As the effects of global warming intensify, the probability of extreme weather events increases, accompanied by more frequent agricultural catastrophes, often costly. In the face of agricultural catastrophes, agricultural insurance to protect the interests of individual farmers is particularly crucial. What is the participation rate of agricultural insurance? Is the current level of agricultural insurance sufficient to meet the challenge of climate change? This magazine interviewed Professor Tuo Guozhu of Capital University of Economics and Business.
Professor Tuo Guozhu has been engaged in the research of agricultural insurance since 1984 and is one of the earliest researchers of agricultural insurance in China. He told this magazine that agricultural insurance, which can only be operated by relying on the government, is essentially a competition between the central government and local financial resources. Although China is already one of the top agricultural insurance countries, there are still problems of inaccurate damage assessment and claim settlement, and limited insurance amount. In the face of increasingly frequent catastrophe challenges, the agricultural insurance system needs more professional management institutions with limited financial resources.
The risk of agricultural catastrophes is rising
Sanlian Life Weekly: In recent years, the impact of global warming has become more and more obvious. In April this year alone, the rain fell nearly twice as much in Guangdong Province in April as a whole, and the earliest flood in the country since the country's numbered flood statistics began in 1998. What is the impact of these abnormal meteorological disasters on agricultural insurance?
Tuo Guozhu: Natural disasters such as droughts, floods, storms, insect pests, and epidemics that cause great damage to agricultural production are called "agricultural catastrophes" because of their wide coverage and heavy losses. At present, the risk of agricultural catastrophe has become more prominent, and disaster risk management has become more complex. Two data can prove that one is the coefficient of variation of the disaster rate (crop damage area/total sown area) in each province, that is, the variability of crop damage in different years and different regions. Second, according to the forecast of the National Climate Center, the average concentrated rainfall in China will change from the current once in 50 years to once in 20 years, and the extreme drought event will change from the current once in 50 years to once in 32 years, and the probability and risk of compound extreme events will continue to increase, which means that agricultural catastrophe events with "small probability and high impact" will be more likely to occur. However, the increase in risk should be reflected in the rate of insurance, and the previous agricultural insurance rate was relatively high, so the rate performance is not obvious.
However, there is also a changing side to agricultural losses. For example, if a flood occurs in a rice-producing area, except for the part of the rice field that is directly washed away, if the flood inundates the rice field for more than seven days and the rice is drowned, it must be compensated immediately. And if the flood waters recedes within seven days, you have to wait until before the harvest to see the damage. Because the subject matter of agricultural insurance is living organisms, it has the ability to recover and regenerate. There are many examples of similar disasters and bumper yields. I remember more than 10 years ago, when I was squatting in the countryside to investigate, the corn was growing very well, it had grown two feet high, and suddenly a hailstorm broke the corn stalks, and the seedlings were torn apart, and they were beaten and lying in the muddy water. Farmers cry at the edge of the field and grab the land. But in autumn, it is a bumper harvest of autumn grain. I summed up with the agricultural technology cadres and found that after the hailstorm, the production team organized the farmers to strengthen management, lift up the stalks that had fallen to the ground, and tie them with straw ropes, so that the corn could continue to grow. At that time, chemical fertilizer was still in short supply, and the hail contained nitrogen, which was equivalent to applying nitrogen fertilizer to the land once, and the moisture was also very good after hail. These factors contributed to a bumper harvest. Therefore, there may not be a direct correspondence between a catastrophe and the corresponding compensation.
In terms of the area affected, there has been an overall downward trend in recent years, such as the failure of the planting industry, which has decreased from 3.76% in 2007 to 0.79% in 2022, with an average annual decline rate of 9.88%. However, due to the optimization of the planting structure and the improvement of production conditions, such as the use of agricultural machinery that often costs millions of yuan, the proportion of crops with higher added value is getting higher and higher, and the output value of planting per unit area has continued to increase, from 15.9759 million yuan per 1,000 hectares in 2007 to 46.6604 million yuan per 1,000 hectares. According to the crop failure rate adjusted by output value, the level of disaster loss did not show a significant downward trend.
