Extreme weather events, coupled with vulnerable and exposed socio-economic systems, can lead to significant negative economic impacts, particularly in the agriculture sector. These weather-related disasters are costly to prevent –and costly to recover from. The compound effect of socioeconomic dynamics and the intensification of extreme weather events as a result of human-induced climate change has inflated risk and damages.
Damage recovery instruments offer financial compensation to those affected by disasters. For example, in large disasters where there is no legal liability, contingency funds (mostly through state aid) have traditionally played a major role. These funds are, however, very costly and distribute the burden of cost unequally. A different approach is therefore often advocated. In particular, renewed attention has been given to insurance arrangements that entitle policyholders to receive a compensation in exchange for a regular premium.

Agricultural insurance is a heterogeneous instrument, and can adopt different forms. In a recent book by CMCC and FEEM researcher Dionisio Perez Blanco (Pérez-Blanco et al. 2016), these different forms are explored in detail. Agricultural insurance can be supplied by a commercial insurer (e.g. Australia), the public sector (Greece) or a group of farmers, through either a formal (mutual fund) or informal agreement (common in developing countries). Because of technical barriers, data constraints and capital restrictions, mutual funds and informal insurance arrangements among farmers are often the only real insurance alternative in developing countries. In developed countries, experiences with mutual funds have been traditionally limited to the local level; however, the new EU Common Agricultural Policy (CAP) 2014-2020 promotes the adoption of mutual funds to alleviate gaps in the development of crop insurance schemes and offers subsidies to help them capitalize and overcome technical barriers, and this may result in larger uptake. In the US, agricultural insurance typically addresses revenue (yields and output prices), while yield insurance prevails elsewhere.
In a post recently published, Carlo Carraro explores the role of the agricultural insurance, as a heterogeneous instrument that eases post-disaster recovery.
“There is a long list of agricultural insurance schemes, and the adoption of one particular scheme and its effectiveness is conditioned by the existing risk management policy, site-specific factors (e.g. budgetary constraints, exposure, vulnerability) and institutional arrangements, which may lead to institutional lock-in situations, with undesirable outcomes. Climate change, along with population and economic growth, increases uncertainty“, he said, while pointing out the policy framework and the regulatory environment as the key factors for developing successful agricultural insurance schemes.

Read the full article “Climate change and agricultural losses: what role for insurance?”