How insurance programs are helping producers in the Caribbean and Central American manage disaster risk with greater security.
Economic and natural hazards continue to be a threat to the Caribbean. The region is highly exposed to a range of natural hazards, from volcanic eruptions to earthquakes and hurricanes, floods to drought. It not only damages infrastructure stock, it destroys agricultural production. Over the years, such hazards have caused severe damage to economies and livelihoods in the region.
According to the Nobel Peace Prize-winning Intergovernmental Panel on Climate Change, an intergovernmental body of the United Nations, climate change brings more frequent and intense, unusual, and extreme weather events.
In Central America’s coffee producing regions, natural disasters tend to hurt the poor and vulnerable most, exacerbating already high risks encountered by smallholder farmers, and reducing the productive agricultural potential in extensive areas of Central America. Despite significant vulnerability to climate risks, millions of agricultural producers in the Caribbean and Central America are largely uninsured, according to the United Nation’s World Food Programme (WFP).
In response, disaster risk management has evolved over the past decade, with multiple types of insurance programs aiming to support the coffee sector.
A united front
Ministers from all Central American countries plan to collectively manage disaster risk under the umbrella of the Caribbean Community and Common Market, the oldest surviving integration movement in the developing world that groups 20 countries, 15 member states, and five associate members.
Collaborative action from governments has already seen programs evolve to help coffee growers and roasters mitigate disaster risk in Central America with insurance and finance solutions. In November 2022, the Partnership for Central America, World Bank (WB), and the WFP launched a Disaster Risk Insurance and Finance in Central America Consortium (DRIFCA). The consortium aims to identify and support climate-related agricultural insurance solutions for up to two million smallholder farmers in Guatemala, El Salvador, and Honduras, to increase food security and financial resilience.
“Insurance mechanisms that pay out directly to farmers and other vulnerable populations provide an important livelihood safety net around the world,” says Mark Lopes, Chief Operating Officer of Partnership for Central America.
Guatemala, Honduras and El Salvador are also vulnerable to the impact of strong hurricanes. In 2020, hurricanes Eta and Lota left a trail of devastation. In October 2022, hurricane Julia caused the loss of crops that form staple foods of the Central American populations, where according to WFP, approximately one million people are already severely food insecure.
Will Warshauer, CEO of United States-based non-profit TechnoServe, adds that the September 2022 Puerto Rican Hurricane Fiona was a recent example of how essential disaster insurance is for smallholder farmers.
“In our market-based approach to improving farmer incomes for the long-term, TechnoServe knows firsthand how disaster risk insurance promotes food security, protects business investment, and helps farmers fight poverty,” Warshauer says.
Michel Kerf, World Bank’s Director for Central America and the Dominican Republic, is responsible for enhancing the financial resilience of smallholder farmers and vulnerable households affected by severe and frequent climate-related disasters in northern Central America.
“Our global and regional experience has demonstrated the value of strong partnerships between the public and private sectors to design and implement effective disaster risk financing solutions,” Kerf says. The WB is not alone in its efforts. According to WFP’s Regional Director for Latin America and the Caribbean, micro-insurance is an innovative way smallholders can effectively manage risks and reduce vulnerabilities so they can transition to sustainable food and nutrition security.
A future of threats
Eric Brenner, Program Coordinator at the Texas A&M University Coffee Center in the Unites States, says coffee farmers face three major threats: low prices, pests and diseases, and climate change.
“We have now reached a point where all three threats have converged into an interconnected and complex ecosystem that when changes occur in any of these three distinct environments, [it] will trigger reactions that will interpolate and affect each other,” he says.
Brenner says even though threats are different in nature, they cannot be treated as independent events.
To make matters worse, the logistical disruption created by the global pandemic added what he calls “a new layer of challenges for the coffee industry” exacerbating the vulnerability of coffee farmers. The challenge, however, is finding solutions that are feasible and sustainable.
Historically, low coffee prices reduce a coffee farmer’s ability to obtain supplies, whether it be fertiliser, fungicides, or pesticides. As a result, a farmer’s ability to combat pests like coffee berry borer and diseases like coffee leaf rust, are also reduced significantly.
“A farmer is now in a situation that is also [worsened] by climate change because some of these pests and diseases proliferate as a result of higher temperatures and erratic rainfall patterns where you have areas of extreme wet conditions or long periods of drought,” Brenner says.
“In the case of coffee berry borer, higher temperatures not only increase the population of this pest but also reduce the gestation period causing an explosion in the population in a shorter period of time. As a result of coffee berry borer and the coffee leaf rust infestations, the quality of the coffee greatly decreases which translates into lower prices paid to the coffee farmer, creating a continuous cycle of poverty, and decreased livelihoods.”
