How can we apply international insurance examples to mitigate catastrophic weather risks on Chinese agriculture?
The 7.9 magnitude earthquake that devastated Sichuan in 2008 was record-setting in the catastrophic death toll and overwhelming economic impact it wrought. In a country that did not adapt earthquake building codes until after the deadly 1970s Tangshan earthquake, China faced a massive economic burden of financing the rebuilding of Wenchuan county, which had only a 0.8% property insurance penetration. To build a comprehensive risk mitigation plan for China’s rural regions, I worked alongside two other Wharton students to assist the World Bank and China Meteorological Association in writing a series of reports and proposals analyzing how to adapt and prepare for low probability, high impact natural catastrophes like earthquakes and floods. The final topics covered weather-index linked insurance vouchers, alternative financial instruments and reinsurance markets, and public-private partnerships to support risk mitigation of low-probability events.
To validate future proposals for China, I studied other international weather-index based models to examine what worked and what didn't when setting up a similar pilot for Fujian, specifically focusing on Malawi's groundnut and maize crop insurance program.
In Malawi, there was little demand for a stand-alone insurance product, but an insurance product linked with loan credit for more productive crops and with inputs like seeds and fertilizer was successful in drawing in potential policy holders. The program started with 900 farmers in the first 2005- 2006 season, more than doubled its uptake to 1910 in the next season, and insured as many as 2600 farmers (with a portfolio size of 3 million) by the time the program was discontinued to do non-insurance related defaults. The farmer education requirements, strength of local distributor channels, infrastructure of regional weather systems to measure weather indexes, and potential for reinsurance made this pilot program an attractive model for what China was hoping to implement in Fujian.
As next steps from this research, the organizations that we worked with (GTZ, CMA and World Bank) have expressed interest in funding pilot programs in China as a part of a broader effort on managing disaster risk.