PMFBY: A Panacea or a Necessity for Protecting Indian Farming

In India, crop insurance has evolved to cover more areas and crops since the 1970s. The Pradhan Mantri
Fasal Bima Yojana (PMFBY) was introduced in 2016 in place of existing claim subsidy-based models,
and has now grown to be one of several government initiatives that provide farmers with some level of
security when facing risky or uncertain circumstances.

PMFBY, which combines index insurance for widespread risks with indemnity insurance for localized
risks, is among the most resilient global crop insurance programs. Even so, it has its share of drawbacks.
As a matter of fact, there are several. In actuality, there is no insurance program that comes close to being
flawless. Transparency and efficiency can be improved by learning from the experience.

A major criticism of PMFBY in the media and public discourse was that it resulted in undue profits being
made by insurance companies, particularly those from the private sector. It is important to examine some
of the most critical aspects of insurance and its implementation before determining whether or not the
insurance industry profited from its business. In this article, we examine a few aspects:   

PMFBY Experience:

In most public discourses and media reports of PMFBY performance, the full premium is presented on
one side and only the claims paid on the other side. This is an inaccurate display for two reasons: (i)
typically, the premium is booked on the basis of the farmers' enrolment at the beginning of the season;
their claims would be known several months after the harvest. If someone reports in April 2022 about the
2021-22 season, the full picture of premium booked is available while the claim picture is incomplete.
The yield data may have just been received for some crops, but not for all, and claims are still being
calculated for Kharif (2021). Rabi (2021-22) season crops haven't even been harvested, so we can't talk
about claims yet. This gives a distorted picture of the premium and the claims. Second, for any given year
and more so for recent years, there are states where claims have been calculated but not paid. It is
primarily due to a delay in receiving the government premium subsidies. Other factors, such as delay in
receiving yield data, disagreements over yield estimation etc, may also delay claim payment. The second
distortion occurs when the claim paid is compared to the premium booked (part of which is still pending).
The correct representation should be premium received Vs claims paid OR premium booked Vs claims
incurred, which most often gets missed while reporting.

The PMFBY industry level average CR based on 2016-2021 performance is shown below:

Premium
Year (INR Crore) Claims incurred (INR Crore)Claim Ratio (CR)
2016-17 21,678.4 16,795.5 77.5%
2017-18 24,299.4 21,863.5 90.0%
2018-19 29,684.5 29,370.7 98.9%
2019-20 32,317.4 27,771.4 85.9%
2020-21 31,693.6 20,379.4 64.3%
2021-22* 14,591.9 12,237.5 83.9%
  1,54,265.1 1,28,418.0 83.2%
Source: Ministry of Agriculture & Farmers Welfare, GoI

Note: 2021-22 premium figures were taken only for states where claims are processed, though the
original premium could be approx. Rs 30,000 crore

Similarly, a distortion occurs when the premium surplus over claims is interpreted as profit. Many recent
media reports automatically classify the difference between the premium and the claim as profit for the
insurer. There are several costs associated with insurance. PMFBY administration is so intensive that 50-
100 personnel (some on-roll, some off-roll) are deployed in each major district during key periods. Every
block / tehsil must have an office, every state must have a call center, there are marketing and publicity
expenses; service charges paid to CSC centers and banks for farmers' enrolment. Reinsurance, for
instance, is a substantial external cost. An industry average break-even point for PMFBY is around 90%
for a company writing a premium of about Rs 2500 crore. Above that, insurers begin to lose money.
Thus, only if the claim ratio is below 90% does the margin or surplus accrue.    

Since 2020, eight of the originally empanelled 18 insurance companies have stopped writing crop
insurance business, including both public and private insurers. There can be no doubt that this would not
have occurred if the insurance companies had been making undue profits.

Claim experience of other Major Markets:

In several countries, agriculture insurance is used as a public tool. Among these are the United States and
Canada in North America, Italy, Spain, France, Germany, Russia, etc. in Europe; China, India, Japan,
South Korea, Thailand, etc. in Asia, and Brazil, Mexico, etc. in South America.

A number of these countries have supported agriculture insurance for decades. In order to compare the
CRs, we are using the data from 2016, the year in which PMFBY was introduced. For the crop
component of agriculture (except for Italy), the average and worst claim ratios are presented below:

Average Worst Claim Ratio since

S.No Country Period Claim Ratio 2016
1 Brazil 2016-2021 83.08% 104% (2021)
2 Canada 2016-2021 99.01% 259% (2021)
3 China 2016-2021 59.05% 87% (2018)
4 Italy 2016-2020 99.26% 159% (2017)
5 Thailand 2016-2021 76.28% 223% (2019)
6 Turkey 2016-2021 55.73% 66% (2016)
7 USA 2016-2021 78.02% 94% (2019)
8 India 2016-2021 83.20% 99% (2018)
Source: Compilation from various sources

Note: 1. China, USA & India account for ~70% global crop insurance premium
2. In Canada & USA, the Admn & Operating costs of insurers is subsidized

Only Canada & Italy report higher average claim ratios vis-à-vis India, because both had at least one
extreme event year during this period. Even without an extreme event year, India's claim ratio of 83% is
reasonable and is also better than several other major countries.

How Insurance efficiency measured?

Insurance works on law of averages. Hence each year’s payout cannot be looked into in isolation. Rather
an average over a cycle is the right way to look at it. Since we haven't experienced an extreme event
during this relatively short cycle of past 6 years, a better way to measure is to check if losses were
compensated when farmers in individual districts / states suffered large losses. Yes, it did. The following
are some examples of states since 2016.  

In 2016, 2017 & 2018, Tamil Nadu experienced extreme droughts, resulting in claims of Rs 8397 crore
against a gross premium of Rs 4085 crore. This represents a claim ratio of over 200%. Similarly, farmers
in Maharashtra received compensation of approximately Rs 4500 crore due to heavy rains during the crop
maturity / harvest stage in 2019.  

Way Forward:

The government monitors PMFBY implementation and introduces improvements from time to time in an
effort to improve transparency and expedite claims payments. It currently insures less than 30 percent of
the gross cropped area, which is less than half the share of other key markets despite huge subsidies and a
near-compulsory nature for loanee farmers.

Insurance is not a panacea, nor is it for crop production risks. However, globally, governments support
crop insurance as part of financial risk management initiatives and for protecting the vulnerable farming
communities from vagaries of climatic risks.   

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By Kolli N Rao

He is Head of Agriculture Insurance & Senior Advisor IRICBS Gokhale Institute of Politics and
Economics. Mumbai, Maharashtra, India.