3. The current state of aquaculture insurance in China

Lou Yong
Associate Professor, School of Economics and Management
Tongji University, Shanghai, China

Luo Le and Ping Ying
School of Economics and Trade,
Shanghai Fisheries University, Shanghai, China

3.1 Introduction

Aquaculture is considered a high-risk activity, being prone to natural disasters, market developments, techniques and management. Depending greatly on natural conditions, which are often unpredictable and beyond human control, aquaculturists may have to cope with many hazards, such as floods, typhoons, storms, abnormalities of the weather, pollution and disease outbreaks. Over the last decades, these hazards have caused great damage to aquaculture and its development. In recent years, it is common to see seaside marine aquaculture areas in China being ransacked by red tides. Natural disasters represent the most important risk that marine aquaculture establishments face.

Due to its size and location, China has a relatively frequent occurrence of natural disasters. While its aquaculture is enjoying constant and rapid development, its production and the livelihoods of those involved in the industry are under constant threat from natural hazards. For example, Typhoon Chebi in June 2001 caused direct economic losses to aquaculture in Fujian Province, estimated at around US$270 million. The typhoon and the resulting floods submerged many fishing boats. In total, 6 430 fishing boats, 203 800 marine aquaculture cages and 34 200 mu of shrimp ponds were destroyed or heavily damaged by the disaster. (The Chinese unit of area mu equals 1/15 of a hectare.) Compensation from the government for this damage received by fisherfolk and aquaculturists was only US$0.6 million in total. The gap between the value of the damage and the compensation received shows that aquaculture in China is in urgent need of insurance services.

3.2 Short summary of aquaculture production in China^[3]

China is the largest aquaculture producer in the world: its production reached 20.0 million tonnes in 1995 and has doubled since then. In 2004, aquaculture production in volume terms added up to 41.3 million tonnes. The diversity in species cultivated is large and culture environments are diverse as well. The latter can also be seen in the list of the ten most popular aquaculture species in terms of volume produced. The main species produced are: Japanese kelp, Pacific cupped oyster, grass carp, silver carp, Japanese carpet shell, aquatic plants (nei), common carp, wakame, bighead carp and crucian carp. The first nine from this list of ten species, recorded production volumes of over 2 million tonnes each in 2004.

Aquaculture production in China was valued at US$18.5 billion in 1995; it reached a value of US$28.3 billion in 2000 and the total value for 2004 is estimated at US$36 billion. Grass carp, silver carp and Japanese carpet shell all achieved production values higher than US$2 billion in 2004.

Marine and brackish water aquaculture production in China increased tremendously in the last decades. While production in 1995 was estmated at 10.6 million tonnes, it increased over the last ten-year period to almost 22.8 million tonnes in 2004. In value terms, marine and brackish water aquaculture production increased from US$4.4 billion in 1990 to US$9.5 billion in 1995, reaching US$16.2 billion in 2002. In 2004, marine and brackish water aquaculture production of China was valued at US$16.1 billion.

The estimated number of people employed full-time in aquaculture production activities in China has increased from just less than 2.7 million in 1995 to almost 4.5 million in 2004.

3.3 The insurance market

Insurance as it is known today was introduced in China in 1949 when the People’s Republic of China was founded, but came to a halt in 1958. Only 20 years later, in 1979, the development of the Chinese insurance market resumed, entering a new period of rapid development.

At present, insurance in China is just becoming mature. In 2002, national domestic insurance operations gained an annual income as high as US$37 billion, which is nearly ten times the income of a decade earlier. The growth rate of insurance surpassed that of the national economy in recent years. However, compared to many other countries, China is still lagging behind in the field of insurance.

At present, insurance operations established in China cover four fields - Property Insurance, Liability Insurance, Life Insurance and Guarantee Insurance; altogether more than 300 insurance products are offered. Table 5 presents a list of main insurance products groups, annual premium paid for insurance in US$ billion, percentage of total premiums paid, indemnity confirmation and loss ratios in 2003. The table shows that agriculture insurance premiums were estimated at just US$60 million and represented just 0.2 percent of the insurance market. The loss ratio of agriculture insurance is the highest among all listed insurance product groups. This implies that agriculture insurance starts with a backlog when competing with other sectors for insurance capacity.