Professor Tuo Guozhu of Capital University of Economics and Business (photo by Wang Xuhua)
Sanlian Life Weekly: According to the claims settlement provisions of the "Agricultural Insurance Regulations", can this provision be in place in the case of frequent natural disasters?
Tuo Guozhu: According to the relevant rules, the insurance company should assess the loss and settle the claim to the household. In the actual claim settlement, large households with a planting area of hundreds or thousands of acres have separate insurance policies, which can be assessed separately, and small farmers with only two or three acres of land are often on one policy for each village. Insurance companies sometimes hand over the compensation to the village committee, which may not distribute the compensation according to the actual damage of each family, but divide it equally among everyone. Farmers who have suffered large losses and have lost little have opinions, disputes, petitions, and lawsuits to the courts.
In addition, because the disaster was too big that year, the insurance company had to lose money, especially the head office has assessment indicators for grassroots companies, such as the loss ratio to 80%, 90%, etc. If the actual loss ratio reaches 160%, the insurance company will bargain at the time of loss assessment to try to reduce the payout. Sometimes it's not just the insurance company's problem, but the local government can also intervene in the assessment and settlement of claims. Because from the central government to the county, the premium subsidy of agricultural insurance is concentrated in the county finance, and the county finance settles with the insurance company, and the county leaders will have their own ideas about the amount of subsidies, which will affect the compensation of the insurance company.
More than 10 years ago, when I was researching in one area, an insurance company told me that the county magistrate could not accept the loss ratio of less than 50% in the first year because of the few disasters. For example, the county has 100 million yuan in insurance premiums, and the county magistrate thinks, "The government has subsidized 80 million yuan, how can it only pay a total of 40 million yuan?" "The county magistrate asked the insurance company not to pay 60 or 70 million yuan, and the subsidy of 80 million yuan will not be given to the insurance company. As a result, not only will some farmers who should not be compensated receive compensation, but more importantly, there is a difference between natural disasters from year to year, and there is a lot of money left over this year, and they will have to add money to it next year to catch up with the disaster. But the county asked for more compensation, and the insurance company had no choice. And when it comes to the disaster year, you need to come up with a large amount of money, and the insurance company will go to the county magistrate if there is no surplus. The county magistrate knew that he was at a loss, so he promised the insurance company to pay less. In this way, the interests of farmers will be damaged. This is the "negotiated payout" that the regulator has repeatedly ordered to prohibit.
Agricultural insurance in China needs to be extended to the field. On February 26, 2023, in Yichun, Jiangxi Province, volunteers from an insurance company go to the field to promote policy-based agricultural insurance (Photo by Zou Zhong/Photo courtesy of Visual China)
Government "welfare" still needs to be improved
Sanlian Life Weekly: At present, China's policy-based agricultural insurance can provide insurance protection for crops such as rice, corn, and wheat, livestock such as pigs, cattle, and sheep, as well as special agricultural products such as tea and lychee. The main types of insurance are physical and chemical cost insurance, which includes the cost of seeds, fertilizers, pesticides, and agricultural machinery, and full cost insurance, which adds land rent and manpower to the physical and chemical costs. From the perspective of insurance types and insurance ratios alone, to what extent can the current level of agricultural insurance ensure the interests of farmers?
Tuo Guozhu: First of all, we need to clarify two concepts, vehicle insurance, housing and family property insurance in property insurance, which are generally "full insurance", how much is the value of the target, and how much can the insurance pay at most. Agricultural insurance is different, the insurance amount of physical cost and complete cost can only cover part of the "expected income", and it is impossible to completely protect all the "expected income" of farmers, which is called "insufficient insurance". Because agricultural production is essentially a care-taking activity, if the insurance protection is too high, farmers may not manage their crops well, and only wait for insurance to pay, there is a "moral hazard". Therefore, the insurance company assigns part of the responsibility for the loss to the farmer, and only compensates for part of the loss even if it is a total loss. Globally, the maximum coverage ratio of agricultural insurance will not exceed 80% of the expected value.
