The total crop insurance premium from US, China and India were respectively $9.3bn, $6.3bn and $2.7bn in 2016, ranking as first, second and third place in the world. As shown in the chart below, there has been a rapid growth in China and India over the last decade whereas the growth in US has levelled off in the recent years. There are many similarities in the development of crop insurance among the three countries, but they also have major differences and are currently facing different challenges.
The most important common feature in all three countries’ programs is the government subsidy which was the engine for the rapid premium growth in the US during the 1990s and is currently propelling the expansion in China and India. The total US government subsidy amounted to $5.9bn in 2016, covering the direct premium subsidy (ranging from 38% to 68%) and administration and operation (A&O) compensation. The money for the subsidy comes from the President’s farm budget and the subsidy level is uniform across all crops and regions. The government subsidies in China and India take different forms. There are no A&O subsidies so premium rates are loaded with expense ratios. China’s premium subsidy is split among Central, Provincial and Local governments, resulting in different subsidy levels among crops and regions. Usually, wealthier regions have a higher subsidy level. The overall premium subsidy percentage ranges from 65% to 80%. In India, the premium rates paid by farmers are capped at 1.5% and 2.0% for crops grown in the Rabi and Kharif seasons, respectively. The difference between the actuarial rates and what the farmers pay is shared equally by the central and state governments as premium subsidy.
The types of insurance product, underwriting and claim process differ significantly among these three countries. Over 80% of the premium in the US is from revenue protection which protects against shortfalls in yield, price and/or a combination of the two. The majority of coverage is at the farm level where creditable historical and actual farm production records are used for coverage establishment, actuarial rating and claim adjustment. Crop insurance coverage in China and India is mostly for yield shortfall only at the village and/or regional level. As the table below shows, although the two countries are producing the volume of grain, oilseed and cotton as in the US, the average farm size in China and India is much smaller. As such there is no reliable and trustworthy farm-level data available for establishing sound coverage and rate making.
In China, the primary protection is for the cost of production. The terms and conditions including premium rates, maximum sum insured and premium subsides are discussed and agreed by three levels of government entity each year before the planting season commences in May and June.
In general the insurance policies for individual farms residing in the same village are issued collectively to an appointed “Insurance Coordinator” who usually is an elected village official. This coordinator/official will be in charge of keeping all of the insurance-related records for each farm in the village. He will participate in loss adjustment with insurance companies and is responsible for settling claims for each farm.
Crop insurance in India is mandatory in nature where the farmers who borrow production loans from the Rural Financial Institution (RFI) are required to be insured under an area yield index scheme called the Prime Minister’s Fasal Bima Yojana (PMFBY) which was launched during the 2016/17 crop season. Insurance companies develop their business through a tendering process at a district/cluster level by offering competitive rates. Each year the provincial government determines the coverage level and insured value for each insured crop. Insurance rates tendered are actuarially developed using the historical regional/area yield data collected by the government. The actual yields for the insured crop are estimated through the Crop Cutting Experiments (CCEs) which are conducted and managed by the government. The insurance companies monitor the CCE through appointed specialists from third party vendors. They can appeal or dispute the actual yield estimations from CCE if there are meaningful differences.
Since each insurance policy is linked with the loan from the RFI, it ensures that the premiums collected and remitted to insurance companies and claims settled to each individual farmer’s account.
There are also some major differences in reinsurance requirements and demand among the three countries. Through the Standard Reinsurance Agreement (SRA), US crop insurers are required to cede 6.5% of all business to the Federal Crop Insurance Corporation (FCIC) and protected with a maximum loss cap of 116.5% for the Assigned Risk Fund and between 151.5% and 194% for the Commercial Fund. The private reinsurance companies like the Toa Reinsurance of America offer the proportional and/or excess of loss protections net of the SRA. In recent years, many large international reinsurers have become direct SRA holders, meaning the majority of private quota share reinsurance opportunities have disappeared and making the excess of loss the primary reinsurance need in the US agriculture market.
In China, crop insurance companies are mandated to cede a minimum of 50% of their business to the China Agricultural Reinsurance Pool (CARP) which is currently managed by China Property & Casualty Reinsurance Company (CPCR). The rest of the business is reinsured by international reinsurers mostly through proportional treaties, making China the largest crop reinsurance market in terms of reinsurance premium. There is no loss cap provided by the Central Government for crops, but some provincial governments participate in catastrophic loss and/or provide maximum loss caps. In India, a minimum of 5% crop business is required to cede to General Insurance Corporation of India (GIC). Under the PMFBY scheme there is a loss cap of 350% per loss ratio or 35% per loss cost, whichever is higher, at the national level in a crop season. The loss exceeding these levels will be paid equally by the central and provincial government. Most crop insurers buy proportional reinsurance protection for capital relief because of the sudden growth in the crop business. As a result, India has quickly become the second largest crop reinsurance market in terms of ceded reinsurance premium.
At present, the biggest challenge facing US crop insurance companies is the uncertainty surrounding the government subsidies. The Trump Administration’s budget proposal calls for a premium subsidy cap at $40,000 per farm for a savings of $16bn as well as eliminating the harvest price option (HPO) for a savings of $12bn over the next decade. Crop insurance is considered by many lawmakers as one of the most successful farm programs in US, but the significant cuts that have been proposed have created a significant level of frustration and anxiety across farm communities, even though the final legislative outcome will not be known until a new Farm Bill is enacted in 2018.
In the emerging markets, the governments in China and India are expect to pull more budgetary supports to their vast rural economy including further development of crop insurance programs as there has been a significant economic improvement in urban areas. The common challenges are a lack of systematic infrastructures, including processing systems, underwriting control and compliance rules. Compared with the US, the current coverage level is primitive due to a lack of credible data at the farm level. As such, crop insurance programs in China and India are yet to become an effective risk management tool for many individual farmers.
State of the art computer systems for data mining along with the latest GIS remote sensing and drone technology eliminate much of the moral hazard and adverse selection in US, and China and India have a lot to catch up on. Finally, international reinsurance companies will need to see a considerable improvement with regards to data transparency and timely reporting when it comes to dealing with the emerging markets of China and India.
Dr. Bin Zhang and Andrea Shi, SVP and VP of Toa Reinsurance