On the supply side, the insurance market was completely monopolized until 1988by China’s state-owned commercial insurance company, the People’s Insurance Company of China (PICC). At present, however, the ownership and management structure of the insurance market is becoming more diverse. Since 1988 PICC has continued to play a leading role; however, other insurance companies have been established to provide insurance services to a number of sectors such as finance and banking, civil administration, transport and agriculture. Meanwhile, foreign insurance companies were allowed to enter the Chinese market, thus increasing competition and further promoting the development and spread of insurance in China. In 2003, PICC’s insurance market share was around 62 percent. Other major insurance companies were: Pacific Property Insurance (12 percent of the market share), Ping-an Property Insurance (9 percent of the market share), Chinese Union (5 percent of the market share) and Tian-an Insurance (4 percent of the market share).

TABLE 5
Insurance product groups, premium incomes and loss ratios of insurance in China (2003)

Source: China’s Statistics Yearbook, 2003

In China, aquaculture insurance is considered part of agriculture insurance and handled similarly. Aquaculture insurance functions as a form of economic protection for aquaculturists. It protects against economic losses caused by natural hazards and contingencies in the aquaculture production process. The 20-year history of available aquaculture insurance has been filled with twists and turns. In the very beginning, the aquaculture insurance market was dominated by PICC, whose agriculture insurance unit was also in charge of aquaculture insurance. PICC was restructured into a limited corporation in July 1996. This restructuring also included a change in management goals and systems, which determined that the provision of agriculture insurance products was no longer economically viable. Therefore, despite the fact that in only a few regions, including the major region of Shanghai, agriculture insurance and therefore also aquaculture insurance were still in the portfolio of services, in practice they remained stagnant after 1996. Until 2004, agriculture insurance services were only provided by PICC and the Property Insurance Company of the Chinese Union, whose agriculture insurance units suffered great losses every year. It is estimated that the agriculture insurance premium income in 2003 was between US$55 and US$60 million, accounting for less than 0.2 percent of the total insurance premium income. This means that the average premium payment by the 230 million farmers nationwide was less than US$0.24 in 2003. When comparing the agriculture insurance premium income of 2003 with that of 1993 when it was at US$100 million, a large decrease can be noticed. Further, over the same period, the agriculture insurance product diversity decreased from around 60 to around 30 products.

Concerning PICC, its activities in the field of aquaculture insurance covered less than 2 percent of the entire agriculture insurance in 2003. Between 1982 and 1995, the total premium income obtained by PICC from aquaculture insurance was US$1.12 million, while US$2.2 million was paid for compensation, resulting in a loss ratio of 197 percent. During the same period, the loss ratio of fish culture insurance was 144 percent. From 1989 to 1995, the average loss ratio of fish culture insurance was 172 percent, while that of shrimp culture insurance reached 1 440 percent, ranking the highest among the various agriculture insurance species (Ge Guang-hua and Lou Yong, 1997). The average loss ratio in aquaculture insurance from Shanghai Anxin has been around 80 to 90 percent in recent years, higher than that of any agriculture crop insurance.

In contrast, capture fisheries insurance in China has developed sustainably over the last decade. It has been argued by some that capture fisheries has been more profitable and that fisherfolk’s awareness of insurance is higher. In particular, the capture fishery sector has its own insurance association, which has been up running for some ten years - the China Fishing Vessels Owners Mutual Assurance Association. This association has the necessary institutions, talents and technological advantages, and has established a system of capture fisheries insurance services throughout most of the country.

Chinese government had no policy or legislation on aquaculture insurance for a long time since aquaculture insurance was considered part of agriculture insurance. There was no uniform policy to support its development, and therefore a nationwide and standard insurance system was not formed. No policy changes in this respect occurred in 2005.

With China’s membership in the World Trade Organization (WTO), it became clear that many issues have to be solved as soon as possible, including the provision of agriculture subsidies and some existing regulations in order to bring China’s agriculture in line with the agricultural agreements signed between China and other WTO members. It has become inevitable for China to improve its agriculture insurance market structure and conduct as soon as possible and to set up better systems for protecting the agriculture and aquaculture sector against natural disasters. After several years of stagnant aquaculture insurance, it then entered into a new stage of development in 2004. Moreover, the operational structure for aquaculture insurance has become more diverse. The insurance institutions and their market conduct are becoming more diverse. Insurance institutions of different backgrounds (public, collective-owned, national, private, share-based and foreign-capital-funded all play separate roles in the aquaculture insurance market. They provide different insurance products - profit-oriented, policy-supported as well as disaster-assistance and mutual insurance - and use different operation modalities (e.g. through agents and mutual insurance arrangements).

