When weather shocks occur, smallholder farmers in developing countries are the least able to cope and are easily dragged into extreme poverty and food insecurity. It is important that those most vulnerable to the effects of climate change are helped to build resilience to its impacts. If they are not, tens of millions of people may be pushed back into extreme poverty by 2030, undoing improvements of recent years and undermining progress towards the Sustainable Development Goals.
Insurance can play a critical role in achieving this resilience among small-scale farmers. When used appropriately, it can protect people from falling into extreme poverty after climate shocks, and the security of insurance can also encourage farmers to invest more into their own productivity through modern seeds and crop varieties, and move beyond low-risk, low-return activities. Well-designed insurance also incentivises greater adoption of farming practices that mitigate against climate change, if they lead to lower premiums for example.
It is important, however, to deploy insurance judiciously within an overall risk management strategy for small- scale farmers. Insurance is not an appropriate response to all of the multitude of risks faced by poor people, and it should not replace other ways of building resilience to climate shocks – through improved agricultural practices, for example.
This APPG briefing paper summarises what climate risk insurance does and doesn't do, explains the potential benefits of deploying insurance, and provides recommendations on how to use risk-transfer mechanisms in a way that ensures the poorest people actually benefit.