Developing a Sustainable Agricultural Insurance System in the People’s Republic of China

This brief explains how the People’s Republic of China (PRC) is using agricultural insurance to help its famers reduce risk and mitigate the impacts of climate change, while outlining opportunities to deepen the system.


INTRODUCTION
Climate change and resource scarcity are projected to increase the intensity and frequency of climate-related shocks, heighten uncertainties in agriculture, and accentuate other risks.In developing economies, agriculture absorbs 63% of the damage and loss caused by climate-related disasters across all economic sectors. 1 Developing risk management tools in agriculture is increasingly important for mitigating and diversifying the impact of short-term weather and market risks together with investments in capacity building of food supply chains to absorb, adapt, and transform in response to long-term risks.This evolution of agricultural insurance systems and the People's Republic of China's (PRC) present challenges offer important lessons for developing countries.The PRC's efforts toward modernizing the agricultural sector are challenged by pests and epidemics affecting livestock and crops, natural resource exhaustion, pollution, and climate change impacts.By building resilience (i.e., the ability to plan and prepare for, absorb, recover from, and adapt to adverse events), farmers are better placed to cope with risks and uncertainties and even benefit from new opportunities.The development of national crop insurance schemes is critical for expanding coverage, especially among vulnerable Asian farmers, and building their climate resilience.In the past 2 decades, agricultural insurance systems led by public-private insurance arrangements have evolved and expanded quickly in the Asia and Pacific region (Asian Development Bank 2021).The agricultural insurance market in the PRC developed rapidly and became the second largest in the world, behind the United States market. 2

EVOLUTION OF AGRICULTURAL INSURANCE IN THE PEOPLE'S REPUBLIC OF CHINA
Since 2004, the PRC has developed a policy-based agricultural insurance system.In this model, the government transfers parts of or all its operational responsibility to the private insurance sector.The government plays the role of "collaborator" and "supervisor" for commercial insurance companies.The efficiency of the agricultural insurance system has increased compared to the state-owned operation model (Box 1).
2 By 2020, the country's agricultural insurance premium income had reached CNY81.50 billion, providing risk protection worth CNY4.13 trillion for 189 million households and paid CNY61.66 billion in compensation to 51 million affected households, becoming an important source of funds for farmers' post-disaster reconstruction and recovery of production and life.
3 For some perils in agricultural insurance, like hail, the market is fully competitive.When covering all risks, loss ratios range from 60% to 75%, with some catastrophic years, making insurance affordable and sustainable through subsidies.Australia is the significant exception, operating without subsidies.It offers no direct subsidies for agricultural insurance policies.However, the government has set up a new drought fund for farmers who experience difficulties after making claims through insurance companies.
4 Agricultural insurance is dominated by the People's Insurance Company of China (PICC) Property and Casualty Co., Ltd.The PICC generates almost half of all premiums (45.8% in 2018), followed by the China United Property Insurance Co., Ltd.(13.5%),China Pacific Property (7.3%),China Life Property & Casualty (6.1%), and Sunshine Agricultural Mutual Insurance Company (5.0%).Besides the multiline nonlife insurers writing agricultural insurance, there are five officially recognized agricultural monoline insurers.
Expanding insurance premium subsidies.In 2007, the PRC introduced agricultural insurance premium subsidies.As shown in Figure 1, premium subsidies have increased steadily since then.In a purely commercial operation, the cost of covering agricultural risk would require a significant premium rate.In its current form, the financial support given by the government in the form of exclusivities and subsidies allows agricultural insurance to be offered at a reasonable premium rate.In many countries, agricultural insurance receives government support to make it affordable for farmers. 3n the PRC, premium subsidies reached CNY60.3 billion in 2020, accounting for 74% of the total premium.There are more than 270 varieties of subsidized insurance covering agriculture, forestry, animal husbandry, and fishery.
Government and commercial insurance companies share responsibility for insurance product design, insurance loss determination, claims, performance assessment, and supervision of agricultural insurance projects. 4Different levels of government share the cost of premium subsidies.Central government financing will kick Box 1: Stages of Development of the Agricultural Insurance System in the People's Republic of China Initial phase government-led mode (1982-1992).The Government of the People's Republic of China (PRC) was the direct operator of agricultural insurance.The state-owned People's Insurance Company of China (PICC) operated all domestic insurance businesses, including agricultural insurance.Because of the high risk and high cost of agricultural insurance, the PICC was facing significant losses.But, with assistance from government subsidies, the company was able to support the development of the agricultural insurance during this period.-led mode (1993-2003).During this period, the PRC began to accelerate its transformation into a market economy.The PICC gradually transformed into a commercial insurance company, and the pursuit of profit maximization became the main goal of the company.Agricultural insurance, as a branch or department of commercial insurance, was completely market-oriented and no longer received undisclosed subsidies.At this stage, the agricultural insurance business shrank significantly, and operations in many places were in trouble.

