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India - Giving farmers an option risks insurance coverage

In 2016, one of the biggest reforms the Bharatiya Janata Party unveiled for the farm sector was the new crop insurance scheme.

The new scheme–Pradhan Mantri Fasal Bima Yojana–promised farmers a higher cover at much lower premiums and covered localized crop damages, as well as post-harvest and re-sowing losses.


Under the scheme, farmers pay only 1.5-2% of the sum assured for most crops, and state and central governments pitch in with the rest equally.

The government was hoping that the low entry barrier and better cover would encourage more farmers to opt for crop insurance, and insurance coverage would increase to at least 50% of the gross cropped area in three years from around 23% at that time.

Coverage has increased, but at a much slower pace than the government had anticipated. By 2018-19, crops over 30% of the gross cropped area were insured.

All the effort made to expand the footprint of the scheme could now come undone, as the government acquiesced to demands from farmers’ organizations and fulfilled its poll promise to make the scheme voluntary for loanee farmers from Kharif 2020.

It was earlier mandatory for farmers availing crop loans to take crop insurance, as it made it easier for banks to recover the dues in case of crop failure.

Farmer groups were not happy with that dispensation, as banks deducted premiums as well as claims automatically from their accounts. Also, since the crops were insured by banks, farmers had no access to insurance documents or to any redressal mechanism in case of delayed or inadequate claims.

In 2018-19, about 60% of the total farmers covered under the crop insurance scheme were those who had availed crop loans. Making crop insurance optional for such a large chunk of farmers would reduce the pool of the insured, and push up actuarial premiums.

Foreseeing this eventuality, the central government also decided to subsidize the scheme only if insurance premiums are capped at 25% of the sum assured in irrigated areas and 30% in un-irrigated areas.

Insurance premiums are the highest in regions that are most vulnerable to crop failures, and the government’s decision to cap premiums would be detrimental for farmers in those regions.

The government has said it would work out a new scheme to provide financial support and risk mitigation to farmers in 151 water-stressed districts. But till such a scheme is put in place, the burden of bearing the higher premium would shift to states, which are already reluctant participants in crop insurance.

State governments have to dole out insurance premiums as well as direct relief to farmers from state disaster relief funds in case of large crop loss, as not all farmers are covered under the insurance plan.

Their outgo will now increase as insurance companies increase premiums on one hand, and more farmers fall out of the insurance net on the other.

In its new avatar, the crop insurance scheme is likely to alienate other key stakeholders too.

Making crop insurance optional would leave many farmers without adequate risk cover, and expose them to higher risks. It would also affect credit flow to small and marginal farmers as banks would be wary of taking the risk of crop loss on their books.

A smaller and uncertain number of farmers to insure would leave insurance companies in the lurch as well.

Private insurance companies are already reducing their exposure to crop insurance following rising claim ratios over the past two Kharif seasons.

In 2018-19, insurance companies collected a premium of around 284.5 bln rupees under crop insurance and paid out claims totaling 247.4 bln rupees till the end of January, according to farm ministry data. The numbers are still being processed, and claims are seen well over 90% as there was damage to sown crops due to erratic monsoon rains.

This Kharif season, claims are seen more than 100% of the 233.1-bln-rupee premium collected, as the extended monsoon season wreaked havoc on crops.

To add to it, the General Insurance Corp has withdrawn the re-insurance commission on crop insurance, further squeezing margins that were available to the insurers.

With claims piling up, re-insurance costs rising and the pool of insured shrinking, the number of insurance companies bidding for crop insurance clusters is likely to witness a sharp fall in Kharif 2020.

This is despite the government sweetening the deal for insurance companies by allowing allocation of insurance clusters for three years instead of one and introducing clauses to ensure states make premium payments on time.

Farm Minister Narendra Singh Tomar last week said the insured area is likely to fall by about 30% in the upcoming Kharif season due to the recent changes to the scheme. Farm ministry officials admit it would take years to even get back to coverage levels seen last year.

The government was hoping that the changes to the crop insurance scheme would force insurers to strengthen presence at the district and zonal level, and design better products to educate and woo farmers.

This could take years to materialize, the risks–of farmers slipping out of the coverage net–far outweigh the gains.

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