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Natural Disaster Insurance in China: Practice and Lessons Learned

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Natural Disaster Insurance in China: Practice and Lessons Learned

Natural Disaster Insurance in China: Practice and Lessons Learned

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  • 1. Natural Disaster Insurance in China: Practice and Lessons Learned
    Ming Wang
    Associate Professor
    Beijing Normal University
  • 2. Outline
    New Agriculture Insurance Program
    Experimentation of Catastrophe House Insurance
    Proposals of Catastrophe Insurance
    Challenges Identified and Suggestion
  • 3. Integrated Disaster Reduction Strategy
    National Development and Reform Commission
    Office of Emergency Response,
    State Council
    China Insurance Regulatory Commission ?
    Ministry of Finance ?
    Ministry of Civil Affairs
  • 4. History of Agriculture Insurance in China
    (1)
    (2)
    (3)
    1950
    1958
    1982
    2007
  • 5. Understanding of the Four Principles
    “Guided by government”
    Initiated and launched under fiscal support
    Not policy-based insurance: limited liability and support; subsidize premium for policy-holders
    Risk is undertaken by insurance industry only
    “Market operation”
    Should not establish policy-based institution/company specifically for agriculture insurance
    Rely on existing commercial insurers
    “Voluntary participation”
    “Carried forward under joint forces”
    Central and local government
    Government and insurance industry
    Supporting institutions: meterological, water, agriculture..
  • 6. Operational Model
    (2)
    >10%
    (1)
    Farmers
    Insurer at county level
    Government at county level
    <30%
    (5)
    (4)
    35%
    25%
    Insurer at province level
    Provincial government
    (3)
    35%
    Central government
    Step(1): Farmers’ payment
    Step(2): Local government subsidy
    Step(3): Central government subsidy
    Step(4): Provincial government subsidy
    Step(5): Reserve 25% of premium
  • 7. Details in Crops Insurance Policy (2007)
    Source: Peijun Shi et al.
  • 8. Farmers knew the program?
  • 9. How they knew it?
  • 10. Quick Summary
    Too much government act
    Against market operation principle
    However, government helped to educate the market and subsidies are driving force for both insurers and farmers.
    Business grows rapidly.
  • 11. Crops and livestock loss v.s. Insured Amount
    381billion
    end of 2009
    240billion
    end of 2008
    < 30billion
    (before2007)
  • 12. New progress in 2009
    Experimentation of “market operation” on pig, forest and hybrid rice: insurers determine coverage, premium rate and limit.
    Establishing catastrophic disaster fund: government provide matching fund to the reserved premium, and set up an independent account managed by city government.
    In Hunan, subsidy for operating cost is approved at provincial government
  • 13. Legal Basis for Catastrophe Insurance
    Flood Control Lawof The People‘s Republic of China (promulgated on August29, 1997)
    “Article 47 …The state encourages and supports flood insurance”
    Law of the People’s Republic of China on Protecting Against and Mitigating Earthquake Disasters (promulgated on December 29, 1997)
    “Article 25 The state encourages units and individuals to participate earthquake disaster insurance”
    Modified in 2008, ““Article 45 The state develops the earthquake insurance system under the national fiscal support, and encourage ….”
    Emergency Response Law of the People's Republic of China (promulgated on August 30, 2007)
    Article 35 …The country is to establish a insurance system for large-scale disasters under the national fiscal support, and encourage units and individual citizens to participate the insurance program.
  • 14. Farmers’ House Insurance for Natural Disasters
    Zhejiang province
    Voluntary participation
    Divided into two risk zones
    Basic premium RMB 10 or 15 per household
    Farmers pay RMB 3 to 5 Yuan, and option for full subsidy
    Max. indemnity RMB 3600 Yuan per dwelling, up to RMB 18,000 Yuan per household.
    Penetration rate: ~95%
    In 2007, premium collected 116 million Yuan, total indemnity 73.5 million Yuan (63.4%)
  • 15. Farmers’ House Insurance for Natural Disasters
    Chenzhou city in Hunan province
    Mandatory participation
    Basic premium: 11 RMB Yuan in which 10 Yuan is for house coverage and 1 Yuan for post-disaster living cost coverage
    Full subsidy
    Max. indemnity 5000 Yuan for house and 1000 Yuan for living cost
    Penetration rate: ~96%
    In 2007, premium collected 9.69 million Yuan and indemnity 17.12 million Yuan (177%); in 2008, premium collected 9.33 million Yuan and indemnity 10.97 million Yuan (118%)
  • 16. Proposal from Financial Committee of NPC, 2008
    Market operation with government support (subsidy and tax benefit)
    Focus on residential houses and all-in-one policy
    Consider regional difference
    Start with experimentation
    Catastrophe insurance fund operated independently
  • 17. Proposal Submitted to NCDR
    Led by government with fiscal support
    Compensation mechanism with clearly defined responsibility
    Meet fundamental need and consider regional difference
    Encourage international cooperation and risk sharing
    Start with experimentation with centralized budget (EQ)
  • 18. Earthquake premium rate at county level
    There is a gap between people’s WTP and cost of risk financing,
    therefore subsidy is necessary.
  • 19. Suggested Government Subsidy Percentages according to the Classification of Cities and Counties
  • 20. EQ Micro Insurance Proposal
    Source: Risk Management Solutions Inc.
  • 21. EQ Micro Insurance Proposal
    Average value of a rural house ~ 66,800 RMB
    Policy coverage
    Limit of 16,000 RMB
    Policy type – step policy (to minimize operational costs)
    Full limit (16,000 RMB) for a collapsed or red tagged (uninhabitable) house
    No payment for other levels of damage
    Individual annual premium = 10 RMB (affordability!)
    Total countrywide premium: 550 million RMB
    Claims and client services - insurance agencies and village organizations
    Source: Risk Management Solutions Inc.
  • 22. Program Structure
    Source: Risk Management Solutions Inc.
  • 23. Internal Project Conducted by Ministry of Finance
    Project title: Research on Institutional Design of Catastrophe Insurance.
    Framework of establishing catastrophe insurance system was completed.
    A symposium was held in November of 2009 (feedback collected).
  • 24. How will the new program help commercial insurance market?
    How will the new program help low income population?
  • 25. Challenges Identified
    Lack of a government authority whose role is clearly defined to deal with disaster risk financing
    Lack of risk sharing mechanism and government faces financial pressure
    Lack of clear definition of catastrophic disaster (or large-scale disaster)
    Most rural areas have limited capacity against disasters
  • 26. Suggested Institutional Design
    Government, Insurers, Reinsurers and policy-holders adopt a risk sharing mechanism
    Establish a coordinating commission for catastrophe risk management
    Emphasize that catastrophe insurance is one of the components in integrated disaster reduction strategy.
    Start with one peril as experimentation
  • 27. Thank you!
    Ming Wang
    wangming@ires.cn
    Beijing Normal University