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China's Catastrophe Insurance System: Concepts and Policy Options
2010-07-28
By Zhang Chenghui, Research Institute of Finance, Development Research Center (DRC)
Research Report No 030, 2010
I. Difficulties in Establishing Catastrophe Insurance System
The establishment of a catastrophe insurance system has been studied for over a decade, but there has been no substantial progress in this respect mainly due to the following difficulties.
1. Relevant departments have no unified definition of government functions
The arguments have focused on the following issues. (1) Is catastrophe insurance a policy-oriented or commercial system? How do we define the government functions in a catastrophe insurance system? Does the government that establishes a catastrophe insurance system have to contribute funds and if so in what way to make contributions? Are the insurance companies engaged in catastrophe insurance and the general public purchasing catastrophe insurance entitled to policy support? Views on these issues are diametrically opposed to each other. Some believe that catastrophe insurance should be policy-oriented and the government should give fiscal and tax support. Otherwise, the system will be unsustainable. Others hold that catastrophe insurance is mainly a type of commercial insurance and that excess dependence on government support means this insurance is equivalent to a direct fiscal disaster relief and the system design will become meaningless. (2) How do the government departments coordinate with each other? Which government department should exercise leadership over establishing catastrophe insurance? Many government departments will be involved in catastrophe insurance. They include the financial department, the insurance regulatory department, the civil affairs department, the professional management departments (such as those in charge of earthquake administration, meteorological administration, oceanic administration and the Ministry of Water Resources), the National Disaster Reduction Commission, and the department in charge of construction administration. As catastrophe insurance is a system engineering that involves different disciplines and departments, it requires not only clear guidelines and reliable designs, but also close cooperation among relevant government departments. If one specific functional department exercises the leadership, it will lack the required authority and ability to coordinate; but if an administrative institution of the State Council does the job, it will lack the required professional ability.
2. How to design a catastrophe insurance system in conformity with China's national conditions
Many of the past researches are devoted to the introduction of foreign systems and experiences in catastrophe insurance. These researches can help provoke thinking and avoid detours. But in establishing a catastrophe insurance system, China needs more relevant demonstration researches. A simple copy of foreign experience is unlikely to serve the purpose. China is a vast country, with diverse natural disasters. Different regions not only have different natural disasters but also differ drastically in economic development and disaster-combating ability. How should a catastrophe insurance system make a start? Should the system be designed for a specific catastrophe or for diverse catastrophes? Should it cover the whole country or begin with just one province? How to ensure the system to be both scientific and operable? Which operational model and risk diversification mode should be adopted? There have been little in-depth researches on these issues. Should the system design be general or elaborate? Should it take the model of a catastrophe fund or the model of a catastrophe reinsurance company and should it endow the regional governments with greater authority? There are also divergent views.
3. Lack of legal framework for nonprofit institutions
The experiences of many countries indicate that the core tasks of a catastrophe insurance system are all undertaken by nonprofit institutions. These institutions are clearly defined by laws, and their operations have mature models, including the nonprofit institutional governance structure, the government regulation and the social supervision. But so far, China has no legal framework for nonprofit institutions. Although many institutions are nonprofit, many of them have become administrative ones and have a strong impulse for self-expansion due to the lack of legal definitions and effective behavioral restraints. As a result, their branches and workforce have continued to rise.
Under such circumstances, what type of institutions should exercise leadership over the catastrophe insurance system? While direct government management is apparently improper, for-profit commercial institutions are unwilling to take up this job for a meager profit. If a catastrophe insurance fund management company or a policy-oriented management institution is established to do the job, how can we effectively contain its impulse for scale expansion and rationally control its operating cost so as to make the catastrophe insurance system sustainable? There has been no definite answer to this question.
II. Basic Principles of Catastrophe Insurance System Should Be Defined According to China's National Conditions
1. China's national conditions
Compared with other countries, China has some unique characteristics, on which a catastrophe insurance system should be based. First, China is a vast country, with diverse climatic and geographic conditions. Natural disasters are both diverse and frequent and differ in both probability and intensity. For example, Sichuan, Qinghai, Tibet and other places in the west region are far higher than the east region in earthquake probability and intensity. And the typhoons, rainstorms, mudflows and other natural disasters that hit the coastal regions frequently occur rarely in the central and west regions.
The urban and rural areas and the different regions also differ in the level of economic development and the ability of risk management. In the developed regions, not only the general public has a high acceptance of insurance products, but also has a greater capacity to adopt advanced disaster prevention and reduction measures so as to reduce the frequency of loss incurrence. On the other hand, as the developed regions have a high population density and a high assets value, they will suffer enormous losses once hit by an unexpected catastrophe. The circumstances in the underdeveloped regions will be quite the opposite.
Based on the above unique features, we cannot simply copy the successful approaches adopted by some small countries and regions. For example, we cannot introduce uniform fee rates and identical insurance amounts and settlement standards to all regions. Instead, we should design a scientific and rational catastrophe insurance system that can accommodate as many regional characteristics as possible.
Second, the insurance industry as a whole is underdeveloped and noted for low underwriting ability and insufficient accumulation. The lack of professionals for natural disaster risk management and expertise for catastrophe risk management makes it impossible to mobilize the resources of relevant government departments and research institutions. Meanwhile, the public preparedness for natural disasters is very low, the infrastructure for disaster prevention and loss reduction is unavailable, and some measures for disaster prevention and loss reduction have not been institutionalized. For this reason, China finds it difficult to rely on commercial insurance to cope with catastrophes as some developed countries such as UK. The government, which has authority and coordinating ability, should exercise leadership over the establishment of a catastrophe insurance system and should enact comprehensive laws and regulations and introduce relevant policies.
Third, commercial insurance is not popularized. If catastrophe insurance is sold completely on a voluntary basis, the insurance rate is unlikely to reach an ideal level. An excessively low insurance rate cannot produce the effect of regional risk diversification, but increase inverse choices. In order to promote the catastrophe insurance system in a sustainable way, it is necessary to adopt a compulsory or semi-compulsory marketing approach.
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