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India - Govt may tweak farm insurance scheme for crops

The Modi government is considering major changes to its flagship farm insurance scheme, the Pradhan Mantri Fasal Bima Yojana, including an entirely new model of agricultural insurance in the country and making the programme optional for farmers availing farm loans, as messy implementation and delayed payouts have stoked farmers’ angst.

The government hopes making the scheme voluntary will remove a major gripe of farmers with agricultural loans, for whom buying a crop-insurance plan is mandatory, and whose share of premium is automatically deducted from their sanctioned loan amounts, while compensation is often delayed.

The scheme is already voluntary for those farmers who don’t avail loans.

Although several changes to better implement the scheme have already been made since its launch in 2016, delayed payouts, verification of claims, and disputes continue to be big hurdles.

The central government wants to move towards a so-called “risk-pool mechanism”, it told states in a letter last month, asking for their views, an official said requesting anonymity.

The version of “risk-pooling system” of insurance that has been proposed will give the government a far greater control of key variables, from fixing premiums to payouts, this person explained.

In the actuarial business, risk-pooling is a standard practice in many insurance regimes, especially in public and private health care insurance. The agriculture ministry has reviewed global insurance best practices, in which it was assisted by the World Bank, the official cited above said. The model being looked at is one similar to that of national farm insurance schemes in Spain and Turkey.

Under typical risk-pooling systems, all risks (or premiums of individuals covered) are aggregated in a common kitty, which allows for higher costs of riskier people to be offset by the lower costs of the less risky. Larger risk pools are said to create more stable premium regimes and predictability of risks.

The government will create a pool, run by a state agency, where all participating insurance firms will transfer their risks. The pool will be run by an agency created by the government. The pool’s board will have government oversight.

“We have also proposed that high-premium crops be totally taken out of the scheme,” the official said.

A state-run agency that will administer the risk pool will likely fix premium rates. Insurance firms will still undertake normal functions such as collecting premiums. For this, they will only quote, through bidding, an administrative charge.

Crop insurance, currently mandatory for any farmer with a farm loan, is subsidised by the government. Farmers pay between 1.5% and 2% of the premium, while the rest is shared equally between states and the Centre.

According to farm economist Ashok Gulati, who analysed the scheme’s performance in his study ‘Supporting Indian Farms the Smart Way’, the government needs high-end technological fixes, including satellite-based assessments, to quickly estimate and verify crop damage to remove delays in paying compensation to farmers.

“The agency that maintains the pool decides the premium rates for all crops everywhere and companies quote the administrative rates they’ll charge for implementing the scheme. They don’t quote premium pricing,” the official said.

The government is experimenting with big data analytics, artificial intelligence (AI) and machine learning through the Mahalanobis National Crop Forecast Centre to speed up the assessment of crop damage. It has also brought in measures such a penalties and fines for insurance companies for delaying payment to farmers.

However, delay in estimating crop damage and disputes over claims are still holding the scheme back.

Under a new rule introduced in October 2018 (which took effect in January 2019), insurance companies are liable to pay fines for delaying payment of crop insurance claims.

About eight insurance companies were fined around ~16 crore (in total) for various payment delays for outstanding claims owed to farmers amounting to nearly ~530 crore until March 31, 2019. Currently 18 companies are empanelled to offer farm insurance. Of these, five are state-owned. The share of crop insurance business with state-owned firms is 52%.

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