3.4 Demand and supply issues

In theory, all the institutions providing agriculture insurance services can also provide aquaculture insurance. However, China’s territory is so vast that the natural conditions, industry structure and development, economic situation and other factors vary greatly from place to place. Aquaculture location- and condition-specific risks, the demand for insurance and the ability of aquaculturists to pay for the necessary premiums also differ greatly. Agriculture insurance, including aquaculture insurance, started to develop again in 2004, when various new agriculture insurance institutions were established and a number of pilot projects were initiated, also including aquaculture insurance services. The main institutions involved in agriculture insurance (and aquaculture insurance) in 2004 were the following: Shanghai Anxin Agriculture Insurance Company Ltd, PICC, Property Insurance Company of the Chinese Union, China Fishing Vessel Owners Mutual Assurance Association, and Groupama. The activities of the major players in aquaculture insurance in China are discussed below.

Shanghai Anxin was established in September 2004 as an insurance company specialized in providing services to the agriculture sector. Its charter states that the premium income of agriculture and aquaculture should consist of at least 60 percent of the total. In addition, in accordance with international practice, the insurance of agriculture, also including livestock and aquaculture stock insurance, is policy-supported. Farmers active in these subsectors can enjoy premium subsidies offered by the government of around 30 percent. The insurance company is also exempted from some agriculture insurance taxes. Other agriculture-related insurance products, including property insurance and liability insurance, are operated in a commercial manner. In this way, the losses made in arable farming and aquaculture can be compensated by profits gained in other insurance products. This system is called "insurance’s self-raising". In case devastating disasters hit the sector, the government can offer its support under the existing special disaster relief policy; however, this would be done only if the insurance company could not afford to pay its insurance obligations. Shanghai Anxin’s operations focus on the economically important agriculture and assemblage rural sectors near Shanghai. At present, the crop insurance services of the company include insurance policies for paddy, wheat, cole crops, vegetables, wood and melons; insurance of livestock and aquaculture stocks include policies for pigs, cattle, chicken, duck, freshwater fish aquaculture and crab culture in purse nets. Although the aquaculture production in Shanghai accounts for less than one percent only of the total aquaculture production in China, Shanghai Anxin’s share of the total insurance premiums paid in aquaculture adds up to 42 percent of the total premiums paid for insurance of aquaculture in the country. In 2004, a total of some 70 000 mu of freshwater fishponds in Shanghai were insured. These were located in the suburbs of the city where aquaculture production risks mainly come from natural hazards and other contingencies that may cause death by oxygen depletion. At present, annual premium rates for freshwater aquaculture insurance against death caused by oxygen lack are some 2 percent of the total insured sum; 30 percent of the premium can be subsidized by municipality or local government after purchase of the insurance. The maximum compensation that farmers can receive is US$241 for each mu of their fishpond in case of losses. The local branches of the insurance companies, together with the aquatic product office are responsible for the work involved, including contract-signing, premiumcharging and insurance-related investigations.

PICC started in 1982 with agriculture insurance services, using the slogan "low risk, low premium and fundamental indemnity". However, the high risks involved in agriculture production and the low profits gained by the company caused it to terminate its agriculture insurance in the last decade, except in some regions where insurance was policy-supported. As of January 2005, PICC’s branch offices in Fujian, Liaoning and Heilongjiang Provinces still only provide agriculture insurance services. In recent years, the premium income from agriculture insurance, mainly from the insurance of arable crops, accounted for less than one percent of the company’s total premium income. Aquaculture insurance in its turn only accounted for a tiny part of this one percent premium income. For example, while aquaculture production in Fujian Province was estimated at 3.43 million tonnes in 2003, and the province is known for being frequently threatened by typhoons, droughts, storms and other natural hazards, the premium income from aquaculture insurance in the same year was only US$7 000.

