Peru buys catastrophe insurance to protect farmers from El Niño losses

The government of Peru has established a catastrophe insurance facility for the countries farmers, buying a private risk transfer contract to cover around 550,000 hectares of crops, aiming to cover losses up to around $156m.

El Seguro Agrario Catastrófico (SAC), or the Agricultural Catastrophe Insurance, will provide cover t eight Andean regions of Peru, across the 550,000 hectares of crops. Peru’s Minister of Agriculture Manuel Benites said that with a 55% chance of a strong El Niño this year, it was essential to put in place some protection for these regions farmers.

Peru can suffer from catastrophic rainfall and flooding during a strong El Niño, destroying crops and farmers livelihoods. The disruption to the local and regional economy makes having risk transfer in place, in order to finance recovery, is essential.

The agricultural catastrophe insurance that Peru has bought covers more than just El Niño, although that is the immediate reason for putting the contract in place. It will also cover crop losses due to other weather or climate threats such as severe frost, as well as rainfall.

Peru has bought a multi-year agricultural catastrophe insurance contract which will extend coverage through the 2016 and 2017 seasons as well.

It’s not the first time Peru has had this product available to its farmers, but this looks like the largest and first multi-year implementation yet. It’s expected that some of the world’s major reinsurance firms will be behind the product.

At this stage it’s not clear whether the insurance is based on actual measurements of weather, so weather-index linked, or if it is a pure indemnity coverage. It certainly could be linked to actual weather measurements, using parametric triggers, but currently no information is available on the product sold to Peru.

In the past Peru had been the target of an index-based El Niño insurance coverage, developed by GlobalAgRisk. This product, the Extreme El Niño Insurance Product, was based on a parametric mechanism and hailed as the first “forecast” insurance coverage. Based on an ENSO index which forecasts the occurrence of El Niño conditions, the insurance product could provide payments before severe rain and flooding even occurred.

That product was designed to protect a microfinance organisation from the losses due to loan defaults that it would face in the event of a strong El Niño event and the resulting rainfall which could force farmers into loan default.

The Peruvian government’s actions, of purchasing catastrophe insurance coverage for an impending El Niño event, shows the severity with which the country can be hit by rainfall during an El Niño year. It’s also a very good example of the importance of insurance and risk transfer to provide risk capital after severe weather events, in order to help the local economy recover.

This type of catastrophe focused weather cover is expected to become increasingly common around the world, as governments, companies and people look to become more resilient to extreme weather and climate events. As part of the drive to narrow the protection gap, examples like this show re/insurance in action.