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The World Bank Group’s global development institute, International Finance Corporation (IFC), will collaborate with Indonesia’s PT Reasuransi MAIPARK to develop parametric insurance solutions for the country’s agribusinesses against the increasing threat and costs of natural disaster and climate events.
The IFC and MAIPARK, a specialist risk reinsurance firm owned by all licensed and general insurers and reinsurers in Indonesia, will look to work with local insurance firms to develop, sell, and even bundle a range of new index-based, or parametric insurance solutions designed to hedge the financial exposure against adverse weather events for agribusiness, agriculture-loan portfolios, and farmer groups, says the IFC.
Absent the impacts of climate change, which appears to be exacerbating the problem, Indonesia is extremely vulnerable to a range of natural catastrophe events including droughts, flooding events, rising sea levels, and landslides.
Many of the region’s exposures have a serious impact on its highly important agricultural businesses, which provides millions with income and food that’s vital to their survival and the overall social, and economic well-being of the country.
In fact, according to the IFC, in 1997 droughts related to “El Niño adversely affected more than 500,000 hectares of rice-growing land, as well as yields of coffee, cocoa, rubber, and palm oil,” with the losses estimated to be at around $2.75 billion.
Furthermore, recent El Niño conditions of 2015 to 2016 delayed the production of rice, having a detrimental effect on yields and food prices, which saw some three million people struggle to meet even their most basic needs.
“The national program to achieve food security and improve people’s productivity will need to be supported by all parties. The insurance industry can support the program by providing protection against risks faced by agricultural stakeholders.
“Our cooperation with IFC allows us to innovate with parametric insurance products for agriculture,” said Yasril Y. Rasyid, President Director of MAIPARK.
The use of a parametric insurance products, a common feature of the insurance-linked securities (ILS) market and widely utilized in regional and national catastrophe insurance or reinsurance schemes throughout the world, such as the African Risk Capacity (ARC) and the CCRIF SPC, enables rapid payout post-event and by design is highly suited to the tailored coverage needs of vulnerable, poorer parts of the world.
The joint programme aims to protect farmers, businesses, and banks against the impacts of adverse weather events and natural disasters, and falls under the IFC’s Canada-funded Indonesia Agribusiness Program, which is designed to promote and develop inclusive and sustainable growth in rural parts of the country.
IFC Country Manager for Indonesia and Malaysia, Azam Khan, said; “The region’s changing climate reality has made insurance essential to protect local businesses and strengthen industries so they become resilient to climate change. This project reinforces our commitment to create new markets and fully support sustainable growth by providing protection to all key players in the agriculture value-chain.”
With the solutions being structured on a parametric basis, it could well look to the capital markets to provide the reinsurance capacity required one day in the future, providing investors with a diversifying exposure that brings efficient and willing capital to the vulnerable Indonesian agriculture sector.
Such a solution will provide more and more people with access to insurance that protects livelihoods and societies from the world’s perils, reducing the risk of poverty while alleviating some of the post-event financial burden from government balance sheets, which are often strained in poorer parts of the world.
Discussing the project H.E. Peter MacArthur, Ambassador for Canada, said; “Canada’s support to the Indonesia Agribusiness Development Program demonstrates our commitment to increasing incomes of Indonesian farmers, as well as our recognition of how climate change is increasing the vulnerability of farmers and agribusinesses throughout the world. Canada is pleased to support this partnership between IFC and MAIPARK to develop weather-related insurance products to ensure sustained productivity for these groups.”