PMFBY agriculture insurance: Lessons for successful implementation of a multi-stakeholder scheme
In a series of three blogs, our Fellow Ritesh Pandey shares his experiences, working in the Indian crop insurance market. In this second blog, he talks about the journey of Pradhan Mantri Fasal Bima Yojana (PMFBY) in India and key success factors that can be drawn from the Indian experience.
Madan Lal, a 33-year-old farmer, lives in the Jaisalmer district in Rajasthan and cultivates a variety of crops. In 2020, he suffered a major financial blow when unseasonal rainfall ruined his winter crops. But Madan Lal had nothing to worry about, because the PMFBY scheme that covered his crop, paid a US$800 insurance claim. Madan can insure his crops by simply going to the common service centre (CSC) in his village. These CSCs are physical facilities for delivering India’s government e-services to rural areas that enable farmers like Madan Lal to enrol conveniently.
Madan’s tale is not an isolated one. Since the scheme’s inception in 2016, millions of farmers have benefited from PMFBY. In my previous blog, I detailed the evolution of crop insurance in India, beginning with “rain insurance” in 1920 until the recent PMFBY. In this blog, I will talk about the role of PMFBY in safeguarding farmers’ incomes and the lessons that may be derived from its success.
For farmers, PMFBY offers comprehensive coverage from pre-sowing to post-harvest. PMFBY combines “index-based” and “indemnity-based” covers into a single product. There is an index-based cover for the yield shortfall at the season’s end, as well as an indemnity-based cover for localized calamities and post-harvest losses, which are assessed at individual farm level. Further, PMFBY includes “prevented sowing”, which kicks in when 75 per cent of the insured area has prevented from sowing or failed sowing, and “mid-season adversity”, which applies to widespread calamities (estimated losses of above 50 per cent for crops reported in insured areas) to provide immediate relief.
Each year, PMFBY covers more than 60 million farmers and nearly 30 per cent of the gross cropped area. The increase of the insured amount under PMFBY from US$295 per hectare under previous programmes to around US$560 per hectare demonstrates the value of PMFBY for farmers relative to earlier schemes. In the first five years of implementation, insured farmers paid a total premium of around US$2,860 million and received claims totalling US$15,440 million, with 33 per cent of insured farmers receiving claims. It is worth mentioning that farmers pay a fixed percentage of the sum assured as premium; two per cent for all monsoon food and oilseeds crops, 1.5 per cent for winter food and oilseeds crops and five per cent for annual commercial and horticultural crops. The difference is subsidised, with the costs shared between the central and state government.
In India, agriculture is considered a state subject while insurance is both a central and state responsibility. This makes the states’ implementation of the scheme voluntary. Despite this, 27 states and union territories have adopted the scheme since its inception, demonstrating its popularity.
There are many lessons to be drawn from the success of PMFBY, a large crop insurance programme involving multiple stakeholders.
- Government support is important
a. Subsidies can help farmers access insurance
Agriculture insurance is of great importance to the food security of a country. The issue of farmers that often need but don’t want insurance holds true for India as well. As most farmers are small, they possess limited insurance knowledge and scarce finances for buying insurance. The Indian government was aware of this issue and established provisions for subsidy under the crop insurance scheme.
As crop insurance primarily covers systemic risks, diversification and scale are important and government subsidies helped in reaching these goals rapidly. Subsidy support is not unique to PMFBY; it is a feature shared by all major crop insurance programmes around the world.
b. The need for diversified distribution channels
Even if PMFBY provides the most comprehensive coverage against risks, the real test was whether it would be accessible to farmers. In addition to providing financial assistance in the form of subsidies, the central government also ensured accessibility to the farmers through multiple distribution channels.
- Banks and financial service providers — Through the interest subvention scheme, the Indian government offers institutional credit to farmers at a concessional interest rate. PMFBY was bundled with institutional credit, enabling distribution of agriculture insurance along with crop loans. It also ensured farmers’ creditworthiness in the event of natural disasters as well as cushioning banks’ loan portfolios.
- CSCs — Despite the government’s best efforts, many farmers in the country do not have institutional financing. To bring these farmers under PMFBY, a network of over 44,000 CSCs was authorized by the government to deliver PMFBY. These CSCs have emerged as a major distribution channel for farmers not using or not having access to institutional credit.
- Post offices — The government has recently established the Department of Post, which has a presence in every corner of the country, as an official enrolment channel for PMFBY, making the programme more accessible to farmers.
