Outstanding premiums and claims of insurers have gone up over the past year in a first sign of risk from Prime Minister Narendra Modi's crop insurance scheme.
The increase is driven by “a dramatic jump in the crop portfolio” of insurers as the business grows on the push from the scheme, Pradhan Mantri Fasal Bima Yojana (PMFBY), Mr Shashwat Sharma, head-insurance at KPMG, told BloombergQuint. This exposes a large section of the industry to risk from the government, he said.
For instance, ICICI Lombard General Insurance’s premiums due from the government for crop and weather plans rose five-fold to nearly INR18 billion (US$281 million) at 31 March, according to the draft prospectus the private insurer filed for its initial public offering. Outstanding crop claims for ICICI Lombard, or the amount payable to policyholders, nearly tripled to INR22.4 billion at 31 March 2017, its prospectus said.
Under the PMFBY scheme launched in January last year, insurers receive 2% of the actuarial premium rate for kharif (monsoon) crops, 1.5% for rabi (winter) and 5% for horticulture crops from farmers. The rest is subsidised, equally borne by state and central governments. The government has to pay its share at the beginning of the crop season. This payment is invariably delayed and results in late disbursal of claims.
“We cannot disburse claims until we get the premium subsidy, and a lot of work needs to go into speeding up that process,” said Mr Sanjay Datta, chief actuary at ICICI Lombard.
Other general insurers including TATA AIG, Bajaj Allianz and HDFC Ergo’s outstanding premium also rose at end-June compared to a year ago, according to exchange filings. While this includes premium from all businesses, the spike in outstanding dues is largely driven by crop insurance, according to Joydeep Roy, partner and leader in insurance and allied businesses at PwC India.
Impact on GIC Re
The outstanding receivables of insurers have added to the risk for the country’s only state-run reinsurer GIC Re for which crop reinsurance contributes nearly a third of total premium collection, according to its draft prospectus.
“Reinsurance business has doubled over the past year, and most of it is driven by crop covers. GIC Re will be affected much more if the delays in paying crop premium persist,” said Mr Sharma.
GIC Re’s consolidated dues from insurers and reinsurers rose nearly threefold in the year to March 2017 to INR108.91 billion, according to the company’s draft prospectus. The risk from crop underwriting losses has the potential to exceed its risk appetite, GIC Re said in the document.
The reinsurer’s crop premium collection depends on how fast insurers are paid. “We pay the premium as and when it is disbursed to us by the government,” said Mr Datta.
To be sure, the outstanding premium has the government’s implicit guarantee. “If you believe in the fiscal solvency of the government and its intention, then the scenario of money going bad does not happen,” said Mr Roy.