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Trial Reforms of “Insurance Plus Futures”: Evaluation Results and Policy Options(No.77, 2017)


By Zhu Junsheng, Research Institute of Finance, DRC & Ye Minghua, East China Normal University

Research report No.77, 2017 (Total 5152) 2017-7-18

Abstract: The trial reforms of “insurance Plus futures” is an active practice of developing market-based management for reducing the risk of food price. Compared with grain spread subsidy and the policy of purchasing grain at minimum prices in order to prevent grain prices from further dropping, the premium subsidy of “insurance Plus futures” has certain advantage than temporary storage cost. It can achieve the gradient effect of farmers’ price risk transfer, and give full scope to the technical advantages of actuarial and risk management of insurance and futures companies. Under certain circumstances, this model won’t impact the forming of spot price market, but it can strengthen the hard constraints and transparency of fiscal fund for supporting agriculture and avoid the restrictions of international rules on direct subsidies to agriculture. It should be noted that “insurance Plus futures” model has the following defects: its price discovery mechanism is not perfect; the market capacity of futures trading of agricultural product is limited; there are flaws in OTC options; financial support is inadequate; and there are hidden troubles which might induce systematic risks. As a result, it is hard to be widely applied in a short time. In order to promote the development of “insurance Plus futures” model, we should take it as an important market-based tool for national food price risk management and gradually bring it into the policy-based agricultural insurance system. We need to establish a risk sharing system between the government and the insurance and futures market, develop agricultural product futures and floor options, and explore ways for income insurance.

Key words: agricultural product price forming mechanism, insurance, futures, income insurance