Risk Management: Pricing, Insurance, Guarantees - Agricultural Insurance in Latin America: Where Are We?

This paper examines the existing agricultural insurance systems, both in the developed and the developing countries, and identifies drawbacks in them. It further outlines recent innovations in this area that can make the products more attractive and efficient with country specific illustrations.

The paper states that of the available risk mitigating strategies, the more advanced ones, which address both production and price risks, are not available in developing countries. It examines why it is so:

• In developed countries, the participation of private insurers in providing crop insurance is limited as:
  • They are not able to diversify the systematic risk that stems from risks of widespread natural disasters;
  • Difficulty in accessing correct information in a cost effective manner from clients leads to higher probability of adverse selection and moral hazard.
• The private insurers have not been able to provide for multi peril and catastrophic loss coverage to a large market segment;
• While government has been more effective in providing this type of insurance, the economic effectiveness of the product is questionable;
• Disaster assistance by government at the time of a crisis is a deterrent to payment for insurance.

The document outlines innovative instruments that have been developed in the recent past, which can even be implemented in developing countries, such as:

• Area Yield Index: offers payouts when the average yield fall below a certain specified level;
• Weather Indices: CAT bonds, index-based weather derivatives, such as temperature-based options, rainfall based indices.

However, the implementation of these would require:

• Reliable technologies for monitoring and data collection;
• Dependable historical data about weather and yields;
• Reduction in transaction costs;
• Regulatory framework for monitoring of insurance companies.

The document then discusses the experiences of the following countries in piloting new projects:

• Morocco: Rainfall based insurance;
• Mongolia: Livestock mortality index in relation to weather;
• Mexico: Rainfall insurance index contracts;
• Nicaragua: Migration from conventional insurance products to index based contracts linked to the global markets.