Designing Subsidy Scheme for Marine Disaster Index Insurance in China

Abstract

Designing an optimal subsidy scheme for marine disaster index insurance (MDII) for households in coastal areas of China remains a managerial challenge. The issue of subsidies for disaster insurance has received extensive research attention, but extant studies are confined to the issue of whether to subsidize, lacking focus on how and how much to subsidize. In the existing marine disaster index insurance pilots in China, there are varying levels and scales of subsidies in spite of premium subsidies. To design an optimal subsidy scheme for marine disaster index insurance in China, this paper proposes an optimal insurance model of marine disaster index insurance with government subsidy. Excluding the behaviors of the policyholders and insurance firms, the model captures the behaviors of the subsidy scheme from the government. Furthermore, employing the storm surge disasters, the optimal trigger scheme and subsidy scheme are designed and estimated. The results recommend that the optimal subsidy ratio for MDII in China needs to be at least 92.54%. Moreover, this value increases when there are more potential victims of marine disasters who choose to insure MDII, while the total subsidy decreases. Evidently, the subsidies for pilots of MDII in China are inadequate to meet the conditions for operation currently, which explains the dilemma of the MDII in China’s pilots. These findings provide theoretical evidence for the optimization of the MDII in China.