Crop Catastrophic Risk Sharing Ratio Analysis From Government Perspective

Since2007, Chinese central government began to subsidize the agricultural insurance premium. With the implementation of the policy, the agricultural insurance in China has been booming. At present, government-subsidized agricultural insurance has been carried out all the31provinces, autonomous regions and municipalities of China. Agricultural risk has significant systemic characteristic, which means catastrophe occurs frequently. Therefore, catastrophic risk management system is an important prerequisite for the healthy development of agricultural insurance. Chinese catastrophic risk management system is far from perfect. There are more than once when catastrophic loss which excessed the paying capacity of insurance companies and local governments caused negative effect.Chinese agricultural insurance is carried out at provincial level. The provincial governments are responsible to play a major role in agricultural catastrophic risk diversification. When the provincial governments make policies in terms of agricultural catastrophic risk diversification, a direct question needs to be considered:how much risk that the governments shall undertake? If the governments bear excessive risk, it will bring them a heavy financial burden, and "crowd out" the insurance companies’ due responsibility in risk diversification. If the governments share insufficient risk, the objective of the catastrophic risk diversification cannot be achieved and the operation of the agricultural insurance company management is still under the threat of catastrophic risk. How the optimal risk sharing ratio between the government and the insurance company is calibrated still remains unsolved. Thus it is very necessary to conduct the research about the calibration of risk sharing ratio in agricultural catastrophic risk diversification for government to construct the agricultural catastrophic risk management system.This paper takes wheat insurance in Henan Province as an example to explore the optimal risk sharing ratio of catastrophic risk between the provincial government and insurance company. The paper is from the government’s perspective, and uses quantitative model based on county-level data to estimate the optimal risk sharing ratio. The result shows that, in wheat insurance, the optimal risk sharing ratio is210%of the loss ratio (premium/indemnity), on condition that, as assumed in the paper, the loss ratio of insurance company closest approaches to80%, and the volatility of indemnity is minimized. This indicate that when catastrophic risk occurs and causes huge loss of wheat production in Henan Province, which leads to the indemnity of the insurance company exceed2.1times of its premium income in that year, the payment from government is triggered and fulfill the rest of indemnity liability. The risk sharing model in this paper can be applied for policy making on catastrophic risk diversification for other provincial governments.