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UPDATED: April 4, 2008 NO.15 APR.10, 2008
Ag Insurance: A Hard Row to Hoe
High premiums, few insurance varieties and low awareness of insurance are the three obstacles to promoting Chinese farm insurance

SAFETY NEW: The owner of a pig farm in Huaying, Sichuan Province, who signed an insurance agreement for his 296 sows, holds one of his piglets

The snowstorms that hit south China in early 2008 rang alarm bells for improving social early-warning mechanisms. Farm insurance is one of the things that were found to need vast improvement.

The storms were the worst since 1954, affecting 77.86 million people in 20 provinces (autonomous regions and municipalities) in south China. By February 24, direct economic losses had reached 151.65 billion yuan ($21.66 billion). Rural areas were most seriously affected, where 4.22 million hectares of farmland was hit, accounting for one third of China's total cultivated land. In this time of need, farm insurance should have played its role. However, by February 24, only 919,000 cases had been claimed and 1.28 billion yuan ($182.86 million) of indemnities paid. Of the total, farm insurance indemnities only stood at 44.63 million yuan ($6.38 million), 3 percent of the total indemnities.

Yuan Li, spokesman of the China Insurance Regulatory Commission, said that because of the time difference in settling the claims, it is believed that farm insurance indemnities will continue to increase. However, much of the damages will not be compensated because they are not covered by insurance.

According to Yuan, based on previous experience, only 3-5 percent of losses can be covered by farm insurance, while the claim rates in foreign countries are about 30 percent.

The deficiencies of China's farm insurance system, 3 percent and 30 percent, have been uncovered by these serious storms.

During this year's session of the National People's Congress, Premier Wen Jiabao said that this year, the government will actively expand the scope of farm insurance and carry out reforms of policy-based farm insurance.

The fiscal budget report submitted by the Ministry of Finance indicates that in 2008, the central budget will allocate 6.05 billion yuan ($864.29 million) to improve the subsidy system for farm insurance premiums, nearly triple the figure of 2007, meaning that policy-based farm insurance will make new breakthroughs this year.

Tuo Guozhu, professor at Capital University of Economics and Business, thinks that after the snowstorms farmers are more enthusiastic to participate in farm insurance. Strengthened fiscal support this time conforms to this situation. The input of 6.05 billion yuan ($865 million) indicates that farm insurance may achieve breakthroughs in terms of increasing insurance types and expanding subsidy scopes this year.

Wu Yan, President of People's Insurance Co. (Group) of China (PICC), contends that subsidies for farm insurance premiums can multiple the effects of central budget input in agriculture by farm insurance. "This is a very meticulous mechanism arrangement," he said.

Many balk at participation

"I really considered selling all the pigs I had left and never breeding pigs again." When recalling the disaster he faced in 2006, Niu Chengfu is still fearful.

In the second half of 2006, blue-ear pig disease hit south China, causing large-scale abortions of sows and deaths of piglets. Among the total 80 pigs raised by Niu, 30 died of this disease, leading to losses of more than 10,000 yuan ($1,428). All his efforts and investment over half a year lost, since he had not insured his pigs.

In fact, insurance in the breeding industry covers live pigs, so why didn't Niu insure his pigs? "It's not that I didn't want to participate in the insurance, but had no access to the insurance," he said resignedly. According to the requirements, sows and piglets weighing more than 10 kg can be insured, and the annual premium for each pig is 80 yuan ($11), until the pig becomes full-grown and ready for slaughter.

"After deducting breeding costs, the profit for raising a pig was only 300 yuan ($42.86) at that time, but premium accounted for more than one fourth of it," Niu said. To prevent losses, Niu is now willing to buy insurance. But the insurance only covers pigs of more than 10 kg, while piglets below 10 kg are very likely to die.

