China is set to significantly expand the roll-out of an agricultural disaster insurance scheme that has been in pilot mode since 2017, as it has found the results positive in helping small and mid-sized farmers protect their incomes and recover more rapidly from weather and natural catastrophes.
The Chinese government first rolled out the pilot agricultural disaster insurance program to 200 of its major grain producing counties across the country in 2017.
These counties participated in the pilot phase of the new agricultural disaster insurance program, as China looked to modern risk transfer practices to help its farmers increase their incomes.
China has been steadily integrating insurance practices into areas such as its provision of agricultural financial support.
Historically, the Chinese government provided agricultural disaster finance that was effectively government support for farmers when weather and climate related catastrophe events wiped out crops and livelihoods.
This kind of funding had been provided in pools of capital per-region, but each year they were repeatedly drained, which has raised the priority of finding new ways to deliver capital support to the countries farming communities.
Insurance and reinsurance, particularly parametric, has increasingly gained favour, with even the highest levels of China’s State Council expressing a desire to find market-based solutions to agricultural weather and catastrophe impacts.
These initiatives continue to make progress, with the recent announcement that China will more than double the size of its agricultural disaster insurance scheme this year.
Beginning this year, China’s Ministry of Finance intends to expand the pilot scope of the agricultural catastrophe insurance scheme, increasing it from the 200 pilot counties to reach 500 pilot counties.
Growth is expected to be across the country, with Heilongjiang, Henan, and Shandong will each add 30 pilot counties, while Hebei is adding more than 20 and other provinces similar.
The insurance program covers a basic level of direct replacement costs of crops that were damaged, as well as a higher level of coverage that can also cover the costs of land rent as well.
This can be particularly important, as after farmers lose their crops to severe weather or climate related disasters such as flooding, their income is limited and it can be harder to meet land rent charges.
We understand that while the coverage for farmers is largely indemnity based, the programs themselves are being looked on as suitable to cover with parametric reinsurance, which would pay out on the occurrence of specified weather or disaster events exceeding a pre-defined severity.
This is something China has been looking at for some years now, a layered approach to protection that leverages fast income replacement insurance for farmers, parametric coverage for counties and provinces, with the next step perhaps being a level of financial protection for the government itself to finance these schemes on an ongoing basis.
It’s at the government level that it could become really interesting, with the use of capital markets backed sources of reinsurance a clear option, as well as instruments such as parametric catastrophe bonds.
It’s encouraging to see China continuing to promote the use of insurance, in place of government handouts, to support lives and livelihoods of its farming communities.
Other pilot programs are being worked on to cover other areas of the economy and the end-result will be a steady transfer of weather and disaster risks to the private markets, with the resulting narrowing of the economic to insured loss protection gap.