Agricultural insurance subsidy policy needs improvement: where exactly are the shortcomings?

Relying on the leverage effect of the central government's fiscal subsidy policy launched in 2007, China's agricultural insurance developed rapidly, not only playing an increasingly significant positive role in domestic agricultural natural risk management, but also jumping to become the world's second-largest agricultural insurance market after the United States the following year. However, as its scale has continued to expand, many problems have emerged in China's agricultural insurance market, most of which are directly related to subsidy policy. To prevent agricultural insurance from “owing its success to subsidies and its failure to subsidies” and to promote the sustainable development of this green box system encouraged by the WTO, it is necessary to adjust the current subsidy policy as soon as possible.

Areas where China's current agricultural insurance subsidy policy needs improvement

These are mainly manifested in the following four aspects:

(1) The subsidy amount is relatively small in scale. Measured by agricultural insurance subsidy depth (that is, the proportion of various types of agricultural insurance subsidies provided by the government in agricultural GDP), the global average for 65 countries in 2007 was 0.63%, the United States was as high as 4.4%, and Japan was 1.3%. By comparison, in 2007 China's proportion was only 0.16%. Even though the total subsidy amount grew year by year, by 2012 it had reached only about 0.4% of agricultural GDP, significantly lower than the global average and far behind developed countries such as the United States.

(2) The types of subsidies are single. From a global perspective, government subsidies for agricultural insurance mainly include three major categories: premium subsidies to farmers, operating expense subsidies to insurance companies, and excess loss subsidies that share excess losses through reinsurance. According to World Bank data, in 2007 global agricultural insurance subsidies accounted for an average of 68% of agricultural insurance premium income, of which premium subsidies were 44%, and expense subsidies and excess loss subsidies were 24%. The United States and India all have all three types of subsidies, Japan has premium subsidies and excess loss subsidies, and Canada has premium subsidies and expense subsidies. By comparison, China only has premium subsidies, with no expense subsidies or excess loss subsidies.

(3) Local governments bear a relatively high subsidy responsibility. China's agricultural insurance implements a subsidy structure shared by multiple levels of government. Taking crop insurance as an example, the central government subsidy proportion is 35%-40%, local governments at all levels provide 40%-45%, of which the provincial level is at least 25%, with the remainder mainly borne by county-level governments, and farmers bear an average of 20% themselves. Overall, local governments bear a heavier subsidy responsibility in agricultural insurance than the central government. By comparison, under the United States federal crop insurance program, premium subsidies mainly come from the federal government, and state and lower-level governments do not need to provide matching funds.

(4) The regulatory chain for the subsidy process is incomplete. Simply put, this means “emphasizing input, neglecting output”: that is, attaching importance to the early determination of subsidies and mid-term distribution, while neglecting later performance evaluation of subsidies and overall risk control.

Main problems caused by the imperfect agricultural insurance subsidy policy

1. Major crops have not achieved “full coverage where coverage is due”; in particular, areas that most need agricultural insurance support instead have relatively low participation rates

According to CIRC data, in 2013 China's agricultural insurance covered a crop area of 1.1 billion mu, accounting for 45% of the national sown area, leaving more than half not covered by insurance. In major grain-producing areas such as Heilongjiang, due to constraints such as difficulties in county-level fiscal fund matching, agricultural insurance coverage was even lower than the national average.

2. The low level of protection and limited variety have made agricultural insurance increasingly less attractive to farmers

At present, the average insured amount for crop insurance in most regions is very low, not even fully covering planting costs, let alone playing a role in protecting farmers' incomes. In addition, the subsidized varieties are currently mainly the 15 categories supported by central government fiscal intervention, while varieties in high demand among farmers, such as facility agriculture and specialty agricultural products, have almost no insurance coverage due to the lack of subsidy support. These problems are clearly directly related to the relatively small intensity of agricultural insurance subsidies.

3. Local governments intervene excessively in the agricultural insurance operation process, aggravating moral hazard and insurance fraud

In recent years, cases such as false claims and fraudulent subsidy collection have occurred frequently in the agricultural insurance operation process, many of which appear as “collusion” between local governments and insurance companies. This is certainly related to weak follow-up supervision of fiscal subsidies, and it is also related to a certain extent to local governments bearing an excessively high proportion in the subsidy structure, which gives them a considerable incentive to carry out excessive administrative intervention.