Micro and Vulnerable Economy with Inclusive Finance, the well-crafted annual report in financial inclusion was officially released at the “2020 International Forum for China Financial Inclusion (IFCFI)” and published by the Chinese Academy of Financial Inclusion (CAFI) in November 2020. In the “Interpreting the Green Paper” series, we will focus on the main concepts and the essence of the report. This article introduces the insurance demand from micro businesses and vulnerable groups and the available supply.
1. Insurance demand from micro businesses and vulnerable groups
Common risks threatening vulnerable groups include health problems due to illness or accidents, accidental deaths, no support at old age, and property loss due to natural disasters or accidents. A study by the China Banking and Insurance Regulatory Commission (CBIRC) shows that the biggest concern for 45% of Chinese farmers is accidents of family members, followed by children’s education and medical care. The research from the Development Research Center of the State Council also shows that accidental injury is a major threat to the rural labor forces in China (whether they are migrant workers or farmers at home). Meanwhile, as abovementioned, a survey by the State Council Leading Group Office of Poverty Alleviation and Development shows that diseases and disabilities caused by accidents are a major cause of poverty. For vulnerable groups, unexpected expenditures usually will deal a heavy blow to them and make their living unsustainable. It is evident that vulnerable groups are in urgent need of a mechanism for risk transfer, i.e., insurance.
Increasing the income for vulnerable groups is crucial to develop the micro businesses and vulnerable groups. To this end, it is imperative to upgrade operation models for mass production. Mass production gives rise to new business entities and needs for operating capital; however, financing is generally inaccessible and unaffordable for the micro businesses and vulnerable groups. Behind the problems are an underdeveloped credit system and inadequate collateral, which are exactly why credit guarantee and insurance are needed.
Vulnerable groups can resort to serious illness insurance and commercial health insurance to address their health concerns. However, the products for vulnerable groups should be featured by lower deductibles, wider reimbursement scope and higher reimbursement rate, etc. In addition, it is imperative to enhance the connection between basic medical insurance, serious illness insurance and commercial health insurance. To address the risks of accidental deaths and old-age support, personal insurances such as accidental injury insurance, illness insurance, and life insurance are options, but the products should offer proper protection at affordable prices. Also, they can take out catastrophic insurance to cover property damage caused by natural disasters or accidents, farm insurance for farm housing damage, and agricultural insurance such as target price insurance, facility insurance and weather index insurance for agricultural risks. In addition, to meet development needs, they can open up more channels of credit enhancement for smooth financing by pledging agricultural insurance policy and taking out mortgage guarantee insurance with the right to land contractual management, mortgage guarantee insurance with property rights of farmhouses, or by taking out micro-credit guarantee insurance.
2. Supply gap in insurance
Although the micro businesses and vulnerable groups have a substantial demand for insurance, the existing insurance products fall short of their needs. Firstly, insurers are more excited about the higher-end market than the lowest-end market, which is hardly covered in reality. Secondly, the financial stress of the vulnerable group makes a dent in their purchase of the insurance products. The premiums of some insurance products are still too high for vulnerable groups, thus dampening their purchase of insurance products.
Driven by government policies and market players, all major commercial banks took the lead in setting up inclusive finance departments, including the head offices of five large commercial banks and several joint-stock commercial banks such as Minsheng Bank and Industrial Bank, to provide financing services for micro businesses and vulnerable groups. In contrast, much fewer such departments are found in insurance institutions, reputed as “stabilizers” and “boosters”, to serve micro businesses and vulnerable groups.
In addition, micro businesses and vulnerable groups are not keen on insurance products. Based on the survey on farmers in five poor counties in Shandong Province, Quanwei Yang (2019) found that the 42.1% respondents basically had no idea about commercial insurance, 34.2% had some ideas, and only 23.7% had a good understanding of commercial insurance. At the same time, 53.5% of the respondents had very poor risk awareness. Due to the limited reach, the micro businesses and vulnerable groups generally have no intention to buy insurance products; therefore, only a very small portion of the demand has been converted to actual purchasing. The survey also found that only 25.3% of the respondents took out commercial insurance, meaning 74.7% did not.
2.2. Prohibitive insurance premiums
Traditional commercial insurance plans are mainly designed for the middle and upper-income classes, which are prohibitively expensive for the micro businesses and vulnerable groups, therefore, most people in the lower-income brackets cannot afford the current insurance products.
In addition, the lack of recognition, reach and data has also led to the high premiums. Premium rate setting is affected by many factors and calls for seasoned actuaries. Therefore, in reality, many insurance companies in China tend to be conservative and simply draw on data from foreign counterparts; they end up with much higher premiums than what the targeted groups can afford.
To conclude, when developing insurance plans for the micro businesses and vulnerable groups, their actual financial conditions should be first taken into consideration. To address the aforementioned exclusion, we believe that inclusive insurance instead of traditional commercial and social insurance should be the solution for the micro businesses and vulnerable groups.