PMFBY: Fiscally-Stressed States Look For ‘Beed Formula’ to Reduce Costs for Upcoming Kharif Season

PMFBY: Over the years, fiscally-stressed states have turned averse to footing the premium bill for PM Fasal Bima Yojana, resulting in insurers not honouring farmers’ claims on time. According to reports, claims worth over Rs 1,800 crore are yet to be settled. However, at least two states, Maharashtra and Rajasthan have written to the Centre, requesting that the ‘Beed district formula' be used to run the crop insurance scheme for the upcoming kharif season. 

The explanation for this is that states believe there will be a "surplus" in gross premiums paid by insurers this year due to the usual monsoon forecast, and the Beed formula, also known as the "80-110 Plan," will ensure that premiums above a certain threshold are refunded to the state government. 

The insurer's potential losses are limited under the 80-110 plan, as the company is not required to accept claims that exceed 110 percent of the gross premium. To protect the insurer from losses, the state government must bear the cost of any claims above 110 percent of the premium paid. The insurer pays the state government any premium surplus that exceeds 20% of the gross premium. 

The year before, too far-below-normal monsoon rainfalls in central Maharashtra's Beed district discouraged insurers from covering farmers in the district under the PMFBY for kharif 2020, prompting the Centre to request that the public sector Agriculture Insurance Company of India (AIC) to do so. AIC has been guaranteed that claims above 110 percent of the gross premium will not be considered. It was also revealed that, in order to protect the insurer from losses, the state government could shoulder the expense of any claims in excess of the premium collected. The plan worked out well. 

The Centre, according to sources, is not opposed to the concept; however, it has requested the two states to wait because the "80-110 Plan" requires extensive examination and, most likely, Cabinet approval. “Since it (the 80-110 Plan) was implemented in Beed district and Madhya Pradesh as special cases last year, the outcome must be assessed based on premiums received by insurers and claims made by farmers,” a source said. 

For example, under the '80-110 Plan,' if claims total 60% of premium collected, the insurance firm must pay 20% to the state government, and if claims total 70%, the state government will receive a 10% refund. The state will not receive a return if the claims exceed 80%. 

Farmers must pay a premium of 1.5 percent of the insured amount for rabi crops, 2 percent for kharif crops, and 5 percent for cash crops under PMFBY. The balance premium is shared equally by the federal government and the states. Many states have insisted that their part of the government-paid premium be limited to 30%, with the remaining 70% borne by the federal government. 

“Numerous states are hesitant to operate PMFBY because of budget constraints, especially in the aftermath of the Covid epidemic. Furthermore, because the India Meteorological Department (IMD) has forecasted a normal monsoon, the states do not expect claims to rise during the kharif season unless there is a natural disaster. Crop failure is unlikely this year due to lower rainfall, according to an insurance company executive who requested anonymity. 

The Maharashtra government has terminated a three-year deal with insurance companies signed last year in order to save money on crop insurance, while Rajasthan is considering a similar move, according to sources. 

Because many states complained about the "ever-increasing premium," the Centre revised the standards in February of last year, allowing them to enter into a three-year contract with insurers on the premium charged in crop insurance. States might also continue to use the present practice of soliciting premium bids every year, as long as they follow the rules.

The Government pays its formulaic part of the PMFBY subsidy bill as long as the gross premium level is up to 30% of the sum assured in non-irrigated areas and 25% in irrigated areas. If states want to implement the program, they must bear the burden of proof, even if insurers quote premiums of more than 25%-30%.