Highly vulnerable rural population gets groundbreaking access to risk management instruments in an effort to adapt.
The “Pachamama” Agricultural Insurance Program was developed by the Government of Bolivia to help farmers to cope with losses caused by extreme weather events.
Thanks to the involvement of municipal and community authorities, the project introduces a financial instrument to those living in remote areas, a previously untapped local insurance market.
The first phase of the program, which is currently in pilot stage, involves the implementation of multi-peril protection insurance for small farmers in only the poorest of municipalities.
The project protects food security by providing insurance coverage to strategic crops in the country, and contributes to poverty reduction by alleviating the economic impacts of extreme weather events to the more vulnerable population.
Although “Pachamama” was conceived as a public-private scheme in which the government is responsible for risk-sharing, financing and distribution and administration activities, while the local insurers provide the underwriting of the risks; the government is currently absorbing all the risks of the insurance policies issued by the project.
Continuing with the current level of risk retention by the public sector could compromise the expansion and sustainability of the insurance program in the long term, as the potential financial impact of agricultural risks could substantially increase and Bolivia’s fiscal position could vary adversely in the future.
Crowding in private insurance companies into this new segment requires:
- technical capabilities and information to properly analyze risks, and
- risk sharing mechanisms.
Therefore, new financial instruments are being developed in order to expand the scope of the agricultural insurance (both geographic expansion and crops coverage) in an efficient way, for instance, through the design of parametric insurance policies.
Furthermore, in order to strengthen the long term sustainability of the insurance program, improve its financial efficiency and facilitate the participation of the local insurance market and international re-insurers, the project will support the establishment of a stop loss fund that will cover a portion of the eventual losses (second loss) of the insurance program, leaving the first loss to participating local insurers who will transfer the tail risk and losses to the international reinsurance market.