Download Research on the Intervention Model of Government to Sustainable

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Research on the Intervention Model of Government to Sustainable
Forestry Development and Insurance
JIANG Yuxi, CHEN Zichen
School of Economy and Management, Beijing Forestry University, China, 100083
[email protected]
Abstract: As an effective measure of sustainable forestry development, forestry insurance in China
faces the problem of dual-cooled supply and demand. This paper analyses the factors affecting the
supply and demand of forestry insurance from the economic angle: positive externality and price , then
suggests that the government should support the development of forestry insurance through integration
and compensation mechanism, and promote the development of forestry insurance risk securitization.
Keywords: Sustainable forestry development, Forestry insurance, Relationship, Supply and demand
model, Government Intervention, Models
1 Introduction
As a basic component of environmental and economic element, forestry’s sustainable development has
drawn universal attention. Forestry insurance serves as a part of reforms in forest tenure, its function of
indemnify to sustainable forestry development has become increasingly manifest. In recent years, a large
number of scholars are studying the problems and evaluation methodology of sustainable forestry
development, and there are many researches on the forest insurance from perspective of law and policy,
but the research of combining the two topics together and put forward relevant suggestions is quite rare.
It’s analyzed in the paper about the necessity and mode selection of the forest insurance, aiming to
provide referenced viewpoint to researches and practical operations.
2 Brief on Forestry Sustainable Development
Forestry sustainable development, which is China’s national strategy, is firstly mentioned in Earth
Summit in Rio in 1992.According to the definition of World Commission on Environment and
Development, forestry sustainable development can be presented as meeting human forestry needs while
preserving the environment so that these forestry needs can be met not only in the present, but also for
generations to come.
The actual meaning of forestry sustainable development includes protection of further development of
economy, environment and resources. To specify: (1) Persistence. The precondition is the protection of
ecosystem. The exploit of forest for economic and social development should be based on the principle
of keeping the productivity and renewal of forest system, and make sure at this level of exploiting,
forestry needs can be met for generations to come. (2) Expansibility. The core of forestry sustainable
development is still development including the development of forestry economy and the development
of exploit efficiency to satisfy the amount and structure of human forestry needs. The criteria is the
increase in forestry productivity. (3) Synthesis. The activities based on forest should not only reach the
goal of economic and social development, but also take into consideration of the forest’s bearing
capacity, to achieve the benefit of forest, economy and society.
Forestry sustainable development has social, economic and ecological targets: provide continuous
supply of forestry commodities to meet social need, and ensure the interest of forestry managers and the
stability and completeness of forestry ecological system. So, forestry is an economic industry as well as
a social enterprise, including social welfare, economy and ecological environment as an underlying
industry. Its sustainable development relies on practices of all industries.
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3 An Effective Method to Sustainable Development-forestry inSurance
3.1 Existing problems in forestry sustainable development
There are serious problems hindering the forestry sustainable development. Forest disaster is the main
reason, which brought much more losses than other industries, just as the following chart shows.
Furthermore, forestlands are located in mountain areas, which is the poorest part in China. Capital is
hard up there, hinder the production of infrastructure; technology dropped behind with the contributing
rate of only 20%.Under the pressure of disaster and capital, the forest resource in China is less and less.
3.1.1 To jeopardize forestry economy. Forestry disasters will greatly damaged local resources of forest,
animals and microorganism, and caused huge economic losses. The most serious forest fire in
Daxinganling in 1987 led to the destroy of 90 h
of forest area and direct economic loss of 450
million, indirect economic loss of 8000 million. Besides, the imbalance in regional development is
worsened. Forestry disasters damaged the environment, communication and other basic facilities of the
region, the regional attractiveness is weakened thus slowed economic development.
3.1.2 To jeopardize ecological sustainable development. National reserve in China is not sufficient, and
forestry disasters make this even worse. As the first defense line of ecological system, the destruction of
forest will not only devastate the local ecosystem, but also jeopardize the local weather quality. For
example the rising frequency of sand storm is mainly the result of the destruction of forests in the
Meimenggu Alashan region.
