PMFBY revamp to stop profiteering by insurers, pool to handle premiums

The government may undertake a major revamp of its flagship crop insurance scheme - the Pradhan Mantri Fasal Bima Yojana (PMFBY) - to ensure timely relief for farmers and prevent insurers from profiteering. While the changes would ensure that the true spirit of the scheme to provide relief to farmers from weather-induced crop damage remains intact, it would make the PMFBY less attractive for private insurers who may be left with just charging administration fee to run the pan-Indian scheme. 

As part of the revamp, official sources said an alternate model is being considered by the Finance Ministry under which a pool or a trust would be created for managing the premium money with insurers provided by the Centre, the state governments and the farmers. Whenever a claim arises from farmers, settlement will be done by individual insurance company running the scheme by drawing money from the pool.

The pool itself may be managed by state-owned entities with the Agriculture Insurance Co of India Ltd (AICL) as the nodal body and the GIC as the pool manager. The AICL would also design the scheme and do pricing of the product along with actuarial experts selected by the states. The product may also be customized as per local needs.

Besides decision of claim payment would also rest with the AICL and the state government with role of insurance company being limited to enrolments, awareness generation and management of claim payments for a fixed administration fee.

"This model would eliminate discretionary powers with the insurers, particularly private ones, over settlements as their role would be limited. This would also prevent profiteering by insurers enable farmers with adequate and timely settlement of claims," said a government official privy to the development.

Under the scheme, farmers pay between 1.5-2 per cent of the insurance premium while the rest is paid equally by the Central and state governments. The entire premium money rests with the insurers.

The PMFBY was launched by Prime Minister Narendra Modi in 2016 following consecutive years of deficit rains. Ever since the launch, the scheme has been mired with issues. The scheme has also seen a sharp 15.5 per cent decline in enrolments, which fell from 5.73 crore in 2016-17 to 4.84 crore in 2017-18.

However, despite lower enrolments, the premium collected by insurance companies - shared by farmers, Central and state governments - shot up by 11.5 per cent from Rs 22,589 crore in 2016-17 to Rs 25,178 crore in 2017-18 as per official data. 

In contrast, the claims paid by insurers have remained low with claim settlement at Rs 17,992 crore in FY18. Sources said that profits under the scheme has soared to over Rs 9,000 crore for insurers. 

Faced with a sharp decline in enrolment for the crop insurance scheme, the Centre last year also imposed a 12 per cent penalty on insurance companies for delayed settlement of claims.

Among the other suggestions given to the Finance Ministry for the PMFBY revamp is to offer the GIC the role of managing the premium pool. Moreover, excess of loss reinsurance protection may be taken on the pool above the amount of Rs 20,000 crore to prevent against catastrophic losses.