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Agriculture insurance - a promising future

Supportive government policies are catalyzing the adoption of agriculture insurance in China. Improving agriculture insurance penetration has also helped mitigate the impact of climate change on country’s agriculture sector to some extent. Agriculture insurance, however, is also facing challenges. By Anoop Khanna

In May 2021, five government agencies and a communist party unit in China issued a joint document ‘Opinions on Financial Support for the Development of New Agricultural Business Entities’. This document explored the concept of ‘policy-driven basic insurance + commercial insurance + additional insurance’ for agricultural insurance.

The opinions document called for:

  • Exploring an agricultural insurance product system consisting of subsidized basic insurance, commercial insurance and additional insurance to meet the multi-level and diversified risk protection needs of new agricultural business entities

  • Accelerating the establishment of a dynamic mechanism for adjusting agricultural insurance protection levels and premiums

  • Strengthening coordination in the use of agricultural insurance compensation funds and government disaster relief funds

  • Giving full play to the role of China Agriculture Reinsurance Corporation (CARC) and improving the agricultural reinsurance system and catastrophe risk transfer mechanism

  • Encouraging insurance institutions to establish and improve the basic agricultural insurance service network

  • Staging more financial inclusion reform trials in rural villages

Performance reflects the resolve

With favourable government policies, the insurance sector predicts that by 2025, the volume of agriculture insurance premium income would surpass that of liability insurance to become the second-largest non-auto branch of insurance in the P&C insurance market, behind health insurance.

CBIRC data shows that from 2008 to 2020, agriculture insurance premium income in China rose more than sevenfold from CNY11.1bn ($1.7bn) to CNY81.5bn.

In 2021 China’s agriculture insurance premium income was CNY97.6bn ($14.6bn), a growth of 20% as compared to 2020. Agriculture insurance premiums in China are estimated to exceed CNY160bn ($24bn) by 2025.

Subsidies provide a boost

Premium subsidies handed out by the government and coverage expanded to include a wider range of crops over the years have encouraged farmers to buy agriculture insurance. The subsidies cover 55%-90% of premiums on agriculture insurance, reducing farmers’ vulnerability to severely adverse conditions.

Recently China’s State Council also announced a CNY10bn ($1.45bn) subsidy to support rice farmers experiencing drought conditions which authorities have warned pose a ‘severe threat’ to this year’s autumn harvest.

In 2021 the central government allocated CNY33.35bn in premium subsidies, up 16.8% year-on-year. This is in addition to central reserve funds that the government often allocates in response to major natural disasters. Local governments are then responsible for allocating the funds to farmers.

The total agriculture insurance financial subsidies handed out by the central and local governments in 2021 stood at CNY74.64bn or 75%, in support of the development of agriculture insurance.

CBIRC also encourages Chinese insurers to issue offshore catastrophe bonds, which could help to diversify losses from natural calamities.

New kid on the block

The establishment of the state-owned reinsurance company, CARC, in 2020 to promote insurance coverage in the agriculture sector has also helped the sector tremendously.

In 2021 CARC signed standard reinsurance agreements with 35 agriculture insurance institutions to bear 20% of insured agriculture losses. The premium income from the coverage exceeds CNY19bn ($3bn) for insurance protection of about CNY1tn ($158bn) for 188m farmers.

In a report published in August 2021, AM Best said that the new state-backed reinsurer has brought changes to the agriculture reinsurance dynamics in the local market. Direct insurers are required to make a 20% quota-share cession to the reinsurer for policy-based subsidized agriculture products.

Policy-based agriculture insurance products include central government subsidized crops (e.g., rice, wheat, cotton, potato); forests; livestock (e.g., pig, dairy cattle, breeding sow) and local specialized produce.

AM Best said the premium income of $3bn under the 20% compulsory quota share cession scheme exceeds the combined agriculture reinsurance premium revenue of all onshore reinsurers in China before China Agriculture Re’s establishment.

Commercial reinsurers have had to swiftly adjust their strategies to compete in the much narrower competitive segment of additional proportional and excess-of-loss agriculture treaties, as well as retrocession programmes of the new reinsurer.

The broad prospects of the agriculture insurance market have attracted more and more insurers. Furthermore, affected by motor insurance pricing reform, many insurance companies regard agriculture insurance as an important branch into which to diversify as they shift their focus from relying on motor insurance business to non-auto insurance business.

Supportive government

Fitch Ratings, in an analysis released in October 2022, said supportive government measures, including government-subsidized reinsurance coverage, will mitigate the exposure to higher environmental risk for China’s rated insurers.

A report published by Moody’s Investors Service in August 2022 said the government has extended strategic mandates to several state-owned agriculture companies. For instance, state-owned agriculture-related companies Syngenta Group and COFCO (Hong Kong) have strategic mandates to advance agrochemical technologies and manage major reserves and grain imports.

The broad prospects of the agriculture insurance market have attracted more and more insurers.

The number of insurers offering agriculture coverage has increased from single digits to nearly 40 at present, including five standalone agriculture insurance companies and more than 30 general insurers.

National food security also helps

According to the Moody’s report China’s agriculture-related companies, including insurers, are set to get a boost as the government pursues national food security.

The government has also raised its focus on food security, motivated by factors like pandemic disruptions, the Russia president Vladimir Putin’s invasion of Ukraine and climate change.

The insurance sector is one of the most exposed to the rising frequency of extreme events and insurance is expected to cover an increasing portion of economic losses from natural disasters in the country. The increasing use of agriculture insurance, aided by supportive policies and government subsidies, has also mitigated to some extent the impact of climate change on agriculture sector.

According to Swiss Re, insured catastrophe losses totalled around 10% of economic losses from natural disasters in China, a proportion that is much higher than in developed western markets such as North America.

Challenges also persist

While the agriculture insurance business has grown, it is also facing challenges in terms of achieving underwriting profits.

With fierce competition raging in the market as more insurers enter the segment, underwriting gains turned negative in 2019. A small underwriting profit of CNY277m was reported in 2021, representing an underwriting profit margin of 0.40% (2020: Underwriting profit of CNY101m; underwriting profit margin of 0.17%), according to an analytical white paper Technology-assisted High-quality Development of Agriculture Insurance (2022) produced by government, insurance industry and academic institutions.

Many insurers operating in the segment have a combined ratio of more than 100%. The loss ratio of agriculture insurance business in the past two years averaged 75% nationwide.

Furthermore, the agriculture insurance market is much concentrated for comfort. In terms of agriculture insurance market share, the top 20 companies account for 93% and over 78% of the market share in 2021 rested with the top five agriculture insurers.

Technology can be an enabler

Technology is expected to be the ‘golden factor’ to catalyze the development and growth of agriculture insurance. Traditional agriculture insurance underwriting and loss assessments are mostly carried out by manual on-site sampling. The workload is huge and cumbersome, requiring a lot of time and labour costs, and the claim settlement cycle is too long.

Technology like mobile internet, 3S (including remote sensing RS, geographic information system GIS, global positioning system GPS), AI, big data, cloud computing, IoT and other applications can help to enhance agriculture insurance service capabilities, improve agriculture insurance precision and supervision efficiency, and promote agriculture insurance innovation and development.

Agricultural insurance is likely to become the new growth point for P&C sector in China and it is expected to become an important business focus for non-life insurers in general in the future.



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