The Insurance Company of Chinese Union (ICCU) is also a state-owned company involved in agriculture insurance. The company was originally called the "Insurance Company of the Xinjiang Construction Corps" and was established in 1986. At that time, it was mainly involved in the agriculture insurance in Xinjiang Province. In 2002 it became ICCU after being ratified by the Insurance’s Supervising Committee of China and was allowed to expand its operations to other provinces around the country. At present, it has opened branch offices in nine municipalities and provinces including: Beijing Municipality, Shanghai Municipality, Chongqing Municipality, Guangdong Province, Zhejiang Province, Sichuan Province, Jiangsu Province, Liaoning Province and Shaanxi Province. Together with the Xinjiang Production and Construction Corps, ICCU established an agriculture risk fund, where the premium income is stored on a 30/70 percent basis, just as compensation is paid when disasters occur. ICCU provides crop insurance to farmers for arable crops and aquaculture, although the activity is only of minor importance to the company in terms of premium income. Since ICCU’s experiences with agriculture and aquaculture insurance are not very positive (e.g. the loss ratio in 1999 on agriculture insurance was around 76 percent), the company shows limited interest in promoting aquaculture insurance and making it a major activity.

In 2004, the China Fishing Vessel Owners Mutual Assurance Association started its first activities in aquaculture insurance (see Box 1). Some other professional agriculture insurance companies have just been established or allowed to enter the market. Their operations are generally confined to provinces where fisheries play only a limited role; so far no information could be given on any specific type of aquaculture insurance in their portfolio. Nevertheless, aquaculture insurance is listed among their services, so they might be regarded as potential suppliers in the aquaculture insurance market. One of the new parties on the market is Groupama, which opened a branch office in October 2004 in Chengdu, the capital of Sichuan Province. It is the only foreign company offering agriculture insurance services in China as of January 2005. Anhua Agriculture Insurance Company, which was operating in Jilin Province in December 2004, is another new market player. At present, it operates as a commercial company, not yet policy-supported. The company follows a marketing strategy of combining direct and indirect sales, cooperating closely with rural credit unions and utilizing them as its main marketing channel.

A final new market player worth mentioning here is the Yangguang Agricultural Mutual Insurance Company, which is the first real mutual insurance company in China. In January 2005, it was established to provide agriculture services (including aquaculture insurance) to farmers in Heilongjiang Province, which is located in China’s major "bread basket".

On the demand side, in 2003 the total area used for aquaculture in China was 7 103 648 ha (China’s Fisheries Statistics Yearbook, 2003); however, less than one percent of this area was covered by insurance. Demand for insurance shows an increasing trend in the development of aquaculture. In recent years, fundamental changes have taken place with regard to the economic structure of aquaculture. Aquaculture is increasingly considered an activity that involves risks. Its vulnerability to risks objectively calls for the establishment and perfection of related social and financial service systems.

Moreover, aquaculture is developing in China towards intensification, increasing yields, and increasing efficiency and output in terms of high-quality and safe food. These trends require investment increases in facilities and equipment, and a culture of high-quality and high-value aquatic products; higher investments mean higher financial risks.

In addition, the awareness of risks among aquaculturists has also improved greatly in recent years. This is partly a result of a shakeout in some areas; production in these areas is being centralized in the hands of some very successful aquaculture enterprises and specialized households. The less profitable aquaculture farms are disappearing and the successful ones seem to grow in areas like Shanghai. Increased scale of operations and intensification create additional risks, which can be a great burden on individual aquaculture enterprises and households involved in the activity. To reduce this burden, more and more aquaculturists call for aquaculture insurance services. Many of the pilot projects in aquaculture insurance carried out in recent years were established at their request. The government generally urged locally active insurance institutions to respond to the farmers’ requests.

Wang Wei-Jing (2004) estimated that in China the direct economic loss to the fishery sector (including aquaculture) each year caused by natural disasters is around US$600 million. Relating this figure to the situation in Western countries where on average 20 percent of the losses are compensated for through insurance, the current capacity of the fishery insurance market in China would add up to around US$120 million. It should be noted here, however, that the premium rates currently applied in aquaculture insurance depend on the average degree of damage or loss. The premium charged usually accounts for around ten percent or more of the production value. Such an insurance premium is considered too high for most aquaculture households in China.

3.5 Policies currently in force

The exact number of aquaculture stock insurance policies in effect in China is unknown. Based on verbal communications from operators in the various insurance companies currently involved in aquaculture insurance in China, there are roughly a few hundred policies in force in 2005. The insurance companies approached did not, however, reveal the current number of aquaculture insurance policies.