3.1.3 To jeopardize social sustainable development. Firstly, the forestry disasters caused unneglectable
casualties. It is estimated that annual casualties in China after 1949 is 105. What’s more, the forestry
disasters devastate the natural living environment of the locals. The immigrants problem and
compensation will create enormous expenditures.
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3.2 The relationship between forest insurance and forestry sustainable development
The fact is generally recognized that the damage of forest will lead to the deterioration of ecosystem and
economy. As a major mechanism to improve the forest’s capacity of resisting risk, forest insurance
promote the forestry sustainable development as follows:
3.2.1 Raise the enthusiasm of the forest cultivators. The loss caused by forest disasters restrict the
production of forestlands, especially after the marketization of forest production, cultivators take more
responsibilities. Furthermore, the scale of forest production circulation is quite small, decentralized
individual cultivators’ capacity of undertaking risks is weak. It’s hard for many cultivators to get
organized to reconstruct after the disaster, and their daily life is seriously curbed. Quite a few cultivators
can’t repay the loans in time. Forest insurance helps to resume the production after disaster, promoting
the sustainable management of the forest.
3.2.2 Ensure the reproduction of forest resource. Various forest disasters imperil the growth of forest to
different degrees. According to researches, the area of forest destroyed per year exceeds that of planted.
In the long run, it will hinder not only the forestry sustainable development, but also the improvement of
environment. To renew the forest in time and keep the stability of resource’s quantity and quality, the
support of fund from forest insurance is essential.
3.2.3 Reduce the investment risk in forestlands. The character of long period, high risk and slow effect
restrict the enterprises and firms and to invest in forest. Forest insurance can provide guarantee and
release the worries before investing, which will help creating a better financing environment.
3.2.4 Reduce the bank’s risk of loaning. The period of forest investment is so long that investors would
get the fund from banks. The frequency of forest disaster weaken the enthusiasm of banks to provide
loans to forest investment, making the threshold of loaning relatively high, restricting the development
of forest investment. Forest insurance release the risk of banks and make it easier for investors to
finance.
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4 Development of Forestry Insurance in China
4.1 Overview of its development
Forestry insurance’s pilot project was launched in 1984 in China, creating 4 kinds of categories: hosted
by PICC, and executed by forestry department, such as forestry insurance service in Guilin, Guangxi,
and Huitong, Hunan; coinsuranced by PICC and forestry department, as insurance in Shaowu, Fujian;
self-insuranced by forestry department itself, for example, Benxi, Liaoning; mutual insurance among
forestry cooperative organizations, as insurance in Sichuan and Shandong. Forestry insurance in China
is still in the testing stage. Forest underwritten is less than 5%, far less to meet the demand of
sustainable forestry development.
4.2 Constraints
4.2.1 Supply
Forest is a high-risk industries itself, whose coverage is narrow, making the risk of insurance company
relatively concentrated and compensating ratio high. China is one of the countries with the most serious
natural disasters in the world. In 2007,8089 forest fires occurred in the whole country, causing 23462 h
area of forest damaged; in 2008,23 million h
area of forest among 19 provinces were damaged
resulting from the freezing disaster, accounting for 1/10 of the whole area of forest in China, and the
direct economic loss is 101.4 billion. The huge loss frightens the commercial insurance company.
Moreover, the insurance company can’t distinguish the concrete risk of the cultivators; however, the
cultivator themselves has a relatively better cognition of their own risk, making the adverse selection
caused by the asymmetric information common. Commercial insurance companies avoid that part of
business, making a quite short of supply.
