ENSO Index-Based Insurance for Agricultural Protection in Southern Peru

Abstract

Agricultural operations in southern Peru are particularly vulnerable to climate variability due to water resource scarcity. In general, the response to drier than normal conditions in this region is reactive and fairly limited due to challenges associated with climate forecasting and administrative capacity to distribute resources. To shift this paradigm, we investigate the potential for an El Niño–Southern Oscillation index-based insurance product. The article presents a demonstration of methodology and application for one specific crop in a department of southern Peru. The purpose of this product is to streamline the ability of decision makers to provide financial relief to affected farmers during, and perhaps before, drought; extending the lead-time of the index that is used to trigger product payouts produces results of similar skill to a product trained on concurrent conditions. Issues explored in this work include basis risk, initial endowment requirements, product longevity, and the potential crossover from index-based insurance to forecast-based financing. The ability of such products to mitigate losses during and after drought may be advantageous in Peru and other regions with notable interannual climate variability.

Keywords

• index-based insurance
• forecast-based financing
• agricultural planning
• drought response
• southern Peru