New government fiscal, taxation and regulatory policies aim to develop the agricultural insurance market
China’s agricultural insurance market took a step forward when, on June 26, the State Council issued a document on the reform and development of the insurance industry, granting key support to agricultural insurance.
The document, entitled Suggestions on the Reform and Development of the Insurance Industry, stipulates that insurance should be included as part of the agricultural support system. It also proposes a “three subsidies” policy of subsidizing farmers, insurers and reinsurers, and suggests the establishment of a catastrophic risk insurance system financed by the state.
“This will completely change the deadlock of the agricultural insurance market’s slow development or even retrogression caused by the incapacity of the farmers to buy insurance and that of the insurers to provide compensation,” said Professor Tuo Guozhu from the Capital University of Economics and Business.
Tuo, who studies China’s insurance industry, expressed strong support for the government’s new policy, believing that it will change Chinese farmers’ fate for thousands of years of “living by nature.”
On June 30, a strong hailstorm hit some villages in Yantai, Shandong Province, destroying all their watermelon patches, pepper plants and apple orchards within 20 minutes. In the wake of such a disaster, farmers have no ability to protect their livelihood. All they can do is to grow other crops. Because they did not have insurance, they did not receive compensation for their losses.
“Over 80 percent of Chinese farmers do not have agricultural insurance so they cannot enjoy the guarantees provided by such insurance,” Tuo said.
Because China’s agriculture is still traditional, with limited ability to resist disasters, the majority of agricultural areas suffer the consequences.
A slow start
In 1982, China launched a commercial agricultural insurance market, but with less satisfactory results. In 1993, premium revenue from agricultural insurance nationwide hit an all-time high to 830 million yuan, but the amount began to decline after that. In 2005, the total premium revenue of China’s insurance industry was 492.7 billion yuan, but that from agricultural insurance was only 520 million yuan. Considering the 230 million farming families around the country, that amounts to an average premium of 2 yuan per family.
“The main reason is that farmers cannot afford agricultural insurance premiums,” Tuo said.
According to the National Bureau of Statistics, in 2005, the average income of farmers was 3,255 yuan, which was used to buy daily necessities, support elderly family members and pay for children’s education. In addition, most farmers have no pension or medical benefits, so they must try to save some money for those needs, as well as for emergency use. Thus, it is difficult for them to consider buying agricultural insurance.
“Another reason is that insurers are unwilling to provide agricultural insurance,” said Ji Yuhua from the Development and Reform Department of the China Insurance Regulatory Commis-sion.
The high risk of agriculture and the high loss ratio of agricultural insurance make the insurers unwilling to develop that market. Research shows that the ratio of compensation claims to premiums is 88 percent, much higher than the accepted critical point of 70 percent, so that those who offer such insurance tend to operate at a loss. Insurers thus must raise their premium rates, so that the cost of agricultural insurance is always higher than that for other types of insurance.
In general, the agricultural insurance premium rate is between 2 and 15 percent of the insured amount, while that of ordinary commercial insurance is 1 percent.
“Traditional agricultural insurance refers to insurance for crops and livestock―the most urgent items for farmers―but the risk is very high, so that commercial insurers are unwilling to provide the service. Hence farmers have nowhere to buy agricultural insurance,” Tuo said.
Developing the market
At present, China has six insurance companies that offer agricultural insurance―the People’s Insurance Co. of China, China United Property Insurance Co. and the four specialized agricultural insurance companies set up in 2004.
At the beginning of that year, the China Insurance Regulatory Commission proposed guidelines for developing the agricultural insurance market and authorized the four specialized companies. They are Shanghai Anxin Agricultural Insurance Co., Ltd., Anhua Agricultural Insurance Co., Ltd., Heilongjiang Sunshine Mutual Agricultural Insurance Co., Ltd. and the Chengdu branch of France’s Groupama, China’s first foreign-funded agricultural insurance company.
Shanghai Anxin offers crop and livestock insurance, which is required to make up no less than 60 percent of its total business volume, but the other companies provide very little service for those items, concentrating mainly on insurances for farmers’ household properties, accidents and health.
Wu Dingfu, President of the China Insurance Regulatory Commission, said, “It’s not that farmers do not want to buy agricultural insurance but they have no place to do so.”
