An analysis of factors influencing the feasibility of weather index crop insurance in China: the case of Huojia County, Henan Province

Abstract

The pressure to feed such a large population and the responsibility to stabilise incomes of a plethora of small-scale farmers presents a serious challenge for the Chinese government. Natural disasters, particularly weather-related, have increased both in frequency and intensity, heightening the demand for risk management strategies to enable households to cope with crop production risks. Among risk management strategies, agricultural insurance has been mooted as a powerful povertyalleviation mechanism and important agricultural protection tool. For China, the development of agricultural insurance has gone through: a trial period (1950-1958); recovery period (1982-1992); recession period (1993-2003); and breakthrough period (2004 onwards). From 2004, China commenced a new round of pilot experiments, with “policy-oriented” agricultural insurance conducted throughout China from 2007, supported by either the central government or by provincial governments. The experiments and program rollout uncovered several problems that have significantly constrained farmers’ demand for agricultural insurance including difficulties in claims procedures and low indemnity. Weather index insurance has been proposed as one means of overcoming some of these difficulties. The objective of this study is to investigate the relative merits, perceptions, and feasibility of weather index crop insurance as a means of managing weather-related production risks for individual farmers in China. The investigation is conducted using the case of Huojia County in Henan Province where the main crop of interest is winter wheat. The analysis draws on historical village yield and county weather data from 1981-2010, as well as information collected from households, insurance agents, meteorological bureau and local officials and leaders. Key components of the analysis include: (a) identifying the technical relationships between weather and crop yields which form the basis for the weather index crop insurance contracts; (b) understanding central and local government objectives, support for and capacity to facilitate weather index crop insurance; (c) eliciting the attitudes, perceptions and demand by farm households for risk management strategies, in general, and agricultural and weather index crop insurance, in particular; and (d) understanding issues associated with the supply and implementation of weather index crop insurance from the perspective of insurance companies. The renewed emphasis on agricultural insurance since 2004 has been accompanied by a growing literature and this study adds to that literature by providing a holistic analysis of weather index insurance rather than a focus on just one aspect such as the underlying technical relationships or on the attitudes of farm households.Included among the key findings from the study are: (a) weather insurance is technically feasible; (b) the policy environment is conducive for introducing weather index crop insurance in terms of providing information, promotion, organization and coordination between departments, although the funding support from local government was found to be limited; (c) the demand for a weather index crop insurance product to offset the risk of yield loss for farmers in rural China represents a substantial opportunity and displays a growing trend as households seek time-efficient risk management strategies; and (d) the supply of weather index crop insurance products by insurance companies in China needs further attention especially in terms of product design and development to address concerns about profit margins, farmers’ trust, and high initial investment. Overall, the integrated analysis in the study indicates that purely commercial weather index crop insurance in rural China without government support is extremely unlikely at present to be successful. However, given the generally favourable perceptions of weather index crop insurance by farmers, insurance companies and government, subsidised insurance products meeting the risk management needs and objectives of households and governments, and the commercial imperatives of insurance companies may be possible in the future.