Market
Government-market cooperation mode (2004-present).In 2004, the No. 1 Document of the Central Government proposed for the first time that the PRC should "speed up the establishment of a policy-based agricultural insurance system."Since then, the threshold for institutions to engage in agricultural insurance has been lowered.The central and local governments started to subsidize agricultural insurance premiums and management costs and to shape several aspects of the policy, basically forming the framework for government guidance, market operation, and coordinated promotion.Under this model, insurance companies achieved commercial competition under a high level of regulation, and the agricultural insurance market in the PRC developed rapidly.By 2020, the country's agricultural insurance premium income had reached CNY81.50 billion, providing risk protection worth CNY4.13 trillion for 189 million households and paid CNY61.66 billion in compensation to 51 million affected households, becoming an important source of funds for farmers' post-disaster reconstruction and recovery of production and life. in after the provinces provide supporting subsidies.At present, for the four types of insurance subjects (i.e., plantation, breeding, forest, and Tibetan special insurance) and the three regions in the East, Middle, and West, the central government differentiates the national coverage of premium subsidies.All are higher than the proportion at the provincial level.In most cases, subsidy expenditures are shared at the central, provincial, municipal, and county level.However, there are different practices across provinces, as presented in Table 1 for Jiangsu Province, Henan Province, and Sichuan Province. 5creasing commodity coverage and innovation.The range and risks covered by agricultural insurance have been increasing.From the initial coverage of corn and wheat, the availability of products has expanded to cover fruit, tea plants, medicinal herbs, tobacco, wood frogs , silkworms, and mulberry trees. 6In many cases, the expanded coverage only comes in the form of pilots or small-scale and dedicated areas (Box 2). 7This rapid and positive development in the increased scope of coverage of insurance products is 5 The central government has not clearly stipulated the expenditure responsibilities of governments below the provincial level (municipal and county), as these responsibilities are independently arranged by the provincial financial departments in consideration of the situation in the province.The opinions of the Chinese Communist Party Central Committee and the State Council on comprehensively promoting rural revitalization and accelerating agricultural and rural modernization clearly put forward that "insurance + futures" should play a role in serving the development of rural industries.The principal insured crop perils are fire, hail, frost, floods, and wind.Other perils being insured on an experimental basis include drought, excessive rain, low temperatures, plant diseases, and insect damage (particularly locusts) (nonlife insurance market reports of PRC-Axco, July 2021).
8 Swiss Re has entered a reinsurance protection scheme with the government of Heilongjiang Province and the PRC's Sunlight Agricultural Mutual Insurance Company.This is the first time that the PRC government has employed commercial insurance programs to protect farmers against financial risks from natural catastrophes.(Source: Swiss Re.2016.First Parametric Insurance Programme Against Risks of Natural Disaster for Farmers in China.3 August.https://www.swissre.com/media/news-releases/2016/nr_20160803_chinaparametric.htm.) 9 In September 2018, a month after the first case of African swine fever was reported, African swine fever was included in the scope of subsidies for mandatory culling, with a subsidy standard of CNY1,200 per head.In addition, from 1 May 2019, the Ministry of Finance has temporarily increased the coverage amount for live pig insurance.After the government implements compulsory culling, farmers can apply for culling subsidies from the county-level agricultural and rural departments, and they can also obtain the difference between the insurance amount and the subsidy from the insurance agency.supported by (i) the creation of an agricultural insurance research institute; (ii) government and international insurers and reinsurers to improve product development, including index-based insurance; and (iii) risk pricing by the government. 8Livestock insurance has evolved from covering compulsory slaughter for cows to most livestock varieties and a wider range of mortality causes. 