Agriculture insurance grows more resurgent

China considers food security to be as important as national security. To that effect, the government has implemented the national rural revitalisation strategy to accelerate reform of the agriculture industry, by re-allocating resources and establishing better financial system in the rural area. This will help modernise agriculture and achieve food security for the country.

To achieve this, the Chinese agriculture system is gradually transforming from labour-intensive towards a machinery-intensive and equipment-oriented industry.

China now encourages mid-sized farms or scaled cooperatives as they can benefit from the economies of scale on the usage of arable land, especially for grain crops where machinery technology can be better applied or pig producing cooperatives as they can be farmed in a more environment friendly way.

Double digit growth in last 5 years

Reforms in the country’s agriculture sector has also led to rapid expansion in agriculture insurance, with premium income rising to about CNY67.2bn ($10bn) in 2019 compared to CNY5.18bn in 2007 when the government set out fiscal subsidies for the policy-based agricultural insurance premiums.

According to data released by the China Banking and Insurance Regulatory Commission (CBIRC), gross premiums generated from agricultural insurance in China have grown in double-digits over the last five years. Table 1 shows that gross premiums reached CNY67.2bn in 2019 from CNY37.49bn in 2015.

Still room for improvement

Despite the good growth of the insurance market, improvements are still needed in several areas, including increasing the extent of protection, fine-tuning premium rates, making clearer the management system and expanding the coverage.

Asian Risks Management Services founder general manager Marc Burban speaking with Asia Insurance Review said, “The present agriculture insurance covers available in the market are traditionally ‘all risks covered’ products and these cover not only the loss of herds and crops following natural hazards but also property, equipment and machinery in case of fire.”

He said, “In such cases, however, the limits of indemnity are low. The insurance benefits are suitable for small or medium scale farmers but not for large scale farms for which large capacities are required with better technology and scale of operation to meet the targeted productivity.”

Agricultural reinsurer formed

The Chinese Academy of Agricultural Sciences in its meeting in January 2019 had released a document ‘Guiding Opinion on the Revitalisation of the Rural Sector through Financial Services’ which had stated that China would soon establish an agricultural reinsurance company, so as to improve the country’s agricultural reinsurance system.

China Agricultural Reinsurance Company (China Agricultural Re) started its operations in September 2020. The new company’s main function would be to redistribute catastrophe risk faced by the agricultural sector and to build and manage a national agricultural disaster fund.

China Agricultural Re with a registered capital of CNY16.1bn has the ministry of finance as the single largest shareholder with a stake of 55.9%. Five property and casualty insurance companies are also shareholders. The combined agricultural insurance market share of these five shareholders is about 75%.

The Chinese government’s positioning of China Agricultural Re is to distribute agricultural catastrophe risks, promote the establishment and overall management of a national agricultural insurance catastrophe risk fund; strengthen agricultural insurance data information sharing; promote the improvement of the agricultural insurance system and effectively implement national policies to support agriculture.

Significance of the national agricultural reinsurer

The Insurance Society of China (ISC) has in a report outlined the significance of the establishment of the reinsurer to the development of China’s agricultural insurance.

The report says that policy-based agricultural insurance needs government-supported reinsurance protection. This system must have at least three levels:

• the catastrophe risk reserve system of the direct insurer.

• a reinsurance system supported by the government.

• arrangements for liabilities in excess of reinsurance cover.

According to ISC, China Agricultural Re represents the second layer of protection. It said the reinsurer has been formed also because relying solely on commercial reinsurers may make the reinsurance market for agricultural insurance very unstable. Some international reinsurers have left the Chinese agricultural insurance market after facing losses.

As for arrangements for liabilities in excess of reinsurance cover, the ISC says there are two choices -establish a national agricultural insurance catastrophe risk reserve or provide a statutory and reliable financing channel.

The Chinese government is expected to choose the former. In this, China Agricultural Re is seen as the best manager of the national agricultural insurance catastrophe risk reserve.

Another mission of China Agricultural Re is to collect, share and manage agricultural insurance information. The reinsurer can lay a solid foundation for more professional and effective development of agricultural  insurance and reinsurance in China, as well as the government’s agricultural risk management decision-making.

Domestic reinsurance underwriting capacity still inadequate

Rural Insurance Institute (Capital University of Economics and Business) director Professor Tuo Guozhu said, “China’s domestic insurance market’s ability to cover the risk of natural disasters is still limited. While the market has the capacity to settle claims for regional and sporadic floods, drought, and pests; in the event of a catastrophe over a wide area and with massive damage, insurance companies would not be able to cope.”

Professor Tuo told People’s Daily that with this base (China Agriculture Re), the agricultural insurance system will be more complete once catastrophe reinsurance excess of loss arrangements are established.

Many foreign companies have been involved in China’s agricultural insurance reinsurance in recent years, including Swiss Re, Hannover Re, Munich Re, SCOR, and CCR Re. They have more than 50% of the agricultural reinsurance market share.

International reinsurers have brought new ideas, new technologies, new products and a lot of information from the international market. In recent years, Swiss Re has developed China’s agricultural risk map and used its experience in other countries to test and develop agricultural catastrophe index insurance in Heilongjiang, Guangdong and other places.

At present, China’s agricultural insurance market is the second largest in the world. Expectations are that it will become the largest market in the future and will be several times the size of the current market. The cumulative risks of such a big market are very large and thus need to be redistributed.

Source: this article was published in Asia Insurance Review

Asian Risks Management Services Limited (ARMS) is an international consultant advising clients on insurable risks. Independent from any insurance providers, ARMS acts to the best of our clients.