Agricultural insurances as a risk transfer mechanism in Peru
Peru is one of the world’s most vulnerable countries to climate change. As extreme weather events such as droughts and floods increase in frequency and intensity as a result of climate change, so do climate-related disasters. The agricultural sector is particularly affected by these, owing to its intrinsic dependency on environmental parameters. Given that three quarters of the rural population work in agriculture, that 60% of the rural population live under the poverty line, and considering that almost a third of the rural children are chronically undernourished, climate change-related disaster risk in the agricultural sector poses a major burden to rural socioeconomic development and food security in Peru.
Agricultural insurances have the potential to transfer the risk of yield and income losses from agricultural producers to specialized insurance companies. Compensation occurs when yields fall below a certain threshold. Thereby, agricultural insurances ensure the continuity of farming activities, facilitate farmers' access to credit, contribute to food security, competitiveness of the agricultural sector, social inclusion and prevent flight from the land. At the moment, two types of agricultural insurances exist: the Catastrophic Agricultural Insurance, which was launched in 2009, and is entirely subsidized by the state and aimed at subsistence agriculture in the poorest and most affected areas of Peru. Commercial Agricultural Insurances, which are on the market since 2013, are aimed at large and medium producers and usually promoted alongside agricultural credits.
The project 'Integrated financial management of climate risks in the agricultural sector' (Climate, Agriculture and Risk Transfer – CAT) is undertaken by Peru's Ministry of Agriculture and Irrigation with support from the German development cooperation implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, commissioned by the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety, with funds provided by the International Climate Initiative (IKI). The project’s objective is to establish a sustainable risk transfer system based on agricultural insurances and jointly founded and funded by the state and private sector.
Since 2014, agricultural insurances protect the number of people affected by disasters, thereby reducing losses in lives, livelihoods and health, contributing to the second target of the Sendai Seven Campaign. Capacity building has improved the quality of technical decisions, premium calculation and policy making. Moreover, agricultural finance and insurance were integrated into the National Agricultural Policy, attributing them their deserved importance. Reaching an institutional milestone in March 2017, the Department for Finance and Agricultural Insurance within the Ministry for Agriculture and Irrigation was founded. The yet biggest achievements were made with regards to the coverage of the Catastrophic Agricultural Insurance: between 2014 and 2017, the area and number of farmers insured almost doubled, and the insured amount increased by 127% (table 1). Since 2017, the Catastrophic Agricultural Insurance also includes coastal regions affected by the El Niño phenomenon, which greatly devastated Peru earlier on this year.
Until its completion in 2019, the project will continue to support the development of insurance solutions as risk transfer mechanisms. Given that so far only about 17% of the cultivated agricultural land in use are covered by either of the two types of insurances, and yet no insurances for livestock, agroforestry systems or aquaculture exist, there’s still work to be done.