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The Inter-American Development Bank (IDB) has published the document “Climate variability and parametric insurance in agriculture in the Southern Cone.” The paper analyzes the possibilities and limitations that parametric insurance would have as a tool to contribute to adaptation to climate risk in agricultural production in Latin America Southern Cone countries. Parametric or index-based insurance technically consists of products that estimate productive loss based on the evolution of one or more variables correlated with yields. Therefore, what is insured is a level of the index, called a trigger, below (or above) which it is appropriate to indemnify.
The document comprises five main sections. The first section describes the main extreme climate events, the agricultural risks and their aggregate impact on the countries of the Southern Cone region. The second section presents a review of the state of development of climate parametric insurance in the world and in the region, as well as the limitations for its adoption. Next, it deep-dives into the reasons for the limited offer and therefore low adoption of parametric insurance, analyzing, the internal risk management processes in agricultural companies, the base risk and the complexity in designing parametric coverage, among others. The fourth section analyzes lessons learned and future possibilities of parametric insurance related to: i) catastrophic risks, ii) traditional risk management mechanisms, and iii) new technologies (e.g. drought-resistant seeds).
The last section presents public policy proposals and final comments. The authors recommend that promoting the adoption of parametric coverage requires a strategy that combines research, communication, and pilot testing.