Agriculture is a cornerstone of Latin America and the Caribbean’s (LAC) economy, accounting for more than 7% of the region’s GDP [1]. As a region rich in biodiversity and arable land, LAC serves as a global breadbasket. The sector supports not only regional food security but also economic stability, with agriculture accounting for a substantial share of exports in many LAC countries and positioning as an important source of jobs [2].
Only in LAC, small farmers represent more than 15 million family farms controlling about 400 million hectares and employing more than 60 million people, these farmers produce the bulk of locally consumed food, yet they face significant barriers [3] [4].
Rising temperatures, shifting precipitation patterns, and the increasing frequency of extreme weather events have significantly affected agricultural productivity. In 2023, for example, El Niño caused widespread agricultural losses, drastically reducing yields in several countries. Argentina alone faced losses exceeding USD 20 billion due to one of the worst droughts in a century [5]. In broader sense, a 2023 report by the FAO revealed that climate-related disasters account for billions of dollars in agricultural losses annually, with smallholder farmers bearing the brunt of these costs. These disruptions threaten not only livelihoods but also regional food security and economic growth [6].
Current Challenges and Adaptation Needs
Smallholder farmers also face financial vulnerabilities, they are often excluded from traditional credit and insurance markets, limiting their ability to invest in climate-resilient practices. This exclusion is particularly acute for those in remote areas, where access to banks, insurance providers, and formal sales networks is limited, making it difficult for farmers to secure financial protection [7].
Additionally, as previously mentioned, farmers must contend with environmental challenges such as soil degradation, water scarcity, and unpredictable weather patterns. Traditional risk management strategies often fall short, underscoring the need for innovative financial solutions tailored to the realities of small-scale farming.
To effectively support smallholder farmers, financial tools must offer both immediate relief and long-term resilience. These solutions must also be accessible and easy to use within local communities. Parametric insurance, with its streamlined claims process and predefined payout triggers, presents a promising solution. By providing financial stability during climate shocks, parametric insurance enables farmers to recover quickly and invest in sustainable agricultural practices.
Understanding Parametric Insurances
Parametric insurance represents a departure from traditional indemnity-based insurance models. Instead of compensating policyholders based on assessed damages, parametric insurance uses predefined triggers, such as rainfall levels or temperature thresholds, to determine payouts. This approach ensures that payments are made quickly and efficiently, often within days of an event, providing critical support when farmers need it most. Additionally, it significantly reduces transaction costs associated with claims processing, making it a more cost-effective solution for both insurers and policyholders [8].
Figure 1. Process of parametric insurance [9]
Parametric insurance offers several key advantages over traditional insurance models:
- Reduced administrative costs: Eliminates the need for costly and time-consuming on-site damage assessments.
- Transparency and trust: Clearly defined payout mechanisms enhance confidence in the system.
- Financial inclusion: Provides coverage to farmers who might otherwise be excluded due to a lack of credit history or the incapacity to contact an insurance broker.
By addressing these barriers, parametric insurance expands access to financial protection for smallholder farmers, strengthening their resilience against climate-related shocks [10].
Case studies
Subsaharan Africa is a pioneer region in successfully implementing parametric insurance for small farms. For example, Kilimo Salama, a program in Kenya, Rwanda and Tanzania, has leveraged mobile technology to deliver affordable insurance to smallholder farmers. This program has been lauded for significantly reducing recovery times and enhancing farmers’ ability to reinvest in their operations, thereby creating a ripple effect of economic benefits within rural communities. Insured farmers invested 19% more and earned 16% more than the rest and also increased their access to finance [11].
In our region, Munich Re pioneered parametric insurance in the region, tailoring its tools to address specific agricultural challenges, as hurricanes, faced by small farmers in the Caribbean and Mexico [12].
In Mexico, a partnership between the government and private insurers has implemented programs to protect maize farmers against drought. The project seeks to give an efficient payout process and stabilize household incomes, ultimately reducing rural poverty levels [13].
Another successful project is in Guatemala, where public-private partnerships have facilitated access to parametric insurance for farmers from vulnerable communities, traditionally underserved by the financial sector. These programs have proven successful in improving food security and promoting inclusive economic growth. Farmers participating in these initiatives report increased financial confidence and a greater willingness to invest in sustainable agricultural methods, showcasing the long-term benefits of these programs [14].
