Price index insurance becomes a new trend in the development of policy-based livestock insurance
At present, China's policy-based livestock and poultry breeding insurance mainly provides risk protection against production risks, but for another kind of risk in livestock and poultry production and operation——market risk, or price risk——there is basically no protection. In fact, with the development of the market economy, market risk has an increasingly large impact on livestock production, and fluctuations in the market prices of livestock products, especially live pigs, not only affect producers' income levels, but also directly affect the consumption welfare levels of the general public.
Jiangsu formally launches live pig price index insurance
Recently, the author learned from the Office of the Jiangsu Provincial Agricultural Insurance Leading Group that the “Jiangsu Province Live Pig Price Index Insurance”, developed under the leadership of Pacific Property Insurance, was officially implemented starting from December 10, 2014. All live pig price index insurance offered in China uses the “hog-to-grain ratio” as the reference system. China's current break-even point for live pig production is a “hog-to-grain ratio” of about 6:1. Based on measurement and analysis of the break-even point for live pig breeding in Jiangsu Province over the years, the benchmark hog-to-grain price ratio in this Jiangsu live pig price index insurance contract was set at 5.8:1, meaning that if the average hog-to-grain price ratio in the month of slaughter during the insurance period is below 5.8:1, the insurance company will compensate the breeder. At present, the insured amount is set at three levels: 600 yuan/head, 800 yuan/head and 1000 yuan/head; the insurance premium rate is 5%; and provincial-level fiscal premium subsidies are implemented at the standard of 20% for southern Jiangsu, 30% for central Jiangsu and 50% for northern Jiangsu. According to the provisions of the policy, when the hog-to-grain price ratio in the current month of slaughter is below 5.8:1, the insurance company shall immediately initiate the claims procedure, notify the breeding farms and households to provide proof of live pig slaughter for the current period and relevant sales certification materials, and pay compensation within 10 days. The insurance contract adopts different compensation ratio coefficients under different price fluctuation scenarios: when the hog-to-grain price ratio is between 5.3 and 5.8, it is 60%; when it is between 4.8 and 5.3, it is 80%; and when it is less than 4.8, compensation is paid according to the insured amount.
Live pig price insurance can serve as a good policy for stabilizing the market
Price fluctuations in the live pig market are normal and unavoidable. How can the impact of pork price fluctuations be effectively mitigated? Live pig price insurance is a type of insurance that uses live pigs as the insurance subject matter and the live pig price index as the insured liability. During the insurance period, when the average live pig price index is lower than the price index agreed under the insured liability, the insurance company will compensate according to the contract. Live pig price index insurance actually establishes a minimum income level for breeders. Even when pork prices are too low, breeders can still have a certain income and can remain in the live pig breeding industry, thereby making future market supply relatively stable and avoiding drastic market price fluctuations.
In foreign countries with developed futures markets, the futures market price is generally used as the “price index” in livestock and poultry product price index insurance products, whereas China has only launched egg futures, and the futures market for livestock and poultry products is not yet well developed. Choosing to launch live pig price index insurance is both an effective means of regulating live pig production and the market and also provides live pig breeding farms and households with a risk management tool. Moreover, compared with options, live pig price index insurance has advantages in three respects: first, the transaction volume per lot of futures options is too large, and ordinary live pig breeding farms and households cannot reach the volume required for futures trading, nor is it very possible for breeding farms and households to directly use the futures options market, whereas buying product price insurance is very easy; second, futures options are highly professional, and livestock and poultry producers generally do not possess the relevant knowledge, but agricultural insurance companies often have relatively close relationships with farmers and will establish other cooperative relationships besides price insurance, making cooperation easier to achieve; third, although the principle of price or revenue insurance is very similar to that of put options, its cost is not higher than that of options, and the cost of revenue insurance is actually somewhat lower.
Price index insurance is a new trend in the development of policy-based livestock and poultry insurance
Price index insurance is mainly based on the futures market price and spot market price of agricultural products. It can minimize the basic risk of the insurance market to the greatest extent and is necessary and feasible under market conditions. Its advantages are mainly shown in the following four aspects: first, it can break the restrictions imposed by primitive records of agricultural production, namely data and materials such as the time and type of disaster occurrence and disaster loss conditions, on rate setting; second, it does not require understanding the loss situation of the insured, effectively reducing business costs; third, this insurance method uses random variables that are closely related to losses in the breeding industry, easy to observe and difficult to intervene in artificially, solving the problem of information asymmetry and helping to prevent moral hazard and adverse selection; fourth, buyers of index insurance are not limited to farmers, as anyone else can buy it, helping to spread agricultural risk over a larger scope and making the operation of agricultural insurance more consistent with the law of large numbers.
Practice in developed countries has long proven that in modern agriculture, the dominant factor determining agricultural efficiency and farmers' income is market demand. Therefore, the focus of agricultural policy in European and American countries has been placed on protecting farmers' interests under surplus conditions. At present, the United States and Canada have both launched corresponding price index insurance to provide protection for the interests of growers and breeders. At the same time, relevant departments in China are also exploring the possibility of using price index insurance to regulate the market prices of agricultural products. In China, Beijing, Shanghai, Sichuan, Zhejiang, Jiangsu and other places have attempted to carry out live pig price index insurance and off-season leafy vegetable price index insurance. These explorations and practices provide experience that can be drawn on for attempting to carry out price index insurance for milk, eggs, broiler chickens and chicklings in the livestock and poultry breeding sector. Therefore, price index insurance will be a new trend in the development of policy-based livestock and poultry insurance.