CLIMATE RISK FINANCING IN AGRICULTURE
Climate change has a significant effect on the agricultural sector, aggravating its exposure to natural perils through increased variability of weather patterns and increased frequency and severity of extreme climate events. In the case of South American farms, average simulated revenue losses from climate change in 2100 are estimated to range from 12% for a mild climate change scenario to 50% in a more severe scenario.
Possible adaptation measures are essentially investments in risk reduction and increased resilience, as well as transfer of residual risks. Agricultural insurance provides long term effective and efficient adaptation for non-controllable risks such as climate change-induced yield volatility.
Agricultural insurance markets in the LAC region are mostly underdeveloped and have very low penetration levels. The main barriers for the development of these markets are presented in Graph 1.
Graph 1. Barriers for the Development of Agricultural Insurance
The innovative solution proposed by the Risk Management Team to reduce the impact of climate change in the productivity of the agriculture sector is a public-private partnership for agricultural climate risk insurance to be implemented through a financial risk transfer fund (see Graph 2) that facilitates access to reinsurance markets, reduces the costs of insurance premiums and contributes to a sustainable development of agricultural insurance markets.
The implementation of this instrument is designed under a comprehensive framework for climate change adaptation and risk reduction (see Graph 3) and contemplates parallel activities to tackle market barriers that are inhibiting the entrance of insurance companies into these markets, such as strengthening local technical capabilities and improving the availability of information to assess agricultural risks.
Currently, the design and implementation of this solution is being deployed in two countries, Colombia and Bolivia. For the case of Bolivia, the Pilot Project for Climate Resilience (PPCR) has committed a US$10 million concessional loan in the second round of Access to Competitive Funding ( BO-X1012 ), where the proposal was ranked first by the independent expert panel. These resources are complemented by close to US$2 million in technical assistance grant resources from the IDB and MIF and another US$0.5 million from the Swiss Government. For Colombia, a US$18million grant is being procured from the Green Climate Fund with US$2million of counterpart resources from the Colombian Government.
Graph 2. Operational Scheme of the Risk Transfer Fund
Graph 3. Comprehensive Approach for Climate Change Adaptation in Agriculture