Sustainability and Parametric Insurance: a symbiotic relationship
Parametric insurance not only enhances productivity but also contributes to broader sustainability goals. Parametric insurance has demonstrated its transformative potential in addressing the vulnerabilities of smallholder farmers across Latin America and the Caribbean. By leveraging predefined triggers and delivering rapid payouts, it serves as an effective tool for mitigating the financial and operational risks posed by climate change. This innovative approach not only provides immediate relief during crises but also empowers farmers to adopt sustainable practices, strengthening long-term resilience [15].
To fully harness the benefits of parametric insurance, a multi-stakeholder approach is essential. Governments and financial institutions must collaborate to ensure widespread access to these products, particularly for smallholder farmers in remote and underserved areas. Additionally, farmer education initiatives are critical to build awareness and trust in parametric solutions, enabling farmers to make informed decisions about their risk management strategies [16].
Furthermore, public-private partnerships should be prioritized to scale successful pilot projects and foster continuous innovation in product design. Insurers, governments, and multilateral organizations must work together to develop robust data infrastructure that enhances the accuracy and effectiveness of parametric products. Investments in meteorological and agricultural data systems are particularly critical for tailoring insurance products to the unique challenges of each region [17].
In conclusion, parametric insurance serves as a vital tool in enhancing the resilience of smallholder farmers against climate change. By providing swift financial relief and promoting sustainable practices, it empowers farmers to secure their livelihoods and contribute to the stability of agricultural communities. Scaling access to these innovative financial instruments will be key to fostering long-term resilience and ensuring food security across Latin America and the Caribbean.
—
Luis Wagner is an analyst at HPL, graduated Cum Laude with a Bachelor’s degree in International Relations from the University of San Andrés (UdeSA), where he has been a fellow professor of Comparative Politics since 2022. At HPL, he has contributed to the development of 4 consulting projects through research, comparative studies, gap analysis, development of sustainable financing frameworks and reporting. Additionally, he is currently pursuing a Master’s degree in Sustainable Energy Development at the Buenos Aires Institute of Technology (ITBA). Before joining HPL, Luis worked for over a year at the Undersecretariat of Energy Planning of the Argentine Republic, where he gained experience in energy transition, public policies, and international cooperation. He also worked at Tonal Media, a political communication consultancy and media agency, where he gained knowledge about communication strategies.
—
References
[1] IDB (2024). Agricultural policies in Latin America and the Caribbean. Available here.
[2] World Economic Forum (2022). How to ensure food security for Latin America — now and in the future. Available here.
[3] CAF (2022). Towards Sustainability of Agribusiness in Latin America and the Caribbean. Available here.
[4] Oxford Academic (2014). The state of smallholders in agriculture in Latin America. Available here.
[5] Ámbito Financiero (2024). Campo: confirman que Argentina perdió u$s20.000 millones por la sequía en 2023. Available here.
[6] FAO (2023). The impact of disasters and crises on agriculture and food security. Available here.
[7] Fontagro (2024). Adaptation of agriculture to climate change in LAC. Available here.
[8] Swiss Re (2023). What is parametric insurance?. Available here.
[9] Midland Insurance Brokers (2025). Parametric Insurance – what is it, how it works and when to use it. Available here.
[10]AON (2023). Parametric Insurance: A Complement to Traditional Property Coverage. Available here.
[11] World Bank (2014). Agriculture and Climate Risk Enterprise. Available here.
[11] Munich Re (2025). Seguros paramétricos en Latinoamérica: conceptos innovadores contra las brechas del seguro convencional. Available here.
[13] Milenio (2022). Hacienda pondrá en marcha un seguro paramétrico para cosechas de maíz. Available here.
[14] World Food Programme (2022). Parametric Microinsurance: A key tool to achieve resilience in Guatemala. Available here.
[15] Ibid 10.
[16] Agribusiness Global (2024). How Parametric Crop Insurance Offers a New Approach to Managing Agricultural Risk. Available here.[17] AgriTech Tomorrow (2023). Enhancing Resilience of Smallholder Farmers against Climate Change – Can Parametric Agricultural Insurance Make a Difference. Available here.