Why Insurers Are Cutting Down On Crop Protection Business

Private insurer ICICI Lombard General Insurance Co. exited the segment in in 2019. Others, including public sector companies, are cutting exposure.

For state-run The New India Assurance Co., the segment accounted for Rs 1,068 crore in revenue in the year ended March 2021, Prithvish Uppal, analyst at IDBI Capital Ltd., told BloombergQuint. That’s 3% of its total revenue and a 50% drop over the preceding year.

That comes as revenue of non-life insurers rose to their highest this year in August, led by crop insurance, according to data from the sectoral regulator. Agriculture Insurance Co. of India Ltd., which covers crops under various government schemes, registered a month-on-month growth of 145.2% in its gross premium to Rs 4,547 crore, contributing to increased revenues of state-run non-life insurers. On a year-on-year basis, premiums rose 54%.

Private and state-run insurers provide crop insurance largely through the Pradhan Mantri Fasal Bima Yojana, a yield-based crop insurance scheme. A small share also comes through the central government’s weather-based crop insurance scheme.

Sahil Udani, assistant vice president of financial sector ratings at ICRA Ltd., said private insurers may be reducing their business in this segment because of multiple reasons:

• Schemes Made Voluntary: Earlier, crop insurance was mandatory for farmers who borrowed money from banks. Now, it's voluntary. Insurers, Udani said, had a better claims experience from loanee farmers.

• Longer Tenure Of Tender: With tender tenor increasing to three years, many insurance companies were unwilling to fix rates for longer terms as claims experience would vary every year.

• Overdue Receivables From States: Although insurers are not liable to pay claims till entire premium is received from a state government, the insurance regulator extended the period during which receivables can be factored in solvency ratio from 180 days to 270 days.

• Rising Reinsurance Rates: Reinsurance rates on crop insurance have have risen for private insurers because of a higher claims ratio.

Uppal of IDBI Capital said the state-run reinsurer General Insurance Corp. of India has also reduced exposure to the crop insurance business from around 30% in FY19 to 20% in FY20. “GIC witnessed a loss ratio of 120% in FY20 versus 91% in FY19 and approximately 110-115% in FY21,” he said. “The reinsurer has been reporting underwriting losses in the crop insurance segment as well.”

He said the loss ratios have been very high for some years and this makes crop insurance very volatile as a business. The reinsurer is more focused on insuring states that have opted for the Pradhan Mantri Fasal Bima Yojana, and is cautious about underwriting in states that have opted out of it as they have higher claims ratios.

GIC told BloombergQuint that it has worked towards ensuring the “PMFBY scheme is sustainable in the long run by strictly enforcing pricing methodology, loss ratio caps, loss corridors and other control measures for pricing deficiency, minimum mandatory loss monitoring, among others”.

The company has not supported schemes other than the PMFBY floated by some states. “[But] few insurance companies and states moving out of the crop insurance market in the recent past have led to reduction in GIC’s market share of crop insurance premium,” it said in an emailed response.

Maharashtra, Rajasthan and Madhya Pradesh were the top three states in terms of gross premiums from crop insurance under the two centrally run schemes, according to data for FY20 published by Ministry Of Agriculture & Farmers Welfare on Aug. 3. Their shares stood at 20%, 16% and 12%, respectively.

Tweaks Be Enough?

The government has been modifying the insurance scheme—like the Beed formula—in certain loss-making regions to encourage participation of private firms. The aim is to cap insurers’ payout, beyond which states have to foot the bill.

The Beed formula, named after the drought-prone agrarian region in central Maharashtra, follows the “80-110” model. Private insurers are liable to bear up to 110% of losses arising on policies issued, beyond which it shall be made good by the state governments.

If the loss ratio is less than the premium amount, the insurers shall be allowed to retain 20% of their profits while the rest will be remitted to the state governments.

“This modified PMFBY scheme has little relevance to GIC Re, since it has not participated in the scheme since its inception last year,“ the reinsurer said. “It would be premature to comment on such model which is lacking the minimum back up data, usually 10 years past performance data is analysed under the PMFBY scheme.“

BloombergQuint awaits responses to queries emailed to The Oriental Insurance, New India Assurance and ICICI Lombard on Friday morning. HDFC ERGO General Insurance has declined to comment.

The business under such models is not lucrative enough, considering the acquisition cost and extent of losses to be borne, said a senior executive at an insurance company offering crop covers. The person spoke on the condition of anonymity fearing business repercussions.

Historically, the executive said, the loss ratio in such regions like Beed has been high.