Crop Insurance Principles and Risk Implications for China

Firms within various sectors of an economy are often faced with a number of risks. These risks can be relatively sudden and large, especially if they are weather related. In agriculture, risk often has natural causes such as weather, and therefore losses can be large and costly in particular years. Crop insurance has been commercially available in many developed countries for a number of decades, though it is only now starting to become more commercially available in a number of developing countries such as China. When facing these risks without crop insurance, farmers may use fewer inputs and invest less in crop production, resulting in lower yields and lower production. As well, lenders may be reluctant to extend credit to farmers, if farmers have not purchased crop insurance. Crop insurance has been one of the most successful risk management and longest running stabilization programs for farmers in many parts of the world. The purpose of this article is to explain the main principles underlying crop insurance, with implications for China. Challenges for crop insurance development are also pointed out, along with some possible solutions. Some North American experience with crop insurance is also discussed, including the case of Canada.