Tuesday, September 21, 2021

Oops! We canceled the corn insurance

Corn was the crop most impacted when floods covered large swathes of China's Henan Province during July 2021. It turns out that officials had canceled insurance for corn four years ago, even though corn is by far the biggest crop grown in Henan during the summer, so many farmers were not insured.

Flooded fields in Henan Province in July 2021

This oversight was revealed in an August 16 Beijing News interview with two agricultural insurance experts from China's Academy of Agricultural Sciences which revealed numerous shortcomings in the country's huge subsidized agricultural insurance program. 

The experts explained that China's agricultural insurance program is the biggest in the world. According to the Beijing News interview, premiums grew 27-fold to about $12.5 billion from its launch in 2007 to 2020--significantly larger than the U.S. agricultural insurance program. China's agricultural insurance covers 16 major commodities and 60 local specialties. Insurance covers major grain crops as well as rubber plantations, greenhouse crops, seed producers, sows, hogs, cattle, and fish. Each locality can decide which commodities are included in the program. Nearly all insurance is subsidized, with subsidies from central, provincial and local governments covering about $9.3 billion of the premiums. 

In 2016, China's agricultural officials launched a 5-year campaign to cut back on corn production in a "sickle" region--an arc of territory stretching from China's Russian border through the arid northwest, grasslands, and mountainous areas of the southwest. The campaign was meant to reduce surplus corn output and grow more suitable crops in these environmentally fragile regions. In 2017, Henan Province withdrew corn from its agricultural insurance program--even though the province appears to be outside the "sickle" region. One agricultural technicians' commentary noted that Henan did not restore insurance for corn in 2021 even though the national corn glut turned into a deficit in 2020 and China began importing large amounts of the crop. Readers' comments observed, "Ha ha, the crop grown the most is not insured," and "Insurance is a joke."

The experts interviewed by Beijing News said the agricultural insurance needs lots of improvements. Most insurance insures only farmers' expenses for material inputs like seeds, fertilizer and pesticides, only a fraction of the crop's value. Payouts are lower for seedlings  hit by disaster than for mature crops. Farmers are often dissatisfied because they were not compensated for the lost income from selling crops. China has launched new pilots to insure the full cost of production and income insurance for wheat and rice in order to address these problems. 

The claims and indemnification process is long and drawn-out, with negotiations and disputes between insurance companies, local governments, and farmers. Payouts are typically made in a piecemeal fashion. Farmers who want their payouts quickly have to settle for a heavily discounted claim; they have to "wait patiently" if they want a bigger payout. Local officials often intervene in the claims process to "maintain stability." It is common for payments to be spread over the maximum number of farmers with a small average amount after a widespread disaster. A survey of farmers found that their insurance payouts tend to be about 30%-40% of their actual losses. 

Chinese insurance companies devote little effort to agricultural insurance. They rarely have a full network of representatives in rural areas. Farmers have trouble contacting the company when they want to file a claim. Insurance personnel have varying qualifications, uneven training, and are often unaware of insurance policies, provisions, and procedures. 

Insurance premiums are not adjusted for differences in risk across commodities, regions, and producers. Subsidies only cover premiums. One expert recommends that subsidies should also be given for operating insurance programs, for reinsurance, education, training and promotion. 

The experts interviewed by Beijing News say China's agricultural insurance is still in its initial stages. They recommend clarifying indemnities, improving risk assessment, public sharing of information, incorporating environmental protection and carbon reduction in insurance products, and better coordination in administering and monitoring the program.

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