Economic Analysis on Development of Marine Insurance in Shanghai. 1 Introduction

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1 Economic Analysis on Development of Marine Insurance in Shanghai WANG Yun, LIU Juanjuan Research Institute for Science of Water Transport Economy, Shanghai Maritime University, 155 Pudong Av., Shanghai, China Abstract: This paper studies the relationship between marine insurance and the development of shipping, finance and regional economy based on statistics. We use the quantitative analysis method, partial correlations method, to find out the key factors in local marine insurance development. Though the analysis we conclude that Shanghai has advantages in such key factors as property insurance development and cargo handling capacity. These advantages should help Shanghai to develop marine insurance most effectively, strengthen the link between international shipping and finance development, and continuously promote the local economic development. Finally, the paper suggests high-priority development of marine insurance in Shanghai. Keywords: Marine Insurance, Partial Correlations, Economic development 1 Introduction The government document, suggestions for development of modern service and advanced manufacturing industry and establishment of international finance and shipping center in Shanghai, is significant to the economic reform and long-term development of Shanghai. It is also a strategic plan for further promoting reform and opening up policy, transforming the economic development mode and enhancing overall national strength. In order to achieve the goals, marine insurance industry should be put great emphasis on because it relates to both finance and shipping factors. Ship financing, fund settlement, shipping market derivative and marine insurance are traditional finance services in shipping industry. Marine insurance is a branch of insurance with a long history. The objects of insurance are not only ships, cargoes and other movable property on the sea, but also the freight, rate, commission, expected interests and third party liabilities due to the maritime perils. Marine insurance initiated early in Western countries, but its contents changed rapidly according to its appliance. The studies of marine insurance mostly concern its juristic aspect. Martine Remond- Gouilloud (1) [6] conducted theoretical research of marine insurance by systematical modern insurance ideals. Modern theories of economics and management bring the theory of marine to completion. Hong Zou, Mike B. Adams (6) [] studied the logistic insurance as a major property insurance. Through the research of the purchasing behavior of property insurance of Chinese enterprises, a link was established between insurance and economy. Research of marine insurance is a new direction for scholars in China. Marine insurance is separated from logistic insurance. As water transport is a vital form of logistics forms, marine insurance is also essential in logistic insurance. Li Henqi (7) [5] studied the risks of modern logistics and demands for logistic insurance. Ren Ying, Wang Wei () [7] analyzed the accelerating effect of insurance to the development of logistic industry. The development of marine insurance can bring along the finance, shipping, and overall development in the whole region. Jin (13) [3] set the establishment of shipping center and transport network as primate strategy based on the analysis of the trend of economic globalization. A hierarchical shipping center network should be surrounded by core city in order to promote cooperation. Khan () [4] considered that the effect marine insurance bring about is a result of Economics of Scale in finance system and improvement of integrated efficiency. International shipping center denotes port city with hard infrastructure such as container transportation hub port, deepwater fairway, collection and distribution network, and soft infrastructure such as finance, trade, and information services. The 1

2 economic growth is refer to the growth of the real economy such as GDP and per capita GDP, the improvement of production technology, the optimization of economic structure and the perfection of economic system. Nevertheless, due to the lagging development of marine insurance and the fact that researchers rarely have chance to acquaint practical operations, some researches are lack of pertinence. In positive view, the new subject provides new opportunities to researchers. The train of thought and technical route of this paper is taking the cross-industry feature of marine insurance into consideration, conduct a correlation analysis of economic aggregate index and statistics in logistic and finance industry. Choosing port throughput and total amount of property insurance as typical detail indicator of shipping logistics and insurance industry afterwards, the paper conducts further studies of partial correlations without the influence of economic aggregate. Finally we find out the major factor of marine insurance development by comparing those coefficients of correlation. Marine insurance is developing rapidly in Shanghai, the most developed port city in China. This research is not only to the actual need of marine insurance industry but will also accelerate the theoretical innovation in marine insurance. The Externality and Social Benefits of Marine Insurance Marine insurance provide not only basic functions as risk sharing and compensate for loss or damage but derivative functions as risk management as well. Ships as huge movable assets of high value, face frequent and serious accident risks, thus, risk management is especially vital in marine insurance business. The function of risk management benefits the whole shipping industry and other related industries as marine architecture, and trade. Besides, the level of finance service will be improved along with the development of marine insurance. Specifications in services as valuation of assets, credit guarantee, and auction of cargoes will be established and perfected. Those specifications can serve broad fields in the society. Because the operation of marine insurance is on the basis of credit system and legal safeguard, the development of marine insurance is of great importance to the financial firms and the government especially in the establishment of credit system. 3 Factor Analysis on Developing Marine Insurance 3.1 Partial Correlations Method Partial correlation method is to obtain the degree of correlation of two variables in a multivariate model by figuring out the coefficient of correlation when controlling other variables. In the computation process, we consider the interrelationship among several variables and find out net correlation between two chosen variables by specific control method. To figure out the coefficient of partial correlation of variable x 1 and x by avoiding the interrelationship of variables group ( x 3 ~ x ) in a multivariate model with p independent variables, the equation is as follows: R1(,3,... p) R1(3,... p) r1,3~ p = 1 R 1(3,... p ) Where r,3~ p p (1) 1 is the coefficient of partial correlation of variable x 1 and x, x3 ~ x p are controlled variables, R 1(,3,... p) is the Regression coefficient of determination of x1 and variables group ( x ~ x p ), R 1(3,... p) is the Regression coefficient of determination of x 1 and variables group ( x3 ~ x p ). Assume that after excluding the interrelationship of q independent variables, the coefficient of partial correlation is r. The significance test equation is given by q

