The Chinese government has announced that 200 of the major grain producing counties in the country will participate in a pilot of a new agricultural disaster insurance program, as it looks to leverage risk transfer to help its farmers increase their incomes.
China faces numerous catastrophe and severe weather risks, with its agricultural sector particularly threatened by disasters that can wipe out profitability for farmers on successive years.
As we’ve written previously, the size of the Chinese agricultural sector and the number of livelihoods that depend on the sector, combined with the country’s high exposure to natural disaster events, suggests more can be done to ensure greater access to affordable and effective disaster insurance or risk transfer coverage.
The Chinese government is constantly taking steps to enhance the protection of its citizens and an announcement from its State Council shows that agriculture is a particular focus.
The government aims to start a new agricultural disaster insurance pilot, with 200 of the highest grain producing counties set to be included at the start.
The counties selected for the pilot disaster insurance program will be largely grain producers, taken from the 13 leading grain-producing provinces in China.
The Ministry of Finance of China has stressed that it wants local or regional governments involved in the pilot disaster insurance scheme to explore innovative insurance models to achieve disaster insurance risk transfer, and then to share their experiences at the end of the pilot.
We’re told by a source in the country that this will involve a focus on indemnity protection, for loss of livelihood, and also parametric or index-triggered insurance and risk transfer products that can offer more rapid payouts.
It seems that a combination, or hybrid, insurance product that offers quicker payouts using parametric triggers to farmers that have a chance of recovering after a disaster or severe weather event strikes, as well as indemnification against total loss of livelihood and crops could prove a model that would work in China.
The goal is not just to protect farmers, but also to relieve the burden faced by local, regional and national government in China, as the majority of the costs of natural disasters and severe weather still fall to the authorities to pay for.
This is why the government should also buy reinsurance protection, or capital markets risk transfer, for its disaster insurance schemes, in order to transfer the disaster risk away from China’s government and offshore into the diversified risk transfer and reinsurance markets.
The fact that risk transfer is such a high priority for the government and State Council of China is positive and will likely result in an increasing amount of disaster insurance premium being underwritten in the country, with the subsequent increased demand for disaster reinsurance protection.
The steady progress towards increasing insurance cover will naturally result in more reinsurance capacity being required in China, offering opportunities for ILS funds, the catastrophe bond market and other capital markets risk transfer solutions to play a role.
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