How can agricultural insurance innovation be driven from the supply side?

Agricultural insurance is an important means of avoiding losses from natural risks, safeguarding agricultural production, and stabilizing farmers' incomes. It is becoming ever more deeply integrated into every link of agricultural modernization, and plays an important role in building the rural financial system and in the structural adjustment and transformation and upgrading of agriculture. Since 2007, China has gradually increased fiscal support for agricultural insurance, driving its rapid development and markedly strengthening its capacity to serve agriculture, rural areas, and farmers. From 2007 to 2015, agricultural insurance premium income grew from more than 5 billion yuan to over 37 billion yuan; the main crops covered expanded from 230 million mu to more than 1.1 billion mu; and the areas where agricultural insurance is offered now cover all provinces and municipalities nationwide. The 2016 No. 1 Central Document proposed treating agricultural insurance as an important means of supporting agriculture, expanding its coverage, increasing the variety of insurance products, and raising the level of risk protection; the Outline of the 13th Five-Year Plan also proposed innovating rural financial services and improving the agricultural insurance system.

At present, the environment for agricultural and rural development in China has undergone major changes. The existing insurance policies no longer match the new demands of agricultural risk management, and their effect in supporting agriculture, rural areas, and farmers has weakened somewhat. This is mainly reflected in two aspects. First, agricultural insurance has a limited risk management effect on small-scale farming operations. China's agricultural insurance plays a relatively large role in risk management and income support for large-scale farming households, because their main source of income is agricultural production; for the numerous small-scale farming households, the risk management function of agricultural insurance is not obvious, because their agricultural income accounts for a relatively low share of total household income, and compensation amounts also account for a relatively low share of income. Therefore, for the vast majority of small farmers, both the expected returns from participating in insurance and their willingness to participate are not high. Second, fiscal support has a "leakage effect," and its role in supporting farmers' incomes is limited. Under China's current agricultural insurance system, the state entrusts commercial insurance companies to provide insurance products and services, farmers pay premiums to insure, insurance companies assess losses and settle claims, and the government provides subsidies. At present, the state's premium subsidy ratio for agricultural insurance reaches 75%-80%. Although the government subsidizes most of the premium, the form of subsidizing premiums with fiscal funds entails a certain "leakage effect," and the supporting role of fiscal funds for agricultural insurance has not been fully brought into play.

In order to achieve the goals of further consolidating and raising grain production capacity by 2020, effectively safeguarding national food security and the supply of important agricultural products, and bringing farmers' living standards up to a moderately prosperous level in all respects, it is necessary to improve and innovate the agricultural insurance system from the supply side.

First, relying on commercial insurance companies, actively develop insurance products that meet the needs of new types of agricultural business entities. Represented by large grain farmers and large-scale operators, new types of agricultural business entities have large production scale and high input, and thus a relatively high demand for risk management. Therefore, commercial operation should be the main approach, supplemented by government subsidies, to strengthen the risk management function of agricultural insurance. The government should encourage insurance companies to develop insurance products according to the needs of new types of agricultural business entities, while appropriately increasing support.

Second, innovate insurance instruments with the goal of strengthening income support for small farmers while also safeguarding food security. One option is to eliminate intermediate links to reduce leakage. A special agricultural insurance account can be set up in the existing bank cards used to pay direct subsidies to farmers. Farmers pay insurance premiums according to the actual insured area, the state treasury provides matching funds, and the two parts of the funds are combined and recorded in a personal account under special management. After a disaster occurs, the compensation mechanism is triggered, activating the insurance claims procedure, and farmers can withdraw the prescribed compensation amount from the dedicated account. If the land is transferred due to retirement or other reasons, the balance can be withdrawn in a lump sum; those who take over the land pay in again and accumulate insurance funds, and when compensation is triggered, the upper limit for withdrawal is the total accumulated amount in the personal account. The trigger mechanism can draw on the idea of index insurance, indexing the degree of damage, that is, designing insurance contracts and compensation trigger mechanisms not on the basis of actual losses but on parameters such as regional average yield, rainfall, temperature, and satellite imagery.