s from the Insurance for Climate Change Adaptation Project in Peru July 2012
s Learned from the Insurance for Climate Change Adaptation in Peru July 2012 Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH german cooperation Insurance for Climate Change Adaptation Project Printing Giacomotti Comunicación Gráfica S.A.C. Calle Huiracocha 1291. Of 302, Jesús María 1st. edition, Lima - Perú, July 2012 Cooperación Alemana al Desarrollo - Agencia de la GIZ en el Perú Av. Prolongación Arenales 801, Miraflores 2 Legal deposit in the Biblioteca Nacional del Perú (National Library of Peru) N. 2012-08704 Total or partial reproduction of this work is allowed, provided the source is cited.
s from the Insurance for Climate Change Adaptation Project Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH german cooperation launched a project in 2010 whereby an innovative alternative to risk reduction and climate change adaptation is being offered; this initiative is commissioned by the German Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety (BMU) within the context of the International Climate Initiative (ICI). The project s purpose is to give producer associations, agro-export companies, fisheries, and financial and governmental institutions along Peru s northern coast the chance to insure themselves through offering innovative weather insurance products. Nationwide, the development and introduction of new weather insurance products is being conducted with participation from the public and private sectors, yet our project specifically targets northern coastal regions that are most affected by the El Niño (Piura, Lambayeque, and La Libertad). The first ground breaking product being promoted is index the Extreme El Niño Index Insurance Product (EENIP), which, unlike other forms of insurance, uses an index stipulated in the policy to authorize payment of the sum insured, regardless of actual damages. The index relies on the average November- 3
December sea surface temperature reported by the U. S. National Oceanic and Atmospheric Administration (NOAA). Since the index target months are November and December, the payout can be made in January, before losses actually occur, so different stakeholders can prepare and thus mitigate any damages produced by intense rains and catastrophic flooding. Moreover, because the weather index is based on predictions for determining the payout, the insurance must be purchased one year in advance before any index confirms the occurrence of an extreme El Niño Phenomenon. Niño region 1.2 measured and reported by the National Oceanic and Atmospheric Administration (NOAA) NIÑO Region 1.2 1 2 Source: NOAA; author s own creation. 4 The project is coordinated nationally and sub-nationally with public and private sector institutions and Peruvian and international research institutes. The primary national stakeholders are the Superintendencia de Banca, Seguros y AFP (SBS) [Superintendence of Banks, Insurance Companies, and Pension Funds], Ministerio de Economía y Finanzas (MEF) [Ministry of the Economy and Finance], Ministerio de Agricultura (Minag) [Ministry of Agriculture], Ministerio del Ambiente (Minam) [Ministry of the Environment], Centro Nacional de Estimación, Prevención y Reducción del Riesgo de Desastres (Cenepred) [National Disaster Risk Estimation, Prevention, and Reduction Center], Asociación Peruana de Empresas de Seguros (Apeseg) [Peruvian Insurance Company Association], reinsurers, insurers, and financial institutions. Sub-nationally, the work
Insurance for Climate Change Adaptation Project Partners Private insurance companies and financial institutions Designing insurance products against natural hazards Sub-national and national governmental institutions Supporting the political-legal framework for developing the market Sub-national government Politically and technically supporting product promotion Peruvian and international research institutions Guaranteeing the scientific viability of the products focuses on the regional governments of Piura, Lambayeque, and La Libertad as well as producer associations and private enterprises. The project strategy is divided into four action lines. The first is performing a demand and risk analysis in order that the population and public and private institutions (target group) in the pilot region have a clear idea of the need and advantages of purchasing weather insurance as a means of lowering weather-related risks. The second is weather insurance product development tailored to the target group s needs. The third is institutionality and legal framework strengthening on the matter of weather insurance in both the government and private spheres. Furthermore, national institutions are supporting the respective adaptation of the legal framework so that weather insurance is endorsed. Finally, the fourth action line is knowledge management for spreading information on weather insurance products nationally and internationally, for promoting experience sharing, and for evaluating their reproducibility in other Peruvian regions and throughout Latin America. As part of knowledge management, the lessons to date from the project activities under each action line will be systematically described. 5
1 To conduct a study for the purpose of measuring insurance product demand, one must adapt overall insurance understanding and know how to position new products. Developing weather insurance capacities is a long term process that is hindered by a limited culture of financing and insurance. Pioneering insurance products, such as index insurance, are particularly difficult to understand, mainly because there is an overall lack of understanding on insurance. 6 2 It is necessary to adapt the Extreme El Niño Index Insurance Product (EENIP) to the needs of different customers and to explain clearly and reasonably how it works. The project team conducted a demand analysis, presenting a specific insurance product to the people interviewed: the colocar the Extreme El Niño Index Insurance Product (EENIP). The lesson is that one must emphasize that this insurance is for extreme events and not moderate or weak ones. Moreover, from the policy holder s perspective, this insurance must be combined with additional insurance products that will cover other risks, such as droughts, floods, or extreme swings in temperature, and not just one risk, namely a extreme El Niño.