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Figure 1 Statistical graph of forest fires
Occurred in China during 2000-2008
Figure 2 Statistical graph of economic loss caused
by forest fires during 2000-2008
4.2.2 Demand
First, forest region is an area with relatively backward economy, forest cultivators is less paid than other
workers. In addition, insurance companies who chase profits set thresholds as raising the premium rate
or setting deductibles, which weaken the will of cultivators to insure. Second, the forest tenure is not
clear in China, and the rights, duties and benefit of forest property owners is hazy, making the forest
departments’ sense of insuring quite weak. What’s more, the system of property allocation hasn’t been
amplified in forestlands. On the premise of collective ownership, the ownership and usufruct are
separated. In principle, state-owned forest belonged to the nation, but the actual manager is the local
forestry executive department. It’s hard to define the entity of rights and obligations when insuring. For
example, the actual manager of the national forestlands in Daxinganling is the bureau of forest industry
in Heilongjiang. Nowadays, wildwood cutting is forbidden in that area, making the bureau faced with
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economic difficult and impossible to pay the premium. Furthermore, the main kind of forest insurance in
China is fire insurance, and many other categories hasn’t been transacted, including the forest pest
insurance, which occurs in most parts of China ,and other kinds of insurance during the forest managing.
The cover of insurance is simple, which can’t meet the risk-transfer demand of forest cultivators.
4.3 Economic analysis
4.3.1 Analysis of positive externality
The healthy and sustainable development of forest is essential for the demand of forestry product by
national construction and people’s living, so the forest insurance has the character of over-flow benefit.
Cultivators purchase the forest insurance to evade risk, meanwhile the reproduction of forest is
guaranteed and national economic get stabilized; Insurance organizations which launch the forest
insurance also has the mentioned macroscopic effect. Although the forest insurance is aiming at
improving the development of forest, it brings much more benefits. In a word, forest insurance is a
production with positive externality, whose benefit belongs to the whole society.
Forest insurance’s positive externality exists in figure3.When positive externality is not taken into
consideration, MSC=MPC represents the supply curve of the forest insurance, and MPB represents the
demand curve. The balanced point M corresponds the output Qm. Because of the exiting of positive
externality MEB, MPB moves up to MSB; the point of intersection of MSB and MSC corresponds the
output Qe. For commercial insurance companies, it’s reasonable to provide the output Qm. If the price
remains the same and provides the output Qe, which is expected by the society, loss is inevitable.
P
MSB
MPB
Pe
Pm
P
GP
P2
P1
NP
MSC
E
M
MEB
Qm
Qe
S
D
Q
Q3 Q1 Q2 Q4
Figure3 Analysis chart of forest
insurance’s positive externality
Q
Figure4 Analysis chart of price’s impact to the
supply and demand of forest insurance
4.3.2 Analysis of price’s impact
Supply and demand are the main factors that influence the development of forest insurance, and price is
the deciding factor of supply and demand. The gross rate of forest insurance (GP) =net rate (NR)
+surcharge rate, NP=the loss rate of insurance account × (1+coefficient), the surcharge rate is
determined by the expense for launching the forest insurance. As in figure 4, cultivators is willing to pay
the premium equal to or just a little more than the net rate, here the supply quantity is Q3, demand
quantity is Q4, demand exceeds supply in the forest insurance market; commercial insurance companies
is willing to sell the warranty just a little less than the gross rate for the fear of deficit, here the supply
quantity is Q2 and the demand quantity is Q1, supply exceed demand this time.
4.3.3 Analysis of income of insurance company
Compensation=damaged area premium per area
1-deductible ratio
condition of loss
Assume the income of premiums of insurance company is P1,covered area is s, deductible ratio is d, and
the cost of insurance company(mainly compensation expenditures) is c s,d The higher the deductible
×
×（
）×
（ ）。
ratio, the less compensation expenditures insurance company has when disasters happen, so
.
Assume the area under the management of the forest farmer is f, with an income of P2 per area. The
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losses when disasters strike is l(f,d):the higher the deductible ratio is the greater the losses of farmers,
so
。
The income function of insurance company is:
：
To maximize the income P1=
With
, 0=
, in order to maximize its income
，insurance company has motivation to increase
deductible ratio until the marginal cost of the deductible ratio is zero.
