Flood Insurance Demand Supply and Public Policy APRIA
Flood Insurance: Demand, Supply and Public Policy APRIA Moscow Conference, July 2014 Nannan Zhang Lijun Guo Chengguang Li* Insurance School Central University of Finance & Economics Beijing, China
Outline • • • Introduction Literature Review Demand, Supply for Flood Insurance and Gap Estimation Public Policy Choices Concerning Flood Insurance Conclusion
1. Introduction • Flood risk is the most frequent, severe and slowlyrecovering one to China. • Commercial and policy-oriented coverage for flood risk is available in most areas, nevertheless the inadequacy or mismatch of flood insurance supply still exist. • The purpose of this paper is to observe the gap between demand supply for flood insurance, analyze the influential factors, and explore how government could help fill the gap through appropriate public policies.
2. Literature Review • Mark J. Browne et al (2000), Erwann O. et al(2010), and Craig E. Landry et al(2011) made empirical tests on demand for flood insurance using the national and local data and examined the hypothetical determinants of the flood insurance purchasing. • William L. Huth (1990) , Okmyung et al(2008), Erwann O. Michel-Kerjan(2010), Colin Green and Edmund Penning -Rowsell (2004) and Paul A. et al(2013) conducted studies on the supply problems of flood insurance such as pricing, product developing and operation as well as the impact of government behavior on flood insurance.
2. Literature Review • Xinli Liu (2004) , Yizhi Bai (2009) etc. made the econometric analysis of regional flood risk in China. • Zhaohui Liu, Xinhui Hu and Huimin Wang (2008), Jiuda Wang (2009) introduced the international experiences of operating flood insurance programs and made crosscountry comparisons. • Qixiang Sun and Lingyan Suo (2004), Yuanda Zhao (2005), Qiang Zhuo (2007), and Yingjun Huang (2009) discussed how to design flood insurance regime and make institutional innovation in China.
3. Demand, Supply for Flood Insurance and Gap Estimation • 3. 1 Ranking Flood Risk by Areas from Demand Side a. Data collection Data for frequency (during 2008 -2011) and losses (during 1999 -2012) of flood disasters in the areas located in specific River Valleys such as Yellow River Valley, Yangzi River Valley, Min River Valley. .
b. Sample selection and ranking Through data observation, we keep 13 areas as high-risk areas with annual average losses incurred by flood larger than ¥ 4. 354 billion, the national average losses incurred by flood as sample areas. Correspondingly, the flood disasters happened in there areas are more frequent than other ones, with annual average frequency higher than six.
• Combing the absolute with relative risk level indicators, the sample areas could be divided into three groups from demand side. The first group includes Hunan, Hubei, Zhejiang and Fujian subject to the strongest demand for flood insurance. The second group includes Sichuan, Jiangxi, Chongqing and Anhui subject to less demand for flood insurance. And the third group includes Guangdong, Guangxi, Shandong and Henan with relatively weak demand for flood insurance.
• 3. 2 Comparing Available Flood Insurance Coverages from Supply Side Flood insurance coverage is not independent program but contained in the comprehensive property insurance products including homeowner and enterprise property insurance, auto insurance, agriculture insurance and farmhouse insurance.
• Conclusion: In general compared with the property exposed to flood risk, the coverage for flood risk is inadequate, not only due to relative low insurance depth but also due to wide range of exclusions. Compared with low risk areas, high risk areas are less probable to be covered by flood insurance probably due to relatively weak purchasing power. Lack of coverage, mismatch between demand supply and inconsistency of policy exist in all types of lines whether it’s commercial or policy-oriented.
• 3. 3 Estimating and Ranking the Gap between Demand Supply for Flood Insurance Note: Lack of actual data for loss ratio of various lines, we apply annual average property premium divided by annual average DEL incurred by flood to analysis as substitute indicator, which is titled gap ratio here.
• Conclusion The results show that the gap not only lies in the demand for risk transfer, but lies in the capability to realize the risk transfer including the purchasing power from demand side and supply motives from supply side.
4. Public Policy Choices Concerning Flood Insurance • 4. 1 Establish the High-level Diversification Mechanism for Flood Risk a. Whether Flood Risk is Diversifiable? Table 7 shows the correlation coefficients of flood losses between any of two areas around the country. We can find that the losses incurred by flood in most areas are weakly correlated or nearly irrelative to each other except those numbers in bold font referring Jiangxi etc. . That demonstrates flood risk is diversifiable in a wider platform.
b. How to Design High-level Diversification Mechanism?
• 4. 2 Adopt Differentiated Subsidy Policy for Policyoriented Flood Insurance
• Here RB is the benchmark subsidy ratio specified by central government with Φ 1 the adjusting coefficient for adjusted gap ratio, Φ 2 the adjusting coefficient for financial power of local government and Φ 3 the adjusting coefficient for residents’ disposable income. • Just as equation (6) tells us, the former two indicators are positively correlated to subsidy, and the latter indicator is negatively correlated to subsidy
5. Conclusion • The demand for flood insurance is more probable to be impacted by flood risk level and the capability of loss retention relative to the economic foundation in different areas. • Flood risk level, development of insurance market, purchasing power of residents and local fiscal strength and price of the product working together lead to the gap between demand supply of flood insurance. • It is supposed that government could endeavor to fill the gap through comprehensive public policies, such as establishing cross-region and national flood catastrophe diversification mechanism and providing differentiated subsidy in premium from demand side.
Thanks! Welcome to contact us at zhangnn@cufe-ins. sinanet. com!
- Slides: 25