Natural Disaster Insurance in China: Practice and Lessons Learned


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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

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