The income of forest farmer is:
：
To maximize the income P2=
As we could see from above, because
,the increased deductible ration lower the maximized
income of farmer. Even through farmer concerns the level of deductible ration, he cannot control it. At
the same time insurance company is to maximize its income without consideration of its adding up to
the cost of farmer. This dilemma makes deductible ration in forestry insurance overly high and low
income of forest farmers. So forestry investment is difficult to attract and forestry capital is struggling
to accumulate.
5 Analysis of Mode Selection of Forest Insurance from Economic Angle
5.1 Analysis on necessity of government’s support
According to welfare economics’ view, for the benefits-over-flow quasi-public goods, government
should produce directly or subsidize the private to produce, so that the output of the production reaches
the optimal scale. It’s demanded by the market economy that the government should regulate and
subsidize for the market failure. Forest insurance, with the character of obvious commonweal and quasi
public, whose positive externality can’t be divided easily, so it’s difficult to recover the investment by
charging. In that case, it’s necessary for the government to subsidize the suppliers and demanders.
What’s more, for forest, quite a few counties, towns or even provinces get involved when catastrophe
occurs. It’s essential to carry on forest insurance in large region to spread forest risk.
As in figure 3, D represent the demand curve of the forest cultivators, S represent the supply curve of
commercial insurance companies who tend to avoid loss. Two curves won’t intersect here. however,
when the government provide some subsidies to the cultivators, making the demand curve move to the
upper right D’, here two curves intersect at A, with the trading volume Q1.When the government carry
on policy insurance to reduce the premium, the supply curve move to the lower right S’, here the two
curves intersect at B, with the trading volume Q2.
As a result, only by subsidizing the cultivators’ premium to shift up the demand curve, and subsidizing
the insurance companies’ expenditures and reducing or exempting its tax to move down the supply curve,
will the two curves intersect.
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P
S
A
S’
B
D’
D
Q1
Q2
Q
Figure 3 The impact to the supply and demand of forest insurance when government intervene
5.2 Mode Selection
5.2.1 Integration Mechanism
5.2.1.1 Integrate the demanders-establish forestry cooperative economic organization. With the
development of collective forest rights reform, large number of small-scale forest cultivators who
decentralized operation becomes the main market players. Because of the deductibles stipulated by
insurance company, adverse selection is common for the forest insurance and the forest cultivators with
relatively less acreage won’t cover the risk. So the government may unite the cultivators to set up forest
cooperatives to insure as a whole, and subsidize them. In this way, the situation that the cultivators can’t
get compensated when the loss is less than the deductibles. So it will arouse the enthusiasm of
small-scale, decentralized cultivators to insure the forest’s risk. This is also the experience of Sweden,
whose history of forest insurance is more than 80 years. The forest cooperatives has existed in Sweden
for a long time, there are 11 large areas of forest cooperatives in the whole country with some 80
thousands members, undertaking some forestry insurance business.
5.2.1.2 Integrate the suppliers-establish policy insurance organization. Policy insurance organizations
can unite forestry insurance of different departments to set up catastrophe insurance pool, taking the
forest catastrophic risk together. In this case, the risk can be decentralized. When no catastrophe
occurred in the insured forest, commercial insurance companies earned premiums by coinsurance, which
increases service revenue; and when catastrophe occurred, commercial insurance companies take the
large compensation together. Whilst, policy banks provide interest-free or low-interest loan for them to
compensate the cultivators representing the government, which helps release the pressure of commercial
banks.
5.2.2 Subsidy Mechanism
Set up a risk compensation mechanism supporting and subsidize the forest industry, which subsidize the
suppliers and demanders. Meanwhile, subsume forest insurance’s premium subsidy into all levels of
financial budget, province-level public finance should take the principle part of the premium subsidy.
