ideas vs Reality
Lately, suggestions to change some aspects of the scheme for greater efficiency have surfaced.
One idea reported in the media relates to partly replacing the existing reinsurance system, by asking insurers to share their portfolio in a central fund in a proportional manner. Such mutual risk sharing look attractive on paper but needs an independent mechanism with tight boundary conditions and expertise to run it sustainably without political intervention. The enhancements in the existing scheme were critical to bring about changes.
Much effort has gone into opening up the insurance sector to private insurers. A return to a state-controlled risk pool would appear to be a policy U-turn while also possibly reducing the diversification opportunities (and implied sustainability) in the nascent Indian reinsurance industry. Here agriculture is an important sector for diversification due to its inherent low correlation with other types of risks like fire, motor liability, and health.
Another idea was to keep the scheme voluntary for farmers with loans. Should severe natural calamities occur in the year, this will significantly impact loan recovery mechanisms of a heavily-stressed banking sector and further burden existing non-performing assets. It will also affect the long-term viability of the insurance scheme, as this may capture only farmers who grow crops with higher risk exposures or who grow in areas more vulnerable to risks.
Agriculture insurance is often discussed in the context of crops. But let us not leave out livestock and aquaculture producers, which are core to our food security on the whole. They too are severely disrupted when hit by a natural disaster, and it can sometimes take years before they normalise. There is a strong need to allocate more funds in building financial protection mechanisms for these sectors, and insurance products that can effectively support them are yet to be seen.
The way forward
For a long-beleaguered industry, we believe that the initiatives under PMFBY are in the right direction and will deliver results in the longer run. Abrupt changes lacking proper stakeholder engagement will only bring about a bit more hurt than help. The right tweaks in the right time will likely be a far better solution overall for the farmers as well as the banking and re/insurance industries.
The author is Head of Agriculture Reinsurance, India, SwissRe
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