3 r q n q t= 1 r q () Here, n represents the number of samples, and the statistic value t subjects to (n-q-) degrees of freedom t distribution. 3. Calculation and Results Suppose x 1 denotes the regional gross income of marine hull insurance and cargo insurance representing the scale of marine insurance industry; x denotes the regional added value in finance industry; x 3 denotes the regional added value of transport, storage and postal service representing the scale of logistics industry. Through calculation, the simple coefficient of correlation of x 1 and x is 6 and that of x 1 and x 3 is 3. Nevertheless, the partial coefficient of correlation of x 1 and x is.656 and the partial coefficient of correlation of x 1 and x 3 is -.1. The result indicates that marine insurance industry enjoys high correlation with finance and logistics industry in the multivariate model, but after eliminating the interrelationship effect, the marine insurance is rarely correlated with logistics industry. Further, suppose x 1 denotes the regional gross income of marine hull insurance and cargo insurance representing the scale of marine insurance industry; x denotes the cargoes loaded and unloaded at port; x 3 denotes the regional gross income of property insurance; x 4 denotes the GDP in the region. Table 1: Coefficients of Correlation x x 1 x x 3 x 4 x 1 x x 1 x x Table 1 provides the calculation results of coefficients of partial correlation of x 1 and x. It indicates that marine insurance is highly related to cargoes loaded and unloaded at port. The coefficient of partial correlation is.71. Another calculation shows that the coefficient of partial correlation of marine insurance and regional gross income of property insurance is.71. In the partial correlation analysis, the correlation degrees are lower than the results showed in simple correlation analysis, but the degrees are considerably high. 4 The Advantages of Shanghai in Developing Marine Insurance From the analysis above, we conclude that two sorts of conditions are needed in developing marine insurance: the conditions of port logistics and finance industry. Especially the cargoes loaded and unloaded, and the development of regional property insurance. 3

4 : Compare to other port cities, Shanghai with its highly developed economy, wonderful political environment and infrastructure attracts best brains. Meanwhile, Shanghai ranks number one in cargo handling capacity globally due to its geographic position in the estuary of Yangtze River and the long term investment in infrastructure. Another advantage for Shanghai to develop marine insurance is the support of advanced financial system. Among all port cities in China, Shanghai enjoys the highest service level of finance and insurance. Up until the end of 8, 68 financial institutions have processed their business in Shanghai including 1 insurance institutions. 165 of the 68 institutions are foreign-funded. They not only provide various financial services but also improve their service level and quality to cope with the competition with each other. The involvement of foreign competitor with ample experience and high management level accelerate the improvement of financial service level in the region. Table Institution munbers of Insurance 7 8 Number of Institution Property insurance 4 41 Intermediary Table shows the rise of insurance institution in Shanghai. The number of insurance institution rise from in 6 to 1 in 8 with a 1.36% average annual rate of growth. It has grown tenfold since. Shanghai has absolute advantage compare with other main port cities in China according to the merits in geographic position, economy, trade, port and shipping, and insurance industry. Shanghai took up the largest share in both marine hull insurance market and cargo insurance market in China. In 8, the scale of marine hull insurance of Shanghai was at least times larger than the scale of Dalian s, while the scale of cargo insurance was 4 times of Shenzhen s. Dalian and Shenzhen ranked second in hull insurance and cargo insurance scale respectively. In 8, the total sum of marine hull insurance was 3.86 billion RMB in China. Shanghai had.681 billion RMB, accounting for 17.6%. Dalian had.317 billion, accounting for 8.1%. Other port cities were far legging behind. The total sum of cargo insurance in China in 8 was 7.7 billion RMB. Shanghai also took the largest part about 16.53%. Shenzhen took the second largest part about 4.3%. The present status of marine insurance in Shanghai is the result of coordinated development of finance and shipping industry. The cargo handling capacity of port may not necessarily lead to the marine insurance development. The direct evidence is the proportion Shanghai occupied in the total sum of cargo handling capacity in China witch was.1% in the same period. This proportion was well below the proportion of marine insurance because the proportion Shanghai occupied in hull insurance and cargo insurance were all above 16%. 5 Economic Benefits of Developing Marine Insurance in Shanghai As a major component of transport industry, shipping plays an important role in Shanghai economic development. Firstly, water transportation takes up a large share in the total cargo transportation. Table 3:Volume of Transport (in 1 tons) Volume of Volume of Year Water % Transport Transport % 4