As for the protection of the interests of peasant households, it is necessary to look at the situation of peasant households affected by the disaster. If it is a total loss, the farmer can get hundreds of thousands or even millions of yuan at a time, which is also a considerable figure. But in most cases, farmers are not compensated for their losses. Because the insured amount is too low, and some losses can only be compensated for part of the insured amount. In most provinces, the amount insured for physical and chemical cost insurance can only account for about half of the income. For example, a large grower insured the physical and chemical cost of rice in the fall of 2020. 199 acres of land to pay insurance premiums of 4847.64 yuan. Heavy rains caused the crop to fail to regreen. The insurance company paid 48,476.4 yuan according to the total loss, which was 10 times the insurance premium he paid. However, compared with his expected income of 190,000 yuan, it only accounted for 25.5%.
Stills from "Ideal Shines on China".
There is also the fact that the rules of the insurance contract are not reasonable, for example, according to the current insurance terms, the insurance period is from the emergence of the crops to the harvest. There is no insurance liability before the emergence of the seedlings, and the farmers cannot be compensated for the damage of the grain during storage after harvesting, and the loss of grain quality caused by the disaster is not the insurance liability. Some farmers do not understand and think that the insurance contract should be fulfilled from the time the seeds are planted. Although there is no problem under the current insurance contract, the risk protection provided to farmers is not yet suitable for their needs. Other countries, such as the United States, have incidental sowing insurance, which bears the responsibility for the risk loss from sowing to emergence, as well as the loss of product quality.
Sanlian Life Weekly: In view of the low level of insurance amount, the focus of central agricultural insurance support is now on all large grain-producing counties, for each insurance policy, farmers only pay 15%~20% of the premium, city and county financial subsidies of about 10%, provincial government subsidies of 25%, and central government subsidies of 45% (central and western regions). What efforts have been made by the central and local governments to support agricultural insurance?
Tuo Guozhu: At present, the central government supports and subsidizes the agricultural insurance premiums of the main agricultural products related to the national economy and people's livelihood, including rice, corn, wheat three major food crops, as well as oil crops, sugar crops, pigs, dairy cows, commercial forests, ecological forests and other 17 categories, more than 20 kinds of agricultural products, other special agricultural products by the provinces themselves, this is called "the central government to protect the bulk of the region, the local to protect the characteristics". In some provinces, the premium income of local specialty products has exceeded the insurance premium income of the insurance projects subsidized by the central government.
Fundamentally, agricultural insurance is a competition for the country's financial resources, more than 100 countries in the world to do agricultural insurance, developing countries can not do it, mainly because of their financial resources. The mainland's financial support for agricultural insurance is very large, with a total subsidy of more than 830 billion yuan from 2007 to 2023, with an average subsidy rate of 73.8%. For example, in 2022, the coverage rate of wheat, rice and corn full cost and income insurance reached 74.09%, 54.76% and 49.79%.
However, the coverage rate of other targets is still relatively low, only 20%~40%, and even the three major food crops with the highest insurance rate are very different from province to province. In some large grain-producing provinces, the insurance participation rate is only 450 percent. This is mainly because the central government's subsidy is a matching subsidy, and the provincial government first needs to take out 25%, and the central government will take out 35%~45%. More than 70 percent of the province's finances rely on transfer payments from the central government, and even if the subsidy ratio is 25 percent, it will need to come up with hundreds of millions, which the provincial government cannot afford. Therefore, at present, the level of protection in some provinces is not high, or the coverage rate is relatively low.
