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Insurance Approach for Financing Extreme Climate Event Losses in China: A Status Analysis

Listed author(s):
  • Haitao Yin


    (AnTai College of Economics and Management, Shanghai Jiao Tong University)

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    China suffers a variety of natural disasters every year. The frequency and consequences of these disasters have risen due to climate change, resulting in increased economic losses. This project first examines the existing public system of disaster relief and recovery including both direct government subsidy and public insurance system through extensive documentary study, focus group discussions and in-person interviews. We found that the usefulness of direct government subsidies is limited by the availability of public financial resources. Direct government subsidies are largely reserved for those who do not have the capability for self- relief and recovery. For those who do receive government subsidies, the amount of assistance is only sufficient for basic housing needs instead of restoring the way of life people had before a natural disaster. Public insurance, on the other hand, only applies to rural areas and has a maximum coverage of only about CNY 18,000. As with direct government subsidies, the purpose of public insurance is meeting basic needs, instead of helping people go back to the life they used to have. Furthermore, the premium of the public insurance system is heavily subsidized and not related to risk. This practice has been criticized for watering down economic incentives for proactive risk management and emergency response capacity building (Gurenko and Lester 2004; Heinz Center 2000; Yin, Kunreuther, and White 2011). The limitations of the public approach create a space for private insurance. In this paper, we investigate how China’s insurance industry (as suppliers) and Chinese people (as consumers) view natural disaster insurance. We conducted in-person interviews with insurance companies that are involved in the property insurance market in China. Insurance companies hesitate to offer insurance policy against natural disasters because of institutional barriers (e.g., natural disaster coverage is not considered a separate category, and existing accounting and tax regulations), low demand from consumers and the ambiguity associated with natural disaster. Our analysis of the demand for insurance is based on a field survey, which includes a choice- experiment of insurance selection. We found that people have a low demand for insurance because of three major reasons: a) the perception of “it won’t happen to me”, b) budgetary constraint, and c) a deep distrust in the insurance industry. We found that people tend to avoid insurance offered by small-scale insurance companies and strongly favor government insurance. This suggests that the establishment of natural disaster insurance should be initiated by government in China. We also found that one’s willingness to pay (WTP) for natural disaster insurance would significantly increase if one has high risk perception, and has experienced natural disasters. Our analyses suggest that neither the public nor private approach present an adequate solution to the challenge of financing natural disaster losses in China. Government-business collaboration may provide a viable alternative. Based on our findings, we discuss the roles that government and the private sector should play in a collaborative system.

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    Paper provided by Economy and Environment Program for Southeast Asia (EEPSEA) in its series EEPSEA Research Report with number rr2013035.

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    Date of creation: Mar 2013
    Date of revision: Mar 2013
    Handle: RePEc:eep:report:rr2013035
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    1. Kunreuther, Howard & Hogarth, Robin & Meszaros, Jacqueline, 1993. "Insurer Ambiguity and Maarket Failure," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 71-87, August.
    2. Gurenko, Eugene & Lester, Rodney, 2004. "Rapid onset natural disasters : The role of financing in effective risk management," Policy Research Working Paper Series 3278, The World Bank.
    3. Anna Alberini & Maureen Cropper & Alan Krupnick & Nathalie Simon, 2006. "Willingness to pay for mortality risk reductions: Does latency matter?," Journal of Risk and Uncertainty, Springer, vol. 32(3), pages 231-245, May.
    4. Nick Hanley & Robert Wright & Vic Adamowicz, 1998. "Using Choice Experiments to Value the Environment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 11(3), pages 413-428, April.
    5. Kunreuther, Howard & Sanderson, Warren & Vetschera, Rudolf, 1985. "A behavioral model of the adoption of protective activities," Journal of Economic Behavior & Organization, Elsevier, vol. 6(1), pages 1-15, March.
    6. Adamowicz, Wiktor L. & Boxall, Peter C. & Williams, Michael & Louviere, Jordan, 1995. "Stated Preference Approaches for Measuring Passive Use Values: Choice Experiments versus Contingent Valuation," Staff Paper Series 24126, University of Alberta, Department of Resource Economics and Environmental Sociology.
    7. Haitao Yin & Howard Kunreuther & Matthew W. White, 2011. "Risk-Based Pricing and Risk-Reducing Effort: Does the Private Insurance Market Reduce Environmental Accidents?," Journal of Law and Economics, University of Chicago Press, vol. 54(2), pages 325-363.
    8. Adamowicz W. & Louviere J. & Williams M., 1994. "Combining Revealed and Stated Preference Methods for Valuing Environmental Amenities," Journal of Environmental Economics and Management, Elsevier, vol. 26(3), pages 271-292, May.
    9. Howard Kunreuther & Mark Pauly, 2004. "Neglecting Disaster: Why Don't People Insure Against Large Losses?," Journal of Risk and Uncertainty, Springer, vol. 28(1), pages 5-21, January.
    10. Dwight Jaffee & Howard Kunreuther & Erwann Michel-Kerjan, 2008. "Long Term Insurance (LTI) for Addressing Catastrophe Risk," NBER Working Papers 14210, National Bureau of Economic Research, Inc.
    11. Louviere, Jordan J., 1992. "Experimental choice analysis: Introduction and overview," Journal of Business Research, Elsevier, vol. 24(2), pages 89-95, March.
    12. Boxall, Peter C. & Adamowicz, Wiktor L. & Swait, Joffre & Williams, Michael & Louviere, Jordan, 1996. "A comparison of stated preference methods for environmental valuation," Ecological Economics, Elsevier, vol. 18(3), pages 243-253, September.
    13. Kunreuther, Howard C. & Michel-Kerjan, Erwann O., 2011. "At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262516543, July.
    14. Nick Hanley & Douglas MacMillan & Robert E. Wright & Craig Bullock & Ian Simpson & Dave Parsisson & Bob Crabtree, 1998. "Contingent Valuation Versus Choice Experiments: Estimating the Benefits of Environmentally Sensitive Areas in Scotland," Journal of Agricultural Economics, Wiley Blackwell, vol. 49(1), pages 1-15.
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