BackCrop insurance flaws fuel farm distress
At a time when rural incomes are sliding, the only existing safety net for the farmer is failingHigh costs of reinsurance due to erratic weather, a spike in claims, political interference in crop loss estimation are reasons that forced some insurers to leave the business
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Santosh Kumar’s first brush with insurance left a bitter aftertaste. A farmer’s son, 26-year-old Kumar from Bihar’s Araria district felt betrayed when hundreds of farmers from his village, including his own father, were denied what was due to them. In August 2017, Kumar’s village in Palasi block of Araria was flooded by an overflowing Kosi river. Much of the paddy crop got washed away.
Thankfully, for the first time—without even knowing about it—around 250 farmers had gotten themselves covered under the Prime Minister’s flagship crop insurance scheme. Premiums had been automatically deducted from their crop loan accounts held by a public sector bank without their consent. However, after the floods, it seemed like a blessing.
A month after the water receded, the flood-hit farmers visited the bank as the insurer did not have a local office. They were told matter-of-factly: your claims will be settled, but it may take more than a year. “Such delays are normal".
So, they waited. By February 2019, their patience had worn off. They made a list of insured farmers and pressed for a settlement of the claim. The bank advised them to get in touch with the insurer, a private firm. The response of the insurer’s customer service executive came as a rude shock: “You were supposed to intimate us within 48 hours of crop damage, which you didn’t. Besides, according to our records, your crop did not suffer any significant loss."
“We felt cheated. How could we inform the company when our homes were under water?" asks Kumar. “We were living on the highway...on the roofs of concrete houses. During the first 48 hours of the flood, some took shelter on top of trees," added Kumar, who still harbours a faint hope that the money will reach him someday.
Experiences like Kumar’s have become fairly common. And it is starting to make farmers view the flagship central government crop insurance scheme with suspicion. When the Pradhan Mantri Fasal Bima Yojana (PMFBY) was launched in June 2016, the idea was fairly simple: any farmer who avails a loan will simultaneously sign up for insurance; any crop damage will be evaluated by state government officials; and the insurer would eventually pay out a compensation amount commensurate to the degree of yield loss. That was the theory.
In practise, few farmers get compensation on time. As on 1 November, insurance companies owe farmers ₹2,511 crore from the kharif 2018 crop season (16% of estimated claims). That amounts to a delay of more than a year from the date of harvest. For winter crops harvested in April-May of 2019, farmers are waiting for another ₹1,269 crore (26% of estimated claims), revealed an agriculture ministry official on condition of anonymity.
Naturally, farmers are losing interest. Enrolment under PMFBY fell from 40.5 million farmers in kharif 2016 to 34 million in 2018, a 16% drop within two years.
So, what really came out of the government-led programme to mitigate the risks faced by the farmers which has cost nearly ₹1 trillion in premiums since 2016? What will happen to those who suffered serious crop damage this year due to an erratic monsoon, which has, most visibly, resulted in soaring onion prices?
Inside this esoteric world of premiums and compensation claims and the fates of individual farmers lies a larger economic puzzle: how can there be a revival in rural incomes when the only remaining fallback fails?
Private exit
Farmer distrust regarding the scheme has only gained strength after four private insurers—ICICI Lombard General Insurance Co. Ltd, Tata AIG General Insurance Co. Ltd, Cholamandalam MS General Insurance Co. Ltd, and Shriram General Insurance Co. Ltd—did not bid for insurance clusters in the kharif 2019 crop season.
“After making money for two years, private insurers are running away when adverse weather is hitting us in more and more states," said Raju Shetty, a former member of Parliament and farmer leader from Maharashtra.
Insurance industry insiders point to a slew of problems which forced some to leave the business. High costs of reinsurance due to erratic weather, a spike in claims and political interference in crop loss estimation are significant reasons, they claim.
The decision to stay away is not final and was driven by extreme weather conditions, said S. S. Gopalarathnam, managing director at Cholamandalam MS, which is expecting an adverse 165% loss ratio (claims as a % of premiums) in 2018-19. Both ICICI Lombard and Tata AIG declined to respond to queries from Mint.
However, Bhargav Dasgupta, MD and CEO of ICICI Lombard, in an earnings call in July this year, said: “We don’t believe that the crop business, given the reinsurance terms, can be viable. At the end of the day, it is social insurance."
Suddenly, three years and seven crop seasons after PMFBY was launched with much fanfare, no one seems to be happy. The farmer is troubled, the insurer is running for cover and state governments, who spend a significant amount of their agriculture budget on the scheme, appear reluctant to pay their share of premium on time (under the scheme, farmers pay only 2% of the premium while the rest is borne equally by the Centre and state governments).
“The claims for kharif 2019 are expected to cross 90% of the premium collected," predicted a senior official at the agriculture ministry who did not want to be named. “With an average 10% in reinsurance costs and 5% in administrative charges, this season is likely to bleed insurers."
To fill the gap left behind by private firms, public sector insurers now account for 65% of the crop insurance market, up from around 50% a year ago. The largest among them, the Agriculture Insurance Company of India Ltd, is now staring at heavy payouts due to erratic rains in at five states—Maharashtra, Madhya Pradesh, Gujarat, Chhattisgarh and West Bengal.
The ministry official cautioned that it should not shock anybody if public insurers, too, express an intent to exit, unless the government makes good their losses.