Brenner says understanding the link between each threat, and how they relate to each other through cause-and-effect mechanisms, is pivotal, because it serves as the foundation that will help support the creation and implementation of educational and training programs for coffee farmers.
Due to the unpredictable nature of coffee farming, any coffee insurance program or sovereign disaster risk financing will help safeguard against sudden macroeconomic shocks that negatively impact fiscal performance, and in turn, economic development. As such, Brenner says is it “extremely relevant”, yet in order for any program to be effective, understanding the complexity and correlation of threats will be extremely important for its long-term sustainability.
In 2007, Central America’s Finance Ministers created the Caribbean Catastrophe Risk Insurance Facility (CCRIF) to provide cost-effective and fast- disbursing liquidity. It has become an efficient way to finance a liquidity gap arising in the immediate aftermath of disaster. CCRIF pools Caribbean- wide country-level risks into a central, more diversified risk portfolio, offering lower premiums for participating national governments.
CCRIF limits the financial impact of catastrophic hurricanes, earthquakes, and excess rainfall events by quickly providing short-term liquidity when a parametric insurance policy is triggered.
In 2022, CCRIF made four payouts totalling US$15.2 million to three of its member governments during October for hydrometeorological events associated with the 2022 Hurricane Season.
To support CCRIF, Evaluación de Riesgos Naturales and Risk Engineering and Design, a risk management specialist, formed a consortium to provide risk management, financial planning services, and catastrophe modelling services while coordinating reinsurance placement for CCRIF.
“Since its inception in 2007, CCRIF has made a total of 56 payouts to 16 of its member governments, totalling approximately US$245 million – all paid within 14 days of the disaster event. Based on the assessment of the use of payouts, these funds have supported over 3.5 million persons in the Caribbean and Central America, following natural disasters, providing them with food, medication, and water,” says Isaac Anthony, CCRIF’s CEO.
Payouts also have been used to support the rehabilitation of critical economic infrastructure, such as roads and bridges in the rebuilding of schools and other social infrastructure.
The US$40 million payout to Haiti following the 2021 earthquake is the largest payout CCRIF has made since 2007.
“In the face of a changing climate, parametric insurance is a must-have tool for governments in the Caribbean and Central America. CCRIF has been in the business of providing parametric insurance for the last 15 years and we continue to be encouraged that we are able to support our members to have access to quick liquidity after a natural disaster, to begin recovery efforts and to support the most vulnerable in their populations,” Anthony says.
The CRIF’s member governments purchased US$1.2 billion in coverage for catastrophe risk insurance for 2022/23 against climate-related and seismic hazards. The renewal focused on tropical cyclones, excess rainfall and earthquakes, and the fisheries sector. For the earthquake, tropical cyclone and excess rainfall policies, members ceded over US$1.2 billion in coverage – an increase of 10 per cent over the previous year. Thirteen governments increased their coverage compared with the 2021/22 policy year. The renewal and
demand for increased coverage by members illustrates that countries continue to recognise the importance of financially protecting their economies against natural disasters.
Raul Salazar, Chief of the Regional Office for the Americas and the Caribbean at the United Nation’s Office for Disaster Risk Reduction, says “more stagnant weather patterns are expected”.
In order to reduce disaster risks and losses, Salazar and his UN teams are building what he calls “multi-hazard, multi-sectoral and multi-actor preventative and anticipatory approaches” which integrate disaster, climate, and crisis risk management.
“This will strengthen the resilience of people, their agricultural livelihoods, and the ecosystems they depend on in a sustainable manner. Multi-hazard early warning systems are required now, more than ever, to anticipate and mitigate the interconnected, cascading and mutually aggravating nature of risks and their impacts across sectors and systems, including agri-food systems,” he says.
Salazar is focused on “informing agricultural planning and investment”, and “speeding up” the implementation of prevention, preparedness, and anticipatory action measures, such as insurance. He says successful multi-hazard early warning systems leverage the knowledge and expertise of a diverse pool of expertise, including local, traditional, and indigenous communities, to effectively monitor, identify, communicate alerts ahead of disasters, and undertake appropriate measures.
UN Secretary-General António Guterres agrees. In November 2022, after last year’s devastating flooding in Pakistan, Guterres launched an action plan to provide early warning systems within five years. On the International Day for Disaster Risk Reduction, he noted that it was “yet another reminder that real and concrete action on loss and damage must be global priority”.
“Extreme weather events will happen, but they do not need to become deadly disasters,” he said in a statement.
This article was first published in the March/April 2023 edition of Global Coffee Report. Read more HERE.