It must be noted that these are additional channels to the insurance companies’ direct agent network, crop insurance app and the National Crop Insurance Portal (NCIP).
c. Relevance of dynamic and flexible guidelines
The insurance life cycle involves many stakeholders, and its success depends on all stakeholders assuming their roles and responsibilities. This is especially important for PMFBY, which involves farmers, the central government, state governments, insurance companies, banks and CSCs. To address this, PMFBY has operational guidelines detailing the roles and responsibilities for each stakeholder, with well-defined timelines. As the scheme grows in scope and scale, it needs new provisions and changes to existing provisions. The operational guidelines have been highly adaptive, with regular updates and improvements. The original 2016 guidelines were revised in 2018 and then again in 2020, based on lessons learned from implementation. Although PMFBY’s operational guidelines are dynamic, the enforceability of provisions sometimes becomes difficult in the absence of a legal framework. As a result, there is growing debate in the country for separate crop insurance regulations, which I will talk about in my next blog.
d. Assistance through Centralized Information, Education and Communication (IEC) efforts
Farmers are generally unaware of the importance of insurance. To address this, the PMFBY’s guidelines require insurance companies to spend 0.5 per cent of their gross premium on IEC activities. Since 2022, a nationwide door-to-door policy distribution campaign “Meri Policy Mere Haath” (“My policy in my hand”) educates farmers about coverage details, in addition to a grass-root farmer sensitization programme “Fasal Bima ki Paathshala” (“School for Crop Insurance”). One of the most notable aspects of the scheme has been the emphasis on ongoing capacity-building workshops for all stakeholders. Even though behavioural change typically takes time, the government’s commitment and continuous efforts are already yielding positive results, as shown by over 32 per cent of farmers voluntarily enrolling into the scheme, compared to nine per cent under previous schemes.
The journey of crop insurance began as a “voluntary” scheme in 1972, then migrated to compulsory coverage under the National Agricultural Insurance Scheme in 1999, to then return to voluntary status again for all farmers in 2020. This return to a voluntary regime occurred after ensuring access to PMFBY for all farmers through multiple distribution channels at the grassroot level, as well as increased levels of awareness about the scheme with centralized IEC efforts. This is a classic example of how a mandatory scheme can be made voluntary after reaching scale if there is a robust distribution mechanism and high levels of awareness.
2. PPPs are important for scale and efficiency
PPPs are a priority for the government when implementing PMFBY. The role of the private sector is evident at each stage of the insurance process. The scheme now has 13 private sector insurance companies and all five public sector insurance companies on board who acts a risk taker under the scheme. Distribution under the scheme is carried out primarily by financial institutions and CSCs, which are one of the major sources of enrolment for non-loanee farmers. Private sector players participate in the crop cutting experiments for loss assessment along with the state governments institutions. Likewise, both state government agencies and private players develop the infrastructure for weather stations and other technology interventions.
3. Long term contracts and public tendering help in commercial viability
State governments allocate work among PMFBY enrolled insurance companies through an open tender process. Insurance companies assess risk based on historical data and arrive at an actuarially derived price. The use of an open tender process for work allocation across geographies, as well as an actuarial pricing regime, ensures that PMFBY remains a commercially viable option for insurance companies.
In addition, geographies are now assigned for a period of three years, giving insurance companies enough time to invest in infrastructure and staff. Crop insurance is known to rely heavily on reinsurance support, and in India, approximately 80 per cent of the premium is ceded to national and international reinsurers, with insurers keeping the remaining 20 per cent. These provisions, together with tax incentives and extensive use of technology, guaranteed reinsurers’ continued participation in the scheme.
4. Technology can assist in dealing with large numbers effectively
One of the foundations of PMFBY is the use of technology to increase transparency and efficient implementation. The NCIP, an IT-based system, brings all stakeholders together on a common platform and gives a single data overview. The NCIP is important in a multi-stakeholder scheme like PMFBY, because bringing together stakeholders is a major concern and it was a shortcoming in the country’s previous crop insurance schemes. The Crop Insurance App, for enrolling and real-time tracking of farmer applications, and the CCE-Agri app, for the collection of crop-cutting experiments data, are other tech-based initiatives taken under PMFBY.
Following discussions in 2020, PMFBY updated its operational guidelines to improve the scheme’s efficacy and transparency. Despite these changes, the scheme faces obstacles, such as a delay in subsidy and yield data by some state governments, challenges in yield assessment, some state governments and insurance companies opting out of the scheme and slow yield estimation initiatives and slow-moving advancement of the NCIP.
As mentioned before, one of the crucial aspects of PMFBY’s success is its continuous evolution based on prior experience. As PMFBY approaches its eighth year of implementation, I will discuss in my next blog how the government intends to resolve these obstacles and to make PMFBY a more robust risk transfer mechanism for farmers.
