Research On The Establishment Of Catastrophe Compensation Fund System Of China

The past 30 years has witnessed the growing catastrophes all over the world, and also the increasing losses following behind. China is always a country seriously stricken by Cats; especially the "Wenchuan" earthquake (May,2008) caused magnificent losses in human lives and economy. But in China the main way to deal with these Cats always lies in the use of fiscal funds and social donations, which is usually of limited effects. On the contrary, other countries like New Zealand, America, Japan, Taiwan District and several countries in European Union have established more successful compensation systems for Cats. Recently, heated and extensive debates were carried out all over our country upon the foundation of Chinese catastrophe compensation system. Based on comparison and summary of those extant systems, this paper aims at offering some help for the construction of our system.The main context of this paper is composed of seven parts:Chapter 1 is the foreword, describing the current catastrophe situations faced by the whole world, especially by our country, and explaining the research methods and the logic of this paper. Chapter 2 summarizes the definition of "catastrophe" given by different organizations and scholars, and gets the conclusion that without considering the shaping factors, to regard the human lives and economy losses as the core factor to measure the Cat losses is more appropriate; then this chapter describes the characters of catastrophe risks to make a basis for the foundation of efficient management of Cats. Chapter 3 is a review of the literatures related to catastrophe risks. During the development of the theories in relation to catastrophe management, there are risk allocation views based on law of large numbers, dispute on the strong points and weak points of catastrophe insurance, comments on the catastrophe derivatives such as catastrophe futures, catastrophe options and catastrophe bonds, dispute on the effect of governmental intervention, and other ways that could fit the catastrophe risks to law of large numbers. Finally, to conclude the ideas of building our catastrophe insurance system which were put forward by Chinese scholars, and to work out the theory logic of the establishment of our compensation system. Chapter 4 and 5 begins with the development history of catastrophe compensation systems in other countries, summarizes the prevention and rescue measures taken by them, compares their systems in legal background, operation mode, insurance coverage, subject of coverage, the flow of fund, and the pay and allocation regulation, etc., draws a conclusion of the similarity and difference among those systems, and at last finds out the common pattern and successful experience of them. Chapter 6 generalizes the situation of our current compensation system for Cats, and picks out its weak points, such as the rareness of compensation subject, the smallness of salvation ratio, the underdevelopment of catastrophe insurance. Based upon the above work, Chapter 7 suggests a new conception on how to establish the. Catastrophe Compensation Fund of China (CCFC), which has been integrated with the advantages of the capital structure and operation mode of insurance, mutual funds, catastrophe bonds and stocks. The organization of the fund and related system, the sources and usages of CCFC, main ways in the operation and the advantages of CCFC are also discussed in details. In the end, chapter 8 comes to the conclusion of the whole paper, and points out the directions of intensive study on this theme.In this paper, the author holds a view that the low probability of the Cats, the broad influence and the huge losses caused by them, etc. make the traditional commercial insurance unsuitable for the Cat risk management. To change the 'natural'characters of the Cats in a short time is impossible, so what we can do now is to remodel the traditional insurance operation style and the accumulation mode of compensation fund. Cat risks securitization can efficiently transfer the Cat risks to the capital market, and lead to cooperation of the public sector and private sector; it's a promising way to solve the Cat risk allocation and transmission problem. But the ideas to establish Cat insurance system in China raised by many domestic scholars recently cannot deal with the situation of underdevelopment of the insurance industry.Up to now, the United States, Japan, New Zealand, some countries in the European Union and Taiwan District have set up their catastrophe compensation systems, according to their own national conditions. The main types of them can be concluded as follows:'unlimited guarantee by the government'type as the EQC (New Zealand),'reinsurance'type as the JER (Japan) and CCR (France),'private and without government's guarantee'type as CEA (USA),'unprofitable firm'type as TREIF (Taiwan District).The main differences among those compensation systems mentioned above arise from the nature of organization, the scope of covered catastrophes, the enforceability and government guarantee, etc. The successful experience is reflected on the common points of those systems:firstly, based on specialized laws to go by; secondly, with inordinately government involvement; thirdly, diversity of sources of the compensation funds; furthermore, diversity of operations of the funds; in addition, hierarchy of compensation; finally, based on the developed insurance and catastrophe insurance industry. It has been found that, those catastrophe risk management systems played an important role in dealing with catastrophes and did great help in losses compensation.So, based on the underdevelopment of the insurance industry in China and integrated with the successful experience of other countries, this paper puts forward a proposal to establish Catastrophe Compensation Fund of China (CCFC): its core institution is catastrophe compensation fund co., which is directly managed by the government; the funds is managed with two separate accounts (government funds account and social funds account); the financing sources include government and social funds, issuance of the CCFC and related catastrophe derivatives, retention of the investment income, etc.; the fund is operated to reach the balance of liquidity, safety and profitability; and the income distribution in sequence is to pay the expenses or cost, to pay the taxes, to withhold investment income and to compensate catastrophe losses.On the whole, two innovations are created in this paper.One point is on the method of study. When comparing the compensation systems, other literatures only described the details of them separately and then got the conclusions. But in order to make better comparison, this paper takes a different point of view, that is from the sections of a system, such as legal background, operation mode, insurance coverage, subject of coverage, the flow of fund, and the pay and allocation regulation. This way helps to analyze the existing systems more clearly and more conveniently to draw lessons from. Another point is on the conclusion. Based on a youth program'Research on the establishment of catastrophe compensation system of Sichuan'(SC08C13), which is supported by Sichuan Federation of Social Science, this paper will fill the gap in the study on the mode of catastrophe compensation system of China in the future, break the research limits focused on the insurance industry in domestic studies, enlarge the sources of fund for catastrophe compensation through security market, insurance market, credit market and fiscal policies, overcome the weak point that the current compensation system is almost tied to financial funds and hardly to develop for the limitation of the underdevelopment in insurance industry.The fund mode put forward in this paper is likely to give consideration to both the sociability and commerciality, to reach the justice in basic compensation and compensation differential in commerciality, to mobilize the initiative of fund holders to chase money, to get better pre-disaster preparations and post-disaster loss reduction and to avoid the low efficiency problem brought about during the operation only by government agencies.