Parametric insurance launched for farmers in China, backed by Swiss Re

The first parametric disaster insurance programme for farmers in China has been launched, covering participants against the impacts of flood, excessive rain, drought and low temperatures in 28 counties across Heilongjiang province.

Global reinsurance firm Swiss Re has provided the risk transfer required to back this new parametric insurance programme, by entering into a reinsurance arrangement with the government of Heilongjiang Province and the Sunlight Agriculture Mutual Insurance Company of China.

It’s the first time that the Chinese government has utilised commercial insurance products to protect farmers in the country against the financial risks associated with weather and catastrophe risks, a step forward in the greater adoption of insurance and reinsurance in the country.

The innovative parametric insurance products use satellite and weather data sources to enable for rapid payouts, using triggers designed to cover the perils of flood, excessive rainfall, drought and low temperature.

Another important innovation is the fact that this programme is the first tailored solution that combines both a weather index product with a satellite-based flood parametric product, something that could perhaps be utilised in developed countries as well as a way to increase flood insurance uptake.

Swiss Re acted as both technical adviser and sole reinsurance capacity provider for the parametric insurance programme and was responsible for designing the scheme and its triggers, using advanced modeling technology.

Swiss Re Global Partnerships Chairman Martyn Parker commented; “This is a real innovation and a groundbreaking success in supporting China to protect against fiscal fluctuation caused by natural disasters. It has also set up an excellent example of public private partnership in mitigating natural catastrophe risks with insurance programmes.”

Swiss Re President for China John Chen added; “It is one of the top priorities of the government bodies in China to better manage natural catastrophe risks, and it has been the desire of the insurance companies in the market to play a bigger role in this sector. We are pleased to bridge the cooperation with an innovative solution and would look forward to replicating the solutions for other provinces in China.”

The programme is also hailed as the first anti-poverty insurance arrangement in China, and a public-private partnership that enables raid disbursement of funds for farmers and ultimately covers the Heilongjiang government, which would otherwise have been using its funds to enable recovery.

China has a complex arrangement of agricultural financing systems, including pools of capital set aside for enabling farmers to recover from weather, climate and natural disasters. Those pools of capital are state-backed and have never been insured. Programmes such as this will enable the Chinese local, state and national government to become less reliant on their own capital and to draw on international insurance and reinsurance markets to finance agricultural recovery post-disaster.

Swiss Re explains; “This solution, which is the first of its kind, determines insurance payouts based on triggers from satellite and meteorological data. Compared with traditional insurance, this programme enables a greater efficiency in payments and therefore strengthens the governments’ capability in emergency management. With this programme, the local governments will have capital available for disaster relief and post-disaster reconstruction in the event of a severe disaster.”

28 poverty-stricken counties in Heilongjiang Province in Northeast China are covered by the parametric insurance scheme. It will provide financial compensation for harm to lives and property of farming families and covers loss of income after floods, excessive rain, drought and low temperatures. The total insurance coverage in place under the scheme for the 28 pilot counties is up to RMB 2.32 billion (or USD 348 million).

Bear in mind that this is a single province and not even every county in that province. The $348m of coverage is actually quite a large number and if the programme was successful and scaled out to the rest of China’s agricultural counties the coverage required could be huge.

Being parametric, the programme could in the future look to the capital markets as a way to secure the reinsurance required to back the scheme, with catastrophe bonds a clear choice that could enable Chinese farmers to benefit from the efficiency of the capital markets in years to come.

Heilongjiang is highly exposed to weather and natural disasters, with an expectation that impacts will increase as the climate changes. Substantial and unexpected payouts for disaster relief and post-disaster reconstruction are considered a significant financial risk for the provincial and prefectural governments across China.

The insurance solutions offered by this parametric programme will help people by reducing the risk of poverty following such events, therefore protecting lives and livelihoods, as well as benefiting the governments by removing the financial burden from their budgets.