Mumbai: Out of almost nowhere, the government has created a new market of Rs 17,000-18,000 crore with its new crop insurance scheme. This segment will be almost twice the size of the fire insurance business of non-life companies, which includes premium from covering buildings, factories, houses and shops. Until last year, crop insurance was a business that generated less than Rs 5,000 crore of premium and most of it wasbooked by the Agricultural Insurance Corporation. The reason for the change in fortunes is the new scheme — Pradhan Mantri Fasal Bima Yojana (PMFBY). In the earlier National Agriculture Insurance Scheme (NAIS), both premium and claims were capped for the insurer. This time, the government has freed the pricing. In exchange, insurers undertake to fully compensate the farmer for any loss. So while the government has an initial outgo in the form of a premium subsidy, it does not have to pay out anything even if there is widespread crop failure. Earlier, the exchequer would compensate for any losses above a certain limit.
"Subsidising of the premium paid by the farmer is done in most countries. This is because in farming every aspect of production is out of the control of the farmer and there is a need for risk mitigation in the form of insurance," said Bhargav Dasgupta, MD & CEO, ICICI Lombard General Insurance. The private insurer has bid for several states as the risk-based premium now makes crop insurance a viable business.
Although the farmer pays a flat 2% of the sum insured for kharif and 1.5% for rabi, insurance companies are free to charge 12% if claims in earlier years justify that kind of pricing. The difference between the subsidized rate the farmer pays and the actuarial rate will be paid by the government. "The farmer now sees more value in farm insurance as the entire crop is covered. The policy also covers pre-sowing and post-harvest risks," said Dasgputa.
According to G Srinivasan, chairman, New India Assurance, earlier only 15% of 'loanee farmers' (farmers with bank debt) were purchasing insurance because the premium rates were high. Now with premium rates for farmers being capped, more and more people are taking it. "Our target is to take it to at least 50% of the loanee farmers. Even if it reaches 30%, we should see a premium of Rs 15,000 crore," said Srinivasan.
The combination of higher sum insured and more farmers joining the scheme has increased the risk for Indian companies. "All the companies will have to go for reinsurance, because it is too big for any company to retain on its own book as there could be catastrophic claims. Both GIC Re and international reinsurers have given support," said Srinivasan.
Going ahead, the pricing of premium is set to get even more scientific. "We will use satellite imagery and drone photography to develop our models. These will be co-related with earlier data which will give us the change in yield," said Dasgupta. For now, the government requires that estimation of yield has to be done by actual crop-cutting experiments.