In 2023, China's agricultural insurance premiums will be more than 143 billion yuan, which is about the same as the United States, which has the highest premiums, while India, which ranks third, has less than a quarter of China's agricultural insurance premiums. China is already the undisputed agricultural insurance power, but it is far from being an agricultural insurance powerhouse.
Stills from "Mountains and Seas".
Government support in the face of market failure
Sanlian Life Weekly: Why does agricultural insurance always need to be led by the government and give more financial support?
Tuo Guozhu: This is determined by the nature of the subject matter of agricultural insurance. Different from the specific property insured by car insurance and property insurance, agricultural insurance covers the subject matter and the expected value. For example, the insurance for winter wheat starts at the end of October of the previous year, and the insurance is how many catties of wheat can be harvested and how much it can be sold in June of the following year. And the risk of this expected value is particularly high. The risk loss can be reflected in the rate, and the greater the probability of risk loss, the higher the rate. Compared to other property insurance, the rate of home contents insurance is 0.05% or even lower. The rate of agricultural insurance is 2%~15%, and the pure risk loss rate of agricultural insurance is dozens to hundreds of times that of the insurance rate of family property. That is to say, when purchasing property insurance, the policyholder can get up to 10,000 yuan in insurance compensation for spending 5 yuan in insurance premiums. The high rate of agricultural insurance (e.g. 5%) means that farmers can get up to 1,000 yuan in loss compensation for spending 50 yuan in insurance premiums, which is very cost-effective. Commercial insurance companies simply can't do it.
This is also the experience that people have learned from history. At the beginning of the last century, insurance companies in the United States began to promote agricultural insurance in rural areas. Because the rates are so high, farmers are either resigned to their fate, or apply to the government for relief after a catastrophe. No one buys agricultural insurance, which leads to natural disasters, and insurance companies either lose money or go out of business. Until the Great Depression in 1929, the farmers in the United States were severely impacted, the Roosevelt administration investigated the failure of commercial insurance companies to operate agricultural insurance, found this market failure, in 1938 through the promulgation of the "Federal Crop Insurance Act", decided to promote agricultural insurance led by the government, the Ministry of Finance invested 500 million US dollars, registered the establishment of "crop insurance companies", to provide farmers with agricultural insurance premium subsidies. At first, the government subsidized 30% of the insurance premiums, and the proportion of farmers participating in the insurance was only 30%, and then the subsidized insurance premiums and management fees together reached 75% ~ 80%, and the farmers' insurance rate reached 80%, and in the 90s of the last century, it provided a low level of "catastrophe insurance" for those farmers who were unwilling to participate in agricultural insurance, and the coverage rate of agricultural insurance in the United States reached more than 90%.
In the 90s of the last century, due to the Congress's demand for agricultural insurance to be marketized, they reformed the system, and the government's "crop insurance company" was only responsible for risk zoning, product development and actuarial pricing, and providing reinsurance. The crop insurance company sets the insurance policy and price, and hands over the direct insurance to the commercial insurance company on its behalf.
Other countries have also adopted a government-led and sponsored model. Canada, for example, has been a government-run model since 1959, with 10 provinces having 10 provincial-run agricultural insurance companies. In 2017, I went to Canada to investigate, and the net expense ratio of other countries is 20% or 30%, and they are only 6%~8%, which should be the highest efficiency in the world. These practices show that agricultural insurance can only be a policy-based operation, with separate rules formulated, and the government should give a high proportion of insurance premium subsidies.
Because it is a policy-based insurance, the government does not allow insurance companies to bear unlimited liability, that is, insurance companies will not sell assets because of excessive claims. In the United States, agricultural reinsurance is provided by the Federal Crop Insurance Corporation, and if the reinsurance contribution is not enough, the law allows it to borrow money from the government's policy financial institutions to compensate. The same is true of China's system. At present, China's agricultural insurance operates a three-tier risk protection mechanism, one is the catastrophe risk fund of the insurance company, which is composed of a part (4%~8%) of the premiums received by the insurance company and a large part (75%) of the surplus of the current year. In years when the disaster is severe, the loss ratio reaches 75% or more, and the fund can be used. If the catastrophe risk fund is insufficient, an agricultural reinsurance company controlled by the Ministry of Finance will be established in 2020, and the state will also establish an agricultural insurance catastrophe risk fund in the future to prepare for the sharing of excess liability after reinsurance.
