Agricultural insurance can help producers manage their financial exposure to natural hazard shocks and enhance the efficiency of resource allocation. Agricultural insurance markets in Mesoamerica, however, are underdeveloped. Moreover, in developed and developing countries alike, agricultural insurance is often used as additional income transfer mechanisms by governments, which results in market distortions, making the impact of future natural hazard shocks even worse. Some recent innovations in agricultural insurance instruments have the potential to serve as an effective tool in Mesoamerica to deepen rural financial markets, overcoming many of the limitations of traditional insurance instruments in reaching small-scale agricultural producers.
This study analyses the opportunities and challenges presented by agricultural insurance instruments to deepen financial services in rural areas in a sustainable manner. It presents a public policy framework to guide the decision making process of public support and interventions. The focus is primarily on the role of insurance to financially manage (and transfer) agricultural production risks that are too large for self-insurance to cover, yet not catastrophic to the point that government and international disaster aid would be necessary.