- Farming distress – government washing off its hands – 1/3
- Finance Capital feeds on farmers distress
- How the US supports its rich farmers and India ditches its poor farmers
After announcing a meagre amount as compensation, Tamil Nadu government is pushing the distressed farmers to the doors of insurance companies for more compensation.
It is important to understand that crop insurance scheme is a fraud practiced on farmers by the state; It is meant to insure the state against the claims of peasantry as argued in this RUPE article.
This article establishes that not only crop insurance, medical insurance is also economically illogical and socially nonviable way of providing care to the people. This article was published immediately after the presentation of union budget for 2016-17.
continued from part 1
Financialised insurance, although advertised with words such as ‘trust’, ‘security’, and ‘partnership’, is in practice an adversarial relationship. The profit of an insurance company is arrived at as follows: income from premiums, plus income on investing these premiums in different financial instruments (bonds, shares, etc), minus payment of claims and operating/administrative expenses (premiums + investment income – settled claims – expenses). Any profit-oriented firm would address each of these elements. It calculates the probability of various events to determine whether to insure the entity, and how much premium to charge, in order to ensure that it will make a profit; it also tries to invest well in order to maximise the income on its investments; and it tries to keep down its operating expenses. And, significantly, it would try to minimise its payment of claims.
There is no shortage of evidence of this adversarial relationship. Firms sell policies which are inappropriate for insured persons, in many cases resulting in the lapse of the policy, loss to the holder and gain to the firm. They avoid insuring persons whom they assess as high-risk. They sell policies which may prove useless at a time of real need. In theory, if the firm acquires a bad reputation, it will not attract customers, but customers even in developed countries lack information and the capacity to assess different firms and policies, and hence regularly fall prey to these practices; the “fine print” of insurance policies is a matter of lore, and the grist for John Grisham novels. In the developed world, insurance firms have also been reckless in their investment policies, thus endangering the insurance of their policy-holders.
In the case of India, rampant mis-selling of life insurance policies by a host of firms during the period 2005-12 led to very large-scale lapse of policies, causing a loss to customers of Rs 1.5-1.6 lakh crore (Rs 1.5-1.6 trillion) and boosting the profits of the firms and the income of agents. This scandal led the insurance regulator to regulate certain insurance products, but the firms have suffered no serious penalties. (So appalling have been the practices and performance of private sector insurance firms since their entry in 2001 that they have reversed the pre-2001 trend of rising insurance penetration in India – i.e., premiums as a percentage of GDP. Life insurance penetration has fallen sharply since 2006, and is now at the level of 2002, while general insurance penetration has stagnated at very low levels.) While such a problem of mis-selling may not arise in the case of crop insurance at the moment, since at present there will be a single, standardised policy, this experience highlights the adversarial nature of the relationship and the sharp practices of firms.
What is the Government’s interest in having insurance firms provide crop insurance? This is a puzzling question, because it would not appear to make financial sense for the Government. The insurance industry rests on the laws of probability. The larger the number of insured persons, the better the insurance firm can predict the chances of the event occurring against which the person is insuring himself or herself. Accordingly, the insurance firm can calculate how much premium it needs to charge from each person in order to make a profit even after paying out claims and covering its running costs. For the individual, on the other hand, the premium is small compared to the sum insured. Premiums from a large number of insured entities are pooled by the insurance firm; each insured entity’s premium is a small sum compared to the sum insured.
But this is not the case with the proposed scheme of crop insurance (the PMFBY). The peculiarity of the present situation is that the Government says it will pay 85-90 per cent of the premium. In which case, the advantage of insurance to the person insured – i.e., the fact that the premium is much smaller than the sum insured – disappears. A single entity – the Government – would in effect foot the bill for the claims, plus the expenses and profits of the insurance firms. This makes little sense for the finances of the country. Why then does the Government need to hire an insurance firm to do the job? It might as well use its own machinery to assess losses and settle claims. Alternatively, it could direct public sector insurance firms to do the job.
Enthusiasts of private enterprise may believe that private insurance firms will do the job more quickly and efficiently than Government or public sector employees. Quite to the contrary, however, insurance firms have a strong incentive to keep down the amount paid out as claims; and as a matter of fact, among insurance firms, private sector firms have a much higher rate of rejection of claims than public sector firms. Presumably, this is due to the fact that a culture of public service, rather than a profit-maximising culture, lingers on to some extent in the public sector firms.
Some analysts claim that the premiums would come down once insurance firms cover, say, 50 per cent of cropland. However, this is unlikely to happen, for two reasons: the risk involved, and the Government’s intent to guarantee high profits to insurance firms.
Agriculture is a high-risk activity, both because of the frequency of adverse events, and because, unlike with most other types of insurance, a large number of insured persons may simultaneously suffer sizeable losses. These losses can be large enough to wipe out the capital of individual insurance firms. In India, where 60 per cent of agriculture is rainfall-dependent, there have been five drought years since 2000. There have been other calamities as well, with losses running into tens of thousands of crores. In 2015 alone, the year began with unseasonal rains in 14 states, particularly in the northwest; July saw floods in parts of Rajasthan, Gujarat, and western Madhya Pradesh; in August, cyclone Komen struck West Bengal, and Bihar and Assam experienced floods; and the year ended with the south India floods (including most notably Chennai). As a result, it is unlikely that unsubidised premiums would come down to low levels.
Secondly, the entire gamut of current Government policies in different fields, from infrastructure to defence production to health and education, is intended to revive business profits and activity by providing attractive guaranteed returns. Moreover, the Modi government has staked its political reputation on ensuring that the target of covering 50 per cent of the area under the PMFBY, which is to be executed almost solely by private firms; hence the latter will be allowed to charge premiums which make crop insurance an attractive business to them.
It is not, therefore, on grounds of superior economic efficiency that the Government has devised the PMFBY. The real rationale lies elsewhere, which we will return to at the end of the article.
 Monika Halan, Renuka Sane, Susan Thomas, “The case of the missing billions: Estimating losses to customers due to mis-sold life insurance policies”, https://ifrogs.org/PDF/insurance-misselling_jepr.pdf
 Insurance Regulatory and Development Authority of India (IRDAI), Annual Report 2014-15.
 IRDAI, ibid. While the public sector LIC rejected only 1.2 per cent of death claims and kept 0.5 per cent pending, all private insurers had much higher rates of rejection and pending; Edelweiss Tokio was the highest, rejecting 37.8 per cent and keeping 5 per cent pending. There are similar gaps in the case of general insurance.
 Insurance premiums tend to be higher when coverage is small, partly for the reason that those who opt for insurance initially tend to be those with higher risk (what is called ‘adverse selection’). Risk is expected to decline as coverage becomes near-universal. However, in India this does not seem to be the case with existing crop insurance. Rather, existing coverage is linked to public sector bank lending: cultivators are compelled to buy crop insurance when they take loans from banks. So it is unlikely that the risk of losses will decline as coverage increases.
(continued in part 3)
To read part 1
Courtesy : RUPE