Could Microinsurance Achieve “Jing Shi Ji Min” with Government Interventions? Evidence from China
Written by Yu Yan & Michael Faure.
The Chinese word “economy” is originated from a famous idiom called “经世济民” (jing shi ji min), which suggests that a prosperous society is not only about economic success but also about the financial well-being of the general population. Microinsurance (the commercially available insurance that is designed to insure low-income groups against a variety of risks) is a perfect case that reflects this concept. It strikes a balance between a social-driven outcome and a sustainable business model.
Given the tremendous benefits of microinsurance, since 2007, China started to launch personal microinsurance schemes (including both life and personal accident insurance schemes). By the end of 2017, 31 provinces in China had implemented microinsurance schemes and covered approximately 110 million people. Meanwhile, the Chinese governments have developed extensive, and to some extent, unique interventions in many aspects to ensure the success of the microinsurance schemes. These interventions fall into four typical forms. The first form is subsidizing. For example, in Sichuan providence, the local government directly subsidizes insurance premiums and in Guangdong province, subsidizing is done indirectly via risk-sharing. The second form is simplification, where the government requires the insurers to provide simple and understandable microinsurance policies (simplified insurance terms with fewer exclusions). The third form is encouraging the use of group policies. The last form is stimulating the use of established distribution channels, such as the distribution through village committees that are common and extensive throughout rural China.
Even though these government interventions in microinsurance schemes are indispensable, they are not always adequate. From a law and economics perspective, there could be distortions in the microinsurance market if: (1) government subsidies on microinsurance premiums are not stable or not smartly designed (e.g. risk-adjusted or more targeted); (2) simplification of microinsurance terms is done not by reducing the complexity of microinsurance policies but by reducing exclusions; (3) the utilized microinsurance distributors are poorly-trained or improperly licensed; (4) the group of low-income insured lack incentives to renew their insurance policies.
Therefore, for China and other emerging economies, government interventions in microinsurance should be designed carefully. Interventions are effective only when it is able to increase the availability of insurance for the poor and when certain instruments for controlling moral hazard and adverse selection are still available so that the intervention does not cause additional market distortions.
Read more in: Yan, Y., & Faure, M. G. (2021). Government interventions in microinsurance: evidence from China. The Geneva Papers on Risk and Insurance - Issues and Practice, 1-28. https://doi.org/10.1057/s41288-020-00202-6.