5 % % Table 3 shows that as the cheapest way of transportation, water transportation had occupied a proportion of 5.5% in 7 in Shanghai total cargo transportation. It was far more than the proportion in 1, which was merely 3.4%. Along with the development of import and export trade, the container throughput in Shanghai skyrocketed in recent years. According to the statistics compiled by Shanghai Municipal Transport and Port Authority, the container throughput of Shanghai port had ranked number one since Sep.. Table 4:Container Throughput Year Weight Container Throughput Weight: in 1 tons Container Throughput: in 1 TEUs As part of finance industry, insurance industry has got golden opportunity in the economic progress in Shanghai. The insurance industry has gained much experience during expending in size. The size of property insurance in Shanghai has risen from 3.5 billion RMB in 1 to billion RMB in 8 Marine hull insurance has a large share in property insurance due to its insurance premiums. According to the data proclaimed by Shanghai Insurance Regulatory Commission, the premium income of hull insurance and cargo insurance are.681 and billion RMB respectively. Marine insurance is increasingly important to the development of insurance industry. In 8, though the number of inward and outward ships decreased by 8.4% over the same period, the marine hull insurance increased by 5%. The insurance market in Shanghai stabilized and resumed in. The premium income of property insurance increased at 15.% from billion in 8 to 15.8 billion in. Based on the analysis above, we conclude that a relation chain exists from the development of economy, trade, transportation industry, to shipping industry and marine insurance industry, which is a chain from the whole to parts. The development of economy and trade accelerates the demands of transportation, then promotes the development of shipping industry, finally propels the marine insurance industry. In this chain, every knot connected closely and a virtuous cycle is formed consequently. 6 Conclusion Marine insurance is getting indispensible to the development of economy, trade, shipping, port, and finance. Two sorts of conditions are needed in developing marine insurance: the conditions of port logistics and finance industry. Studied the correlation between marine insurance industry and related industries, we quantitatively verified the source of advantage of Shanghai in developing marine insurance is its advantage in both shipping and finance industry. The development of marine insurance will bring benefits to multiple industries. Marine insurance industry will arouse a new round of economy growth in Shanghai and contribute much to the whole nation. 5

6 References [1]. Guo Songpin, Yuan Jianhua, Marine Insurance, Beijing, China Finance Publishing House,, in Chinese. []. Hong Zou, Mike B. Adams, The corporate purchase of property insurance: Chinese evidence, Journal of Financial Intermediation, 6,, [3]. Jin F., Study on development strategy of shipping centers and transportation networks in the Yellow Sea Rim, Chinese Geographical Science, 3, 13, [4]. Khan, A., The finance and growth nexus, Business Review-Federal Reserve Bank of Philadelphia,, [5]. Li Henqi, the Risks of Modern Logistics and Demand Analysis of Logistic Insurance in China, Transaction of Xi an Jiaotong University (Social Science Edition), 7, 6, in Chinese. [6]. Martine Remond-Gouilloud, Insurance, Liability and Compensation, Marine Policy, 1, 3, [7]. Ren Yin, Wang Wei, A Brief Analysis of the Promotion of insurance to the development of logistics industry, Logistics Technology,,, -4. in Chinese. [8]. T. Baker, Insurance and the Law, International Encyclopedia of Social & Behavioral Sciences, 4,