Reinsurance giant Munich Re have teamed up with Germany’s Gesellschaft fur Internationale Zusammenarbelt (GIZ) GmbH to establish a risk transfer system for agriculture in Peru.
The project titled; “Integrated Financial Management of Climate Risks in Peru’s Agricultural Sector” will aim to work alongside Peruvian authorities to develop a legal, institutional and structural framework to protect the agriculture business from weather-related risks.
The projects technical adviser, Munich Re’s agricultural insurance expert Joachim Herbold, said; “The Peruvian agricultural sector faces great challenges, which are being aggravated by climate change and the increasing fluctuation in associated yields. Munich Re is contributing its know-how to develop a comprehensive system that provides farmers with sustained protection against natural hazards.”
The project will last for five years and is viewed by all parties as a vital step for Peruvian agriculture, as the sector has seen strong growth in recent years with exports in 2013 at $3.4 billion, up from $624 million in 2003. The Peruvian economy relies heavily on agricultural business but climate change has seen an increase in the frequency and severity of droughts, flooding and frost, often completely wiping out the smaller farmers.
Philine Oft of GIZ added; “We are pleased to be able to work together with Munich Re on the creation of sustainable agricultural insurance markets in Peru. The risk transfer system we are developing should benefit Peruvian farmers and protect them from the financial burdens of crop losses from extreme weather events. In future, the system may even serve as a blueprint for other countries.”
The risk transfer system will likely include a reinsurance layer facilitated by Munich Re as well as insurance products at the front-end for the Peruvian agricultural community. These insurance products are likely to be weather-index based or parametric in nature, with Munich Re’s advice and technical expertise enabling the system to be protected by the international reinsurance market.
The key to any of these schemes to bring better risk transfer to a region is to get the reinsurance risk priced in the private markets, while enabling local insurance companies to operate under its protection. It is also key to remove subsidy as quickly as possible, aiming to make the scheme self-sufficient and to allow it to shop around for its reinsurance protection to get the best prices.
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