Stills from "Tian Gengji".
Sanlian Life Weekly: Compared with other countries, what are the special features of the establishment of China's agricultural insurance system?
Before agricultural insurance subsidies were included in fiscal revenue in 2007, China also explored the use of agricultural insurance by commercial companies, and the Chinese People's Insurance Company began to experiment with agricultural insurance in 1982 and withdrew from the agricultural insurance business before its listing in Hong Kong in 2004, and continued to lose money for 22 years. At that time, because farmers could not afford to buy expensive agricultural insurance, the insurance company reduced the insurance amount, and the insurance amount per mu was 70 yuan, and the farmers also paid an insurance premium of one or two yuan. In the event of a major disaster, the company will lose all the money. The phenomenon of market failure is no different from that of the rest of the world.
According to a 2021 survey by the Ministry of Agriculture and Rural Affairs, smallholder farmers own 60% of the country's arable land, and the number of rural households accounts for more than 90% of the country's total. Village collectives have not formed highly modern cooperatives with a clear division of labor like in Europe and Japan.
The impact of this characteristic on agricultural insurance is reflected in the fact that the cost of business for insurance salesmen is particularly high. Compared with the city, a salesman driving or riding an electric car between enterprises and families, can get tens of millions of yuan of business a month, the rural land is vast, the farmland is scattered, and the salesman needs to knock on the door one by one. The Henan Insurance Regulatory Bureau once did an experiment after the state subsidized agricultural insurance. They found a village, found a car, and sent staff to a village to mobilize and insure from house to house, adding up the costs of salaries, cars, gas, and so on. In the end, the farmers paid 3.5 yuan per mu of land, but the cost of business development was 5.3 yuan. In addition to the pure risk loss rate, the insurance rate is the cost of operation and management expenses, including business development, which makes it more difficult to reduce the insurance rate. Insurance premiums are high, and peasants' incomes are only 40 percent of those of urban residents, and peasants' willingness to participate in insurance is even lower.
In traditional agriculture, farmers adopt the method of double cropping to avoid risks. For example, in the farmland, part of it is sorghum, part of it is corn, and part of it is corn. When there is no drought, the yield of corn is high, and once there is a drought, corn is not drought tolerant, sorghum is drought tolerant, and the harvest is also better, and farmers can solve the food rations. However, under the conditions of modern agriculture, mechanized sowing and production must be planted in a large area of the same crop, so it is necessary to adapt to the risk sharing mechanism of modern agriculture, which is policy-based agricultural insurance. Since 2007, China has implemented a business model in which the government subsidizes premiums and insurance companies operate independently and voluntarily, design agricultural insurance products and set prices. Based on the cost of agricultural products at more than 2,000 points in the "Survey on Agricultural Products" published by the National Development and Reform Commission every year, insurance companies around the country design rates, and then refer to the opinions of local governments, and sell insurance after approval by the regulatory authorities.
A professional governing body is required
Sanlian Life Weekly: Can the mainland's policy-based agricultural insurance business model make agricultural insurance more efficient?
Tuo Guozhu: Practice has shown that there are difficulties. First of all, the insurance company develops the design product and actuarial it, and pricing is an issue. Insurers are limited by data and the company's own considerations, and pricing may not be accurate, especially if it overestimates rates. The regulatory department is responsible for approving products, but the regulatory department only has a few people, and there are hundreds or thousands of terms and rates across the country, and the problem of reasonable pricing cannot be solved through review.
