Of course, the state government has to bear the cost of any claims above 110% of the premium collected to insulate the insurer from losses, but such higher level of claims rarely occur, so the states reckon the formula in effect reduces their cost to run the scheme.By Prabhudatta Mishra
The Centre has written to the state governments seeking their views on including the so-called ‘Beed formula’ as an option under its flagship crop insurance scheme Pradhan Mantri Fasal Bima Yojana (PMFBY). The move comes at a time when several states have developed cold feet on PMFBY, citing the cost of the premium subsidy being borne by them.
Under the ‘Beed formula’, also known as 80-110 plan, the insurer’s potential losses are circumscribed – the firm won’t have to entertain claims above 110% of the gross premium. The insure will refund the premium surplus (gross premium minus claims) exceeding 20% of gross premium to the state government. Of course, the state government has to bear the cost of any claims above 110% of the premium collected to insulate the insurer from losses, but such higher level of claims rarely occur, so the states reckon the formula in effect reduces their cost to run the scheme.
Under the 80-110 Plan, in case the claims reach 60% of premium collected, the insurance company will have to refund 20% to the state government and if the claims are 70%, the refund to state will be 10%. In case of claims above 80%, the state will not get any refund.
Maharashtra and Rajasthan had earlier written to the Centre seeking the Beed formula to run the crop insurance scheme for the current kharif season. However, the Centre told the two states to wait as the 80-110 plan needed detailed evaluation and probably Cabinet clearance. Both the states have reluctantly rolled out the PMFBY scheme in late last month, sources said.
Two successive years (during 2018 and 2019) of a far-below-normal monsoon in central Maharashtra’s Beed district, resulting in high claims ratio dissuaded insurers from covering farmers in the district under the PMFBY for kharif 2020, and the Centre then asked public sector Agriculture Insurance Company of India (AIC) to oblige. AIC was assured that it won’t have to entertain claims above 110% of the gross premium. It was also told that the state government could bear the cost of any claims above the premium collected to insulate the insurer from losses. The scheme ran successfully.
“There is a possibility of the states tinkering with the crop cutting experiment data, which determines the extent of losses, as they do not have funds to pay their part of the premium. So the claims to premium ratio may not practically exceed 110%,” said an expert who was involved in devising the ‘80-110 Plan’.
Under PMFBY, premium to be paid by farmers is fixed at 1.5% of the sum insured for rabi crops and 2% for kharif crops, while it is 5% for cash crops. The balance premium is split equally between the Centre and states. Many states have demanded their share of the government-paid premium be capped at 30%, with the balance 70% borne by the Centre.
Gujarat, Andhra Pradesh, Telangana and Jharkhand exited from the PMFBY scheme last year. While Punjab never implemented the crop insurance scheme, Bihar and West Bengal have their own schemes under which farmers do not pay any premium, but they receive a fixed amount of compensation in case of crop failure.
As last reported by FE, claims worth over Rs 1,800 crore (until kharif 2019) was yet to be settled as states defaulted in paying their shares of subsidy to the tune of Rs 1,680 crore.
As many states were complaining about ‘ever-increasing premium’, the Centre in February last year had changed the guidelines and allowed them option of three-year contract with insurers on the premium charged in crop insurance. States also can continue with the existing system of inviting bids for premium every year, as per the guidelines.
The Centre foots the PMFBY subsidy bill to the extent of its formulaic share so long as the gross premium level is up to 30% of the sum assured in non-irrigated areas and 25% in irrigated areas. The onus is on the states if they want to implement the scheme even if insurers quote any premium above 25-30%.
