IRDAI flags pricing risks in PMFBY, proposes one-third premium for EoM calculation
IRDAI has proposed that only one-third of the gross premium under the Pradhan Mantri Fasal Bima Yojana should qualify as gross direct premium income for Expense of Management calculations, seeking to curb aggressive pricing, address systemic risks and encourage actuarially sound participation.
Join the RuralVoice whatsapp group
The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a significant change in the way insurers' participation in the Pradhan Mantri Fasal Bima Yojana (PMFBY) is considered for regulatory Expense of Management (EoM) calculations, citing concerns over aggressive pricing, systemic risk and the sustainability of crop insurance.
In its consultation paper released last week, “Recalibrating Economics of Insurance Distribution,” IRDAI observed that PMFBY has witnessed severe competition among insurers. According to the regulator, this competition has been driven more by the need to meet EoM compliance requirements than by a clear underwriting strategy for crop insurance, which is a key priority line of business.
The regulator has particularly flagged the impact of the “cup and cap” model adopted by some state governments under PMFBY. Under this arrangement, insurers can bid aggressively because their maximum liability is capped at 130% of the premium.
IRDAI said such aggressive pricing could create a systemic risk. In the event of extreme weather events, which have become increasingly prevalent, state governments could be left with substantial risk exposure. The regulator also cautioned that such circumstances could adversely affect farmers.
Against this backdrop, IRDAI has proposed that only one-third of the gross premium earned under PMFBY should qualify as Gross Direct Premium Income (GDPI) for calculating EoM.
The proposal is based on the regulator's observation that the acquisition cost involved in PMFBY is not proportional to the premium. Treating only one-third of the gross premium as GDPI for EoM purposes would, according to IRDAI, provide adequate incentives for insurers while discouraging participation driven primarily by the need to utilise permissible management expenses.
The proposed approach is also intended to encourage participation by serious insurers and facilitate a return to actuarial pricing, under which premiums are more closely aligned with underlying risks.
The consultation paper is currently open for stakeholder feedback. The last date for submission of comments and feedback is October 25, 2026.
