How can catastrophe insurance create synergy? Multi-party participation is key
Since the beginning of this year, natural disasters such as typhoons, floods and storms have “taken turns on stage”, wreaking havoc across many provinces in China, making the establishment of a catastrophe insurance system all the more urgent. According to the latest requirements of the State Council executive meeting, China's catastrophe insurance relief system will shift from the current government “taking everything on itself” and “backstopping the whole process” toward a new disaster relief mechanism featuring “clearly defined responsibilities” and “limited backstopping”. In the process of establishing a catastrophe insurance mechanism, the key for both the government and insurance institutions is to work in concert——
Establishing China's catastrophe insurance system is already a matter of urgency; this is the clear signal sent by the recent State Council executive meeting. The meeting proposed “gradually establishing a catastrophe insurance system supported by fiscal funds, with commercial insurance as the platform and multi-tiered risk sharing as the safeguard”. It can be seen that the catastrophe insurance system is being advanced at a strategic level to disperse natural disaster risks and safeguard economic and social stability.
The vast number of farmers will undoubtedly become the biggest and most direct beneficiaries of the catastrophe insurance system. Due to their own inherent vulnerability and the natural particularities of the production process, agricultural production faces many natural risks. China is also a country where agricultural disasters occur frequently, and farmers' ability to disperse natural risks on their own is very limited. The catastrophe insurance system will strengthen agriculture's capacity to withstand natural disasters and reinforce the effectiveness of existing agricultural insurance.
The process of establishing a catastrophe insurance mechanism is in fact a process of defining the rights, responsibilities and interests of all participating parties. Whether government or insurance institutions, the key is to find the right position and work in concert. According to the latest requirements of the State Council executive meeting, China's catastrophe insurance relief system will shift from the current government “taking everything on itself” and “backstopping the whole process” toward a new disaster relief mechanism featuring “clearly defined responsibilities” and “limited backstopping”. As far as the government is concerned, its functions will be further integrated with the market.
The government-plus-market operating approach has been practiced in areas such as critical illness insurance and pension insurance, and has achieved good results in many places. But a common problem is that supporting fiscal funds are invested late in many places, or even in arrears, affecting the effectiveness of the protection. An important reason for this is the mindset. Insurance is inherently an intangible commodity, and its functions can mostly only be realized after a risk occurs. But many local governments do not have this mindset; they tend to emphasize compensation while neglecting investment, fearing that insurance companies will make money. But as a market-based operation, if commercial institutions make no profit at all, or invest at a long-term loss, such cooperation cannot be sustained. Therefore, the key is to establish a reasonable profit space, such as a low-margin break-even model, which involves how local governments determine the sharing of risks with commercial insurance companies.
For the government, the most important thing in the process of establishing the catastrophe insurance system is to respect market rules and establish a spirit and concept of contract. It can neither take on everything nor wash its hands of the matter. In addition to fiscal fund investment, non-monetary forms of public resource investment can also be made. For example, intensify education and publicity to raise public awareness of catastrophe risks, and promote the popularization of catastrophe insurance through certain administrative means; for some fiscal fund projects and state-owned assets, catastrophe insurance should be made mandatory.
The insurance industry that undertakes the protection must also recognize that catastrophe insurance is not merely the development and launch of a new product, but requires repositioning from the perspective of how the insurance industry, as a modern service industry, can contribute to the upgrading of China's industrial structure and give play to the decisive role of the market in allocating resources. At present, underwriting institutions need to solve two key problems: risk management and control, and market development. As the main body bearing risks, insurance institutions' own risk management is particularly important. On the one hand, they must ensure that underwriting risks and accumulated risks remain under control through various techniques, including zoning techniques and limit management; on the other hand, they must address risk dispersion and operational stability through techniques such as reinsurance and catastrophe bonds, especially through catastrophe excess-of-loss arrangements. On this premise, they should explore product innovation, channel innovation, service innovation and business model innovation in catastrophe insurance, so as to concentrate and release the risk management capabilities of the insurance industry at a higher level, and ultimately promote the healthy development of catastrophe insurance.