This wasn’t the case till last year (2018-19). In the six crop seasons between kharif 2016 and rabi (winter harvest) 2019, insurance companies collected a total of ₹76,155 crore in premiums and settled ₹55,618 crore in claims. On balance, that implies decent profit margins, given the unique nature of the scheme—since costs are kept low by selling policies through the banking network and crop loss assessments are mostly carried out by state governments.
“The heavily subsidized scheme unlocked a lot of value for insurers. Now that the market is mature, farmers are aware, and the government is eager to make insurance work for farmers, companies are running away," said an insurance consultant to a state government who did not want to be named.
Insurance companies have used every trick in the book, the consultant said, “from choosing low-risk profitable clusters to forming cartels in order to quote higher premiums during bidding". In the end, when nothing else works, there is always the option of an exit.
“The government needs to go back to the drawing board and fix this," said the state government official. “Insurance companies cannot be entrusted with the scheme where so much public money is flowing (close to ₹1 trillion in seven crop seasons to kharif 2019) and when farmers are running from pillar to post to get claims."
A mess across states
At its heart, a well-functioning insurance is meant to bail out a person when the need is dire. That is why the idea of crop insurance itself has its origins in depression-era 1930s US. But India’s farmers have little hope that PMFBY will come to their aid this year.
In Maharashtra alone, an estimated 10 million farmers are affected. Farmer organizations are now demanding that the state be declared hit by a “wet-drought". Drought, for the lack of rainfall in the early months of monsoon (June-July), and wet since crops like soya bean, cotton and onion were washed away by three weeks of continuous rains in October.
“Poor claim settlement cannot be justified (this year) since the rainfall data is proof of how extreme it was," said Prakash Popre, a farmer and professor of agriculture from Nanded.
If poor compensation payouts was not worrying enough, in July this year, Madhya Pradesh government went a step ahead to limit the maximum payout. To lower its financial outgo due to premiums, the state government reduced the sum assured by 25%. For instance, in Harda district, farmers were entitled to a claim of ₹35,000 for 100% damage to their soya bean crop per hectare in 2018, which has now fallen to ₹26,250 this year.
“Back in 2017, the claim payout was as low as ₹131 in some cases. We are unsure this year," said Ram Inaniya, a farmer from Harda, Madhya Pradesh.
There is an evident conflict of interest, admits the official from the agriculture ministry quoted earlier. “We are running PMFBY as a social sector scheme for farmers. For insurers, it is a business. Still, the beauty of the scheme is that insurance companies cannot decide everything, including the extent of crop loss," said the official.
Saga of distrust
But that element of protection built into the scheme, which mandates state governments to determine the extent of damage, may be one of the main reasons for the long delays in compensation payouts.
In cases where crop damage is reported, state governments usually undertake crop cutting experiments (CCEs) in the presence of officials from insurance firms. The challenge lies in the sheer number of CCEs which needs to be completed within a short window—currently estimated at more than seven million every year. “The possibility of dispute is high since the process is manual and farmers are (often) unhappy about the choice of plots to estimate yields. Moving away from yield-based insurance to a weather-based products could offer a solution," said Yogesh Patil, CEO of Skymet, a private weather services company.
The way ahead could also lie in extensive use of technology, such as satellite imagery and drones to estimate losses—which PMFBY promised but has been slow to implement.
Data on a host of parameters like the groundwater situation, soil moisture, irrigation, weather and remote sensing can be used to estimate yields, said Anuj Kumbhat, director at Weather Risk Management Services. “The idea is to use CCE’s as a corroboration tool and minimize the number of CCEs. But states have been slow to adopt new technology."
With limited use of technology and gaping challenges in implementation, crop insurance seems to be on the verge of getting caught up in a web of distrust fuelled by limited evidence.
Even farmers sometimes exploit these weaknesses, says Siraj Hussain, a former agriculture secretary. That begins with enrolment, which has a cut-off date of end-July, when the actual arrival of the monsoon is in early June.
“Insurance is a cover for uncertainty… one cannot allow enrolment when signs of a drought or flood is evident," said Hussain. “A scheme where so much of public money is involved needs integrity at all levels." He added that by November, more than 2.5 million claim intimations have already been filed by farmers in Maharashtra for post-harvest losses due to excess rains, and some of these may be dubious.
Meanwhile, Suresh Ediga, a volunteer with the non-profit run helpline Kisan Mitra, has been grappling with a spike in distress calls from farmers in several districts of Telangana, who are genuinely in a fix due to irredeemable crop damage. The helpline, originally meant to be a suicide hotline, is quickly learning about the intricacies of insurance.
Most insured farmers, a shocked Ediga found out, had no knowledge about whom to report their losses. They did not have any details about the insurance policy, which crop was insured, or the amount of coverage (sum insured). The helpline of the private insurer did not work most of the time, and when it did, the customer executive could not follow the local language, Telugu.
But the state of India’s response to remedy the risks inherent in farming became most evident, Adiga says, by one instance in which a private bank sold a mortgage insurance to a Telangana farmer who was made to believe it was crop insurance. This year, like many other farmers in India’s hinterland, he will get no relief.
An earlier version of the story inadvertently omitted the word 'reinsurance' from a comment by Bhargav Dasgupta, MD and CEO of ICICI Lombard. The correct quote should read: “We don’t believe that the crop business, given the reinsurance terms, can be viable. At the end of the day, it is social insurance." The story has been updated to reflect this change.
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