The policies terms and conditions as well as the application forms of the current policies in force are generally developed by the insurance companies themselves.

3.6 Perils covered

Aquaculture insurance in China is limited to "named perils".

As far as aquaculture stock insurance is concerned, the insurer generally compensates for the economic losses due to death caused by oxygen lacks, hurricanes, tornados, storms, floods and thunder storms, electricity failure at the farm and collapse of dykes.

In addition, insurance coverage occasionally includes theft, poison-casting, looting and pollution by pesticides flowing from neighbouring farmland into the pond. The valid term of fish aquaculture insurance is generally one year, and if a pond is cleared halfway, the insurance obligation automatically comes to an end.

In shrimp production, the insurer compensates for the economic losses due to devastating tides, tsunamis, collapse of ponds, atrocious weather conditions causing an anoxic situation inside the fish pond, and losses due to poison-casting.

The present insurance policies in place prescribe that compensation shall be mainly confined to the death of species caused by devastating disasters beyond man’s control or by contingencies that do not result from farmers’ behaviour. Hazards such as diseases that can often be prevented and mitigated through technical methods are generally not included under the insurance coverage.

3.7 Species insured

In 2005 aquaculture crop insurance included insurance policies for shrimp, fish, freshwater mussel, sea tangle (i.e. kelp) and shellfish culture. Currently, however, insurance coverage is limited to some fish and shrimp species culture in the Shanghai Municipality and Zhejiang and Liaoning Provinces. The main species include black carp (Mylopharyngodon piceus), grass carp (Ctenopharyngodon idellus), silver carp (Hypophthalmichthys molitrix), bighead carp (Aristichthys nobilis), common carp (Cyprinus carpio), crucian carp (Carasslus auratus) and blunt snout bream (Megalobrama ambly-cephala). In general, these species need not be differentiated very clearly when applying for insurance coverage.

The species in coastal and marine aquaculture that can be insured at present are shrimp (Penaeus chinensis and Penaeus monodon), scallop (Chlamys farreri) and kelp (Laminaria digitata). The major risks in the culture of these species originate from sea-borne disasters such as typhoons, tsunamis, abnormal tides and seawater pollutants. The insurance provides compensation for these risks. At present, the cages and fish fry of various species can be insured for deep-water cage fish culture. Insurance coverage neither includes misconduct and mismanagement by the aquaculturist, nor acts of war and government conduct. In some cases, diseases can also be insured against.

Some companies are investigating the possibility of also providing insurance cover for high-value aquarium fish species culture.

3.8 Growing systems insured

Although the specific insurance policies vary from place to place, intensive and semi-intensive grow-out of fish in fishponds is generally considered the main insurance of fish and shrimp aquaculture. Only aquaculturists raising fish or shrimp who have chosen the right place for the ponds and who have the necessary anti-disaster devices, such as those capable of providing additional oxygen under water to enable him/her to manage the pond normally, can apply for insurance coverage.

Shrimp, scallop and kelp raised in coastal areas, mainly in the shallow sea and on coastal banks, can also be insured.

At present, not one insurance company in China provides insurance coverage for hatchery production. Some companies plan to insure purse-net culture activities in inshore areas and inland water bodies.

In addition to aquaculture crop insurance, some of the Chinese insurance companies offer the aquaculturists coverage for buildings and onshore equipment, public liability, employer’s liability and products liability.

3.9 Underwriting

Insurance companies try to transfer part of the risks to reinsurance companies or government, mainly in the face of devastating disasters that might ruin their company and make it impossible to compensate all those insured. For example, it is prescribed by some companies that any insurance policy with a total sum of insurance above US$2.4 million or premiums above US$0.48 million shall be reinsured.

Due to the high loss ratio of agriculture (fisheries) insurance, China’s commercial agriculture insurance companies have not managed to find reinsurance within China to date. This means that the risks are mainly borne by the company itself. In case large disasters hit the sector and the losses do not exceed the companies’ solvency, sometimes it is the local government that provides some financial support. In many regions in China, however, no guarantee fund for agriculture insurance has ever been set up, and local governments cannot therefore provide any assistance in paying additional compensation to those insured that are hit by disasters.

To date, Chinese insurance companies involved in aquaculture insurance are not allowed to underwrite aquaculture risks in other countries.