5.2.2.1 Subsidize the forest cultivators, such as direct premium subsidy, afforestation investment
products, technical guidance. First, according to the principle of “subsidy if insured, vice versa”,
subsidize the insured forest cultivator or enterprise of premium by the public finance. For example, the
public welfare forest’s subsidy proportion of state or province level is 100%, among which the central
and province finance take the same proportion; the subsidy of commercial forest accounts for 60%, the
proportion of the central province and county is 30%, 25% and 5%,the rest undertaken by the insured.
secondly, as the effective supporter of the government to implement social and economic policies,
policy banks should provide low-interest premium loan to the cultivators. For example, China
Development Bank and Agriculture Development Bank of China may introduce soft loan to the credit
union in the forest area, who serves as an intermediator to provide the loan to cultivators in need to
release the pressure of insuring. What’s more, after the policy insurance organizations are set up, the
government should decline the current premium of forest insurance, and give concessions to the
cultivators whose area of forest haven’t been destroyed. The government should also make full use of
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the consensus guidance to encourage the forest leading enterprise and corporate to subsidize the
cultivators with premiums, allowing expending before tax-pay.
5.2.2.2 Subsidize the insurance companies, including subsidizing for operating expense and reducing or
exempting the tax. Revenue, with fair principle and regulating function, should play its role to support
the high-risk, low-profit forest insurance, such as reducing or exempt the income tax of insurance
companies for carrying out forest insurance. Whilst, subsidize for the operational expenditures, such as a
part of management cost and other kinds of fees.
5.2.3 Innovation in forest insurance products
By exploiting a variety of forest insurance products, the forest industry is joined with the finance market,
so does the insurance market and the capital market, In this way, the risk which forest insurance
departments are faced are transferred to the large amount of investors in the market, such as the issuance
of forest-risky bond with floating interest.
Feasibility analysis: according to the theory of asset securitization, whose core is the analysis of the cash
flow by the securitized asset, forest insurance risk has the condition of generating foreseeable cash
flow—the premiums insurance companies receive by underwritting the risk. In this case, the premiums
received can be turned to the contingent income of the investors. By changing the investors in turn, the
capital of the insurance company can be replenished, then the solvency of the company can be
reinforced. Forest-risky bond has a higher return because of its high risk, which will meet the
requirement of investors or organizations with higher risk preference, making it feasible.
Practice: forest cultivators pay the premium to the insurance company for the forest insurance, then
insurance companies combine and classify the insured risk in different ways, and issue the forest-risky
bond by the policy insurance organizations; the investors receive the risk premium by purchasing the
bonds in the capital market. For investors, if forest disasters don’t occur or are less than a certain
number during the fixed time which bonds set ,the issuers will pay high interest besides the principle; on
the contrary, if disasters occur in a fixed time and exceed a certain number, the issuers will use the fund
financed from forest-risky bond to pay the claim, without the obligation to pay the principle and interest
to the investors.
catastrophe’s reparations
Premium
Forest
cultivators
Insurance
companies
Guarantee
Reinsurance fee
Forest-risk securities
Design (pricing included)
Investors
Policy
insurance
Repay the principle and
organization
interest when no catastrophe
catastrophe’s reparations
Reinsurance fee
Figure 5 Flow chart of Forestry Insurance Securitization
6 Conclusion
Forest insurance is a production with over-flow benefits; the government should fully exert the role of
micro-control, fiscal and finance policy to support the development of it. It’s tried in the paper to put
forward several approaches of the government’s intervention, but since forest insurance is a rising
operation, there remains lots of problems for its wide expansion. The pace of forest insurance’s
development should be accelerated to promote the sustainable forestry development.
References
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[4]. Xu yan, Zhang Caihong. Research on Financing Channels for China’s Forestry Sustainable
Development.Journal of Beijing Forestry University(social sciences).2006,3:60-63(In Chinese)
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