A Chinese proverb 'biggest profits mean gravest risks' is coming to haunt the general insurance companies who took aggressive bets in the Prime Minister Fasal Bima Yojana (PMFBY) or crop insurance launched three years ago.
The biggest profits theory was simple. The insurance companies were getting the bulk business from state governments for crop insurance without any acquisition cost. The bulk of the premium was a direct transfer from the Centre as well as state governments (50:50 contribution) with the insured farmer contributing only 1.5 to 2 per cent of the sum assured.
The insurance companies initially raked in good profits, but things seem to have been changing now. The first one to bid goodbye to crop insurance is one of the largest players ICICI Lombard General Insurance Company. The private sector insurer has called it quits because of underwriting losses. More players may follow suit because of shrinking margins and losses. In July this year, Union Agriculture Minister Narendra Tomar announced that the government has invited suggestions from stakeholders to make the PMFBY more effective.
What are the issues that are coming in the way of general insurers? First one is on the pricing front. The insurers often quoted lower prices because of bulk business and the assumption of reduced losses. But the losses are on the rise. Take, for instance, the gross premium collected in 2018-19 stood at Rs 20,923 crore, whereas claims were to the tune of Rs 27,550 crore. In addition, there are other costs such as re-insurance taken from GIC or other global re-insurers. There are operational costs as well, especially fixed costs. There are instances of states delaying their 50 per cent contribution to be paid to insurance companies. It delays claims processing and often leads to disputes between states and insurance companies.
The states and insurance companies also spar over yield, which is one of the key factors at deciding the insurance claim. Insurance companies are also obligated to spend a small part, say 2 per cent of the gross premium, on rural infrastructure such as weather stations. Apart from political interference at the state level, insurance companies also fear penalties. There is a strict provision of penalties of 12 per cent per annum in case of a delay in paying the claims amount.
Lastly, the re-insurance is not easily available in some of western and southern states because of high incidents of frauds. The global re-insurers are staying away from certain markets on account of bad experience. The re-insurance rates are rising because of high claims insurance.