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India - IRDA rejects risk pool proposal for crop insurance

The national insurance regulator has deferred the central government’s proposal to create a ‘risk pool’ for claim settlement under its crop insurance scheme aimed at diversifying the risks for insurers and lowering the cost of reinsurance.

Instead, the Insurance Regulatory and Development Authority of India (IRDA) has asked the government to continue with the scheme for at least seven years to assess the results before making any change, a senior agriculture department official said.

This has limited the scope of any major change in the Pradhan Mantri Fasal Bima Yojana (PMFBY) launched in 2016 to provide financial assistance to farmers in the event of any crop loss due to weather vagaries.

“The risk pool model can be implemented only after getting a go-ahead from IRDA as first it (regulator) has to come up with guidelines and framework,” the official said.

Under the proposed risk pool format, it is proposed to create a government-owned agency that will have the mandate to fix crop premiums and payouts. “The participating insurance companies would be restricted only to administrative functioning against a fixed charge,” the official said.

“This would eliminate the misnomer that private insurance companies are making money from this scheme. Companies will be given fixed charge and the entire risk will be transferred to the agency.”
At present, insurance companies retain 25% of the risk and premium, and transfer the remaining 75% to reinsurers who underwrite the risk of insurance companies and generate revenues by reinvesting the insurance premium.

Under the ‘risk pool’ model, three-fourths of the premium will go into the pool — to be managed by the proposed government agency — that would act similar to reinsurer, while the insurer will retain 25%. Also, claims will be settled in the same ratio, with the insurer paying one-fourth and the rest coming from the pool, the official said. “Any surplus generated will remain with the pool for providing cushion to losses incurred due to heavy payment in case of massive crop damages.”

In the existing system, insurance companies operating in states where incidences of crop damage are low get away with surplus while those operating in damage prone states suffer losses, the official said. This ‘uneven system’ has forced at least four insurers — ICICI Lombard, Tata AIG, Cholamandalam MS, and Shriram General Insurance — to exit this business.

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