According to Wu, the commission has been paying great attention to developing the market, launching various pilot projects and authorizing specialized agricultural insurance companies to support these projects. However, in recent years, agricultural insurance premium revenue has continued to decline, due to the inadequate support from the government and the refusal of commercial insurers for fear of making losses, experts say.
Since the agricultural insurance industry is a new one, however, there are other factors restricting its development.
In urban areas, there are many insurance salesmen promoting different kinds of insurance. However, the agricultural insurance market has few professional salesmen.
In addition, Chinese farmers’ traditional idea of living at the mercy of weather prevents them from purchasing agricultural insurance.
Furthermore, the incomplete agricultural insurance system and a lack of relevant regulations hinder the development of the market.
Guo Zuojian, Deputy Director of the Property Insurance Regulatory Department of the China Insurance Regulatory Commission, said the current aim of agricultural insurance is to improve the farmers’ capability to resume normal life and production after a disaster.
“Given the current situation, it’s impossible to create a scientific, effective and perfect agricultural insurance system in a short time,” he added.
The government’s impact
The situation has forced the Chinese Government to reconsider its impact on the market. The Suggestions on the Reform and Development of the Insurance Industry, for the first time, grants government financial and taxation support to agricultural insurance, which used to be categorized as a sole commercial operation.
The document stipulates that the state treasury and local financial authorities will provide subsidies to agricultural insurance according to the type and amount purchased by farmers. Subsidies are also provided to insurance companies for the cost in operating and managing policy-related agricultural insurance, and an agricultural reinsurance system will be set up with the financial support from the central and local governments.
Ji of the China Insurance Regulatory Commission thinks the Central Government’s financial support marks the biggest breakthrough in the development of agricultural insurance since it was introduced in 1982.
According to Ji, the past lack of government support has had the following two results. First, because farmers’ incomes are low, they cannot afford agricultural insurance, and the problem cannot be resolved without state subsidy. Second, because of the lack of financial support, the amount and type of insurance coverage cannot be expanded and improved. Setting premiums at the rate for commercial insurance operations means farmers cannot afford insurance, while setting premiums according to standards that farmers can accept means insurers cannot afford to provide compensation for losses.
In fact, it is a common international practice for the government to actively support agricultural insurance. Such countries as the United States and Japan provide subsidies to insurance premiums for farm crops, with the ratio for some crops reaching 70 percent in Japan.
Ji said subsidies can solve three main problems: the farmers’ unaffordability of insurance, the high operational costs of agricultural insurance, and the difficulty of diffusing catastrophic risks.
“With the government’s financial and taxation support, agricultural insurance will develop rapidly for sure,” he added.
According to Ji, government subsidies mainly involve three parts. The first is premium subsidies. These should mainly apply to such staple crops as rice, wheat, corn, soybeans and cotton, and the average subsidy rate should exceed 50 percent. The second part refers to subsidies to commercial insurance companies that offer agricultural insurance, with the amount of subsidies determined by specific conditions. The third part refers to subsidies to reinsurance companies for the building of catastrophe compensation funds. Reinsurers acquire policies from other insurance companies to spread the risk of loss.
Prospects brighten
The market for agricultural insurance is broad. The China Insurance Regulatory Commission has decided that agricultural insurance is one of the four key insurance categories, along with endowment insurance (a type of life insurance), health insurance and liability insurance. Given that the insurance coverage rate in cities is high, the main area of competition in China’s insurance market will gradually shift to rural areas.
According to the commission, the country’s agricultural insurance market is open to all types of capital, and all types of commercial insurers are encouraged to offer agricultural insurance.
Currently, France’s Groupama is the only foreign-funded insurance company to participate in China’s agricultural insurance market.
The outlook has brightened considerably this year, with agricultural insurance premiums for the first six months exceeding 600 million yuan.
Some experts estimate that, with subsidies from the Chinese Government, agricultural insurance premiums will reach 2 billion yuan in 2008, an average of 10 yuan per family against the present level of 2 yuan. This will attract more insurers to participate in the market.
Anhua Agricultural Insurance Co., Ltd. is reportedly planning to open provincial-level branches in Beijing, Shandong and Inner Mongolia with authorization from the China Insurance Regulatory Commission.
“We will not abandon such a good opportunity to grasp the agricultural insurance market,” said Zong Guofu, the company’s president.