3 It is important that financial instruments, the likes of weather insurance, become part of a comprehensive risk management and transfer strategy. Potential customers and user groups need to be informed to a greater extent on the overall risks associated with weather and the possibilities of managing and transferring them. The paradox of an insufficient policy and weak culture of risk management is the belief that insurance is the solution to all problems. Very few people remember that if development mechanisms incorporate risk management in their design, then we can avoid or reduce much of the damage. 4 Small holders need a wide range of financial products, such as savings, credit, and insurance, to manage weather risks. Credit and savings are important elements for managing minor and frequent risks, whereas insurance protects against catastrophic weather events. Organized small holders have more weight and greater negotiation capacity for garnering favorable conditions in terms of credit coupled with insurance. 7
5 A cooperative instead of competitive approach to creating a weather insurance market. This is the best way of efficiently harnessing the limited financial and human resources for developing weather insurance products. Cooperation among institutions makes it easier to forge a weather insurance market and circumvents competition since there is still much research and development to do. When insurance companies want to cooperate, they become motivated to invest in creating and designing products that are easier to understand but, at the same time, they encourage collaboration and a suitable environment for them. 6 Distinguishing between catastrophic and agricultural insurance. Insurance is an important tool but not the only one. Severe natural hazards, like an extreme El Niño, affect almost all economic sectors and a wide array of stakeholders. However, agricultural insurance solely focuses on farmers and livestock owners. Many interesting forms of insurance can be developed for risk management that do not fall within that category. 8
7 To develop weather insurance, one must generate reliable information and data. The challenge here is adequately quantifying and assessing weather-produced damage, and many Latin American countries feature obstacles and restraints for developing these information systems. 8 It is not possible for the private sector alone to create an insurance market. It is necessary to fashion a conceptual and institutional framework that includes all sectors and that facilitates its operation. 9
9 It is not possible to create a market from pilot projects that only work with a few, very specific, and innovative products. International donors and organizations often prefer to fund pilot projects, for instance, testing a specific insurance product for a determined productive sector or geographic region. These projects are required for learning, but their impact and sustainability are limited, and they lack a more holistic approach. 10 It is important to develop a system of agricultural insurance that encompasses all types of risks and financial instruments that can be offered to the producers. Agricultural insurance is an integral part of national policy, and therefore we recommend that it not be designed in a vacuum. It is essential to draw up a roadmap and to build a framework for it. Pilot projects and successful products should be taken advantage of and linked to pertinent institutions. 10
11 To develop financial instruments, like weather insurance, the role of each sector and stakeholder must be clearly defined. It is crucial that proper conditions be set up for system sustainability and that cooperation between the public and private sectors, as well as internally within the very public and private institutions, be encouraged. We need to develop a suitable legal and regulatory framework for including different instruments, risks, and ground breaking products. 12 It is necessary to adapt financial instruments to specific contexts and to develop different tools for different types of risk (trust funds, insurance, stocks, cat bonds, subsidies, derivatives). Each nation develops its own formula, an advantageous blending of different financial instruments for risk management and transfer. The challenge is how to develop these formulas: there is no universal one. All are context specific. 11
Design: Renzo Rabanal Risk is out there, get insured For more information contact: Alberto Aquino Main Advisor alberto.aquino@giz.de Jr. Los Manzanos 119, San Isidro http://seguros.riesgoycambioclimatico.org 12 The Insurance for Climate Change Adaptation Project is part of the International Climate Initiative (ICI) of the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU).