Rural revitalization and common prosperity are the goals of China in the coming years and the key to achieving them lies in micro and vulnerable economy.
The micro and vulnerable economy refers to the family economy that includes economic activities related to micro businesses and vulnerable groups such as micro-businesses, the self-employed, mom-and-pop operations, mobile vendors, low- and middle-income households, and rural households. The family economy contributes not only to economic growth, but also to social harmony, as it involves intergenerational care, education, and healthcare and can alleviate social issues concerning left-behind children and empty nesters. The family economy is not an economic entity in transition in China; instead, as a dynamic and stable economic unit, it constitutes the base of the national economy and social development as well as rural revitalization and common prosperity; therefore, it is a major target group of inclusive finance.
The significance of inclusive insurance for the micro and vulnerable economy
In recent years, inclusive finance has enhanced its accessibility for the micro and vulnerable economy. In the next stage, the inclusive financial ecosystem can focus on inclusive insurance to better support micro businesses and vulnerable groups. With poor financial health and weak risk resilience, such micro businesses and vulnerable groups are likely to slip back into poverty due to illnesses and disasters and thus they are in dire need of risk protection. According to “Financial Diary”, a survey conducted by the Chinese Academy of Financial Inclusion (CAFI) at Renmin University of China in Yijun County, Shaanxi Province, and Pingjiang County, Hunan Province, micro businesses and vulnerable groups have greater demand for insurance than credit. Insurance can lend them more risk resilience and economic vitality, so a wider coverage is imperative to consolidate and expand our achievements in poverty elimination and achieve rural revitalization and common prosperity.
In China, the high saving rate is mainly attributed to imperfect credit and insurance markets, which push households to save for unexpected risks. Insurance helps households to defuse risks, reduce losses, bolster confidence about the future, and make better arrangements for expenditures and future development. On the whole, the risks for the micro and vulnerable economy come from two aspects: first, the uncertainty of future income (including the uncertainties of current income and future pensions) brought by natural disasters and price fluctuations in production and operation. Second, the uncertainty of emergency expenses. For example, a sudden illness may destroy a family’s financial status. The frequent medical fundraising cases on the internet are telling examples of the vulnerability of the group when facing critical illnesses.
At present, thanks to strong fiscal and policy support, and the market-based exploration, an inclusive insurance ecology in response to major risks for micro businesses and vulnerable groups has taken shape, including agricultural insurance, basic medical insurance for urban and rural residents, basic pension insurance for urban and rural residents and various commercial medical insurances. However, as inclusive insurance is still at the initial stage, it holds limited insurance products and inadequate reach, thus failing to meet the needs of micro businesses and vulnerable groups. According to a survey of 550 rural households in Sichuan, Shandong, and Jiangxi provinces by CAFI, only 17 percent of respondents believed that their insurance could cover all possible risks for the family. In China, the middle and upper classes are the major insurance buyers and the main clientele of insurance institutions. However, insurance services have not yet fully reached the micro businesses and vulnerable groups, which are the most vulnerable groups.
The status quo of insurance in the micro and vulnerable economy
In recent years, thanks to the unremitting efforts of the government and the steady growth of the market, micro businesses and vulnerable groups come to know about insurance products, but they are still hesitant to buy them, plus, there are very few channels to buy them, so they are poorly covered.
Reluctance to buy. Many micro businesses and vulnerable groups underestimate potential risks and believe that they are unlikely to suffer property losses caused by natural disasters or serious illnesses, so they regard insurance as unnecessary spending and thus are reluctant to buy such products. Most households only consider insurance when they personally know someone benefiting from it or falling back to poverty due to illnesses and disasters and a lack of it. In particular, some micro businesses and vulnerable groups are reluctant to pay for premiums of basic pension funds for urban and rural residents and few of them buy commercial insurance for the elderly.
Few channels. Although some micro businesses and vulnerable groups can identify the risks in their family operation and life, they know little about the insurance market nor can they find suitable insurance products. They have very few channels to buy such products. Apart from government-subsidized basic medical insurance for urban and rural residents, basic pension funds for urban and rural residents, and agricultural insurance, all of which are promoted by villagers committees or urban residents committees and directly deducted from their bank accounts, they have little access to appropriate insurance products from the market. In addition, insurance products designed for micro businesses and vulnerable groups are quite limited.
Inadequate insurance coverage. It is mainly reflected in health insurance and agricultural insurance. According to a survey of rural households in some areas, most micro businesses and vulnerable groups only purchased basic medical insurance and only 38 percent purchased commercial accident insurance, 11 percent bought family property insurance, and 4 percent had commercial critical illness insurance. Basic medical insurance can provide basic protection to family members with underlying conditions, but it is inadequate for serious diseases. In terms of agricultural insurance, a disaster may cause widespread damage but the payout from the insurer most often cannot fully cover all the losses, putting the family income on the line.
Challenges for inclusive insurance: inadequate supply and demand
Currently, inadequate insurance coverage for micro businesses and vulnerable groups is mainly attributed to two factors.
As the financial literacy and capability of micro businesses and vulnerable groups are relatively low, their demand for insurance is insufficient. Most of them live in counties or even remote villages, so they have very limited access to knowledge and information, which disadvantages them in all aspects. It is difficult for financially vulnerable households to predict the potential risks and losses in production and life, so they are likely to misjudge risks and lack the ability to prevent and defuse risks.
Insurance institutions also face multiple challenges: the premiums are small, yet the labor costs for loss assessment and claim settlement are high; business operations are generally inefficient and the scale is very small, so the sustainability of the business is challenged. For example, in 2007, the government began to subsidize agricultural insurance with a coverage of up to 90 percent of premiums in some areas. As farmers only need to pay a small portion out of their pocket, more and more of them began to buy the products. Notwithstanding such strong fiscal support, the underwriting insurers found that they were struggling to break even, let alone in areas of fewer government subsidies. They have to face more operation pressure when the agricultural insurance products have fewer buyers. Some local governments have found some quick fixes to cope with the meager margins, such as “to buy insurance to feed insurance”. They give agricultural insurance underwriters some government-sponsored insurance projects and commercial insurance projects to cover their payout for the agricultural insurance products, which can help them break even in the long run. Currently, there are few incentives for insurance institutions to design insurance products for micro businesses and vulnerable groups, making it difficult to create an inclusive insurance ecology serving the micro and vulnerable economy.
Inadequate supply and demand result in small market coverage of inclusive insurance for micro businesses and vulnerable groups. As the inclusive insurance market lacks intrinsic drivers, it depends to a large extent on government subsidies for the demand side and the supply side. To fully leverage the role of insurance in supporting the micro and vulnerable economy, the underlying problems need to be addressed to foster a sustainable market.
How to enhance the accessibility of insurance for the micro and vulnerable economy
Inclusive insurance is challenged by the “Last Mile Problem” in the insurance market. Many valuable experiences can be drawn from the development of inclusive finance
First, to strengthen the financial capability of micro businesses and vulnerable groups. Financial capability includes the income and expenditure management, risk prevention, wealth accumulation, and opportunity management of micro businesses and vulnerable groups, and it holds the key to helping micro businesses and vulnerable groups to defuse risks. Specifically, we should establish a long-term mechanism for building the financial capacity of micro businesses and vulnerable groups, and design hierarchical and diversified financial capacity building programs based on their education level and production and living needs. For example, in economically developed areas, financial capability can be built by making good use of digital channels. In remote rural areas where micro business and vulnerable groups may reject or be skeptical about novel financial services, villages and production groups-based task forces can be organized to improve the local financial capability. In addition to the financial training programs organized by regulators, financial institutions or social organizations, relevant departments, institutions and organizations can make financial capacity building close to local needs and local culture by training and supporting local trainers to enhance the adaptability and practicality of the programs; the trainers are selected from local villagers to provide follow-up training, consultation, and liaison services. These capacity-building efforts can help the micro businesses and vulnerable groups better predict potential risks and losses, better understand insurance products, better access insurance products, and select appropriate insurance products that meet household needs, thus releasing the demand for insurance products.
Second, to improve the services of insurance institutions. Insurance institutions need to better understand market demand and grasp the true demands of micro businesses and vulnerable groups so that they can better design insurance products that fit the risk profile of micro businesses and vulnerable groups. They also need to optimize capabilities to make their operations more sustainable and to provide diversified insurance products for micro businesses and vulnerable groups. Specifically, insurance institutions can work on the following three aspects. 1. To apply digital technologies to reduce operating costs. Digital technologies such as big data and cloud computing can improve operational efficiency and reduce information asymmetry and moral hazards. 2. To design more inclusive insurance products for micro businesses and vulnerable groups. Based on the features of micro businesses and vulnerable groups, insurance products should have simple functions and reasonable prices. In addition to cooperating with local governments, traditional bank outlets, etc., the insurance products can also explore online channels and expand the coverage of insurance products. 3. To enhance risk-sharing inter-institutional cooperation. Insurance institutions need to keep exploring new modes of cooperation with peers and other types of institutions. The products of “insurance + futures” are useful explorations, so are the subsequent explorations of “insurance + futures + banking” and “insurance + futures + banking + basis trading” . Meanwhile, widely applied mutual insurance and reinsurance can also be used in inclusive insurance.
Finally, the government should keep enhancing its facilitating, supervision, and regulation role. At the initial stage, government subsidies can encourage micro businesses and vulnerable groups to buy insurance products, which helps raise their insurance awareness and thus stimulate the insurance demand. Meanwhile, government subsidies also incentivize insurance institutions to develop the targeted insurance market. In the process, the government needs to avoid excessive subsidies, which will lead to overdependence or insufficient subsidies. More efforts should also be made to establish a public data platform and improve financial infrastructure. For example, in price insurance, sales data can be directly derived from the platform to claim for loss assessment and payments, thus lowering the labor costs of insurance institutions for small claims. Data from the public data platform as public goods can be used in finance, economy, and many other fields. If financial institutions build their own data platforms, it will be costly and have limited use, which is not conducive to data protection and prone to monopoly. Therefore, the government needs to build a public data platform to improve the efficiency of all kinds of financial businesses and tap the value of various data. At the same time, supervision and regulation should be enhanced while developing the insurance market to prevent insurance institutions from setting unreasonable claim terms for excessive profits.
THE END
