29.11.2017

Agricultural Insurances and Risk Transfer in Peru

Potatoe farmers in the high plateau of Puno, Peru; photo: © GIZ/Leslie Searles.

Potatoe farmers in the high plateau of Puno, Peru; photo: © GIZ/Leslie Searles.

In Peru extreme weather events such as droughts and floods, and with them wheather-related disasters, increase in frequency and intensity as a result of climate change. The loss and damage caused by recurrent climate phenomenon El Niño alone amounts to billions US dollars each year. The agricultural sector is particularly affected, 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.

Flooded maize field in Piura in the North of Peru following the El Niño phenomenon in March 2017; photo: © GIZ.

Pedro Huertas, rice farmer from Piura, Peru; photo: © GIZ."Everybody here grows rice. That’s how we survive. Agriculture is very important for us, because basically we are all farmers here. That’s how we make our living. We don’t produce anything else, this is what we live on."
(Pedro Huertas, rice farmer from Piura, Peru)

Agricultural insurances have the potential to transfer the risk of yield and income losses from farmers to specialized insurance companies. Compensation in case of weather extremes ensures the continuity of farming activities, facilitates farmers' access to credit, contributes to food security, competitiveness of the agricultural sector, social inclusion and prevents flight from the land. Nevertheless, there is simply no insurance culture in Peru. Many cannot pay the premium or do not believe that their claim will be compensated. Others rely on a repeat of emergency aid instead of actively investing in prevention.

The project 'Integrated financial management of climate risks in the agricultural sector' (Climate, Agriculture and Risk Transfer – CAT) aims to establish a sustainable risk transfer system based on agricultural insurances jointly implemented and financed by the state and private sector. This comprehends the development of policies, adequate legislation   and institutional structures. At the moment, two types of agricultural insurances that target distinct groups of farmers 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; and Commercial Agricultural Insurances, which are on the market since 2013, aimed at large and medium producers and usually promoted alongside agricultural credits.

The success of the project depends on the close collaboration between the local counterparts on the ground: private insurance companies, banks and actors in the agricultural sector. The state supports the agricultural insurance by promoting it, subsidizing the premium and providing legal back-up. Capacity building of public and private personnel decreases their response time to claims, improves the quality of technical decisions, premium calculation and policy making. The banks conveniently promote agricultural insurances alongside credits in order to guarantee that harvest losses do not interfere with loan repayment.

"When I started with the loan for rice, everything was normal. While water was available, I paid off my loan, step by step. But then problems of water shortage occurred, the climate changed, it was very dry and a lot died off”, says farmer Pedro Farfán. The insurance helped him keep paying off his debt and allowed him to change to bananas better adapted to water shortage: “We grew tired of the water scarcity and the losses in rice harvest.” He strongly recommends the agricultural insurance, particularly when taking a loan. “If you take a loan and you don’t have an insurance, you are bound to lose." (Pedro Huertas, banana farmer from Piura, Peru)

Farmer in his banana plantation in Piura, Northern Peru; photo: © GIZ.

Petrolina Farfán, banana farmer from Piura, Peru; photo: © GIZ."The agricultural insurance helped us when we suffered chaos and desperation during the rainfalls. We could not harvest the fruit, (…) we got into debt. We weren’t able to pay our workers. But the insurance payed us compensation, thankfully, and some was left to fertilize." 
(Petrolina Farfán, banana farmer from Piura, Peru)

In March 2017, the Department for Finance and Agricultural Insurance within the Ministry for Agriculture and Irrigation was founded. Yet the 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.

The project is part of the International Climate Initiative (IKI) funded by the Federal Ministry for Environment (BMUB). It 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.

Table 1: Coverage of the Catastrophic Agricultural Insurance and the Commercial Agricultural Insurances in Peru.
Compensation (USD/hectare) Insured Area (thousands of hectares) Number of insured farmers (thousands) Insured amount (million USD)
Year 2014 2017 2014 2017 2014 2017 2014 2017
Catastrophic Agricultural Insurance 168 199 343 660 146 281 58 131
Commercial Agricultural Insurances 2051 2034 23 40 9,6 14,6 47 78