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CLIMATE RISK INSURANCE FOR THE AGRICULTURE SECTOR IN ARMENIA
BUILDING CLIMATE RESILIENCE THROUGH AGRICULTURAL INSURANCE Agriculture is a key sector of the Armenian economy, accounting for 15 percent of Armenia’s GDP in 2017 and 12 percent in 2019 (52 percent from crop production and 48 percent from animal husbandry). Agricultural land accounts for 68.7 percent of the country’s area and is critical to the country’s food supply. In recent years, more than 60 percent of priority food products were grown domestically. At the beginning of 2019, rural residents represented 36.1 percent of Armenia’s population and 26 percent of the employed population works in the agriculture sector. Small and micro farming operations in Armenia operate on a small scale in terms of plot size, production volumes and income. About 90 to 93 percent of farming equipment is already fully depreciated (made between 1976 and 1991), although efforts have been made in recent years to upgrade agricultural machinery.27 Farmers are constantly facing the consequences of natural disasters, with significant losses from hail, drought, frost and other extreme weather events. In the last six years, agricultural damages from extreme weather events amounted to over AMD 110 billion ($0.221 billion). More than 80 percent of these losses were due to hail. Annual hail damage ranges from 10 to 15 percent of cultivated area, and in some areas hail has caused yield losses of 80 to 100 percent (Figure 1). The poor rural population, which depends mainly on income from agricultural goods, is extremely vulnerable to the effects of climate change. Extreme weather events exacerbate this precarious financial situation for those with loans, who must continue making loan payments even when they lose their source of income and desperately need financial resources to continue farming. In 2016, the outstanding agricultural loan portfolio of banks represented six percent of all bank loans, according to CBA data. In extreme situations, farmers depend on government support, which does not cover all their losses. Assistance to farmers is provided through the distribution of fertilizer, seeds and direct cash payments. Based on past experience, the Government of Armenia and the CBA agreed there was an urgent need to introduce new solutions and develop a comprehensive approach to mitigate the risks of climate change.
This prompted a decision to create an agricultural insurance scheme that would be available to all farmers whose production is primarily exposed to the risk of extreme weather events, for example, outdoor crop production. Inclusive green finance is part of the draft NFIS, and the new agricultural insurance scheme was included in the action plan for implementing the draft strategy (Table 1). A comprehensive risk management approach included introducing agricultural insurance, leveraging technology, modern farming practices and infrastructure improvements. Introducing this innovative insurance product to the market required joint efforts from the public and private sector, with key stakeholders including the Ministry of Economy, Ministry of Finance, the CBA, insurance companies, financial institutions, the Armenian National Farmers Union and international donors, including KfW, InsuResilience Investment Fund (IIF) and reinsurance companies. While it was developing this mechanism, the Armenian Government continued to support farmers with subsidies, awarenessraising campaigns about agricultural insurance and various other forms of assistance. To coordinate the development of the agricultural insurance scheme and ensure it was launched smoothly, the CBA established the Agricultural Insurers’ National Agency (AINA) in 2019 as a public-private partnerships (PPP). The agricultural insurance scheme was introduced in a three-stage process: > STAGE 1: The CBA, with financial and technical support from KfW, initiated a feasibility study on agricultural insurance for Armenia. In 2015, a team of international consultants presented the results of the preliminary analysis to the CBA and other stakeholders (Ministry of Economy, KfW, etc). > STAGE 2: The consultant team of experts proposed directions and mechanisms for introducing insurance cover for agricultural risks in Armenia to the main project stakeholders (CBA, KfW, Ministry of Economy and insurance companies). > STAGE 3 (2019): A conglomerate of Swiss consulting companies, reinsurance company with financing and technical support from KfW and InsuResilience Investment Fund SICAV-RAIF (IIF), finalized the development and implementation of the insurance scheme. In 2019, the CBA established the AINA as a PPP to serve as a central hub. 27 IFAD, 2014