9 Linking coverage to other financial products.Insurance coverage, together with loan default insurance, allows banks to increase the number of affordable loans to the rural population while increasing overall protection for farmers (Box 3).Health, life, morbidity, and physical loss or damage to farm buildings and machinery are protected by microinsurance products.A significant amount of the insurers' assets are designated for investment in rural areas to foster development. 10Insurance companies can compete on the use of these donated assets to provide insurance services in rural areas. 11State-owned financial institutions are expected to serve the less prosperous regions in the PRC.Under this scheme, animal husbandry and veterinary departments and insurance companies are responsible for (i) verifying the health conditions of pigs and applying a unified ear mark management system; (ii) implementing the entire process of joint supervision on pig breeding, immunization, and production; and (iii) employing a tripartite information exchange among government, banks, and enterprises.
The insurance company provides insurance on live pigs, which allows farmers to use then as collateral for bank loans.This scheme reduces the financing costs and makes loans more accessible to pig breeding enterprises.Advancing regulatory frameworks at all levels.The Insurance Law of the PRC has been amended several times since 1995, with the latest amendments in 2015.The regulatory framework in the PRC has made important progress toward stricter observance of international standards, including a risk-based approach to supervision and a risk-sensitive capital regime, the China Risk-Oriented Solvency System (C-ROSS). 12The insurance supervisor, the China Banking and Insurance Regulatory Commission (CBIRC) issued substantial regulations and guidelines implementing the insurance law. 13e provincial governments play a critical role in administering agricultural insurance.To qualify for provincial insurance subsidies, besides the CBIRC license for agricultural insurance, the insurer needs to be licensed by the provincial government.In practice, the provincial government specifies the qualifications for insurance operators, unifies service standards for insurance agencies, sets the principles for the bidding process, and then entrusts the relevant departments at the county (city, district) level to take responsibility for the specific local bidding process.
For example, Jiangxi Province requires that a county (city or district) can select only one insurance company to underwrite agricultural insurance with a three-year operating cycle.To ensure continuity and stability, the company may not abandon its operation without authorization.However, more provinces are taking townships as the unit and multiple insurance companies are being selected to undertake their respective contracting areas, with one-to four-year operating cycles.The role of some local governments goes beyond providing subsidies to filling gaps.Some local governments have agreements with insurance companies to get involved in product distribution, premium collection, settlement, and claims payments, and even carrying or co-insuring risk.Such direct engagement by local governments usually takes place in remote areas because of the high costs that commercial insurers would incur to operate in those areas.
Developing a reinsurance system.The PRC's risk pooling mechanism for agricultural insurance is in transition from a pool system to a reinsurance structure. 14In 2021, the state-owned XL 12 The second improved version of C-ROSS, known as C-ROSS II, entered into force in 2021.C-ROSS II has the same three-pillar structure as Solvency II (quantitative capital requirements, qualitative supervisory requirements, and market discipline).But contrary to Solvency II, C-ROSS II includes, in a quantitative manner, the quality of risk management of the insurers through existing supervisory tools known as the Integrated Risk Rating and the Solvency-Aligned Risk Management Requirements and Assessment.Among the important changes under C-ROSS II, besides the new capital charges calibration affecting all lines of business, are the lifting of the catastrophic reserve required to be set up by agricultural insurers and the management of risk through additional catastrophic-related capital. 13 The CBIRC is a ministerial public service department formally inaugurated on 8 April 2018, reporting to the State Council.The organization is financed by levies on insurers' capital and net retained premiums.The CBIRC is responsible for issuing insurance regulations and for licensing and supervising all insurance market participants, including insurers, reinsurers, and intermediaries.
14 In a pool system, insurers participate on agreed percentages of the agricultural insurance policies sold and placed in the pool.In a reinsurance scheme, each insurer has a direct responsibility and a specific reinsurance contract only on the policies sold by that company.

15
A cession is the portion of the underwritten business that the insurance company reinsures.

CHALLENGES AND OPPORTUNITIES FOR AN AGRICULTURAL INSURANCE SYSTEM IN THE PEOPLE'S REPUBLIC OF CHINA
Despite a rapid increase in the agricultural insurance market, penetration remains comparatively low.Only 16% of the total value of the PRC's agricultural production is insured compared to over 28% coverage in the United States. 17Around 70% of premiums are for crops and the rest for livestock and forestry.In 2016, the national coverage rate for ordinary farmers was 53.2% and 58% for large-scale agricultural households (i.e., larger than six hectares).Among those with coverage, 98% of ordinary farmers and 94% of large-scale agricultural households relied on policy-based insurance.The remaining used commercial insurance and some used both.
An agricultural insurance system should evolve into a more market-oriented system.A clear government policy to protect rural livelihoods and reduce demands on the state budget for natural catastrophe relief has resulted in extraordinary growth in agricultural insurance.However, the sustainability of an agricultural insurance system should be enhanced by reducing its dependency on subsidies over time and increasing the role of commercial agricultural insurance products.Current premium subsidies reach 75% and reducing this percentage remains a challenge, with only 1.7% of farmers enrolled in fully commercial insurance. 18The current policy channels government support through insurance companies and controls competition among insurance providers. 19The central government decides which crops and agricultural activities to subsidize, while the provincial and local governments decide on the financial support for specific local agricultural activities and the level of premiums.These subsidies are financed by the local governments, resulting, in many cases, in a shortage of financing for locally required insurance and leading to suboptimal choices for local insurance needs.
Inefficiency and risk in the subsidy system.A list of underwritten policies is submitted to the local government to collect subsidies.
Based on this list, the central government sends a payment to the provincial government, which sends it to the county government to pay to the insurers.Multiple steps to collect subsidies add a cost to the operation and underscores the liquidity issues faced by insurers.Claims are reported at the village level and confirmed by a third-party organization (local government authorities, the farmers, and the insurers' staff).This can lead to unprofessional claims settlement.For subsidized products, reinsurance is bought, or retained by the local government.The government might underestimate the risk it retains, or the reinsurance contracts bought might not be ideal and leave significant risk with the government. 20 Limited incentives for innovation.Under the current system, insurance companies are selected to participate in counties or villages through a tendering process based on a grading system.
Companies need to have their products approved by the local government, including price and coverage.The premium is not technically determined and could be insufficient.At the same time, risks might not be effectively covered by the policies, reflecting the needs of farmers with respect to coverage and risk appetite.The duration of the assignment is limited to 1-3 years, resulting in a lack of continuity, thereby curtailing the investment interests of the insurers in the project.At the same time, data collection is limited by time.
Inefficient information sharing systems, premium collection, claims, and payment processes.There is no formal channel or mechanism for communication or sharing data and information among authorities, companies, and farmers.Such cross-level, cross-sector, and cross-department information sharing barriers affect the rationality and precision of agricultural insurance policies and decisions.There are a variety of reinsurance programs that address different risk management needs.For instance, a stop loss that protects the whole portfolio above a certain level of losses is ideal for systemic risk management, while an excess of loss scheme will cover losses in excess of a certain amount.In addition, a quota share scheme shares the risk in a fixed proportion to a co-insurance agreement.Lastly, variable reinsurance premium schemes allow for protection that benefits the insurer when the claims are low.
agricultural insurance information management platform uniformly deployed by the CBIRC, although not yet fully opened to and shared with local governments, is expected to provide local and provincial governments with a formal channel for data and information sharing.
Sustainability hinges on the economic performance of the insurance sector.The sustainability of the insurance sector exclusively providing agricultural insurance is affected by economic conditions and extreme natural hazards in the sector.The capacity for managing large catastrophic risks is a critical success factor for any agricultural insurance system.Agricultural insurance premiums are moving toward technical pricing, although with important hurdles to overcome.Existing statistics on claims are not credible and of limited use because of climate and other changing conditions affecting the frequency and severity of agricultural losses.Controlled ratings, low deductibles, and lack of diversification in some cases result in economic losses to the agricultural insurance sector.There is a need for holistic risk reduction (including at the farm and enterprise levels) and risk diversification through a wider geographic and product spread, notwithstanding the large amount of subsidies flowing in to cover insurance premiums.

CONCLUSIONS AND POLICY RECOMMENDATIONS TO DEVELOP A SUSTAINABLE AGRICULTURAL INSURANCE SYSTEM
As climate change impacts increase the significance of agricultural insurance as a tool to manage risk, a successful risk management policy is key.This means closely working with farmers, reducing and transferring risks, closing gaps, and removing market anomalies and inequities.Public-private partnerships (PPP) in establishing an agricultural insurance pool (AIP) allows the government and insurance providers to better absorb risk through pooling financial risks and filling the gap between domestic and international reinsurance markets.The consolidation, sharing, and analyses of historical agricultural insurance data through an AIP would support the development of innovative agricultural insurance products, management of technology platforms, industry risk research, and longer engagement of insurance providers.In this regard, investments in agritech solutions become a key facilitator across the agricultural insurance sector.

Crop and Soil Monitoring Predictive Analytics
Autonomous robots designed and programmed to handle essential agricultural tasks, such as sowing seeds and harvesting crops at a higher volume and faster pace.
• Address the problem of availability, productivity, and high cost associated with human labor.
• Crop and soil health monitoring data captured by drones and software-based technology and processed using computer vision and deep-learning algorithms.
• Provide advisories on the optimal use of soil nutrients, fertilizers, and pesticides.

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Provide farmers with early warnings on adverse weather conditions, information on optimal sowing and harvesting periods, and alerts on possible pest attacks.
• Machine learning models developed to track and predict various environmental impacts on crop yield.
• Developed like Alexa to assist farmers in their daily operations.

