Four private insurance companies have decided to opt out of Pradhan Mantri Fasal Bima Yojana (PMFBY), government’s flagship crop insurance programme.

What is PMFBY?

• The Pradhan Mantri Fasal Bima Yojana (Prime Minister's Crop Insurance Scheme) was launched in 2016.
• The scheme is aimed at reducing agricultural distress at instances of monsoon fluctuations induced price risks.
• It envisages a uniform premium of just 2% to be paid by farmers for Kharif crops and 1.5% for Rabi crops.
• The premium for annual commercial and horticultural crops will be 5%.

How has the scheme performed over the years?

• The PMFBY is better than most other farm insurance instruments tried out with little success since the early 1970s.

• However, it does suffer from several inherent flaws which undermine its appeal to both insurers and farmers.
• The insurance companies find it a loss-making business despite the hefty 90% subsidy by the government.
• On the other hand, the farmers complain that the compensation is too meager and comes with an inordinate time lag.

• The common impression that the subsidy is being cornered unfairly by insurance firms seems true but only partly.
• In the initial years after the launch of the scheme in 2016, supportive weather had prevented crop damages.
• Hence, the reimbursement claims were low.
• This allowed the insurers to make good profits.
• But, the situation has since changed with irregular monsoon rainfall.
• There was 9% deficient in monsoon rains in 2018 and 10% excess in 2019.
• This inflicted heavy crop losses in several states.
• As a result, the compensation claims have exceeded the collected premium.
• This, consequently, eroded the insurance companies’ profits.
• It ultimately made crop insurance an unattractive proposition for them.

What are the concerns with the scheme?

• The shortcomings in the design of the PMFBY include -

1. the involvement of banks in the mandatory insurance of the crops grown by borrower farmers
2. the assessment of damages on the basis of average crop loss in a given contiguous area rather than in the farmer’s field

• The banks usually adjust the compensation amount against the loans without the consent or knowledge of the farmers.
• This worsens the trust deficit among farmers, banks and insurance companies.
• Also, the involvement of the state governments in sharing the financial burden equally with the Centre is creating problems.
• The states’ involvement in estimating the losses through crop-cutting experiments and other means is also problematic.
• The use of technology in damage evaluation is not happening to the desired extent.
• This is limiting the credibility of the crop loss data and is also needlessly delaying the finalisation of reimbursement amounts.
• Moreover, states often release their share of the funds late and in installments.
• This affects the liquidity and paying capacity of the insuring firms.
• Many states have capped the sum assured at unrealistically low levels, which do not adequately cover costs.

How does the future look?

• The above issues need to be suitably addressed to prevent the PMFBY from meeting the same fate as its predecessors.
• The Indian farmers are typically heavily indebted small land holders.
• They need crop insurance to hedge their risks which are steadily mounting due to growing menace of pests and diseases and rapidly changing climate.
• The frequency of erratic and extreme weather events has already aggravated.
• Devastating cyclones, which used to be rare, have become a common feature in coastal areas.
• These developments have added to the woes of the cash-stressed farmers.
• It is, thus, crucial to provide reliable risk management avenues like conveniently accessible farm insurance to abate farmers’ distress.