Crop Insurance in India - intermediaries please excuse!

A few days back, I was returning from an event along with one of my friends who happens to be an eminent broker in the Indian Insurance market. We were having a chat about the Pradhan Mantri Fasal Bima Yojana ( Prime Minister’s Crop Insurance Scheme), which incidentally seems to be the talk of the town in the insurance market circles in India these days. One can safely say that this scheme has been singularly responsible for the huge spurt in non-life insurance premium collections in recent times in India. It aims to cover 30% of the farmers (around 40 million) in the Kharif crop season this year. The Government of India hopes to ramp that number up to 50% in the next few years.

I have doubts as to whether a commercial insurance scheme would be a silver bullet solution for the Indian farming sector, beset with so many deep rooted problems of its own. Many such programmes have not been quite successful in the past. However, for the purpose of this blog, let me keep such thoughts in abeyance.

Assuming this scheme is indeed the right choice of insurance protection for the farmers, has an appropriate distribution strategy been put in place? I’m not too sure. My friend was ruing the fact that no meaningful space has been given to intermediaries like him in the distribution architecture of this scheme. Intermediary commission payable is calculated only on the farmer’s contribution and not on the total policy premium. It's pertinent to note that the latter includes a component that the government defrays as a subsidy to keep the scheme within reach for farmers. The farmer’s contribution is thus capped and considerably lower compared to the subsidy paid. Hence the commission will not likely be remunerative for the agent. Effectively, it's the banks who advance loans to farmers that are acting as the intermediaries in this insurance scheme, even though they are technically only a premium channelling agency to the insurers.

To give a perspective, assuming a total premium of Rs.2500 to cover a certain farm, the contribution of the farmer could be about 25% which is Rs. 625 and the government subsidy would be the remaining Rs. 1875. The agency commission payable @ 15% on the farmer’s contribution works out to Rs. 93.75. This amount does not cover even the overheads for an agent in terms of running around for premium collection and providing claims settlement assistance, leave alone generating a decent livelihood for himself and his family. Unless an agent can consolidate a large number of farmers, the commission earnings will not simply add up and won't be attractive enough.

Current levels of penetration of the scheme has been achieved by enrolling loanee farmers, mainly through compulsive action by the bankers who have a financial exposure to the crop being cultivated. Banks are paid a fee for this enrolment. Voluntary enrolment of farmers has been quite low (less than 10% of total enrolment as per anecdotal evidence). For the scheme to gain acceptability amongst farmers and succeed over a longer time horizon, it’s imperative that farmers join the scheme voluntarily and not through compulsion or coercion. Providing a space for intermediaries other than banks to distribute the product could have increased voluntary enrolment.

Why is it that there is so much aversion or indifference to intermediaries? I would think this is more of a mindset issue.  The intermediary or the dalal is often described in a pejorative way in Indian context. Someone who needs to be kept away from transactions as much as possible. Nevertheless it's counter-intuitive to assume that they exist for no reason without any value-add, enriching only themselves under all circumstances. If that be so, why should businesses worldwide engage intermediaries in their transactions? An intermediary helps in reducing the fixed cost a company would have otherwise incurred had it created an infrastructure to directly sell to customers. The intermediary earns only if he posts a sale or seals a deal unlike staff engaged by companies who need to be paid fixed salaries irrespective of any sales outcome.

An agent or an intermediary does serve a useful purpose in an insurance transaction. He educates the customer about various products, the need thereof and thus helps in making an informed buying decision. Besides this, he helps the customer in filing claims and in securing payment from the insurer through follow up. In case of the government’s scheme, none of the parties involved - the government, the banks or the insurers - can ever provide the personalised service and attention to the farmer that an agent can.

Besides improving penetration by better distribution, encouraging intermediation would have resulted in job creation as well. More rural people would have got involved in selling of the product by becoming agents. The same rural agents could have got into cross selling of other government run schemes like Universal Health Insurance, making a rural non-life insurance agency model financially viable for the agent. Voluntary selling of the government-run products would have increased which in turn would have ensured better credibility and increased mindshare amongst public for government insurance programmes.

Alas but that's not to be. Intermediaries, please excuse!

Note: Views expressed are personal