3.10 Risk management

Cooperation between insurance companies and aquatic product offices is common practice in China to create awareness and support the development of aquaculture insurance, reduce risks through promotion of better management practices, and the monitoring and evaluation of aquaculture practices and damage and losses. Any successful aquaculture insurance operation in China up until now has worked closely with aquatic products offices.

In the various pilot projects carried out over the past years, aquaculture insurance is also used as tool to increase cooperation between various participants in the project, with the overall goal to reduce the risks in both aquaculture production and the insurance service.

Some risk management activities most commonly used in China are:

• When introducing new insurance products, the marketing and extension personnel will evaluate the risks, using their experience and know-how of the sector.

• When aquaculturists apply for insurance, an inventory is made of the equipment, facilities and situation at the site, which will be compared with the situation after any damage or losses have occurred.

• Compensation is paid according to different levels of damage or loss, and those insured who enjoy successful production processes and thus need little compensation from the insurers will be rewarded by a deduction in premium fees.

• When the insured sum is determined, insurance companies generally make the aquaculturists share some of the responsibilities and take on part of the risks; this is done to increase awareness of disaster prevention and stimulate mitigation efforts. For example, in some recent pilot projects, it was common practice that 30 percent of the risks were assumed by the aquaculturists themselves.

• Policies of some insurance companies allow for a certain amount of the insured items to be exempt from compensation. (For example, in the pilot aquaculture insurance project in Pingyang County, the exemption ratio for compensation varied between 10 and 20 percent for different aquaculture species.) This was introduced as a measure because it was extremely difficult to determine who was responsible for the damage or loss and the exact amount of damage or loss incurred. Exempting a certain amount from compensation can slightly reduce the risks for the insurance companies.

• Insurance companies usually cooperate with technical departments of aquatic products offices in their daily management to oversee the whole process of aquaculture production and carry out steps of disaster prevention; the tasks of the aquatic products offices sometimes includes contributing to risk management surveys.

In view of the above, the major responsibilities with regard to aquaculture insurance and risk management always lie with the insurance companies, particularly since they evaluate the risks involved in certain insurance products, introduce new insurance varieties, design insurance policies and decide on the insured sum and the premium rate, and evaluate the damage or loss and decide on the amount of compensation.

3.11 Claims handling

The sum of insurance is calculated according to the perennial average output per mu and the fixed unit price. The premium is calculated according to the premium rate prescribed by the insurer. Evaluation of any damage considers the quantity of fish that survived and the different degrees of damage. The procedure is as follows: when an accident occurs, insurers first carry out an investigation into the actual causes of the disaster and the losses or damages resulting from it, record this information, and wait until harvest time to decide on the compensation accordingly.

In general, only loss adjusters of the own company are used, but they might be assisted by staff of the local aquatic products offices.

3.12 Underwriting experiences

Severe losses in the 1980s and 1990s have caused many insurance companies to withdraw from aquaculture insurance. Those companies that have offered insurance coverage for aquaculture stocks since the mid-1990s reported having had major losses until 1998; they reported neither losses nor profits in 1999 and 2000, and better results from 2001 onwards (see also Box 2).

As far as the new market entrants since 2004 are concerned, it was still too early to obtain a historical overview of experiences from these companies.

3.13 Conclusions

In the provinces and municipalities in China where aquaculture insurance services are currently available, it is recognized that it plays an important role in the sustainable development of the aquaculture sector. Benefits of aquaculture insurance are as follows:

• It can help resume aquaculture production in a timely manner and to stabilize aquaculturists’ livelihoods after calamities.

• It facilitates aquaculturists to access credit services and make the necessary investments. In cases where insurance companies provide cover to aquaculturists, their credit can be increased, which allows them to obtain the necessary capital for production in time.

• It increases the introduction and dissemination of better management practices in aquaculture. Insurance companies, their agents and the aquaculturists insured take measures to prevent, increase preparedness for, and mitigate disasters, which will not only reduce the insurance companies’ burden of compensation, but will also contribute to sustainable aquaculture’s development.

It is clear that there is a great demand for aquaculture insurance in China among the 3.9 million people employed in this sector. However, at present it seems that there is little aquaculture insurance available and in some provinces, access to aquaculture insurance is even shrinking. The gap between demand for and supply of aquaculture insurance services has widened in recent years. It is hoped that with the entry of new national and foreign capital-based agriculture insurance companies in 2004 and 2005, aquaculture insurance services will also get a new boost.