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Give farmers access to customized advice from remotely located experts by sharing ground-level information (e.g., through photographs) on a range of issues.
• Mobile applications designed to give farmers access to market information.
• Link farmers directly to agriculture markets and potential buyers, without dealing with intermediaries, allowing farmers to get the best prices for their produce.
• Enable farmers to assess future commodity prices.Incentivize innovation in the agricultural insurance system.The duration of the assignment for commercial insurance companies is limited to 1-3 years under the current government program.Longer engagement for insurers in different counties and villages providing agricultural insurance will motivate insurers to commit long-term investments in innovative products, promote stronger identification with local policyholders, and allow for data continuity.At least 5-10-year assignments are recommended, accompanied by a strong oversight and review process of the insurers' performance.This will require dedicated staff and a process that facilitates changing insurers because of poor performance.To avoid possible monopolistic operations by the selected insurers, at least a few insurers should be selected or, ideally, if an AIP is created, an automatic license of the pool to operate in all regions should be considered.
Establish public-private partnerships.PPPs can help improve the efficiency of agricultural insurance system activities and allow the government to transfer its operational functions to efficient private operators, while retaining and improving its core functions, such as oversight, compliance, and social commitment, including sustainability and climate change reduction initiatives. 23If properly implemented, PPPs can reduce government cash expenditures 23 The agriculture sector, including animal husbandry, must intensify efforts to reduce greenhouse gas emissions from around 30% emissions.There was a 10.1% increase in greenhouse gas emissions since 1990.A 7% increase in nitrous oxide from soil management and a 58.7% growth in combined methane and nitrous oxide emissions from livestock manure management systems are the drivers for this increase.2020 U.S. Inventory of Greenhouse Gas Emissions and Sinks report. 24A PPP is "a long-term partnership between the public and private sectors for the provision of public goods or services based on an equal contract".PPPs can mobilize local, regional, or international private capital that has been idle and is seeking investment opportunities.and provide consumers with high-quality, low-cost services. 24dditionally, the government should monitor the performance of insurance subsidies so that they do not discourage farmers from taking on their risk management responsibilities and provide adequate capacity building and resources to farmers, including early warning systems.
Ensure provincial and local governments assess risks thoroughly.Thorough assessments are necessary to avoid excessive exposure and eventually being liable for extreme losses.
The risk retention analysis of a provincial or local government should be carried out by an actuary, and the recommended reinsurance protection should be purchased.An AIP can fill the gap between domestic and international reinsurance markets and can become an important tool for retaining risk domestically.
The success in the creation of the pool, with the participation of local commercial insurers and reinsurers, the government, banks, and multilateral agencies, will be determined by the structure chosen by the pool, its governance, and allocated resources.
For example, a risk-sharing arrangement between farmers' cooperatives and insurers can be designed such that idiosyncratic risks are borne by farmers' collectives, while catastrophic risks are carried by reinsurers.
Empower farmers to manage their own business risks.A study by Cole, Gine, and Vickery (2017) on financial innovation of small Indian agricultural producers found that, while insurance provision has little effect on total agricultural investments, it significantly shifts the composition of investments toward riskier production activities. 25Insurance should de-risk farming rather than induce farmers to take up riskier farming activities.Hence, policy should incentivize them to reduce risk and adopt better farm management approaches such as crop rotation.
The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of ADB or its Board of Governors or the governments they represent.ADB does not guarantee the accuracy of the data included here and accepts no responsibility for any consequence of their use.

10
The People's Insurance Company of China (Group), for example, has established a CNY25 billion ($3.57 billion) fund specifically for this purpose (nonlife insurance market reports of PRC-Axco, July 2021).11Competition for the use of donated assets by insurers takes place on a platform of the Shanghai Stock Exchange.

Table 1 :
Division of Expenditure Responsibilities of Governments below the Provincial Level for Agricultural Insurance Premiums Source: Documents from the provincial Department of Finance of Jiangsu, Henan, and Sichuan Provinces Box 2: Development of Revenue Insurance in the Fuyang City, Anhui Province Fuyang City is the main corn-producing area in Anhui Province.However, corn production is affected by natural disasters and market price fluctuations.In 2017, a corn revenue insurance pilot project was launched by the local government in cooperation with Guoyuan Agricultural Insurance Company.The project provided premium subsidies to more than 200 large corn growers, insured according to 900 kilograms per mu, ensuring 450,000 tons of corn in Fuyang City, Anhui Province, and covering an area of more than 100,000 mu. a After obtaining the insurance order, Guoyuan Agricultural Insurance Company purchased a put option on yellow corn futures contract in Dashang through Guoyuan Futures Company, covering the period 7 August-7 December 2017 to hedge the risk of corn price decline.In this model, farmers do not need to understand the complex futures market but benefit from price risk protection.The insurance company managing the risk transfers the price risk to the futures market and uses reinsurance against large losses related to other risks.This is an innovative model of combining crop insurance and futures markets, allowing smallholders to manage both yield and price risks.A mu is a Chinese unit of measurement (1 mu = 666.67m 2 , 100,000 mu = 66 km 2 ). a Source: Lu Shuangmei.2018."Insurance + Futures" Benefit Farmers and Agricultural Enterprises.Futures Daily.18 July.https://wap.cnki.net/touch/web/Newspaper/Article/QHBR201807180020.html (in Chinese).United Property Insurance Co., Ltd., together with the Zhaoqing Agricultural Bureau and the Zhaoqing branch of the Postal Savings Bank of China, established a coordinated support system in 2016.
A regulatory sandbox is a framework set up by a regulator that allows innovators to conduct live experiments in a controlled environment under a regulator's supervision.