Agriculture and adaptation to climate change: the role of insurance in risk management: the case of Colombia

Agriculture and adaptation to climate change: the role of insurance in risk management: the case of Colombia

Insurance can potentially play an important role in climate change adaptation for rural households in developing countries as part of the overall climate change adaptation strategy. However, agricultural insurance markets have many market failure s that inhibit their full development. In Colombia these market failures, namely information asymmetries and high transaction costs, are amplified by the country's difficult topography, poor infrastructure, and history of rural violence. Even though the government provides premium subsidies to increase coverage, it is still very low and important crops and small producers are not covered.

This paper analyses in detail the market constraints on the development of the agricultural insurance market in Colombia and provides recommendations so that it can fulfill its potential as a risk management tool in the country.

Policy recommendations:

  • as inadequate agricultural insurance represents one of the most important market failures in Colombia, there is scope for public support in terms of information generation and dissemination. The development and maintenance of agricultural and weather databases as public goods can help insurers properly design and price agricultural insurance contracts, thus reducing adverse selection and possibly prices
  • it is necessary to update the agroclimatic risk maps for different crops and regions, and to generate such maps at a lower scale so that insurance companies have up-to-date effective information for pricing policies and assessing risk
  • in terms of government subsidies, Colombian authorities should examine if current premiums are correctly priced or if subsidies are simply being transferred as profit margins for insurance companies
  • to generate a culture of insurance, the government and the private sector together have to undertake an expansive information and education campaign for producers and producer associations to explain what insurance is and how it can benefit them
  • to protect the emerging insurance market from unraveling because of large losses due to extreme weather events in Colombia, climate change mitigation and adaptation measures should be undertaken to reduce insurance losses. Some examples are the protection of mangroves, reefs, and wetlands, as well as land use planning that buffers storm surges and protect s against flooding and landslide risks
  • for the government, it is necessary to design and implement an integral risk management strategy where support for private insurance and disaster aid are aligned and not at odds with each other, particularly for producers with ability to pay insurance
  • regarding the new challenges climate change poses not only for the agricultural sector but also the insurance sector, it is necessary to create bridges between the scientific community and their climate change models and the actuarial offices in insurance companies so that climate change models can be used to assess and price risks

 

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