Insurance in poverty reduction: a case from China

In China, which makes up one fifth of the world's population, the two primary causes of poverty are disease at 42% and natural hazards at 20%. Researchers at Peking University in partnership with Swiss Re Institute investigated the role insurance can play in alleviating poverty.

They looked into two pilot projects to assess whether and how insurance can reduce the two poverty triggers. One was a supplementary medical insurance programme in Dali, Yunnan Province; the other was an agricultural insurance programme in Fuping, Hebei Province. 

The researchers concluded that insurance and its supporting mechanisms, such as reinsurance and alternative risk transfer solutions, are powerful tools to manage the risk of falling into poverty due to disastrous health expenses or natural catastrophes.

"This report shows what we can achieve when we tap into local insights to find innovative insurance solutions," said Swiss Re China President John Chen. 

Since 2011, China's public policies have increasingly relied on private insurance to reduce poverty through loss protection, credit enhancement and direct financing. However, society is not yet fully aware of the role insurance can play in reducing poverty, the report notes. 

While the researchers saw challenges in replicating the pilot programmes, they believed their conclusions could be helpful and relevant to other developing countries. 

In ancient times, the local governments in China would 开仓放粮 (kai cang fang liang) – open their granaries to help the poor after disasters. Today, governments can leverage insurance to get additional capital to support people in need. The Swiss Re Institute (SRI) is proud to be working with Peking University to publish this report for China, which explores how the insurance industry can play a more important role in making society more resilient, in particular protecting people from falling back into poverty due to disastrous health expenses or natural catastrophes. Our collaboration is more than a win-win – effectively, we have 1 + 1 = 3. What makes it such a success?

First, we have a rewarding partnership. The publication of this Peking University research paper is an example of the kinds of relationships SRI aims to cultivate in the future. As a global reinsurer, we know insurance solutions need to be adapted to regional markets because of social and regulatory differences. To make this happen, we rely on local insights and capabilities to create solutions that meet the standards and needs of each country. SRI finds that tapping the expertise of think tanks and top universities, such as Peking University, leads to improved risk management insights for executives and government officials looking for strategies to increase society's resilience.

Second, these collaborations generate valuable knowledge sharing. This report has applicability not just for China, but also for other regions. We are translating this insightful report into other languages to make the knowhow accessible worldwide, and to strengthen our thought leadership. The global distribution also benefits China, an emerging and fast-growing insurance market. China typically looks to other markets to find insurance solutions; in this case, however, this research paper references domestic cases, giving China the opportunity to share its own experiences with foreign markets.

Third, we have innovative insurance solutions. In this report, Peking University researchers look at various ways to alleviate poverty in China through agriculture and health insurance. The findings could become a model for other countries, and help close the country's protection gap (the difference between total economic losses and insured losses) in natural catastrophes, which was USD 21.6 billion in 2016 due to damaging floods along the Yangtze River basin and USD 6 billion in 2017.

China and Swiss Re have spearheaded novel ideas before. In 2016, Heilongjiang province in Northeast China entered into the country's first anti-poverty insurance deal to protect farmers against financial risks from flood, excessive rain, drought and low temperatures. Swiss Re developed the programme in response to the Chinese Central Government's imperative to build a natural catastrophe insurance system.

I am honoured that SRI is strengthening our relationship with China – the world's second largest economy and third largest insurance market – through our partnership with Peking University, and look forward to more collaborations in the future. By sharing our collective knowledge to create innovative insurance solutions, we are helping to close the protection gap to make economies and societies more resilient for this generation and generations to come.

Poverty remains a critical challenge for most developing countries. The reasons for poverty are under-development of economies, regional imbalance, unequal distribution of income, and insufficient education, among others. In China, which makes up one fifth of the world's population and has a large number of people living in poverty, two of these primary causes contribute more than 60% to poverty (disease 42%, and natural hazards 20%, OPAD, 2017). Insurance, as well as its supporting mechanisms, for example, reinsurance and alternative risk transfer solutions, is a powerful tool to manage the risks of disease and natural hazards. However, society is not yet fully aware of what insurance can or cannot do in poverty reduction. Moreover, there are many challenges in replicating the pilot programs of insurance poverty reduction.

This project on “Insurance in Poverty Reduction” investigates whether and how insurance may alleviate poverty. It demonstrates the effectiveness of insurance on poverty alleviation on vulnerable groups and documents the empirical evidence and cases in the Chinese poverty reduction practice. The project report consists of the following five chapters:

Chapter I, Public Policy and a Three-Pillar System. The Chinese directives and guidelines (Table 1-1) mark the deepening involvement of private insurance in poverty reduction since 2011. We summarize the three major functions of private insurance in poverty reduction as three pillars: loss protection, credit enhancement, and direct financing (Figure 1-1).

Chapter II, Theories. We analyze the comparative advantages of private insurance in poverty reduction to those of a government subsidy, social insurance, and public assistance (Table 2-1). In addition, we develop a theoretical framework to analyze the impact of insurance on households' vulnerability to poverty. We show that insurance has two opposite effects on households’ assets, namely loss compensation and wealth reduction of premium. Together they determine the impact of insurance on poverty reduction. Numerical simulation (Figure 2-1) shows that for households below the poverty threshold, the government usually fully subsidizes the premium, therefore insurance reduces their vulnerability to poverty; for households that have overcome poverty, insurance impacts them according to their amount of assets. We suggest that different degrees of coverage and different forms of products (co-insurance vs. deductible) should be offered so households can make their own coverage choices.

Chapter III, Empirical Analyses. We explore the survey data from the China Health and Retirement Longitudinal Study (CHARLS, 2011, 2013, 2015) to empirically test the impact of health insurance (both private and social insurance) on poverty reduction. Participating in health insurance plans significantly reduces the vulnerability to poverty. However, the impact is only evident in the relative long-term. In short-term observation periods, the impact is insignificant (Table 3-2). Moreover, the degree of health insurance coverage has a positive impact on poverty reduction for sick people (Table 3-3). The results indicate that existing social health insurance programs with high out-of-pocket costs are insufficient to solve the problem of poverty caused by diseases. Thus, private supplementary insurance aimed at reimbursing out-of-pocket medical expenses is highly valuable.

Chapter IV, Chinese Programs. We describe two case studies based on the project's field investigations: the agricultural insurance program in Fuping, Hebei Province, and the supplementary medical insurance program in Dali, Yunnan Province. In both cases, we describe the operating mechanisms (Figures 4-1, 4-3), successful experiences and implications, and current challenges. The key factors for success are the risk management and insurance demand of the local government, the effective supply of tailor-made insurance solutions with underwriting know-how and capacities, and an efficient cooperation model between the insurance institutions and the local government. The programs' common challenges are financial sustainability and risk management demand of insurers. The health and agriculture products correspond to two primary risks leading to poverty in China: disease and natural hazards. Indeed, other insurance products also help poverty reduction, such as micro term life, micro accident, credit and surety, among others.

Chapter V, Conclusions and Implications. We summarize key conclusions, and derive corresponding policy implications for the central government, local governments, the insurance regulator, and insurance institutions.