Actually, insurance companies have no choice but to be so prudent. Since the recovery of the farm insurance industry in 1982, its business has been mainly carried out by PICC. Under the planned economy, costs and profits were not under consideration, and many insurance types were developed all over the country. In the peak time of 1993, premium income of farm insurance totaled 830 million yuan ($118.57 million), but the indemnities also reached 116 percent of the premium. In 1996, PICC was commercialized and farm insurance profits began to shrink. In 2002, farm insurance saw the largest decline in over 20 years, with its premium revenue standing at 640 million yuan ($91.43 million), accounting for 0.04 percent of the total output value of agriculture. After PICC was listed on the Hong Kong stock exchange in 2003, it abandoned most of its farm insurance business for consideration of economic returns.

China is the largest agricultural country in the world with frequent natural disasters. Every year, natural disasters cause economic losses of over 100 billion yuan ($14.29 billion) and 200 million people are affected-manifestations that farm insurance is indispensable.

However, during the process of promoting farm insurance, because of high risks and high operation costs, prices of farm insurance are much higher than those of other insurance types, while farmers' incomes still remain at a low level. For all these reasons, farmers are not enthusiastic about buying insurance, and when in difficulty, they are likely to seek government aid.

Hao Yansu, President of the School of Insurance under the Central University of Finance and Economics, said that at present, most people regard the government as the first line of defense when natural disasters occur. In his opinion, this is inadvisable and people should enhance their ability to cope with natural disasters by themselves. When thinking of some disasters that cannot be dealt with by themselves, they should go to insurance companies to divert their risks. The society and the government should be the third and fourth line of defense.

Improving the insurance system

In contrast with the bitter experience two years ago, Niu's life has changed greatly. Since July last year, pork prices have been soaring, six times of those in 2006. Niu has not only repaid his debts for raising pigs in the previous years, but also bought a truck worth 200,000 yuan ($28,571).

"Now raising pigs makes money, and the risks are smaller." He attributed all this to the policy of farm insurance subsidies carried out in Guangdong since August 2007. According to local provisions, losses caused by natural disasters, insects and plant and animal epidemic diseases can all be compensated. The insurance amount is 400 yuan ($57) per live pig, 6,000 yuan ($857) per cow and 15,000 yuan ($2,142) per hectare of orange orchards. Premiums are fixed by means of public bidding. Participating in farm insurance is on voluntary basis, and the farmers only need to bear a small proportion of the premiums, with the rest covered by subsidies from local governments.

"Farmers only need to pay 12 yuan ($1.71) and the government subsidizes 48 yuan ($6.86) for a pig, and the highest indemnity for a sow is 1,000 yuan ($142)," Niu said. According to him, right after signing the insurance policies, the insurance company will return the 48 yuan of government subsidy for each pig.

According to Hao, this pattern is quite mature in foreign countries. In the United States, over 50 percent of premiums of crops are assumed by the government, while in Japan, the government fixes subsidies on premiums for different crops, with the highest proportion surpassing 70 percent.

However, Niu still believes the insurance types are too limited and the threshold is high, since many crops that need insurance are not included. Particularly, the sudden snowstorms this year make his heart fearful still.

Niu's worries may be relieved this year. According to information from the Ministry of Finance, it will research subsidy measures on premiums for planting and breeding industries, explore the establishment of a farm reinsurance system and natural catastrophe risk management mechanism, enhance the ability of the farm insurance system against risks and cope with catastrophe indemnities caused by extreme weather and climate.

In March, Minister of Finance Xie Xuren told the media that his ministry will further promote reform of the farm insurance system this year based on experiences of pilot projects: It will increase subsidies on premiums, with the rate for the planting industry reaching 35 percent. It will also enlarge the subsidy scope and grant support to provinces with enthusiasm, ability and conditions to develop farm insurance, especially major grain-producing provinces.

Yuan from the China Insurance Regulatory Commission noted that the policy support from the central budget will bring about a systematic transformation and that it is a historic leap to encourage farmers to buy insurance through granting subsidies to premiums and establish a market-oriented risk-sharing system.

"As the experiment of farm insurance is being carried out and effects of indemnities after the snowstorms are seen, farm insurance will see increasingly evident systematic change, which will greatly promote the development of its own and even the whole insurance industry," Yuan said. A mature and improved farm insurance system will protect more farmers. Even if another disaster occurs, they will feel less harm but more courage and confidence of rebuilding their homes.

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