While it is recognized that aquaculture insurance is an essential service for the sustainable development of the sector, there are a number of constraints that hinder the widespread introduction of aquaculture insurance and decrease incentives for insurance companies to establish aquaculture insurance schemes.

Some major constraints are:

• The existing government policy is not supportive of aquaculture insurance development. It allows insurance companies to follow the profit oriented way of working only, creating insurance products that do not meet the demands of most aquaculturists or are out of their reach. At the same time, policies and regulations in support of mutual insurance are not yet standardized, causing market disturbances and unequal chances for insurance companies. The possibility of government intervention in the market for aquaculture insurance is not well-defined at present; which is mainly caused by the fact that the sector is still in an experimental state.

• The revised 2002 PRC Insurance Law prescribes that the insurance business serving the agricultural development should be supported by the government and that specific laws and administrative laws should be prepared for agriculture insurance. As of January 2005, there was not one policy in place to support and guide the responsible and sustainable development of aquaculture insurance. Aquaculture insurance seems to be neglected.

• The limited availability of historic data and the rapid technological developments in the sector make it difficult to assess production risks properly; this combined with the lack of specialists on both aquaculture production techniques and insurance management, and poor experiences with aquaculture insurance in the past create reluctance on the part of insurance companies to add aquaculture insurance to their product range.

• Aquaculture insurance capacity has to compete with insurance capacity of other sectors. The fact that the aquaculture insurance business has been less profitable than most other insurance businesses hinders its development.

• The widespread culture area and the fact that aquaculture households and companies are often scattered throughout the country, together with the large variety in culture systems and species used, increase the administrative and management costs involved in operating an aquaculture insurance scheme.

• The lack of reinsurance capacity available within China of companies providing aquaculture insurance makes insurance companies reluctant to develop products for and service the aquaculture sector.

• As profitability in aquaculture is under pressure due to rapidly increasing production combined with decreasing market prices and high competition on the world market, the demand for aquaculture insurance depends greatly on the premium rates established.

• Asymmetric information, moral hazard and adverse selection also remain among the major constraints for aquaculture insurance development.

3.14 Recommendations

Recommendations with respect to the development and dissemination of aquaculture insurance in China can be made at different levels. The following are some of the most frequently made recommendations when discussing the issue with insurance specialists, government officials and farmers:

• In order to suit aquaculture insurance product policies to the wide variety of aquaculture systems used in the country and thereby increase demand, diversification in aquaculture insurance policies is necessary, keeping policies extremely simple and comprehensible and making claim handling and loss confirmation procedures as straightforward as possible.

• Collaboration in the aquaculture products marketing chain should increase to spread the risks associated with the introduction of new technologies, new species and other innovations in aquaculture.

• Insurance companies and governmental agencies should actively collaborate to increase awareness among aquaculturists on insurance; at present, farmers and fisherfolk with lower education levels generally do not have a clear idea about the significance and functions of insurance, and how to get access to insurance services.

• A clear law on aquaculture insurance, supported by a specific national policy framework, should be developed as soon as possible in consultation with all relevant stakeholders, based on a comprehensive review study of the national and international experiences and in line with international standards.

• Although there are some major differences in opinion on this point, many argue that a policy-supported aquaculture insurance system should function as a general framework. In such a system in which aquaculturists widely participate, insurance is guaranteed by the national government, financed by government subsidies and organized in guilds. The main goals of such a system would be to guarantee food safety and food security, and enhance individual capacities for preventing natural disasters and resuming production after calamities. The insurance system should be multi-level, multi-channel and multi-proprietor, providing opportunities to both commercial and mutual insurance companies. Its main principles would include a low premium, low security and low compensation. In other words, the sum of insurance is based on materialized cost. The system gathers scientific evidence based on policy development, premium establishment and loss confirmation. It is argued that local aquaculture organizations should be responsible for implementation.

• Aquaculturists should keep records of their activities allowing insurance companies, when applying for their services, to gather historic data that would make it possible to better assess the risks involved in the aquaculture activity and to allow them to provide advice on better management practices. This record keeping has started already in some municipalities, but it should be spread to other municipalities and provinces.

• Government and insurance companies should search more actively for reinsurance opportunities for aquaculture, both within China as well as in the international reinsurance market.