In fact, the pricing of commercial insurance companies is one of the important reasons for the low average loss ratio of agricultural insurance in mainland China. The Ministry of Finance requires insurance companies with agricultural insurance business to "guarantee capital and small profits". From 2007 to 2023, the mainland's insurance premium income will total 839.130 billion yuan, and the total compensation will be 524.081 billion yuan, with an average simple loss ratio (that is, the proportion of the amount of claims paid to the premiums collected) of only 62.46%. Assuming that there is 10% of the "premiums receivable" that have not been recovered, and the 10% is removed from the total premium, the average simple loss ratio is only 69.38%, plus the 20% comprehensive expense ratio including employee salaries, office rent, etc., the company's profit margin is also very high. This is the result of many provincial governments, although they do not have actuarial capabilities, but have "bargained" with insurance companies on rates based on past experience, and then reduced insurance rates.
In addition, the issue of scientific and rational insurance operation is also quite prominent. For example, the current policy design and pricing system is basically "one province one rate" and "one province one sum insured". In our investigation, we found that the full cost insurance amount set by some provincial governments for one mu of wheat is 840 yuan. However, in some places in this province, the yield per mu is 600 catties, and even if there is no disaster, the income is only 700 yuan. At the same time, the production capacity of wheat per mu in some areas of the province has reached 1,000 catties, and the income can reach 1,400 yuan, and the insurance amount of 840 yuan cannot cover the full cost.
Another issue is the issue of farmers' insurance. Due to the fact that the peasant households are too scattered, the current method adopted is the system of co-insurers, and village cadres generally serve as co-insurers at the village level. There are 500,000 co-insurers in the country, and each co-insurer is responsible for the insurance work of the village, counting the insured households, collecting premiums, and finally signing a policy with the insurance company. The lack of precision in the company's underwriting has a lot to do with the professional ability and quality of the co-insurers. However, the co-insurer has limited understanding of agricultural insurance, and there will be problems such as the aforementioned equal distribution of claims.
Stills from "Big River".
Sanlian Life Weekly: Are there any means to remedy these problems?
Tuo Guozhu: There are some technical solutions to solve the problems of accurate pricing, underwriting, and claims. For example, weather index insurance, which is not based on the actual damage of crops and claims, but based on a certain meteorological index. For example, if the normal annual precipitation in an area is 800 mm, there will be losses if the precipitation is lower than that. Then, this insurance will determine the compensation based on 800 mm of precipitation, and the more below 800 mm, the more the insurance will pay.
This method can simplify the loss assessment and claim settlement procedures and avoid some disputes over loss assessment and claim settlement, but there is also the problem of "basis risk". For example, last year, a company in Fujian underwrote weather index insurance for fish cage farming. A cage can produce hundreds of thousands of catties of fish. Insurance companies sell typhoon index insurance, and if a typhoon of magnitude 12 or higher passes by, the insured fishermen can be compensated within 160 kilometers of the area where the typhoon center passes. Last year, just in time for a typhoon, within 160 kilometers of both sides of the typhoon center, some fishermen were compensated 3 million yuan for their broken cages and ran out of fish, and some fishermen were also compensated 3 million yuan for their broken cages and no losses. Insured fishermen 160 kilometres away were also affected by the typhoon, and there was no way to compensate for their losses.
Flooded farmland loses hope of harvest (Photo by Yang Dong on October 6, 2017, Hubei Province/Visual China)
The more critical approach is to establish a professional management agency or organization, and establish a substantive agricultural insurance business management agency at the central level. For example, we can rely on China Agricultural Reinsurance Company, or entrust relevant research institutions in research institutes and universities to plan policies, design products, actuarial rates, establish information management platforms, and evaluate the policy effects of agricultural insurance business. For the insurance of characteristic agricultural products, local governments can rely on relevant local universities, research institutes or intermediaries with corresponding qualifications to develop products and actuarial pricing. Insurance operators are only responsible for selling insurance policies. The reform of the mechanism will improve the operational efficiency of agricultural insurance to a great extent.