Agriculture and adaptation to climate change: The role of insurance in risk management – the case of Colombia
This paper (PDF) by the Inter-American Development Bank, analyzes 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. The first section of the paper describes the agricultural sector in Colombia and the expected impact of climate change in the country. The second section then describes the agricultural insurance market in Colombia, providing a brief history of previous and current insurance schemes and a detailed analysis of the market imperfections and constraints in the country as well as of current government support schemes. Afterward new developments in the agricultural insurance market taking place in the country and their potential effects are discussed, followed by a reflection on how climate change will affect the insurance industry. The last section concludes and provides policy recommendations. 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 failures 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. An important policy recommendation of the authors is that 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. Furthermore, 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.